<!--StartFragment-->
This week,
rather than focusing on inflation in the form of prices rising around the
globe, I thought we’d focus a specific form of inflation, namely, that of
inflated earnings.
Indeed, with
earnings season fully underway we’ve already seen some stellar results from the
likes of General Electric, JP Morgan, and Citigroup.
§ JP
Morgan: All time record earnings of $17.4 billion, earnings growth of 48% from
2009’s results.
§ Citigroup:
Annual earnings of $10.6 billion. First full year of positive earnings since
2007.
§ GE:
Total earnings of $13.2 billion, an increase of 15% from 2009’s results.
These three
companies, despite their supposed differences all have a common theme in their
results. That theme is:
Making money by lowering loan loss
reserves.
I realize
this sounds like mumbo-jumbo. It is. In plain terms, what this means is that
these companies are writing off the money they’ve kept in the proverbial rainy
day jar to cover any losses that might occur from the loan’s in their lending
portfolios (yes, GE continues to lend money via its financial arm, GE Capital…
the same arm that nearly took the company under in 2008).
Let me give
you an example. Let’s say that my rainy day jar contains $10,000 to cover any
unforeseen problems. Now let’s say that one day I decide that I only need
$5,000 to cover unforeseen expenses. Does this random mental calculation mean
I’ve made more money and need to report $5,000 more on my tax return that year?
NOPE.
However,
this is exactly how GE, JP Morgan, and Citigroup generated their “stellar”
earnings. In JP Morgan’s case, the bank did this with $2 billion, roughly 11%
of its 2010 earnings. This was on par with GE’s gimmicky at $1.4 billion or 10%
of annual profits. In contrast, Citigroup pulled out all the accounting
gimmicky stops, lowering loan loss reserves by $2.2 billion or 20% of 2010 earnings.
Put another
way, $1 out of every $5 that Citigroup reported in earnings was non-existent.
And $1 out of every $10 GE and JP Morgan reported was non-existent. Thus, the
message Big Business is sending to the world right now is clear:
If
you can’t actually MAKE the money, just MAKE IT UP.
I continually hear arguments that stocks are somehow cheap at today’s
levels. Just skimming over the results for JPM, C, and GE, I don’t see how
anyone can claim to have an accurate valuation of ANY of these companies. To
value a company you need some clue as to its earnings potential. All of these
companies are black boxes.
This is just another layer of the great financial Ponzi scheme that is
the US stock market. Bogus earnings, fictitious accounting, outright fraud,
insider trading, backroom deals… the whole thing is just one huge house of
cards propped up by one thing and one thing only…
The Fed’s liquidity.
Take this away and the whole thing comes crashing down. Some
commentators see this situation and claim that the market will never collapse.
I couldn’t disagree more. Liquidity has a price. And that price will ultimately
be the US Dollar.
Remember,
the US's Federal debt is now at $13+ trillion. And if you include unfunded
liabilities like social security and Medicare, you're talking about $70+
TRILLION in total debt on the US's balance sheet.
Let's be blunt here: the US will NEVER pay these debts and liabilities off. And
once the financial world finishes pummeling the Euro, we're going to see the US
Dollar and Federal debt markets implode.
I cannot tell you when this will happen. All I can say is that it will
happen. And when it does, inflation hedges across the board will EXPLODE
higher.
Good Investing!
Graham
Summers
PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.
I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).
Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.
PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.
You can
access this Report at the link above.
<!--EndFragment-->
A front page story in today’s Wall Street Journal (“Hedge Funds’ Behavior Magnifies Swings in Market,” January 14, 2011) highlighted the relative performance of so-called “crowded” hedge fund trades versus the broad market. The premise of the article is that hedge fund ownership magnifies the beta of particular stocks and reduces the importance of company fundamentals in determining share performance.
We long ago concluded that money flow is important to the performance of stocks and that it made sense to follow the proverbial “smart money.” We have analyzed more than 7,000 individual stock and ETF positions of roughly 600-800 hedge funds every 90 days for the past decade. Five years ago we started publishing our quarterly Hedge Fund Trend Monitor to track the hedge fund money flow into and out of individual stocks and hedge fund sector tilts on both a long and net basis.
