Institutions Becoming More Cautious?

Every week, the Bank Of America Merrill Lynch equity strategy team breaks out data on how much clients are buying and selling.  The report looks at the average of a 4-week time frame.  Over the last few months, the big institutional clients at the bank have been rotating out of stocks on a consistent basis, while the average investor seems to continue to like to buy into the market.

According to this week's data, the amount of selling by institutional clients over the past four weeks has hit the highest level on record.  "Net weekly sales by this group were the largest since March, and the sixth-largest in our data history (since 2008)," writes BAML strategist Savita Subramanian in a note. "And on a four-week week average basis, outflows by institutional clients are the largest in our data history."

While this is only one piece of market data and should be taken in context, it's important to pay attention to what institutions are doing.  While markets can always continue to move higher, it's usually wise to be aware of the actions of institutions, especially when retails investors are doing the exact opposite.

 

 

Smart Investors Losing An Edge?

Big Macro swings in capital markets are confounding even the veterans.

 

Stan Druckenmiller, a one-time chief investment officer of Soros Fund Management, says that investing is becoming harder for him, “because the importance of my skills is receding”. According to an interview with Goldman Sachs said:

 

“My strength is economic forecasting, but that only works in free markets, when markets are smarter than people. That’s how I started. I watched the stock market, how equities reacted to change in levels of economic activity and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised and I’m seriously questioning whether I have any competitive advantage left.”

 

“Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it’s a possibility, but I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It’s not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns.”

 

Throw market manipulation by central banks and things get really confusing, says Druckenmiller: “If the most important price in the most important economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?”

 

Global macro managers bet on big economic trends and policy decisions. But many have found it difficult to time the frequent ups and downs of markets in which swings are often driven by announcements from politicians or central bankers.  Druckenmiller is not alone. In November Geoff Grant, founder of U.S. hedge fund manager Grant Capital, said that he was shutting down because "he has decided his global macro strategy didn't have an edge in today's markets."

 

One of two things may be happening in this new world of investing; either the baton is being passed onto central bankers to rule the day, possibly indefinitely; or we are approaching an extremely vulnerable juncture in financial markets.  We may look back and realize that following the smart money investors out of financial markets may have been the smartest move of all.  Only time will tell.