Where the Big Money Is Betting Big 45 comments
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For years investors have debated whether the big money is the smart money.
The basic premise is the big money (the mutual, pension, and hedge funds) will buy into a “hot” sector. And continue buying into it as long as it keeps going up. The ongoing buying pushes prices up. As a result, the big money looks like the smart money most of the time.
Just take a look at the market swings over the past decade. The big money was buying large-cap growth and technology stocks in the 90’s. For nearly a decade, the big money was the smart money. The stock market consistently rose year after year. Even the average mutual fund was returning 20% a year.
Of course, the big money isn’t always the smart money. After the tech bubble burst, the big money was decimated. The average mutual fund was getting crushed. Most were losing money between 2001 and 2003. During this time, the big money was not smart money.
Then in 2003 and 2004 the markets started to show some life again. The big money, after just taking a beating, wasn’t about to get too aggressive. The smart money, however, was spotting contrarian opportunities in oil, metals, real estate investment trusts (REITs), and emerging markets.
Over the next five years or so these sectors did exceptionally well. Year in and year out these sectors delivered staggering returns. The big money moved into these sectors. China funds and commodity funds were being opened up by the big investment management companies to meet demand from investors demanding exposure to these sectors. As a result, the big money continuing to pile in making itself and the smart money look pretty smart.
That’s why I don’t think the big money is always the smart money. The big money is smart money most of the time, but not always. And it’s recognizing those times when the big money is the smart money and when the big money is not the smart money is the key to being a successful investor.
Right now, in two sectors at least, it appears the big money is on its way to becoming the smart money. And any investor putting money into these sectors now will look pretty smart.
Big Money is Still Big
First though, we have to look at the how big the big money really is to get an idea of how much a wave of big money buying could really do to a sector.
Right now the big money isn’t nearly as big as it was a year or two ago. The credit crunch has wiped away nearly $50 trillion of nominal wealth around the world. That’s a big loss. On the positive side though, there’s still $100 trillion in nominal wealth floating.
A lot of that is still in the hands of big money managers too. The recently released report, Worldwide Mutual Fund Asset and Flows, from Investment Company Institute shows it. At the end of last year there were $18.97 trillion in assets held in mutual funds around the world. That’s trillion with a “t”. About $6.5 trillion of that is in equity funds, about $3.4 trillion is in bond funds, and about $1.8 trillion is in balanced funds (which invest in both equities and bonds).
The key here is where is it going and how much is left to invest. That’s why I’m very interested in the $5.79 trillion sitting in money market funds around the world.
That’s a lot of money on the sidelines. And with money market funds yielding next to nothing, it will be put to “work” eventually.
There is still a lot of money sloshing around outside of mutual funds too. Hedge funds, for instance, have just under $1 trillion of capital available. And we know most of them are just looking for a new trend, idea, or thesis to jump on. Then there are exchange traded funds, private equity funds, privately managed trusts, and more.
There’s a lot of money out there and it will seek outsized returns. So far, it looks like a little bit of that money is seeing opportunity. There have been billions of dollars pumped into new issues in all sectors. Investor interest has picked up in bonds too. But a lot of the new money interest has been focused on two sectors lately: gold and biotech.
Biotech Blast-off
It’s no secret that Big Pharma is facing some big problems. For years the companies have relied on steady revenue and income streams from their blockbuster drugs. These drugs have limited, patent-protected lifespan though. Once the drugs go “off patent” the generic drug makers become overnight competitors and Big Pharma’s big margins get pinched.
This is something we’ve been covering for a while. We only witnessed the initial corrective actions though.
In “The Only Way to Make a Fortune in Healthcare” we looked at the recent surge in mergers and acquisitions among the Big Pharma companies:
We’re seeing everything thing from multi-billion dollar mega –mergers to development deals with small biotech outfits. Merck is merging with Schering-Plough. Pfizer is taking over Wyeth. Roche has signed a merger deal with Genentech. Those are just three of the largest deals. There are dozens of other deals being cut with small biotech companies. And there will be many, many more in the months ahead. It’s the only way they can survive.
In order to get this boom really going the big money has to start moving into the small biotech companies too. Lately, it looks like the big money managers are starting to take action.
