WSJ : Market ‘Capitulation’ Is Nowhere in Sight (So Far)

There’s nothing like a 10% drop in the stock market in the first few days of the year to rev up Wall Street’s myth-making machine.

Although stocks regained some lost ground late this past week, the usual cliches about “panic” and “capitulation” have been flying — and investors should take a moment to winnow fact from fiction.

Myth No. 1 is that individual investors are especially prone to panic.

While some individual investors have undoubtedly been selling, the overall picture suggests patience.

This past Wednesday, when the Dow Jones Industrial Average dropped more than 500 points before closing down by 1.6%, was one of the 10 busiest retail trading days ever at Fidelity Investments, says Fidelity spokesman Robert Beauregard.

But, as they have done consistently so far this year, the firm’s individual clients added much more to their accounts than they withdrew, he says. Through Jan. 19, customers of the brokerage arm of the Boston-based financial firm have invested seven times as much new money in stocks and stock funds as they did in the last three months of 2015 combined.

At Wealthfront, a Palo Alto, Calif.-based automated online investment service that manages portfolios of exchange-traded funds, fewer clients have requested a less-risky investment mix so far in 2016 than did so in 2015, says chief executive Adam Nash.

William Koehler, chief executive of FCI Advisors, a financial-planning and investment-management firm in Kansas City, Mo. that manages $6.5 billion, says about a dozen of the firm’s more than 2,800 clients have either telephoned or emailed this week.

All were in or near retirement, he says, and primarily wanted to make sure they had enough cash to withstand another fall in the stock market.

Jon Stein, chief executive of Betterment, another online firm that manages ETF portfolios, says only 0.4% of its 130,000 clients have initiated any trades so far in January. However, 30% more clients have made new deposits so far this month than the New York-based firm had projected late last year, he says.

There are other reasons investors aren’t running for the hills. An analysis of data from retirement accounts held at Vanguard Group found that investors are less likely to check their balances after sharp declines than after days when the market is flat — a tendency to stick their heads in the sand that researchers have aptly dubbed “the ostrich effect.”

Like most people, investors prefer to savor good news and would rather ignore bad news. When your portfolio goes up, your self-esteem rises with it. In a falling market, you don’t just lose money; you lose face. Who would want to dwell on that?

If investors are ostriches, it isn’t any wonder that there are also problems with Myth No. 2: the chimera of capitulation.

The last thing most investors want to do after losing money is to lock in their losses by bailing out at the bottom. That would force them to admit a mistake — and forgo any chance of recovering those losses later.

Professional investors often describe capitulation as a “frenzy” or “climax” or “crescendo” of trading that, they claim, washes out the last sellers and prepares the market to rise.
But history shows that falling markets tend to hit bottom not with a bang but with a whimper. So if you are trying to time the market by waiting for capitulation, watching out for an orgy of selling is probably the wrong way to recognize it.

Look at what happened in 1929-1932. The Dow peaked at 381.17 on Sept. 3, 1929; a total of 4,439,000 shares traded hands on the New York Stock Exchange that day. By the time the Dow hit rock-bottom in the depths of the Depression, at an index value of 41.22 on July 8, 1932, only 720,000 shares were traded.

Those are not typos: The Dow had fallen 89.2% in less than three years. And trading volume had declined 84% from 1929.

Does that sound like a trading frenzy to you?

More recently, on March 6, 2009 — the nadir of the financial crisis, when the S&P 500 hit the “devil’s low” price of 666 — total volume was 12.6 billion shares. That was right on average for the previous two weeks and well below the levels of the previous autumn. Talk of “capitulation” had peaked months earlier.

So you shouldn’t view the volatile trading and fearful mood so far in 2016 as clear signs that stocks can’t drop much more.

If you have a high tolerance for pain, it’s fine to “buy on the dips” as falling prices make stocks less overpriced. But, as the behavior of many individual investors has been showing, we’re a long way from the quiet despair that has so often been a sign that stocks have finally reached bargain prices.