1. Time horizon is vital to understanding how hedge fund ownership data should be incorporated into the portfolio management process. On a daily or even weekly basis, hedge fund positioning is noisy in terms of explaining relative excess return. However, on a quarterly basis the hit rate of outperformance of hedge fund positions is notable.
For example, our basket of stocks with the “most concentrated” hedge fund ownership (Bloomberg ticker: <GSTHHFHI>) has a 71% hit rate of quarterly outperformance versus the S&P 500 since May 2001 with an average quarterly excess return of 296 bp. Our basket of “stocks that matter most” to hedge funds (<GSTHHVIP>) has outperformed the S&P 500 on a quarterly basis 66% of the time since 2001 by an average of 74 bp. [and here we get the all important footnote from Goldman: "Note: The ability to trade these baskets will depend upon market conditions, including liquidity and borrow constraints at the time of the trade." in other words everyone can get in, but when everyone has to get out, nobody will. Enjoy.]
2. Our analysis shows hedge fund holdings generally outperform during equity market rallies and lag during corrections. We recommend investors use our hedge fund holdings baskets to generate alpha during “risk-on” rallies and as a tool for risk reduction during periods of elevated market uncertainty (see Exhibits 1-3).
For example, our “most concentrated” hedge fund basket has outperformed the S&P 500 by an average of 868 bp (745 on median basis) during the six rallies since the market low in March 2009 and underperformed the S&P 500 by an average of 322 bp (385 bp on median basis) during market corrections.
The reverse is also true! Our basket of “least concentrated” hedge fund positions (Bloomberg ticker: <GSTHHFSL>) lagged the S&P 500 during market rallies by average and median of 69 bp but outperformed the broad market by an average of 99 bp (37 bp on median basis) during corrections.
Our hedge fund VIP list (Bloomberg: <GSTHHVIP>) consists of stocks in which fundamentally-driven hedge funds have a large stake. We define stocks that “matter most” to hedge funds as the positions that appear most frequently among the top ten holdings within hedge fund portfolios. For this analysis, we limit our hedge fund universe to funds with 10 to 200 distinct equity positions in an attempt to isolate fundamentally-driven investors from quantitative funds or funds that mirror private equity investments. Hedge funds own between 1% and 38% of the equity cap of the stocks in the basket with an average of 9%, almost twice the 5% average for the S&P 500.
By construction, our VIP list identifies the 50 stocks whose performance will largely influence the long side of many fundamentally driven hedge funds. The VIP basket lagged the S&P 500 by 822 bp during 2008 (-45% vs. -37%). It reversed in 2009, outperforming S&P 500 by 1,391 bp (40% vs. 27%). In 2010, the basket outperformed S&P 500 by 443 bp (19% vs. 15%).
Our VIP basket has a large-cap bias with a median market capitalization of $49 billion compared with $11 billion for the S&P 500. The VIP basket overweights the Information Technology sector (24%) and underweights Industrials (2%). Turnover for the VIP basket since 2001 averages 34% quarterly (52% annually) with 17 stocks typically entering the basket. The next re-balancing will take place after February 15, 2011.
Current constituents of our hedge fund VIP basket scheduled to report 4Q 2010 results next week include the following. Tuesday: C, AAPL, IBM. Wednesday: WFC and USB. Thursday: GOOG and FCX. Friday: SLB and BAC. Exhibit 52 contains the complete list of constituents for all three baskets.
We define “concentration” as the share of market capitalization owned in aggregate by hedge funds. The stocks in the “most concentrated” basket tend to be mid-caps (at the lower end of the S&P 500 capitalization distribution). Hedge funds own between 17% and 48% of the equity cap of the stocks in the basket with an average of 24% vs. 5% for the S&P 500. Stocks with the “most concentrated” hedge fund ownership outperformed the S&P 500 in 2010 by 84 bp (16% vs. 15%).
In contrast, hedge funds own between 0.2% and 0.6% of the equity cap of the stocks in our “least concentrated” hedge fund basket with an average of 0.5% vs. 5% for the S&P 500. The basket outperformed the S&P 500 in 2010 by 255 bp (18% vs. 15%).