In just the past few weeks, quite a few biotech companies have been able to raise more cash (see table below). They need this cash to pay for clinical trials, more research, and everything else needed to develop new drugs.
Given the situation, this is just the start of a trend. Big Pharma companies are loaded with cash and they’ll be cutting development deals. The big money sees the opportunity in biotech as well. Everything is there for a big run in biotech stocks.
The best part about biotech is the sky is the limit. This is one of the few sectors where a stock can go from pennies to $10 or $20 per share on a single announcement. Then, as it advances a key drug through different stages, they can run higher for a long time. Once a few discoveries are made and a few people strike it big, you can bet a lot more money will follow.
Biotech is not the only sector attracting big money though. There is one other and it could have even more potential.
A Golden Opportunity
Recently gold stocks have been attracting a lot of attention. There are many reasons to like gold right now. And all the fundamentals are there to look really smart in the next three to five years.
As we looked at the other day, the sheer impact of massive government budget deficits financed by newly printed dollars has always led to inflation throughout history. Given the situation in the United States, the budget deficits looming over the horizon are even bigger. Medicare and Social Security shortfalls will only make the current record-setting budget deficits. Combine that with sharply lower economic growth resulting from increased regulation, tax hikes, and an aging population the only way for the deficits to go is up.
As a result, the value of the U.S. dollar will inevitably decline. The stark reality of the situation has led a renewed interest in gold. The interest in shares of companies which mine gold and silver has only continued to grow.
This has been going on for a few years, but now it’s really ramping up. Back in February we noted how “The Final Hurdle for Gold May Have Been Passed”:
Unprecedented sums of money have been pouring into gold in the past few months…
Just take a look at the recent money which has been put into gold companies across the board. They’re all getting new cash. Major miners looking for extra cash to fund takeovers, exploration, and mine development are getting it. Small gold companies looking for one more financing to put themselves into production are getting it too. There’s money out there for gold.
Newmont Mining (NYSE:NEM) is expecting at least $1.7 billion (or more depending on the final terms of agreement) in new cash in its coffers.
Leading the charge in putting this financing together was Citigroup, J.P. Morgan, and BMO. They’re the big money. And they (except for BMO) wouldn’t have given gold the time of day when private equity players were chasing after real estate, Chinese companies, and other “hot” sectors over the past few years.
Of course, it’s not just one big deal though…In the past few months there have been a slew of financings of gold companies. Together Yamana (NYSE:AUY), Agnico-Eagle (NYSE:AEM), and Kinross Gold (NYSE:KGC) have attracted more than $800 million in new money.
Since then, a lot more big money investors have jumped on board. Leading hedge fund managers David Einhorn and John Paulson have put hundreds of millions of dollars into gold. Other fund managers have moved in too.
For instance, Pequot Capital Management, a hedge fund with more than $4 billion in assets, recently ramped up its gold exposure by 997%. Pequot plowed more than $250 million into gold in the past few months.
Highfields Capital did too. The fund management firm, with as much as $10 billion under management, has taken a strong liking to gold. In the last few months it has bet big on gold. It has increased its gold exposure by 302% when it threw more than $150 million into gold.
There are plenty more money managers who have spotted opportunity in gold. They appear to be wading in too. Gold stocks have been doing just as well as most other sectors during this rally. With the big money buying gold, there is a lot more potential upside in gold and gold stocks.
Big Money vs. Smart Money
In the end, there are times when the big money is the smart money. There are times when the big money is terribly dumb.
The deciding factor of whether to follow the big money or start looking for contrarian opportunities comes down to your time horizon.
For the short and medium-term, it’s best to ride along with the big money. Think of the old adages like “the trend is your friend.” Right now the trend is toward healthcare (biotech specifically) and assets which offer inflation protection (gold stocks have been exceptionally possible). We’re sure to find success in the long growing trends like inflation protection and healthcare in the months and years ahead.
For really long-term money though, you look for the big contrarian calls for assets which are completely out of favor. You know, buying stuff that nobody wants.