FT : Dior Homme, Balmain, Hermès AW16 report Paris menswear




Dior Homme, Balmain, Hermès AW16 report Paris menswear

Big brands, big questions on the penultimate day of the Paris shows
Models wearing Dior Homme's Fall Winter 2016 collection©Catwalking

Dior Homme

On this grey afternoon in January, what is the reality of Christian Dior right now? For the fashion industry, it is fractured and incomplete, still without a replacement for Raf Simons, who quit as artistic director in October 2015. In two days’ time, it will present a couture collection created by the unnamed design team. Today, it’s men’s creative director Kris Van Assche showed his Autumn/Winter 2016 collection for Dior Homme. But really, in the mind of the general public, does anything Dior shows on the catwalk actually matter?

Outside our industry bubble, Dior is the smooth-sailing ship of luxury. The image of the brand is far from the catwalk. Take the most recent commercials for Dior fragrances, which were on heavy rotation in the run up to Christmas. These adverts rely on celebrity — Charlize Theron, Johnny Depp. Their styling or mood has nothing whatsoever to do with what appears on the Dior catwalk, either for men or women. In the minds of a majority of consumers, celebrity-as-aspiration is what Dior means today.


And so, in our bubble, the industry gathered for the latest Dior Homme show. It was at its best when it was at its simplest. A camel coat came with a well cut shape. A sweater of differing Fair Isle patterns was desirable. A two-button black single-breasted suit looked neat from the front. From the side, the shoulder padding could be seen pressing through the top of the sleeve. Other suits crinkled like a concertina when the models walked. More precision, better quality was needed.

The catwalk was a vast, wooden parquet floor crammed with skate ramps that were trimmed in red neon. It looked like a rejected set from the dance battle movie Step Up. The collection was about how skate kids of yore grow into the luxury consumers of today. It’s a reality for many a male thirty or forty-something shopper. Just go into Supreme on a Saturday afternoon to see the true age of some of its customers. Yet on the Dior Homme catwalk, the effect was a little too cautious: a trenchcoat worn with a skater bobble cap, a black hoodie embroidered with a white rose. A pair of tight white jeans with a black rose print should not have been let on the catwalk.

Dior finds itself in an interesting situation. Are its catwalk designers truly important to the brand? Should they be given wider creative control than just the collection? Compare Dior with a brand of similar global recognition: Apple. Everything about Apple is unified, with the same language, same taste. Shouldn’t this also be the case for Dior in the 21st century?

Models wearing Balmain's Fall Winter 2016 collection©Catwalking

Balmain

At Balmain, it was all frock coats, great coats, officers coats, frogging. A high percentage of the clothing was encrusted in crystal. It was like the BBC had decided to make its current production of War and Peace more LOL. The menswear season in Paris has been all about humility, quietness. Balmain was about brashness, extravagance. Is it wrong to say it was really fun?

It was certainly audacious. Let’s take a look at random. A midnight blue double breasted velvet jacket had gold embroidered epaulettes, cuffs and lapels. The jacket was belted with a wide quilted cummerbund, held with leather thronging trimmed with long tassels. It was worn with red joggers and knee high riding boots. Casual!

The show had energy and conviction. 30-year-old creative director Olivier Rousteing puts his all into this work. In terms of sales, the brands trajectory so far has been remarkable. Can it retain its speed? Most brands are future-proofing with an air of sobriety. It was refreshing to see unashamed, youthful, unflappable optimism.

Models wearing Hermès's Fall Winter 2016 collection©Catwalking

Hermès

At Hermès, a gentleman sat down next to me and said hello. He asked my name and what I did, and then said his name was Bob Wilson. OK keep calm.

There followed some questioning to work out if he was who I thought he was. Why was he here? He said they’d invited him. No use. What did he do? He was best known for his work in the theatre . . . 