Translation: ignore the voice of reason which argues that if everyone else is on the same side of the trade, then you are the guaranteed sucker on the table, and instead follow the Siren song promising untold riches... until such time as there is an actual downtick in the market (better known as the 100 or so shares that make up 50% of market volume) and where no matter how hard you try to get out, you are stuck. For reference: see the first time Goldman butchered the Greeks...
And some pretty charts: ignore the fact that the least concentrated stocks are solidly outperforming their most widely held cousins...
benchcraft company portland or
Solar & Wind Energy <b>News</b> of the Last Week (or So) – CleanTechnica <b>...</b>
CleanTechnica: Cleantech innovation news and views's authors are supported by a revenue-sharing agreement with the company that operates CleanTechnica: Cleantech innovation news and views, Important Media. Of course, it's never enough ...
Jeddah: City with a survival instinct - Arab <b>News</b>
At no time will Arab News attempt to alter the core meaning of a comment. 3. Reject the message, edit the message when the moderators judge it to be a personal attack, defamatory (or potentially defamatory), abusive, incite hatred or ...
Be A Part of the Oscars Movie <b>News</b> & Movie Reviews | Geo Blog
Do you like reading movie news and movie reviews? All of us without exception love the movies. They allow us to escape into a fantasy world and get away from our everyday realities if only for a while. Sitting in front of the screen at ...
benchcraft company portland or
<!--StartFragment-->
This week,
rather than focusing on inflation in the form of prices rising around the
globe, I thought we’d focus a specific form of inflation, namely, that of
inflated earnings.
Indeed, with
earnings season fully underway we’ve already seen some stellar results from the
likes of General Electric, JP Morgan, and Citigroup.
§ JP
Morgan: All time record earnings of $17.4 billion, earnings growth of 48% from
2009’s results.
§ Citigroup:
Annual earnings of $10.6 billion. First full year of positive earnings since
2007.
§ GE:
Total earnings of $13.2 billion, an increase of 15% from 2009’s results.
These three
companies, despite their supposed differences all have a common theme in their
results. That theme is:
Making money by lowering loan loss
reserves.
I realize
this sounds like mumbo-jumbo. It is. In plain terms, what this means is that
these companies are writing off the money they’ve kept in the proverbial rainy
day jar to cover any losses that might occur from the loan’s in their lending
portfolios (yes, GE continues to lend money via its financial arm, GE Capital…
the same arm that nearly took the company under in 2008).
Let me give
you an example. Let’s say that my rainy day jar contains $10,000 to cover any
unforeseen problems. Now let’s say that one day I decide that I only need
$5,000 to cover unforeseen expenses. Does this random mental calculation mean
I’ve made more money and need to report $5,000 more on my tax return that year?
NOPE.
However,
this is exactly how GE, JP Morgan, and Citigroup generated their “stellar”
earnings. In JP Morgan’s case, the bank did this with $2 billion, roughly 11%
of its 2010 earnings. This was on par with GE’s gimmicky at $1.4 billion or 10%
of annual profits. In contrast, Citigroup pulled out all the accounting
gimmicky stops, lowering loan loss reserves by $2.2 billion or 20% of 2010 earnings.
Put another
way, $1 out of every $5 that Citigroup reported in earnings was non-existent.
And $1 out of every $10 GE and JP Morgan reported was non-existent. Thus, the
message Big Business is sending to the world right now is clear:
If
you can’t actually MAKE the money, just MAKE IT UP.
I continually hear arguments that stocks are somehow cheap at today’s
levels. Just skimming over the results for JPM, C, and GE, I don’t see how
anyone can claim to have an accurate valuation of ANY of these companies. To
value a company you need some clue as to its earnings potential. All of these
companies are black boxes.
This is just another layer of the great financial Ponzi scheme that is
the US stock market. Bogus earnings, fictitious accounting, outright fraud,
insider trading, backroom deals… the whole thing is just one huge house of
cards propped up by one thing and one thing only…
The Fed’s liquidity.
