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Memo to Portfolio Managers: Want to Keep Your Job? Buy Stocks


Getting long equities is a matter of self-preservation.

It was quite interesting to read Jeff Saut's piece today, Jeff Saut: Four Reasons Why Being Bearish Right Now Is a Mistake. Please note how his points 1-3 coincide with points I made in Why the Countertrend Rally Can't be Stopped and Is a Countertrend Rally Inevitable?.

In particular, I'd like readers to focus on point number one, as I've taken quite a lot of flak for making exactly the same argument.

I'm talking to a lot of portfolio managers here in Europe, and they're way under-benchmarked to stocks (especially to the US). They're close to being forced by their bosses to rebalance to at least a 60% stocks/40% bonds weighting.

I don't think many people quite understand the upside implications of this.

Portfolio managers are evaluated based on their performance relative to their benchmark. Most institutional managers are still overweight cash and underweight equities. By my estimation, the majority of managers and the public raised cash (capitulated) with the S&P 500 between 850 and 950. Most of those folks are now underperforming the index relative to the moment when they capitulated.

Perhaps even more importantly, virtually everybody that has cash right now is underperforming on a year-to-date basis. Remember that the S&P 500 started the year at 903.

Fund managers that are overweight cash were feeling pretty smart in February. But the reversal of fortune for these folks has been dramatic. Understand the psychological implications of this: smugness to panic. Today, many of these folks are truly petrified.

Most of these managers aren't bullish on the market, but at this point, it doesn't matter what they think. Getting long equities is a matter of job preservation.

I advise readers to pay attention to what I'm about to say: Large institutional funds don't trade the way you and I do. I worked for one of these large fund-management companies, and I can tell you that it could take 2-4 weeks simply to establish a smallish 1-2% position in a large cap, highly liquid, S&P 500 stock. A large underweight equities position, under normal conditions, can take up to 6 weeks to pare down. Normally, this posed no major problem; under normal conditions, for every institutional buyer, there's an institutional seller doing the same thing, but in reverse.

Now imagine the dilemma we're in today: There are literally dozens of institutional managers that are virtually "obligated" by circumstances to simultaneously start establishing positions that under normal conditions, would take 2-6 weeks to establish.

Warning: There are too many elephants potentially heading towards the same entrance.

I'm not actually predicting a massive upside squeeze in the short term. As I posted on Buzz & Banter late on Friday, although I have a 100% long core position, I'm sort of cautious about this week.

But respect the elephants, folks. When these institutional managers start buying, your personal bearish opinions aren't going to amount to a hill of beans. Indeed, the personal opinions of those managers aren't, either.

These people are just like everyone else - often with spouses and kids to take care of. You may not like it, but you have to understand what drives them. These folks aren't going to let your opinions or their own get in the way of saving their job.

Investors interested in getting ahead of this general market trend might consider such alternatives as SPY, SSO, QQQQ, QLD, BGU, TNA.
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No positions in stocks mentioned.
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