Late in June, BofAML noted with some alarm that during the previous week, "clients were big net sellers of US stocks in the amount of $4.1bn, following four weeks of net buying." "Net sales were the largest since January 2008 and led by institutional clients—after three weeks of net buying, institutional clients’ net sales last week were the largest in our data history," the bank’s Jill Hall continued.
A little over a week later, Bloomberg reported that some two years after Leon Black’s "sell everything" call, "other private-equity firms are following suit - dumping stakes into the markets at a record clip."
Whether that particular bout of smart money dumping was simply an effort to get out ahead of what threatened to be a rather ugly conclusion to six months of bailout negotiations between Greece and creditors, or perhaps a knee-jerk reaction to the harrowing unwind that was unfolding in China’s half dozen backdoor margin lending channels we can’t say for sure, but what we do know is that not only is the smart money (still) selling, but now even the dumb money has joined the party for the second consecutive week.
Clients swing from pro-cyclical to anti-equity
Last week, during which the S&P 500 was down 1.3%, BofAML clients were net sellers of stocks for the third week, in the amount of $1.1bn. Net sales were led by hedge funds, which sold stocks for the fifth consecutive week; institutional clients and private clients were also net sellers for the fifth and second consecutive weeks, respectively. Net sales were entirely in large caps, while both mid- and small caps saw inflows. Buybacks by corporate clients picked up to their highest level since May, though, on a four-week average basis, they still remain below year-ago levels. Year-to-date, private clients remain net buyers for the first year post-crisis, while institutional and hedge fund clients remain net sellers, in part hurt by the continued rotation from active to passive management.
In fact, not only was the dumb money selling, they were selling in droves as private client net sales were the highest in a year. And who was everyone selling to, you ask?
Why, to corporate management teams of course.
The same corporate management teams whose equity-linked compensation benefits from myopic, EPS-inflating, debt-funded buybacks or, to put it in the more politically correct terminology recently employed by GMO's Ben Inkler, "these are asset owners for whom the expected returns of the assets they buy are not a primary consideration in their purchase decisions."
And as a reminder, these are also the asset owners whose purchases have for years served as the perpetual bid behind a stock market where everyone for whom expected returns are important, seems to be selling, on balance. Here's BofAML again:
Net sales by private clients last week were their largest in one year, led by sales of Staples and Energy stocks. Buybacks by corporate clients picked up to their highest level since May.
Spot the odd group out:
So with private clients now bailing for the first time in three weeks and with the smart money continuing to liquidate, the question, as we put it earlier this month, is this: "if price insensitive buyers (which, as you can see from the above, are all that are left) become sellers, will the entire market collapse"?