Another sign of fakery – apart from the implausible ‘V’ shape – is the “dash for trash” in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen’s model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.
That’s Ambrose Evans-Pritchard in his latest article for The Telegraph, entitled “Enjoy the rally while it lasts — but expect it to take a suckers’ punch”. In it, the author suggests that the March/April rally is akin to the dramatic — but fleeting — upturns encountered during the Great Depression (see here for instance).
We have some charts to elaborate on the above point.
The first are from UBS’s most recent US Client Flow Watch, which is based on the bank’s internal client activity of cash transactions only for the week ending May 1. In the first chart, below left, you can see that client inflows, with the exception perhaps of healthcare, went into some of the riskiest sectors — financials and consumer companies. In fact last week saw net buying of financials for the first time this year, according to UBS.
Most of that buying was done by long-only funds according to the data. Hedge funds, as you can see from the next chart, below left, were net sellers in the period; one reason why short-bias hedge funds had something of a difficult April. So while the sentiment seems to have turned amongst US long-only funds, US hedge funds haven’t yet increased their exposure to US equities.
Meanwhile, for UBS’s foreign clients it’s pretty much the same story. Foreign long-only funds were doing much of the buying, while foreign hedge funds were net sellers. Here’s the sector breakdown of the buying:
And in the UK, here’s a breakdown of March/April buying and selling from Citi. You can see financials made a strikingly large contribution to the rally in April.
All of which suggests there is a startling amount of division among investors at the moment. In one corner sit the buyers, who presumably believe that the banks’ have plugged their balance sheets, successfully deleveraged and detoxified (with the government’s help) and that a recovery is just around the corner. In the other corner, sit those who think that the financial sector still has a long way to go to heal itself — or at the very least, are biding their time for more concrete confirmation of a recovery. Battle of bulls and bears, here we come.
Related links:
A suckers’ rally or the real deal? – FT Alphaville
Bank of England: Recovery to be V-shaped – The Telegraph
Can this rally keep going? – SmartMoney
Bill Miller says buy banks – FT Alphaville