Take this away and the whole thing comes crashing down. Some
commentators see this situation and claim that the market will never collapse.
I couldn’t disagree more. Liquidity has a price. And that price will ultimately
be the US Dollar.
Remember,
the US's Federal debt is now at $13+ trillion. And if you include unfunded
liabilities like social security and Medicare, you're talking about $70+
TRILLION in total debt on the US's balance sheet.
Let's be blunt here: the US will NEVER pay these debts and liabilities off. And
once the financial world finishes pummeling the Euro, we're going to see the US
Dollar and Federal debt markets implode.
I cannot tell you when this will happen. All I can say is that it will
happen. And when it does, inflation hedges across the board will EXPLODE
higher.
Good Investing!
Graham
Summers
PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.
I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).
Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.
PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.
You can
access this Report at the link above.
<!--EndFragment-->
A front page story in today’s Wall Street Journal (“Hedge Funds’ Behavior Magnifies Swings in Market,” January 14, 2011) highlighted the relative performance of so-called “crowded” hedge fund trades versus the broad market. The premise of the article is that hedge fund ownership magnifies the beta of particular stocks and reduces the importance of company fundamentals in determining share performance.
We long ago concluded that money flow is important to the performance of stocks and that it made sense to follow the proverbial “smart money.” We have analyzed more than 7,000 individual stock and ETF positions of roughly 600-800 hedge funds every 90 days for the past decade. Five years ago we started publishing our quarterly Hedge Fund Trend Monitor to track the hedge fund money flow into and out of individual stocks and hedge fund sector tilts on both a long and net basis.
1. Time horizon is vital to understanding how hedge fund ownership data should be incorporated into the portfolio management process. On a daily or even weekly basis, hedge fund positioning is noisy in terms of explaining relative excess return. However, on a quarterly basis the hit rate of outperformance of hedge fund positions is notable.
For example, our basket of stocks with the “most concentrated” hedge fund ownership (Bloomberg ticker: <GSTHHFHI>) has a 71% hit rate of quarterly outperformance versus the S&P 500 since May 2001 with an average quarterly excess return of 296 bp. Our basket of “stocks that matter most” to hedge funds (<GSTHHVIP>) has outperformed the S&P 500 on a quarterly basis 66% of the time since 2001 by an average of 74 bp. [and here we get the all important footnote from Goldman: "Note: The ability to trade these baskets will depend upon market conditions, including liquidity and borrow constraints at the time of the trade." in other words everyone can get in, but when everyone has to get out, nobody will. Enjoy.]
2. Our analysis shows hedge fund holdings generally outperform during equity market rallies and lag during corrections. We recommend investors use our hedge fund holdings baskets to generate alpha during “risk-on” rallies and as a tool for risk reduction during periods of elevated market uncertainty (see Exhibits 1-3).
For example, our “most concentrated” hedge fund basket has outperformed the S&P 500 by an average of 868 bp (745 on median basis) during the six rallies since the market low in March 2009 and underperformed the S&P 500 by an average of 322 bp (385 bp on median basis) during market corrections.
The reverse is also true! Our basket of “least concentrated” hedge fund positions (Bloomberg ticker: <GSTHHFSL>) lagged the S&P 500 during market rallies by average and median of 69 bp but outperformed the broad market by an average of 99 bp (37 bp on median basis) during corrections.
Our hedge fund VIP list (Bloomberg: <GSTHHVIP>) consists of stocks in which fundamentally-driven hedge funds have a large stake. We define stocks that “matter most” to hedge funds as the positions that appear most frequently among the top ten holdings within hedge fund portfolios. For this analysis, we limit our hedge fund universe to funds with 10 to 200 distinct equity positions in an attempt to isolate fundamentally-driven investors from quantitative funds or funds that mirror private equity investments. Hedge funds own between 1% and 38% of the equity cap of the stocks in the basket with an average of 9%, almost twice the 5% average for the S&P 500.