I cut the director Robert Wilson off. I told him he had changed my life. A revival of his Paris production of The Magic Flute in 2005 was the first time I understood opera. I can remember scenes from it still today. I’d watch Einstein on The Beach once a month if I could. What an honour to meet and talk with such a man, and what a classy label to invite him.

When the show started, I tried to keep the rose-tinted spectacles off. I was in a glow, but this is said without bias — it was a great collection, neatly summarising the current menswear mood. Soft tailoring, double-breasted coats, zip-up blousons, fine knits. In the whole collection, not one single tie. Here, pops of colour felt light, like a turquoise peacoat, or a great knit with strips of different-coloured pattern, one with checks, another mini trophies, running across another some racehorses. The show finished, we clapped. I had to run but I turned to say goodbye. We shook hands. Thank you, Mr Wilson, thank you.

(ZeroHedge) Here Are The 100 Biggest Hedge Funds And Their Favorite Stocks


Here Are The 100 Biggest Hedge Funds And Their Favorite Stocks

 

Once upon a time, long before central planning, before "smart beta", and before various attorney generals busted Stevie Cohen's massive "expert network" insider trading pardon "information arbitrage" gig, hedge funds were spoken about in hushed tones of reverence, with special admiration reserved for their portfolio managers whose egos (and certainly bank accounts) promptly rose to the status of "financial god."

Then, slowly at first then very fast, the facade fell off in no small part thanks to central bankers acting as Chief Risk Officers of the "market" and making any correction impossible (and thus eliminating the need to hedge as we first warned in 2011), and hedge funds quickly became the butt of all jokes, especially after 2015 when it was revealed that "alpha" simply meant jumping into a handful of "idea dinner" hedge fund hotel positions with hopes that the slowest greater fool will push up the stock price (with leverage) to mark books that much higher, and collect that elusive "20."

Alas it did not work out, and while others were laughing, there were no smiles among LPs and fund investors, and certainly not the hedge fund employees who for yet another year were stiffed despite hopes of retiring after just a few years of "buysiding it."

Oh well, maybe 2016 is your year. Good luck. However, as frequent readers know we have long predicted the collapse of the hedge fund industry, along with its $4 trillion or so in (unlevered) AUM for the simple reason that with central banks, there is no need to hedge (and thus the 2 and 20 model is unsustainable), while without hedge funds, there is no possible hedge one can put on to offset the systemic collapse.

Hence, in some ways, the name of this blog.

That does not mean, however, that the hedge fund industry will disappear overnight.

Here, courtesy of Bank of America, here is a list of the 100 top hedge funds in the US and their 100 favorite stock holdings - assuming the status quo continues, expect very substantial asset declines among these 100 when we rerun this analysis in 52 weeks time.

 

Next, here are the top equity positions of the top hedge funds listed above, and all others:

 

Same thing, but broken down by sector:

Finally, here are the core holdings of the 150 hedge funds as of the start of Q4: as recent experience has shown, everyone is happy on the way up - it is the panic on the way down, observed most violently at AGN in recent months, that is what brings a frown to many a hedge funders' face.

>>> Barrons Summary: Positive on IP and NWL

Barrons Summary: Positive on IP and NWL 

Cover story: Barron's Roundtable Part 2 has picks from Abby Joseph Cohen (PHG, ABBV, MYL, SIG, LOW, Bharti Airtel, Ocado Group), Felix Zulauf (Buy: CME 90 Day Eurodollar Future, U.S. dollar/short offshore Chinese yuan, U.S. dollar/short Korean won, U.S. dollar/short Taiwan dollar; Short: EEM, CME S&P 500 Index Future, IBEX 35 Index Future, EWS, German Stock Future Index, Euro STOXX 50 Future), Mario Gabelli (MSG, GFF, GPC, MIICF, CBS, DISCA), and Jeffrey Gundlach (Buy: HTR, NLY, Puerto Rico GO Bonds, BWX, INP; Short: EEM). 

