Stocktake: Little evidence of anxiety over Fed’s plans

A look around the world’s stock markets

Anxiety regarding Federal Reserve plans caused stocks to retreat last week – or so we're told. The Fed recently left rates unchanged and signalled two rate increases for 2016, down from its previous estimate of four hikes. Markets cheered, but four of the Fed's 17 policymakers have since made hawkish noises.

Nevertheless, it's premature to see last week's minor declines as proof of renewed anxiety. Stocks have soared since mid-February; the S&P 500 last week traded 6 per cent above its 50-day moving average, noted Raymond James analysts, "about as extended as it ever gets". The percentage of technically overbought stocks hit its highest percentage in over three years, said Bespoke Investment Group, while Charles Schwab noted every single Dow Jones stock was technically overbought.

Some kind of pullback would hardly be surprising, then, and should hardly be seen as testimony to renewed market jitters.

Indeed, the rally’s strength should give bears pause. Sceptics say huge gains in beaten-down areas (emerging markets and energy stocks, for example) indicate gains are simply the product of short sellers covering their bets. However, almost all stocks have participated in the rally.


For now, it appears any pullback will not be a traumatic one.

Fed keeping markets afloat, says GMO

The Federal Reserve's importance is also on the minds of Boston fund giant GMO. In a paper authored by James Montier and Irish economist Philip Pilkington, GMO notes that since 1984, a quarter of US market gains have come on the eight days a year when the Fed announces policy. Oddly, gains occurred whether rates were cut, raised, or left unchanged. GMO, a long-term bear on US markets, puts this down to "animal spirits", and suggests equities may be 25 per cent lower were it not for the Fed's "market levitation" efforts.

Still, one could also argue Fed-related moves merely represent “exhalations” of relief, regardless of the rate policy, as Reformed Broker Josh Brown tweeted. The US market may well be a “monetary policy junkie”, as GMO says, but Brown’s “relief” thesis is at least as plausible – more so, perhaps – than GMO’s “animal spirits” explanation.

Nothing “easy” about the market rally

We've had an "easy rally" in risk assets, high-profile money manager Jeffrey Gundlach said last week. Really?

Gundlach, the billionaire founder of DoubleLine Capital, believes this is a bear market environment, but says money can be made during brief market rebounds. On Friday, February 26th, for example, he told Reuters there are “counter-trend moves along the way”, saying he had bought equities “two weeks ago Wednesday” – the day before February 11’s market bottom, just prior to stocks’ explosive move higher. On Monday, March 1st, he said DoubleLine was considering closing its long positions, saying: “I am bearish. There are just wiggles and jiggles”.

On February 8th, however, Gundlach made no mention to Reuters of the “easy rally” that was to come. Volatility was not sufficiently elevated to signal a bottom, he said, adding: “This is not a trader’s market. It is a freight train that you want to stay in sync with. There’s too much order and belief in markets in spite of big losses.”

So, to recap: a few weeks after warning of this “freight train”, Gundlach said he’d actually been buying at the bottom. Two trading days later and three weeks before last week’s peak, he said he was about to take profits.

As “easy” rallies go, this one sounded quite tricky.

Another wild ride for Ackman investors

Another billionaire, Pershing Square's Bill Ackman, is under pressure. Pershing, which trades on the Euronext Amsterdam Exchange, suffered its worst-ever year in 2015. 2016 has been even worse, with Pershing shares now having almost halved over the last year.

The main cause of Ackman's woes has been controversial pharmaceutical firm Valeant, whose shares collapsed from $263 in August to below $30. Instead of cutting his outsized position, Ackman added to it, with disastrous consequences. Risk management has never been Ackman's forte. He enjoyed huge success with his first hedge fund, Gotham Partners, until forced to close the fund in 2002 due to one disastrous holding. Fellow hedge fund manager Whitney Tilson later said Ackman "learned lessons" from this "very instructive" experience.

Apparently not. Once again, Ackman’s heavily concentrated approach – Pershing’s portfolio consists of just 11 long positions and one short bet – has wreaked havoc. His investors can’t say they weren’t warned.