Michigan real estate, anyone? Remember, it takes a lot of water to manufacture anything. And the Midwest is one of the only regions in the country with a lot of fresh water. Or Vietnam, which has the demographics for decades of growth ahead and yet, has one of the hardest hit economies during this downturn.
Those are topics for another day though. For now, just remember there is a time to be running with the herd and a time to go completely against it. The quickest and safest way to a true fortune is figuring out on which side to be at what time. For the short and medium term, it’s best to stick with the big money.
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This article has 45 comments:
The largest turns are large beCause they are places where the big money Stopped being the smart money. And Capitulated, right at the bottom.
False, on average big money's success is about the same as the market in general. For example, there have been a number of studies which have shown that if you just invest in an index fund (for example SPY--S&P 500), its performance will beat 60%-65% or so of comparable actively managed funds. And if pick funds based on their performance in the past, their success often disappears. But you mostly hear about the winners in the mass media; little about the losers.
XOMA it has been trading hugh volume. average volume about 1 million per day. today 41 million !
Given the basis of this study the smart money invested in early March and the big money has been in cash and losing out through the inflationary rally and missed the best part of the rally, whilst losing purchasing power.
It is now common sense that the big money will pile into this rally and lose most of the money when the rally fizzes out, in a few months! LOL
arabianmoney.net/2009/.../
The next debate will be over which junior gold stocks to buy for maximum gain - but not just yet as that strategy was a disaster last year! Then again the smart money would be looking now...
Small molecule development is vastly different than large molecule development which has approximately four or more major hurdles to conquer not found in small molecule development.
Mergers are a sign of weakness, especially in the pharmaceutical sector. Guarantees 5 years of internal turmoil.
Gold is an inflation hedge. Did we add to the money supply or did we replace bad securities with good money, a zero sum game. Any chance the debt encumbered consumer will increase demand?
Real estate: Buying five houses and managing the rentals is a way for seniors to survive. The price of admission is still dropping and they are still making people that need a place to live. Fewer will qualify for a mortgage.
This paragraph makes no sense in the context of your article. The BIG money isn't in mutual funds.
Mutual fund managers almost always have a mandate to invest their funds in a particular way; that is, if they were "high tech" funds, then they had to be invested in high tech (with wiggle room to be some proportion in cash). The mutual fund companies fired up funds with a new tech mandate after venture capital companies started bringing companies to IPO stage. The BIG money made more big money when they sold share through the mutual fund to the "herd" of sheep.
Now there IS big money that isn't necessarily smart, and sometimes even if they are smart they are too early or too late to the party. T. Boone Pickens just lost several BILLION over the last few years. Warren Buffett lost his mind over the last few years (well, he was an Obama supporter). Anyway, some might say he was a bit early to the party... but he always has been.
Anyway, don't confuse BIG money with big piles of money from small investors.
Smart (or dumb) money is usually your own.
On May 16 09:02 AM Ransome wrote:
> Big money is dumb money. A market is made by smart money. It is projected
> that this new and rising market will hit $200 a barrel by the end
> of the year. Dumb money moves in. Near the plateau, smart money moves
> out while momentum defies gravity for a while longer.
>
> Small molecule development is vastly different than large molecule
> development which has approximately four or more major hurdles to
> conquer not found in small molecule development.
>
> Mergers are a sign of weakness, especially in the pharmaceutical
> sector. Guarantees 5 years of internal turmoil.
>
> Gold is an inflation hedge. Did we add to the money supply or did
> we replace bad securities with good money, a zero sum game. Any chance
> the debt encumbered consumer will increase demand?
>
> Real estate: Buying five houses and managing the rentals is a way
> for seniors to survive. The price of admission is still dropping
> and they are still making people that need a place to live. Fewer
> will qualify for a mortgage.
stockcharts.com/c-sc/s...
HardToLove
Let's be clear about Pickens returns. Yes, he lost billions in the last two years. Not mentioned however is that from 2001-2006 his fund delivered triple digit returns. Let's be fair here.
Yank
On May 16 09:06 AM Insiderman wrote:
> "Of course, the big money isn’t always the smart money. After the
> tech bubble burst, the big money was decimated. The average mutual
> fund was getting crushed. Most were losing money between 2001 and
> 2003. During this time, the big money was not smart money."