Features: 1) Positive on IP: Company, which counts AMZN among its customers, is seeing its business grow; the shares discount a lot of bad news, its free cash flow leads that of rivals, and it recently raised its dividend; 2) Positive on NWL: Shares are down on news of the Jarden acquisition, but look like a good deal at their current price because the company is shedding underperforming divisions, streamlining the back office, and investing in key brands; 3) An overview of the World Economic Forum, where climate change, sustainable development goals, and the collapsing Chinese stock market were key topics of discussion; 4) Interview with MacroMavens founder Stephanie Pomboy, who has been bearish on stocks since 2010 because she thinks the market is ahead of fundamentals amid weak consumer spending.

Tech Trader: "The tech world appears to be going through the bursting of another bubble, but the outcome should be positive for investors in publicly traded companies overall, unlike the implosion of the dot-coms in 2001"; The collapse of some young venture-backed companies could affect the demand for networking gear (Cautious on EMC, HPE, CSCO). 

Trader: Last week's recovery was a relief rally from much oversold levels, says Adam Sarhan of Sarhan Capital; For energy sector investors, bonds may be a better bet than stocks, because if oil stays where it is or drops further, bonds bring fewer risks; "As fourth-quarter earnings reports come out, investors should look for pension accounting changes that will artificially flatter earnings by tens of millions of dollars or more in 2016 at some firms." 

Small Caps: Positive on HMHC: Leading provider of textbooks and digital education tools in the U.S. is poised to benefit from the trend toward increased digital learning aids, and with shares down, the share price is attractive and likely to see a rebound. 

Follow-Up: Cautious on KMI: The sharp decline in the energy-pipeline operator's shares could be over, and at the current price Barron's is no longer bearish; Negative on CMG: More bad news at restaurant chain seems likely, "and any more hiccups could drive the shares, still pricey at 36 times projected 2016 earnings, down another 20%." 

European Investor: Positive on SNY: French pharma giant is set to deliver 18 new products by 2020, and could be a good investment at a time when European equities are suffering badly from various global problems. 

Asian Investor: Cautious on CNOOC, Sinopec, PetroChina: If oil stays under $30, investors will likely see large asset write-downs and dividend cuts at China's Big Three energy companies, for which the worst is not over. 

Emerging Markets: Positive on Embraer, Tencent: Amid ongoing trouble in emerging markets, the long-term prospects for the Brazilian plane maker and the Chinese mobile giant look strong.

Commodities: Despite a two-year drop in value, iron ore's rough patch will likely extend into 2016 as big miners churn out record volumes despite lower demand in China. 

Streetwise: Dividend-paying stocks may not be as safe as they look, because the earnings necessary to pay for them may be harder to come by this year; Iman Brinvanou of TCW likes dividend payers KO, MO, and PEP because their risk/reward ratio is still favorable.

>>> Bank of Japan (BoJ) Gov Kuroda: will not hesitate to adjust policy if needed

Bank of Japan (BoJ) Gov Kuroda: will not hesitate to adjust policy if needed to achieve 2% inflation target; no comment on whether BOJ will ease policy next week - Davos comments 
- Currently underlying price trends are solid in Japan; Some indicators of long term inflation expectations have been weak
- BOJ carefully watching market turbulence that started this year for any impact on Japan economy
- Overall, lower oil prices are a net benefit for the global economy; the rapid drop in oil prices and its impact on emerging economies has created risk to global outlook

(ZeroHedge) Iran, Saudi Arabia "Clash" Over Syria At "Secret", Closed-Door M


In case you might have missed it, Saudi Arabia and Iran are teetering on the edge of open war.

For years, the two regional powers have been engaged in at least three proxy wars across the Mid-East.

