Trader Abandons European Stock Long, Admits "Too Busy Patting Myself On The Back"

Authored by Kevin Muir via The Macro Tourist,

Like a bad parent who doesn’t love his kids equally, I have a confession. My infatuation with European stocks has stopped me from seeing clearly. For the past year I have buying European stocks. When I started, the idea was certainly out of favour - Pretty sure I am alone in this trade. Over time, it gathered momentum, and I stuck with it - The Best Trade on the Board.

When I wrote the first piece, many of the cool kids were quite negative on Europe. George Soros was short Deutsche Bank and talk about a European banking collapse due to the problems with contingent convertible bonds filled the financial news cycle. It was lonely taking the other side of all these gurus.

But I was skated onside by an aggressively easy ECB. Gradually the narrative started to change as the wonders of free money covered up many of the issues. Actually, free money is not quite right. The ECB’s negative interest rate policy made it so many firms were paid to borrow money.

With years of European stock underperformance, combined with the absurdly easy monetary policy, the difference between the cost of debt and the cost of equity for European companies created one of the largest arbitrage opportunities in the history of modern finance.

This arbitrage opportunity will not close easily. If I had to put on one trade for a couple of years and not touch it, long European stocks short European debt would be near the top of the list.

Yet I am about to commit one of a trader’s worst sins, and mix time frames. Not only that, I risk confusing my message, but I know my readers are a smart bunch who will understand my conflicting points.

The long European stock trade has become crowded. Big time. Whereas before, most pundits were advocating staying away from Europe, it has suddenly become a consensus trade. And nothing screams consensus more than the cover of Barrons.

Like a mope, I have been patting myself on the back as investors have woken up to my bullish arguments, but really, instead of congratulating myself, I should have been selling. It has been a rookie mistake, and I am embarrassed that I let a love of a trade cloud my thinking. In today’s environment, it is extremely difficult to generate alpha. By the time everyone agrees on a position, it is time to go the other way. I have written about this many times - A Series of Rolling Mini-bubbles, and there are no exceptions. Trades become crowded way faster than ever before, and disappoint even more quickly.

And it’s not like I didn’t have the nagging feeling of doubt. It seemed like every portfolio manager on Bloomberg, and most of the research pieces hitting my inbox have advocated being long Europe. Yet a few brave, smart guys started questioning the long thesis. My favourite millennial trader, Klendathu Capitalist, has been highlighting the overbought nature of European stocks for the past couple of weeks.

If you don’t follow Kieran, then I suggest you get on it (click here for his blog). Yes, he is a millennial, and there will be a bunch of jokes where you might find yourself consulting, but he is a terrific thinker that deserves your attention (not only that, but his banter is amongst some of the best on twitter).

Look at the chart of flows that Kieran tweeted from ZeroHedge. That is the largest inflow into the Vanguard European ETF ever. And it’s not like it eclipsed the previous high by a little. It has blown the cover off the ball. Investors are chasing Europe.

At this point you might be saying, “so what? It’s not like European stocks are going down.” And you would be correct.

European stocks are treading water near the highs. What’s the worry?

Well, think about these massive inflows. Investors are pouring money into Europe, yet European stocks can’t make a new high? That’s not bullish.

And if you look at Europe on a relative basis, it is even less pretty.

The top in the Eurostoxx / S&P 500 ratio was hit on the day of the Barrons’ “Buy Europe” cover story. Talk about selling the news.

I am bearish on equities in general, so I am in a bit of a quandary about my European stock position. I have bought all these super long dated (2024) calls that I think are cheap, but I find myself worried about the short run. My position is definitely of the Hotel California variety (you can check in but…), so I am forced to deal with a delta that I can’t easily trade out of. I have decided to hedge up my delta and get neutral. I know I am late, and I wish I was selling the news instead of reacting to sluggish price action, but I still think there is plenty of room for disappointment.

Sometime in the future I will return to my long European stock trade. But only after all these new bulls give up. This little mini-bubble-of-long-European-stock-sentiment is due for a surprise, and I don’t think of the bullish variety.


peterbracken Tue, 06/27/2017 - 14:27 Permalink

With BS like this, you know it's time to load up on European equities.Why the fuck does ZeroHedge massage the egos of charlatans, fantastists and fakes? You know the line: Bitcoin is the new Dollar; Gold is king; Trump is God's gift; Russia is an emblem of propriety and rectitude.This website is a fuckin' joke. It's beggared its readership to an extent Goldman's would be proud of.     

peterbracken Tue, 06/27/2017 - 14:32 Permalink

ZeroHedge - as you know - is an Alt-right financial website that has garnered an astonishing phalanx of devotees. It was spawned by the financial crisis a decade ago, so the traction it enjoyed in its early years are understandable: the financial system had failed us, the spivs and speculators had been bailed out, and the common man had picked up the tab. The 'destructive creativity' of capitalism had been thwarted. By Central bankers wedded to Keynes and stimulus economics. Or so the website claims. And so, for as long as it has existed, Zerohedge has been peddling its alternative: a cathartic meltdown in risk assets deprived of cheap and concocted money. Better we suffer the pain now than later. There is a decent case to be made against excessive Central Bank intervention. And to some extent the travails of Greece - indeed PIG countries generally - support the view that the ECB is firefighting the economic incoherence of national economies yoked to a Europe-wide currency.But - and this is where the shit hits the fan - ZeroHedge has morphed from financial market malcontent to crank populism. Any alternative to establishment politics is embraced. Trump becomes a saviour. Bitcoin a genuine alternative currency. The gold standard more than a nostalgic echo that once defined a hard currency. Draghi, Yellen and Carney are manipulators that rig the markets and keep the rich, rich and the poor, poor. ZeroHedge is now populated - judging by its comments section - by fakes, fantasists, charlatans, cranks. Which is a measure of the despairing output it now spews.Wrapped in economic garb, it has become an emblem for marginal delusion. And it has eviscerated and impoverished its readership to an extent that out-shames pay-day loan sharks.

Juliette Tue, 06/27/2017 - 15:28 Permalink

European companies are better than their US counterparts. Much more value for the money. Just think Mercedes-Benz, BMW, Porsche, Audi, Volkswagen, Lamborghini, Ferrari, Volvo ...

Arnold Tue, 06/27/2017 - 15:40 Permalink

The financial difference is in the methodology.
ECB is propping bonds.
Fed is propping Stock equity.
BOJ is buying equity via ETF s.
BOC who the heck knows what they are doing other than putting out fires.

All are 'printing at ludicrous speed' for full faith and trust to prop their economies, all want to stop and reduce their balance sheets, none can.