By construction, our VIP list identifies the 50 stocks whose performance will largely influence the long side of many fundamentally driven hedge funds. The VIP basket lagged the S&P 500 by 822 bp during 2008 (-45% vs. -37%). It reversed in 2009, outperforming S&P 500 by 1,391 bp (40% vs. 27%). In 2010, the basket outperformed S&P 500 by 443 bp (19% vs. 15%).
Our VIP basket has a large-cap bias with a median market capitalization of $49 billion compared with $11 billion for the S&P 500. The VIP basket overweights the Information Technology sector (24%) and underweights Industrials (2%). Turnover for the VIP basket since 2001 averages 34% quarterly (52% annually) with 17 stocks typically entering the basket. The next re-balancing will take place after February 15, 2011.
Current constituents of our hedge fund VIP basket scheduled to report 4Q 2010 results next week include the following. Tuesday: C, AAPL, IBM. Wednesday: WFC and USB. Thursday: GOOG and FCX. Friday: SLB and BAC. Exhibit 52 contains the complete list of constituents for all three baskets.
We define “concentration” as the share of market capitalization owned in aggregate by hedge funds. The stocks in the “most concentrated” basket tend to be mid-caps (at the lower end of the S&P 500 capitalization distribution). Hedge funds own between 17% and 48% of the equity cap of the stocks in the basket with an average of 24% vs. 5% for the S&P 500. Stocks with the “most concentrated” hedge fund ownership outperformed the S&P 500 in 2010 by 84 bp (16% vs. 15%).
In contrast, hedge funds own between 0.2% and 0.6% of the equity cap of the stocks in our “least concentrated” hedge fund basket with an average of 0.5% vs. 5% for the S&P 500. The basket outperformed the S&P 500 in 2010 by 255 bp (18% vs. 15%).
Translation: ignore the voice of reason which argues that if everyone else is on the same side of the trade, then you are the guaranteed sucker on the table, and instead follow the Siren song promising untold riches... until such time as there is an actual downtick in the market (better known as the 100 or so shares that make up 50% of market volume) and where no matter how hard you try to get out, you are stuck. For reference: see the first time Goldman butchered the Greeks...
And some pretty charts: ignore the fact that the least concentrated stocks are solidly outperforming their most widely held cousins...
benchcraft company scam
Solar & Wind Energy <b>News</b> of the Last Week (or So) – CleanTechnica <b>...</b>
CleanTechnica: Cleantech innovation news and views's authors are supported by a revenue-sharing agreement with the company that operates CleanTechnica: Cleantech innovation news and views, Important Media. Of course, it's never enough ...
Jeddah: City with a survival instinct - Arab <b>News</b>
At no time will Arab News attempt to alter the core meaning of a comment. 3. Reject the message, edit the message when the moderators judge it to be a personal attack, defamatory (or potentially defamatory), abusive, incite hatred or ...
Be A Part of the Oscars Movie <b>News</b> & Movie Reviews | Geo Blog
Do you like reading movie news and movie reviews? All of us without exception love the movies. They allow us to escape into a fantasy world and get away from our everyday realities if only for a while. Sitting in front of the screen at ...
benchcraft company portland or
[reefeed]
benchcraft company portland or
bench craft company reviews
Solar & Wind Energy <b>News</b> of the Last Week (or So) – CleanTechnica <b>...</b>
CleanTechnica: Cleantech innovation news and views's authors are supported by a revenue-sharing agreement with the company that operates CleanTechnica: Cleantech innovation news and views, Important Media. Of course, it's never enough ...
Jeddah: City with a survival instinct - Arab <b>News</b>
At no time will Arab News attempt to alter the core meaning of a comment. 3. Reject the message, edit the message when the moderators judge it to be a personal attack, defamatory (or potentially defamatory), abusive, incite hatred or ...
Be A Part of the Oscars Movie <b>News</b> & Movie Reviews | Geo Blog
Do you like reading movie news and movie reviews? All of us without exception love the movies. They allow us to escape into a fantasy world and get away from our everyday realities if only for a while. Sitting in front of the screen at ...
benchcraft company portland or
<!--StartFragment-->
This week,
rather than focusing on inflation in the form of prices rising around the
globe, I thought we’d focus a specific form of inflation, namely, that of
inflated earnings.
