For Fund Managers, It Was The Worst Of Times - Bezek's Daily Briefing

|
Includes: GLD, SPY, USO, UUP
by: Ian Bezek

Summary

Markets relatively flat as they, in my view, misread the Fed decision.

Outlook for this rally - I'm still neutral for the time being.

Fund managers are finding 2016 to be a particularly difficult year.

The Fed, as was widely expected, left rates unchanged yesterday. However, they also noted that economic conditions are improving and that uncertainty has decreased. In all, it was a clear sign that the Fed is now preparing the market for the next rate hike. One member went so far as to buck the consensus and vote for immediate action.

And yet, somehow, from this the market concluded the Fed was increasingly dovish. The futures market sharply reduced the odds of a 2016 rate hike following the decision. Gold (NYSEARCA:GLD) and the US dollar (NYSEARCA:UUP) both traded according to that view as well.

One should always be careful when saying: "I'm right and the market is wrong," as there could be an alternative explanation. However, it very much seems that the Fed just told people to start planning for a September - or at the latest December - hike and the market just laughed and traded as though they'd said the opposite.

We're still in the summer doldrums, and the market seems very much nonplussed by news and economic developments. There's no reason that will immediately change. However, don't assume that the market's ambivalence now means the bearish events aren't important.

Crude oil (NYSEARCA:USO), with its slide under $42 yesterday, is close to re-entering a bear market as it has dropped almost 20% off the peak. However, high yield debt markets remain firm - the market isn't connecting the dots yet.

Same with the energy majors; despite several bad earnings releases from the large European integrated oil companies and the ever-falling price of oil, energy shares have only marginally declined.

In China, the yuan remains weak and appears prone to further devaluation. Economic signals from the country haven't been particularly robust either. Yet the market, which viewed similar developments in August and January as fear-inducing, now show little interest.

Polling now shows the US presidential election as a virtual dead heat between the two leading candidates, however there's been little market reaction yet. While you can make a case for either candidate being better or worse for the market, you'd at minimum expect some volatility as investors rethink an election that many people had previously assumed would be a landslide.

Stock buyers are taking a very cavalier attitude here. And I get why they're doing that; it's summer and in quiet trading with everyone on vacation, risk seems limited. And for now, it probably is. But it's not hard to imagine come September, CNBC will be flashing "election panic" or "Chinese currency crumbles" or "energy losses mounting" across the bottom of the screen. The seeds of the next sell-off have already germinated and will bear fruit in due time.

In our modern world, the temptation is always to be doing something. Those who aren't constantly in motion seem behind the times. However, there are situations where the best possible action is to sit on your hands and wait for a more favorable opportunity.

I see very few reasons to buy stocks (or bonds) at this present juncture. The Fed just showed its hand, and you'll be hearing plenty more about rate hikes in the coming weeks. Judging how the market handled the December hike, this alone should put most folks off of buying stocks in the near term.

However, it's hard to get excited about shorting the market yet either. The fact remains that we just broke out of a massive consolidation period on the S&P 500 (NYSEARCA:SPY) and are now in uncharted territory. Breakouts are powerful stuff, they suck in new bulls and lead suffering bears to throw in the towel. Don't underestimate the technical momentum created when stocks finally power through resistance. I'm still looking at late August or September for when this rally really gives way.

Managers Talking Frankly About Market Conditions

Andrew Left, the founder of Citron Research and an investor I really look up to, was asked in a recent media appearance: "What kind of a challenge is it to short a stock in this kind of market environment?" He responded with this gem:

It is the worst job ... Being a short-seller is the worst possible thing. I think I have Stockholm Syndrome because two weeks ago I said nothing is going to make this market go down, then that night I said: Well, if I'm thinking that, it has to go down soon.

Citron, in business for more than 15 years now, has built an enviable track record through both good and bad times. But the current environment leaves him - like many of us - feeling the difficulty of trying to short anything in this market where valuations simply don't seem to matter. Left said:

The best stocks to buy right now are the worst companies with no profits ... It'd be so much easier just to run a company and to say: I'm forgoing my short-term profits for the long-term. Show me a 2019 model, and sell some stock in a secondary.

He isn't the only one grumbling. Look at this bombastic intro from Third Point's latest quarterly letter. Dan Loeb is clearly seeing some stress in the market:

Watching Jon Snow's epic "Battle of the Bastards" scene in the penultimate episode of this season's Game of Thrones gives investors a sense of how it has felt to manage money during some periods over the past year. Surging enemies forming a seemingly impossible perimeter, a crush of fellow soldiers on the field, arrows coming in overhead, and the need to avoid panic and deftly use sword and shield to fight your way out of a seemingly impossible situation is a good analogy for the emotional experience of managing assets since last summer.

Loeb blames "copycat" hedge funds, poor portfolio allocation strategies, bad factor investing, and lack of attention to macro risk as major reasons for the hedge fund industry's recent woes. It is interesting that both Loeb, who is "constructive" on US stocks, and Left, who views things as greatly overvalued, both find the market so difficult.

If you find this market confusing and difficult, don't feel bad. You're not alone. Professional money managers are having a rough year merely trying to keep up with the indexes.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.