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Are You De-Risking? (The Big Boys Are)

Daily State of the Markets 
Thursday Morning – May 20, 2010

Good morning. I'll be in Chicago early in June (June 8th to be exact) hosting a meeting for investment advisors and one of the questions that is sure to come up is "Are you de-risking?" In case you aren't familiar with the term, "de-risking" is the latest big thing in the world of managed money and is connected to the unwinding of "the risk trade." And cutting to the chase, yes, I have indeed done some de-risking over the past couple of months in almost all of the portfolios I run.

Since March 10, 2009, it has been perfectly acceptable to invest money in what has become known as "risk assets" such as stocks, foreign stocks, commodities, and the emerging markets. However, anybody that has owned the higher beta end of this class knows that this has not been a pleasant place to be of late (Emerging markets are down -6% ytd while EAFE is off -11%, and commodities are down -11.8% in 2010). So, with at least at 50-50 chance that the market is seeing a change in character right now, the question all investors need to be asking themselves is: Am I de-risking?

In light of the fact that I've been at this game a while, I am fairly confident that the subject of this morning's missive is enough, all by itself, to power stocks higher today. After all, Ms. Market is very adept at ensuring that any public statement one makes regarding what may happen next in the stock market is usually met with an ego-adjusting Louisville Slugger to the side of your head (or to the value of your portfolio). As such, I have learned that it is usually best to avoid the game of proclaiming one's aptitude for the business or the intelligence of one's moves.

With that very important caveat aside, let me say that I'm not the only one that has come to the conclusion that it might be a good idea to start taking the risk levels down a notch or three in my portfolios. The media's coverage of the SALT symposium (a gathering of hedge fund managers) makes it very clear that the big boys of the hedge fund community are indeed in de-risking mode at the present time. You see, while there is a very good chance that the market will rebound smartly in the near future, the bigger-picture outlook is becoming fairly cloudy. And if you manage large sums of money at either a hedge- or traditional mutual fund, you must be proactive in your movements.

Getting to the point, stocks are oversold and due for a bounce in the near-term. The fact that the S&P played a successful game of tag with its 200-day moving average and that the close was above the important 1110 zone (the May 7th closing low) is definitely a positive from a technical perspective. However, the very idea that the rumor of Greece perhaps leaving the EU could even be considered is indicative of the changed environment.

The mental gymnastics here are fairly straightforward. The recent run for the roses in the U.S. stock market has been based on the idea that the economy is improving, that earnings are improving, and that at some point soon, the job market will be improving as well. However, with a decent chunk of Europe heading for an extended recession (if not a self-induced depression) and the Chinese trying to cool things off a bit, it isn't much of a leap to think that the global growth story may be about to hit a decent-sized bump in the road.

So, how will you know if you need to do some additional de-risking? This is obviously a question of personal preference. However, we'll be watching the action during the upcoming rallies. If the advances are quickly met with selling, it would indicate that the big boys are de-risking into strength. And as such, it might be a good idea to do a little de-risking of your own.

Turning to this morning... de-risking may be the theme of the day as stock futures are down hard in the pre-market in response to huge protests in Greece and a further decline in the Euro.

On the economic front, the Labor Department reported that initial claims for unemployment insurance for the week ending May 15 increased by 25,000 to 471K. This week’s total was also well above the expectations for a reading of 440K. Continuing Claims for unemployment for the week ending May 8 were above consensus at 4.625M vs. expectations for 4.60M. For comparison purposes, last week’s revised total was 4.665M (from 4.627M).


Finally, remember to smile at least once before lunch...

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell...

  • Foreign Markets: Down hard across the board
  • Crude Oil Futures: -$2.11 to $67.76
  • Gold: -$13.10 to $1180.00
  • Dollar: Higher against Yen, Euro, and Pound
  • 10-Year Bond Yield: Currently trading at 3.28%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -25
    • Dow Jones Industrial Average: -193
    • NASDAQ Composite: -42

Yesterday's Earnings



Autodesk ADSK $0.29 $0.23
Applied Materials AMAT $0.22 $0.21
Limited Brands LTD $0.25 $0.19

Earnings Before The Bell



Computer Sciences CSC $1.66 $1.48
Gamestop GME $0.48 $0.47
Patterson Companies PDCO $0.52 $0.50
Staples SPLS $0.28 $0.27

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary


  • Autodesk (NASDAQ:ADSK) - BofA/Merrill
  • Dominion (NYSE:D) - Citi
  • Chco's FAS (NYSE:CHS) - Citi
  • VeriSign (NASDAQ:VRSN) - Deutsche Bank
  • Wells Fargo (NYSE:WFC) - Keefe, Bruyette & Woods
  • Citrix Systems (NASDAQ:CTXS) - Morgan Stanley
  • CareFusion (NYSE:CFN) - Morgan Stanley
  • Aruba Networks (NASDAQ:ARUN) - Stifel Nicolaus
  • FedEx (NYSE:FDX) - Stifel Nicolaus
  • UPS (NYSE:UPS) - Stifel Nicolaus
  • Simon Property Group (NYSE:SPG) - UBS
  • Colonial Properties (NYSE:CLP) - UBS
  • Home Properties (NYSE:HME) - Wells Fargo



  • ArcelorMittal (NYSE:MT) - BofA/Merrill
  • Research in Motion (RIMM) - Cowen
  • Walgreens (WAG) - Credit Suisse
  • Symantec (NASDAQ:SYMC) - Deutsche Bank, Macquarie
  • Alpha Natural Resources (ANR) - Goldman Sachs
  • Spectra Energy (NYSE:SE) - Jefferies
  • Rockwell Automation (NYSE:ROK) - JPMorgan
  • NBTY (NTY) - RBC Capital


    Long positions in stocks mentioned: none

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