By: Kent Engelke | Capitol Securities
More and more high profile hedge fund managers are warning about stock valuations. The reason for the concern is the breakdown of globalism, the concentration of wealth in a handful of companies, rising interest rates that will impact valuations, especially those issues trading at huge multiples, rising input prices that may not be able to be passed onto the end user and rising wages.
There is also rising concern about “portfolio insurance,” the domination of moving average lines to make instantaneous trading decisions and the total capitalization of the S & P 500 as compared to the size of the economy.
Those who are cynical are perhaps thinking current hedge fund bearishness could be the result of the lack of performance as compared to the benchmarks. The last major era of hedge fund out performance ended in 2007.
Passive portfolio management via ETFs has dominated since the financial crisis, a style that focuses more on size rather macroeconomic and geopolitical analysis.
I ask however if the change in today’s environment is indeed tectonic via the collapse of globalism, should this not create a more bullish environment for hedge funds that utilize an overriding thesis and research, thus becoming significant?
Several weeks ago, I noted the collapse of the security research industry, the result of the proliferation and domination of passive ETFs. Some believe such a collapse has created an opportunity for those firms that still follow trends and companies. This group believes the ETF/mega capitalization trade has become very crowded. When anything becomes this crowded, the next path is typically down.
The question at hand is if this trade collapses, what happens to all other issues?
I will argue it depends upon tax and regulatory reform. If reform occurs, such reform will directly benefit “The Main Street Issues” versus “The Wall Street Issues” for a myriad of reasons.
What will happen this week? Earnings season accelerates. The economic calendar is comprised of several regional manufacturing indices, consumer confidence, trade and more housing data, inventories and initial estimates of first quarter GDP.
Last night the foreign markets were up. London was up 1.72%, Paris was up 4.51% and Frankfurt was up 3.0%. China was down 1.37%, Japan was up 1.37% and Hang Sang was up 0.41%.
The Dow should open sharply higher on the results of the French election. The populist Le Penn is thought not to have a chance against the centralist Macron, a person she is casting as an oligarch. The election is on May 7th. The 10-year is off 15/32 to yield 2.31%.