Bizarro Trading Tip
When certain managers in different pinstripes are talking behind their gloves, what are they really saying?
Following up on my post yesterday, I'll put a few numbers and a ridiculous analogy behind my opinion that buying and selling pressure pushes the market, earnings do not pull it. Many believe that last statement violates every rule in the book, but rule #1 in my P/L book is that capital flows from the many to the few in any skill game, over time, every time. There is another side of the story about how strong the underlying earnings really are at some companies, and that is – they just do not matter if their shares are over-owned. Now before the e-mails fly, especially from professors who will very correctly point me toward evidence to the contrary over the longer term I am speaking of only our beliefs, experience, and research system we built based on each. The different opinions here in the 'Ville are why I believe this menu is unrivaled for the most discerning audience extant.
The highest quality companies are NOT the companies you want to own if there are more sellers than buyers. Yet that is precisely what I always hear works the best it seems, in any market, especially when things get confusing and investors need to be placated. One of many clues to solve the mystery of what is over-owned is listening to where the biggest shareholders say is the place to be. They may be revealing more about what they need to work, more than what they would predict will work if they owned nothing. The next guy on my Bloomberg radio or CNBC who thinks high quality, best of breed, large caps are among the worst places to be, will be the first. (cue the "many-to-few" ringing bells right here) But in the face of a liquidity contraction, and ensuing selling pressure, consider which stocks are the easiest to unload – the exact same stocks that are still the object of affection for many.
We have believed one fundamental data point was more predictive than all the others for this group, that they were simply over-owned. According to our research, over the past few quarters alone (but this has been a consistent story for years) those four stocks were each held by more than 4,500 mutual funds, on average. All of them had two things in common. They were sold-out entirely in more funds than added, and their existing positions were decreased in size, according to quarterly filings.
In our last article we opined that liquidity/demand was falling precipitously and outlined our four headwinds to each. Admittedly, they do not matter one bit to find the next rally, the tradable bottom, the key reversal, short-term support. I rely on other professors far more talented than I, for those. But, if you take two or three steps back and really look around the table at this skill game and consider what the other players are going to (or forced to) do next, I think they matter a great deal. It is fine to believe in your stocks and you might be right. But the market is never wrong. When liquidity is drained selling pressure trumps buying pressure and the orders barked to traders do not include any mention of earnings estimates. I submitted yesterday that the Bank of Japan's sucking liquidity from the global market, confirmed today, is a far bigger "tell" than a bank of my flat screens tuned to earnings reports.
One side of the story is that stock's earnings have never been better and eventually it will be reflected in the stock price (my goodness…I can't make this stuff up, another interview ended with this exact statement after I typed it just this moment…word for word.) The other side is to consider what the intevierwee does when he goes back to his office, first. If he is managing a monster fund it is to find out about redemptions or additions. Liquidity decisions manage his fund at least as much as he does (I might suggest here to consider that same sentence for the entire stock market, but that's for a good Pinot at MIM3, find me for both!). So, let's say for sake of argument he is getting redemptions when he arrives back, and is now responsible for selling to cut those checks. Which holdings can he most easily get out of? Could they be the same names that he just explained with excellent rationale are the best to own? Let us share our Bizarro Bullpen Trading Tip to explain how we often hear the same answers in a very different way than many.
Imagine getting to manage just for a moment the baseball team opposing yours in a crucial situation in late innings. You are pulling the strings FOR the other team! After slipping into your disguise, you get to trot out to the hill and motion to the bullpen handpicking the one guy you know that your arch-rival would LEAST like to see take the hill. Now, imagine the conversation on the mound that ensues, when the infielders look up to you scratching their heads desperate for a reason to believe. Your 60 seconds are almost up so you can't break character yet. You gotta tell them why ____ (insert name here, you pick: Tavarez/Farnsworth/etc.) is THE guy right now. "Hey, this may not have worked the past several games, months, okay years, but his stats don't lie, he's one of the best in the world and this is our time, we're finally due, now look at me fellas, let's go…wait somebody gimme their glove (so you can hide your smile)….let's go get 'em." Call me crazy but think about this bizarro-world speech next time you listen to an interview extolling the virtues of what is not working.
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