Indeed, with
earnings season fully underway we’ve already seen some stellar results from the
likes of General Electric, JP Morgan, and Citigroup.
§ JP
Morgan: All time record earnings of $17.4 billion, earnings growth of 48% from
2009’s results.
§ Citigroup:
Annual earnings of $10.6 billion. First full year of positive earnings since
2007.
§ GE:
Total earnings of $13.2 billion, an increase of 15% from 2009’s results.
These three
companies, despite their supposed differences all have a common theme in their
results. That theme is:
Making money by lowering loan loss
reserves.
I realize
this sounds like mumbo-jumbo. It is. In plain terms, what this means is that
these companies are writing off the money they’ve kept in the proverbial rainy
day jar to cover any losses that might occur from the loan’s in their lending
portfolios (yes, GE continues to lend money via its financial arm, GE Capital…
the same arm that nearly took the company under in 2008).
Let me give
you an example. Let’s say that my rainy day jar contains $10,000 to cover any
unforeseen problems. Now let’s say that one day I decide that I only need
$5,000 to cover unforeseen expenses. Does this random mental calculation mean
I’ve made more money and need to report $5,000 more on my tax return that year?
NOPE.
However,
this is exactly how GE, JP Morgan, and Citigroup generated their “stellar”
earnings. In JP Morgan’s case, the bank did this with $2 billion, roughly 11%
of its 2010 earnings. This was on par with GE’s gimmicky at $1.4 billion or 10%
of annual profits. In contrast, Citigroup pulled out all the accounting
gimmicky stops, lowering loan loss reserves by $2.2 billion or 20% of 2010 earnings.
Put another
way, $1 out of every $5 that Citigroup reported in earnings was non-existent.
And $1 out of every $10 GE and JP Morgan reported was non-existent. Thus, the
message Big Business is sending to the world right now is clear:
If
you can’t actually MAKE the money, just MAKE IT UP.
I continually hear arguments that stocks are somehow cheap at today’s
levels. Just skimming over the results for JPM, C, and GE, I don’t see how
anyone can claim to have an accurate valuation of ANY of these companies. To
value a company you need some clue as to its earnings potential. All of these
companies are black boxes.
This is just another layer of the great financial Ponzi scheme that is
the US stock market. Bogus earnings, fictitious accounting, outright fraud,
insider trading, backroom deals… the whole thing is just one huge house of
cards propped up by one thing and one thing only…
The Fed’s liquidity.
Take this away and the whole thing comes crashing down. Some
commentators see this situation and claim that the market will never collapse.
I couldn’t disagree more. Liquidity has a price. And that price will ultimately
be the US Dollar.
Remember,
the US's Federal debt is now at $13+ trillion. And if you include unfunded
liabilities like social security and Medicare, you're talking about $70+
TRILLION in total debt on the US's balance sheet.
Let's be blunt here: the US will NEVER pay these debts and liabilities off. And
once the financial world finishes pummeling the Euro, we're going to see the US
Dollar and Federal debt markets implode.
I cannot tell you when this will happen. All I can say is that it will
happen. And when it does, inflation hedges across the board will EXPLODE
higher.
Good Investing!
Graham
Summers
PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.
I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).
Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.
PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.
You can
access this Report at the link above.
<!--EndFragment-->
A front page story in today’s Wall Street Journal (“Hedge Funds’ Behavior Magnifies Swings in Market,” January 14, 2011) highlighted the relative performance of so-called “crowded” hedge fund trades versus the broad market. The premise of the article is that hedge fund ownership magnifies the beta of particular stocks and reduces the importance of company fundamentals in determining share performance.
We long ago concluded that money flow is important to the performance of stocks and that it made sense to follow the proverbial “smart money.” We have analyzed more than 7,000 individual stock and ETF positions of roughly 600-800 hedge funds every 90 days for the past decade. Five years ago we started publishing our quarterly Hedge Fund Trend Monitor to track the hedge fund money flow into and out of individual stocks and hedge fund sector tilts on both a long and net basis.
