Who's Buying and Selling This Rally?
Josh Lipton
The stock market has moved sharply higher since August 27, when Fed Chairman Ben Bernanke suggested that the Fed might consider another bond purchase program, a maneuver known as quantitative easing.
The point of the program is to prop up the fragile economy by keeping long term interest rates low and encourage borrowing and spending by consumers and companies.
Specifically, the Fed Head said: "The Federal Reserve is already supporting the economic recovery by maintaining an extraordinarily accommodative monetary policy, using multiple tools. Should further action prove necessary, policy options are available to provide additional stimulus." (Also read Never Mind What the Fed Thinks; Markets Say QE Is Coming.)
Investors, believing the Fed can come to the rescue, have responded: citing exchange-traded funds as indicators, the SPDR S&P 500 ETF (SPY), which includes holdings like Exxon (XOM), Apple (AAPL), Microsoft (MSFT), IBM (IBM), and Bank of America (BAC), is up 9.5% since August 27.
Strategists ask the following question, however: just who has been doing the buying?
We know it's not you and your neighbors. The general investing public has continued to largely side-step stocks in their own background. Burned by two bear markets, and a stock market that has gone nowhere in 10 years, retail investors have been tough to lure back into the US equity market. (Also read Equities Edge Toward a Top.)
Sine the beginning of September, they have dedicated just $1.91 billion to US equity funds, according to EPFR. Year-to-date, they have yanked out $54.1 billion.
The principal buyers, say strategists, have included a couple of well-heeled groups of money-makers. First, there are the hedge funds. In September, hedgies reportedly turned in their best performance in 16 months with a 3.5% gain. However, that still undershot a 9% advance for the overall market.
There are therefore reasons to believe that the so-called "smart money" in fact missed the big September move in the market, which might have been dominated instead by the sovereign wealth funds like the kinds operated by the governments of Singapore and Kuwait. However, hedge fund managers are paid for performance and they cannot allow a headline-making advance to happen without them. So they're now buying in order to play catch up and meet their performance bogeys, says Jon Markman of Markman Capital Insight.
A second big buyer in the stock market, says Gluskin Sheff's David Rosenberg, would be the proprietary trading desks at the big commercials banks. These are traders that invest their firms' capital. As Rosenberg recently noted, using weekly Fed data, bank-wide trading assets have soared $50 billion alone in the past month.
Vinny Catalano of Blue Marble Research agrees that it's the fast-money crowd dominating the run-up. "This is predominantly hedge funds and prop traders and they're dancing to the music of ‘Don't Fight the Fed'", says Catalano. "You don't have much buying power from mutual funds because they're already at record low cash levels, and they're getting plenty of ongoing redemptions from investors."
What about pension funds?
The Wall Street Journal this week published an article titled "Pension Funds Flee Stocks In Search of Less-Risky Bets," which started off with the following observation: "After making the same kinds of investment blunders as many individuals, corporate pension funds now are seeking the same remedies: fleeing stocks for the perceived safety of bonds."
Indeed, Dr. Ed Yardeni of Yardeni Research notes that the percentage of equities in defined benefit private pension plans rose from 35.1% during Q3-1990 to a record high of 61.9% during Q1-2006. It then plunged back down to 37.8% during Q1-2009. Of course, that was mostly attributable to the sharp decline in equity prices from October 2007 through March 2009. However, the percentage continued to drop down to 34.2% during Q2-2010 despite the impressive rally in stocks since March 2009.
However, Yardeni thinks the industry, looking ahead, might have no choice but to allocate more funds towards the equity market. That's because they'll remain desperate, he says, for better returns than are now available in the fixed-income markets.
"Many pension plans continue to use the expected return on their assets as a discount rate," Yardeni says. "This is often 8%, and reflects the performance of the past 20-30 years. Good luck with that if bond yields remain this low."
One group of investors that have been determined sellers all year: the men and women actually running our publicly-traded companies. According to Jonathan Moreland, director of research at InsiderInsights.com, in every month this year, the C-suite crowd has sold more than they bought.
In the first nine months of his year, he says, on average, 42% more companies had insiders selling stock than buying it. In total, $40.2 billion worth of stock was sold and only $7.54 billion was bought.
That stat might leave investors nervous: what do these executives know that the rest of us don't?
However, Alec Young, S&P's equity strategist, says that he doesn't place too much emphasis on whether CEOs are now selling their shares. "I don't consider this is some kind of major indicator," he says. "This has been going on all year and the market is still up. Now it may prove prescient, but I tend to focus more on valuation and the earnings outlook."
Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the firm.
The stock market has moved sharply higher since August 27, when Fed Chairman Ben Bernanke suggested that the Fed might consider another bond purchase program, a maneuver known as quantitative easing.
The point of the program is to prop up the fragile economy by keeping long term interest rates low and encourage borrowing and spending by consumers and companies.
Specifically, the Fed Head said: "The Federal Reserve is already supporting the economic recovery by maintaining an extraordinarily accommodative monetary policy, using multiple tools. Should further action prove necessary, policy options are available to provide additional stimulus." (Also read Never Mind What the Fed Thinks; Markets Say QE Is Coming.)
Investors, believing the Fed can come to the rescue, have responded: citing exchange-traded funds as indicators, the SPDR S&P 500 ETF (SPY), which includes holdings like Exxon (XOM), Apple (AAPL), Microsoft (MSFT), IBM (IBM), and Bank of America (BAC), is up 9.5% since August 27.
Strategists ask the following question, however: just who has been doing the buying?
We know it's not you and your neighbors. The general investing public has continued to largely side-step stocks in their own background. Burned by two bear markets, and a stock market that has gone nowhere in 10 years, retail investors have been tough to lure back into the US equity market. (Also read Equities Edge Toward a Top.)
Sine the beginning of September, they have dedicated just $1.91 billion to US equity funds, according to EPFR. Year-to-date, they have yanked out $54.1 billion.
The principal buyers, say strategists, have included a couple of well-heeled groups of money-makers. First, there are the hedge funds. In September, hedgies reportedly turned in their best performance in 16 months with a 3.5% gain. However, that still undershot a 9% advance for the overall market.
There are therefore reasons to believe that the so-called "smart money" in fact missed the big September move in the market, which might have been dominated instead by the sovereign wealth funds like the kinds operated by the governments of Singapore and Kuwait. However, hedge fund managers are paid for performance and they cannot allow a headline-making advance to happen without them. So they're now buying in order to play catch up and meet their performance bogeys, says Jon Markman of Markman Capital Insight.
A second big buyer in the stock market, says Gluskin Sheff's David Rosenberg, would be the proprietary trading desks at the big commercials banks. These are traders that invest their firms' capital. As Rosenberg recently noted, using weekly Fed data, bank-wide trading assets have soared $50 billion alone in the past month.
Vinny Catalano of Blue Marble Research agrees that it's the fast-money crowd dominating the run-up. "This is predominantly hedge funds and prop traders and they're dancing to the music of ‘Don't Fight the Fed'", says Catalano. "You don't have much buying power from mutual funds because they're already at record low cash levels, and they're getting plenty of ongoing redemptions from investors."
What about pension funds?
The Wall Street Journal this week published an article titled "Pension Funds Flee Stocks In Search of Less-Risky Bets," which started off with the following observation: "After making the same kinds of investment blunders as many individuals, corporate pension funds now are seeking the same remedies: fleeing stocks for the perceived safety of bonds."
Indeed, Dr. Ed Yardeni of Yardeni Research notes that the percentage of equities in defined benefit private pension plans rose from 35.1% during Q3-1990 to a record high of 61.9% during Q1-2006. It then plunged back down to 37.8% during Q1-2009. Of course, that was mostly attributable to the sharp decline in equity prices from October 2007 through March 2009. However, the percentage continued to drop down to 34.2% during Q2-2010 despite the impressive rally in stocks since March 2009.
However, Yardeni thinks the industry, looking ahead, might have no choice but to allocate more funds towards the equity market. That's because they'll remain desperate, he says, for better returns than are now available in the fixed-income markets.
"Many pension plans continue to use the expected return on their assets as a discount rate," Yardeni says. "This is often 8%, and reflects the performance of the past 20-30 years. Good luck with that if bond yields remain this low."
One group of investors that have been determined sellers all year: the men and women actually running our publicly-traded companies. According to Jonathan Moreland, director of research at InsiderInsights.com, in every month this year, the C-suite crowd has sold more than they bought.
In the first nine months of his year, he says, on average, 42% more companies had insiders selling stock than buying it. In total, $40.2 billion worth of stock was sold and only $7.54 billion was bought.
That stat might leave investors nervous: what do these executives know that the rest of us don't?
However, Alec Young, S&P's equity strategist, says that he doesn't place too much emphasis on whether CEOs are now selling their shares. "I don't consider this is some kind of major indicator," he says. "This has been going on all year and the market is still up. Now it may prove prescient, but I tend to focus more on valuation and the earnings outlook."
Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the firm.
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