>
> This paragraph makes no sense in the context of your article. The
> BIG money isn't in mutual funds.
>
> Mutual fund managers almost always have a mandate to invest their
> funds in a particular way; that is, if they were "high tech" funds,
> then they had to be invested in high tech (with wiggle room to be
> some proportion in cash). The mutual fund companies fired up funds
> with a new tech mandate after venture capital companies started bringing
> companies to IPO stage. The BIG money made more big money when they
> sold share through the mutual fund to the "herd" of sheep.
>
> Now there IS big money that isn't necessarily smart, and sometimes
> even if they are smart they are too early or too late to the party.
> T. Boone Pickens just lost several BILLION over the last few years.
> Warren Buffett lost his mind over the last few years (well, he was
> an Obama supporter). Anyway, some might say he was a bit early to
> the party... but he always has been.
>
> Anyway, don't confuse BIG money with big piles of money from small
> investors.
Big Pharma became big utility companies, i.e., very little innovation and lots of bureaucracy but they have lots of cash. Furthermore, many biotech have good and promising drugs they developed but, at the same time, they have neither manufacturing nor marketing resources and expertise to move successfully forward and realize the full commercial potential of their products. Consequently, biotech with real breakthrough products are always ready to explode.
It is obvious that the present US reckless and irresponsible financial and economic policies gravely undermined US$ as a reserve currency. Moving forward, the world financial system is in a "no-man" territory. Euro and other currencies are not about to gain strong acceptance due to various problems especially with Asian countries. So, after all, we are back to gold and strategic commodities.
No offense to the author, but how dumb is this statement? If you can do this, you are the smartest money. You will be very good at math. You will be a certifiable genius. You will start and manage your own hedge fund. You will buy OTM puts on the S&P 500 in September of 2008. You will have written a book called "The Black Swan." Your name will Nassim Nicholas Taleb.
arabianmoney.net/2009/.../
On May 17 01:04 AM Peter Cooper wrote:
> Marc Faber likes resource stocks and even real estate stocks in Asia,
> have a listen to his latest predictions at the end of the second
> video, see this post:
> arabianmoney.net/2009/.../
>
On May 16 05:43 PM nova wrote:
> This is a good written paper.
>
> Big Pharma became big utility companies, i.e., very little innovation
> and lots of bureaucracy but they have lots of cash. Furthermore,
> many biotech have good and promising drugs they developed but, at
> the same time, they have neither manufacturing nor marketing resources
> and expertise to move successfully forward and realize the full commercial
> potential of their products. Consequently, biotech with real breakthrough
> products are always ready to explode.
>
> It is obvious that the present US reckless and irresponsible financial
> and economic policies gravely undermined US$ as a reserve currency.
> Moving forward, the world financial system is in a "no-man" territory.
> Euro and other currencies are not about to gain strong acceptance
> due to various problems especially with Asian countries. So, after
> all, we are back to gold and strategic commodities.
Gold. Just saying the word conjures up riches!
It has been reported that Dubai has just finished a state of the art bullion storage facility. Mid east holders of bullion are now in the process of physically having their holdings moved from London and New York to this new location. Much to the chagrin of the British financial community who have been the purveyors of bullion storage for a VERY long time.
Different story in New York. There are "stories" circulating that some ETF's might be a 'little shy' on their physical holdings versus the number of certificates issued. Hmmm. Very interesting! Time will tell when 'Old Mother Hubbard' goes to the cupboard! The outcome could very well have a drastic effect on the price of gold.
Don't forget the 'poor country cousin' - silver. Where gold goes, silver is sure to follow! Silver is one hundred times more scarce than gold because of industrial use. Over the last twenty years a tremendous amount of silver has disappeared into factories. Look no further than your flat screen HD TV. So silver as a play, has it's cheap price compared to gold, in it's favour. Both metals are poised to go much, MUCH higher in price.
