We long for the days when markets were not nearly so centrally managed, when the repetition of the same shallow promises by the “deciders” at the Fed and the ECB held little sway. The U.S. deciders seem to care mostly about where the S&P 500 trades and that shows as it stands out as one of the few global indices in bull mode. With that in mind, hedge funds ramp the U.S. equity futures higher during thin markets when most people in the U.S. are still sleeping and bid at regular times throughout the trading day to keep the party going.
We reiterate that high frequency traders’ shenanigans are given way too little credit for the euphoria. Just last week we learned of a major brokerage that was penalized for permitting all kinds of manipulative behaviors. We would prefer an end of the behavior as opposed to a slap on the wrist, but at least it was a start. Fundamentals matter quite little and we deplore that.
Our favorite bit of chicanery is “Tuesday bid day,” when markets are goosed higher by a confluence of buying on that day of the week for no apparent reason other than it’s the day after Monday. Many times it all starts with a plethora of fake quotes that are never intended to be executed, but create the perception that the sky is the limit.
Central bankers and policy makers across the globe trip over themselves discussing the next market propping measure or they downplay the likelihood of less QE if stocks so much as sneeze. It didn’t used to be the only game in town! Ultimately, fundamentals will assert themselves, but the deciders are doing their best to prevent that.
Most participants move in unison more than in times past with differing opinions hard to find. The June employment report was almost universally painted as robust. Nonetheless, the household side of the U.S. employment report showed a massive increase in part-time jobs and a giant decrease in full-time jobs. That’s not good! What’s more, not too long ago we would have thought the rise in the U-6 unemployment by 0.5% to 14.3% to be bond bullish.
From a big picture perspective, the percentage of people who have a job remains near a thirty-year low as shown below!
Bonds were crushed yet again as the report was proclaimed as quite strong, leading to speculation that the Fed will definitely start buying fewer treasuries and mortgages in the near future. Clearly an untethering from objective reality is at work as every bit of bad news is ignored and every “as-expected” number is portrayed as a “barn burner.”
As always, we feel compelled to mention what is going on away from the chatter of the talking heads. Behind the scenes Portuguese bonds have been blasted on renewed credit worries in recent weeks. Europe is in a major world of economic hurt that just gets worse with most new data points. Unemployment in Italy just hit 12.2%, a 35-year high, and European industrial production fell 1.6% over the prior year. Auto sales are at a two-decade low. Growth in China looks increasingly suspect as bad loans and overcapacity weigh on growth. Exports there are softening and economists are reducing GDP expectations yet again. Japanese growth has picked up for now after the onset of their enormous QE, but their sovereign debt situation remains among the most perilous.
Pre-announcements of negative earnings surprises are running quite high at about 7-to-1 here in the U.S. Revenues will likely shrink for another quarter for corporate America. The damage in the mortgage market is one for the record books, but few pundits really mention it or discuss just how devastating a 30% move higher in rates is to a potential homebuyer. We were only growing either side of 1% prior to the rate spike, which J.P. Morgan and Wells Fargo both admit will have big impacts on their mortgage businesses. Of course, the talking heads act as if growth is 4% or more, even as retail sales come in at levels normally witnessed around recessions! Finally, it does look like the regulators will be doing the right thing by requiring banks to significantly increase their equity capital, but that is not exactly a positive from a growth perspective.
From what we have been reading, it is quite tough in the hedge fund universe. According to Bloomberg, “hedge funds lost 1.4 percent in June, the most since May 2012, paring the gain in the first six months of 2013 to 1.4 percent, according to data compiled by Bloomberg. Hedge funds that use computer models to decide when to buy and sell securities slumped 6.3 percent last month, extending losses for the year to 7.1%.” With the S&P 500 up in the mid-teens for the year, many investors are asking themselves “why hedge at all?” We are in an environment much like 2007 when hedging risk is penalized and participants pay up for the privilege of taking risk. Hedge funds are now routinely derided and “buy and hold” is celebrated.
We have read the book and seen the movie. We find many seasoned practitioners seeming to forget that 10-15% equity corrections are quite common throughout history and 30-40% drawdowns occur around recessions…the current cycle is long in the tooth.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.