1. Time horizon is vital to understanding how hedge fund ownership data should be incorporated into the portfolio management process. On a daily or even weekly basis, hedge fund positioning is noisy in terms of explaining relative excess return. However, on a quarterly basis the hit rate of outperformance of hedge fund positions is notable.
For example, our basket of stocks with the “most concentrated” hedge fund ownership (Bloomberg ticker: <GSTHHFHI>) has a 71% hit rate of quarterly outperformance versus the S&P 500 since May 2001 with an average quarterly excess return of 296 bp. Our basket of “stocks that matter most” to hedge funds (<GSTHHVIP>) has outperformed the S&P 500 on a quarterly basis 66% of the time since 2001 by an average of 74 bp. [and here we get the all important footnote from Goldman: "Note: The ability to trade these baskets will depend upon market conditions, including liquidity and borrow constraints at the time of the trade." in other words everyone can get in, but when everyone has to get out, nobody will. Enjoy.]
2. Our analysis shows hedge fund holdings generally outperform during equity market rallies and lag during corrections. We recommend investors use our hedge fund holdings baskets to generate alpha during “risk-on” rallies and as a tool for risk reduction during periods of elevated market uncertainty (see Exhibits 1-3).
For example, our “most concentrated” hedge fund basket has outperformed the S&P 500 by an average of 868 bp (745 on median basis) during the six rallies since the market low in March 2009 and underperformed the S&P 500 by an average of 322 bp (385 bp on median basis) during market corrections.
The reverse is also true! Our basket of “least concentrated” hedge fund positions (Bloomberg ticker: <GSTHHFSL>) lagged the S&P 500 during market rallies by average and median of 69 bp but outperformed the broad market by an average of 99 bp (37 bp on median basis) during corrections.
Our hedge fund VIP list (Bloomberg: <GSTHHVIP>) consists of stocks in which fundamentally-driven hedge funds have a large stake. We define stocks that “matter most” to hedge funds as the positions that appear most frequently among the top ten holdings within hedge fund portfolios. For this analysis, we limit our hedge fund universe to funds with 10 to 200 distinct equity positions in an attempt to isolate fundamentally-driven investors from quantitative funds or funds that mirror private equity investments. Hedge funds own between 1% and 38% of the equity cap of the stocks in the basket with an average of 9%, almost twice the 5% average for the S&P 500.
By construction, our VIP list identifies the 50 stocks whose performance will largely influence the long side of many fundamentally driven hedge funds. The VIP basket lagged the S&P 500 by 822 bp during 2008 (-45% vs. -37%). It reversed in 2009, outperforming S&P 500 by 1,391 bp (40% vs. 27%). In 2010, the basket outperformed S&P 500 by 443 bp (19% vs. 15%).
Our VIP basket has a large-cap bias with a median market capitalization of $49 billion compared with $11 billion for the S&P 500. The VIP basket overweights the Information Technology sector (24%) and underweights Industrials (2%). Turnover for the VIP basket since 2001 averages 34% quarterly (52% annually) with 17 stocks typically entering the basket. The next re-balancing will take place after February 15, 2011.
Current constituents of our hedge fund VIP basket scheduled to report 4Q 2010 results next week include the following. Tuesday: C, AAPL, IBM. Wednesday: WFC and USB. Thursday: GOOG and FCX. Friday: SLB and BAC. Exhibit 52 contains the complete list of constituents for all three baskets.
We define “concentration” as the share of market capitalization owned in aggregate by hedge funds. The stocks in the “most concentrated” basket tend to be mid-caps (at the lower end of the S&P 500 capitalization distribution). Hedge funds own between 17% and 48% of the equity cap of the stocks in the basket with an average of 24% vs. 5% for the S&P 500. Stocks with the “most concentrated” hedge fund ownership outperformed the S&P 500 in 2010 by 84 bp (16% vs. 15%).
In contrast, hedge funds own between 0.2% and 0.6% of the equity cap of the stocks in our “least concentrated” hedge fund basket with an average of 0.5% vs. 5% for the S&P 500. The basket outperformed the S&P 500 in 2010 by 255 bp (18% vs. 15%).