On May 16 04:32 PM nyse1982 wrote:
> People I see like to push the ideology that when times are bleak
> and market is down that everyone is losing money, and that's not
> true. Smart money continues to make money is doesn't matter the asset
> class. Firm's like Goldman,Lazard, JP all pocketed the trillions
> of dollars lost in 401k and declining home values. So please don't
> think for one second everyone is losing b/c their not. Market Manipulation
> is alive and well and the internet and tv continue to fuel the transfer
> of even more wealth to the 10% of people in this country.They not
> b/c their smart but b/c they predict how the herd of the nominal
> society everyone else is going to react to news.Meanwhile they do
> the exact opposite! Just wait it's going to happen again in the Oil
> markets!
On May 15 11:20 PM Northstar10000 wrote:
> Try
> XOMA it has been trading hugh volume. average volume about 1 million
> per day. today 41 million !
For goodness sake, it's a discussion board. People express opinions.
I do agree with Peter. Any recovery will be accompanied by spectacular gains in junior resource stocks, some of which hold huge resources yet trade at only cash value.
The initial impetus will come from the Chinese and, if this article on the yuan carry trade is correct, the "Big Money" impulse could begin soon.
www.moneymorning.com/2.../
On May 17 01:35 AM nyse1982 wrote:
> This part of the problem people and their predictions, everyone is
> pushing their public opinion while following through on another agenda.
I would prefer the PT boat route. You can maneuver quicker but you have to be the captain. Following the flotilla is what you seem to advocate. I've run aground since Oct. 1987, but not as badly as the big -smart money. What were you doing then, by the way?
On May 17 02:00 PM tessant wrote:
> I put big money into DNDN the other day. Hope it pays off.
On May 17 10:31 PM dragonpaw wrote:
> Again, another great article mixing apples and oranges. If "big "
> money is mutual funds, please leave me out. Remember, their motto;"always
> invested, hell or high water." They like Buffet ,Soros, mutual funds
> hedge funds, and a host of other Wall Street conoscenti seem smart
> when the tide is rising. They have the benefit of insider knowledge,
> after-hours trading , bulk trade rates, and a host of other "benefits"that
> the average investor is impotent to compete with. But like the oil
> tankers that they represent, when times get rough, they run aground.
>
> I would prefer the PT boat route. You can maneuver quicker but you
> have to be the captain. Following the flotilla is what you seem to
> advocate. I've run aground since Oct. 1987, but not as badly as the
> big -smart money. What were you doing then, by the way?
professional money:market makers, trading syndicates,hedge funds
big money:mutual funds, pensions
dumb money:uninformed retail traders,investors aka the herd
arabianmoney.net/2009/.../
If a million Cows (The Herd) jump into a hot mutual fund, then that fund is "big money". That does not make it smart or dumb - it just makes it "herd money". Huge influxes of money into a fund - especially something like a small sector fund - can distort the money, as that fund HAS to invest the money that all the Cows have put in.
To me, "Big Money" (with capital letters) are the guys like Soros, Buffett, and other "single player" investors. (not saying they are all that smart either, just big).
You're right on that one, Sonia
But my father-in-law (79 years young, immigrated in the 70's from Eastern Europe) has yet to ask me to help him in that task (repairing his rentals). As a matter of fact, that's what's keeps him busy and in good shape! You must be referring to a more typical U.S. couch potato ;-) No offense. People are different.
But the alternative is the typical U.S. retiree NOT on a government or (exceedingly rare) company pension with an annihilated 201(k), and soon 101(k) when the current bear market rally collapses. These folks will have to work anyway.
On May 16 10:58 AM Sonia wrote:
> Rental property is a goldmine for young people who can do the repairs,
> painting, and cleanup when tenants move out, and put up with the
> hassle. We sold ours in the 90's and are thankful to be out. It is
> not for seniors. Before buying rental property, talk to landlords
> and understand what you are getting into!
Big Money appears smart because of sheer size, you can play the game early, but one must lead and not follow.
As for GOLD, it is a big bubble ready to burst once BIG money gets bored and realize gold is the dumbest investment vehicle around. It fulfilled its purpose as flight to safety, it never was a long term hold investment, and once new opportunities arise, DUMP money will be left holding it.
If you're smart enough to do this, aren't you smart enough to ignore what the "big money" is doing and just focus on your own research and analysis?