We have eight trading days till the end of the quarter. That is eight days for the well positioned hedge funds to rack up quarterly performance fees. An equal amount of eight days for the shorts, perma-bears, poorly positioned hedge funds and non-believers in this market to try to salvage some performance. However, they have an uphill battle to accomplish that feat in a short time frame. Mutual fund managers and long only managers have already raised some cash and are getting more cash in every day as investors depart the bond market. They are also getting more money into domestic based funds as investors flee China, Europe, metals and weak currency markets. In other words, buy US, Thus, when you put this all together it appears that there is an underlying bid to the market to US equities.
However, there is a more important phenomenon at work. The 2000s are over. This is something that I believe has to be embraced. That decade’s equity markets we marred by hedge fund dominance, high volatility and Black Swan occurrences. Hedge funds are increasingly becoming a broken model. The Bloomberg article on Warren Buffet’s bet since 2008, before the debt crisis wreaked havoc on the markets, is a must read. One could assert that we have had two bear markets in that period of time, yet the S&P 500 (SPX) has outperformed a hedge fund of fund index. I would note that the article failed to mention that Berkshire Hathaway (BRK/A) declined over 16% in the same period of time. The real winner in my opinion is Jack Bogel who sometimes gets short shrift by the hedge fund and fast money happy media. Volatility is getting crush. My research indicates that unless and until the CBOE Volatility Index (VIX) rises on a sustained basis above 25, it is a false messiah of an indicator. Betting on Black Swans may make for great interviews or headlines but it is not a long term investment strategy.
We have a market in which you have to, on a micro basis, maintain discipline and sell or trim back individual stocks that have met price targets. Concurrently, use weakness in individual stocks that offer great investment opportunities to start new positions with cash that you have raised. This is how I have been risk managing all this year. There will be a healthy 3 – 5% pullback. Gaming that pullback is a fool’s errand. When it arrives you will know. Don’t get faked out by “one day blunders” when we get a quick hit to stocks with no downside follow through. Use history as your guide but remember that the 2000s were an anomalous period of time.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC had no positions in stocks mentioned — although positions can change at any ti
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