In Syria, the Quds and the IRGC have been fighting to bolster Bashar al-Assad’s depleted forces since at least 2012, while the Saudis and the other Gulf monarchies have lent assistance to the various Sunni rebel groups fighting to destabilize the government in Damascus.

In Yemen, Iran-backed Houthi militiamen drove President Abd Rabbuh Mansur Hadi from the country last year, prompting Riyadh to intervene in order to prevent Tehran from establishing what would amount to an Iranian colony on the kingdom’s southern border.

And in Iraq, the sectarian strife is as divisive as ever, with Iran dominating politics in Baghdad and the Ayatollah’s Shiite militias stoking fear in the hearts of the country’s Sunni minority even as the fighters function as the most effective force battling ISIS.

Through it all, Riyadh and Tehran haven’t yet squared off directly. That is, where Saudi Arabia has troops and planes Iran fights by proxy and where Iran has ground troops, the Saudis are fighting through their own proxies.

Saudi Arabia’s move to execute prominent Shiite cleric Nimr al-Nimr has the potential to change all of that.

The Sheikh was a leading voice among Saudi Arabia’s dissident Shiite minority and his death sparked outrage and street protests across the Shiite community. Riyadh cut diplomatic ties with Tehran after the Saudi embassy was torched in Iran and the Sunni monarchies quickly followed suit.

Now, the stage is set for a potentially disastrous sectarian conflict that could reverberate for decades to come. Underscoring just how contentious the situation has become, Saudi foreign minister Javad Zarif and Saudi Prince Turki al-Faisal were reportedly involved in a “clash” at a closed-door meeting at the World Economic Forum in Davos on Wednesday.

“The barbed exchange between Saudi Prince Turki al-Faisal and Iranian Foreign Minister Javad Zarif at an invitation-only meeting on Wednesday underlined the hostility between the two Gulf rivals, who are waging proxy wars in Syria, Yemen and Iraq,” Reuters reports before recounting the spat. "It was a dialogue of the deaf," on witness recalls. Here’s more:

U.N. special envoy on Syria Staffan de Mistura, former U.N. Secretary-General Kofi Annan, former Arab League Secretary-General Amr Moussa of Egypt, the foreign ministers of Italy and Austria and officials from Turkey and several other Western nations were also around the table.

 

De Mistura opened the meeting by saying the time was ripe for the Geneva peace talks because outside powers all wanted a political solution to the five-year-old civil war in Syria, the participants said.

 

However, several speakers questioned Russia's motives for intervening in the conflict since September with air strikes in support of President Bashar al-Assad. They cast doubt on whether Moscow and Tehran wanted any deal that would involve Assad's eventual departure.

 

Zarif said Iran supported a political solution and had set out a four-point peace plan when it was finally invited to join international diplomacy on Syria last year. It had been excluded for years at U.S. and Saudi insistence.

 

Without naming any country, he took a veiled swipe at Riyadh by condemning those, he said, who fanned and exploited sectarian differences between Sunni and Shi'ite Muslims across the region.

 

At his news conference, Zarif accused Saudi Arabia of having spent millions of dollars to lobby the U.S. Congress against an international deal on Iran's nuclear program. An agreement with Iran led to the lifting of U.N. sanctions on the country this week.

 

He said Riyadh had panicked after the embassy attack and the Saudis needed to "come to their senses".

 

Prince Turki hit back in the closed session, blasting Iran's role in the Syria conflict, the participants said. Quoting an Arabic saying, he told Zarif:

"I really like what you say but when I look at what you do, I wonder."

 

Prince Turki, the 70-year-old youngest son of the late King Faisal, accused Iran of having 10,000 fighters on the ground in Syria supporting Assad, participants said. He described the Syrian leader as a "terrorist killing his own people" who was directly kept in power by Tehran, the participants said.

 

One participant said the prince's remarks were sharper than expected and shocked some of those attending the meeting.