Translation: ignore the voice of reason which argues that if everyone else is on the same side of the trade, then you are the guaranteed sucker on the table, and instead follow the Siren song promising untold riches... until such time as there is an actual downtick in the market (better known as the 100 or so shares that make up 50% of market volume) and where no matter how hard you try to get out, you are stuck. For reference: see the first time Goldman butchered the Greeks...
And some pretty charts: ignore the fact that the least concentrated stocks are solidly outperforming their most widely held cousins...
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I know you have looked at the balance sheets and think I am a great value for the selling price. Or, you may have examined other information that supports your decision to buy me today. Your desire to keep me eternally and spread the wealth to your children and grandchildren may never happen because I change frequently and sometimes very drastically. The changes I make will happen when you least expect it or maybe it will happen when you need me the most. Because I am so unreliable and I change frequently, please don't marry me.
What if this sign was posted next to every stock you ever thought about buying? You would be warned ahead of time that the prices change frequently and maybe even drastically. You would know that the stock market is not like a bank savings account. You aren't guaranteed to put money in and take out more than you deposited. This type of caution would make you aware that you need to keep an eye open and stay informed, but would it be enough to compel you to watch your stocks and get rid of them when you've made a profit? Stocks are not a bad investment. They are available and can be bought by people that have little or no money.
Whether a friend told you about an infamous stock tip or you've done your homework, it doesn't matter how you arrived at the decision to buy a particular stock. What matters most is how you manage the stock's investment once you own it. The management of a stock is not difficult. When you purchase a stock, you know when the stock price has increased or decreased. Anyone knows when they have made money. If the selling price is higher than what you bought it for, you've made money. But, do you know your selling point. Simply put, do you know how much money you want to make? Set a goal and stick to it.
Maybe you want to take a vacation. Using this short term objective, use the stocks you've invested in, make enough money to pay for the vacation, and sell the stock. The bottom line is profit. You've bought this stock to make money. Once that goal is achieved, sell. Sounds too good to be true, doesn't it?
Depending on the trading frequency, some brokerage companies don't charge their customers to buy and sell stock. Making money from the stock market is the equivalent of having a job. You will have to pay additional income taxes on monies earned. Keeping your stock for over a year will reduce the amount of taxes. Now having said that, figure the income taxes into the selling price so that you will know your net profit. Paying a higher income tax because of the additional money made when you sell stocks for a profit shouldn't keep you from making money. Finding stocks to buy and making decisions to buy and sell is easy work. Buying and selling stocks for a profit beats a full time or part time job. Either way, you still have to pay additional taxes.
The stock market changes too often and too drastically for you to not be aware of what's going on. Buying a stock and never looking at it for years or only glancing at a mailed quarterly statement is known as marrying a stock. You put your money into the business and you don't know if the stock price has fallen or if the company has gone bankrupt. Your quarterly statement will show how much money you lost or gained. A loss can be avoided.
Thanks to the computer, you can look at your stock's price any time. You can evaluate your stock's performance and determine whether or not you are on track to make the money originally intended. Marrying a stock and never looking at its performance or price will cost you money. Also, relying on a quarterly statement from your broker will cost you money.
There are no limits to the number of times you can buy and sell a stock. There are no limits or restrictions on how many shares you can own. The hands off stock management style will not prepare you for the crucial market changes known as the "Bear" market that occasionally occur. When your goal is to make money, you will need to not marry a stock.
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Solar & Wind Energy <b>News</b> of the Last Week (or So) – CleanTechnica <b>...</b>
CleanTechnica: Cleantech innovation news and views's authors are supported by a revenue-sharing agreement with the company that operates CleanTechnica: Cleantech innovation news and views, Important Media. Of course, it's never enough ...
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At no time will Arab News attempt to alter the core meaning of a comment. 3. Reject the message, edit the message when the moderators judge it to be a personal attack, defamatory (or potentially defamatory), abusive, incite hatred or ...
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At no time will Arab News attempt to alter the core meaning of a comment. 3. Reject the message, edit the message when the moderators judge it to be a personal attack, defamatory (or potentially defamatory), abusive, incite hatred or ...
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