There were already doubts as to whether John Kerry and Sergei Lavrov would succeed in bringing the "moderate" Syrian opposition to the bargaining table in Geneva next week and the verbal jousting match between Zarif and Prince Turki suggests that diplomacy may be impossible given the current hostilities between Riyadh and Tehran. 

Meanwhile, Pentagon chief Ash Carter just can't seem to understand why the Sunni powers aren't more helpful in fighting ISIS. “It’s strange that a Sunni extremist group running rampant in Iraq and Syria should attract as little Sunni Arab counterweight as it has so far,” Carter told Bloomberg TV on Friday.

No, Mr. Carter, it is not "strange", nor is it a coincidence.

There is no "Sunni Arab counterweight" because Saudi Arabia promotes a similar brand of ultra puritanical Islam as that espoused by ISIS. Once again, if the US wants help in defeating Islamic State, Ash Carter may want to look to the nations that actually have a vested interest in bringing about the group's demise, namely Iran and Russia. As long as Washington insists on keeping up this charade wherein everyone pretends to be mystified as to why the Gulf monarchies and Turkey don't seem all that interested in seeing ISIS destroyed, this ridiculous dog and pony show will continue, and Javad Zarif's contention that it is in fact the Saudis that are fomenting sectarian discord will continue to fall on deaf ears.

For those who missed it, this is now the most important map in geopolitics:

Barron's : Safer Way to Play Oil?

Safer Way to Play Oil?

Plus, bonds from the likes of Marathon and Hess may be a safer bet on oil.

Was last week’s 9% crude-oil price recovery a bottoming signal or another head fake, like previous rallies that faded? With many energy stocks down 50% and more, the temptation to buy them is strong. But this column is still smarting from a couple of bad oil-patch stock picks last year. Oil might be bottoming—or maybe not.

For an investor who wants or needs an energy component in the portfolio, investment-grade corporate bonds of the larger exploration companies offer a less risky way to participate in the sector, at least until the smoke clears. The bonds are trading at a significant discount, some at 70 to 80 cents on the dollar. “They are trading like high-yield debt,” says Peter Andersen, a portfolio manager at Congress Asset Management.

“We don’t know what a company’s oil price break-even point is, but a bond coupon is more robust than a dividend. The latter, along with capital expenditures, will be cut before the company misses a coupon,” he says. Last week, for example, struggling Chesapeake Energy (ticker: CHK), whose debt is not investment grade, suspended preferred stock dividends to repurchase its debt.

“Following the huge stock drops, many energy companies are working for bondholders because they know they have to pay the coupon and the banks,” Andersen adds.

He owns the ConocoPhillips (COP) A-rated 2.4% bond due December 2022, which trades at 89 cents on the dollar, down from 96 cents just a few months ago, and yields 4.3%. The stock dividend is 8%.

Other energy issues of potential interest include the BBB rated Marathon Oil (MRO) 2.8% bond due 2022, which trades around 67 cents on the dollar, yielding about 9.4%. That compares to a stock dividend of 2.2%.

Similarly, Hess ’ (HES) BBB rated 8⅛ coupon bonds due 2019 were yielding 6.5% versus 2.7% from its stock yield.

Like stocks, bonds have risks, and investment grade isn’t an absolute guarantee. Interest payment coverage ratios are dropping. For example, at Marathon the ratio of annual earnings before interest, taxes, depreciation, and amortization to annual interest charge dropped from 24 times in September 2014 to nine times one year later.

If a ratings firm, like Standard & Poor’s or Moody’s, should downgrade a company’s bonds, selling pressure could ensue. Moody’s is considering a downgrade of the Marathon bond noted above.

Many oil-exploration bonds and stocks made 52-week lows last week. For individual investors, buying a bond isn’t as easy as trading stocks online, but it can be done through a broker. Should crude rise unexpectedly, the stocks will rise faster than the bonds, but they will both rise. But if oil stays where it is or goes down more, bonds will let you sleep a little better.