Over the weekend, we presented an excerpt from the latest weekly note by One River Management’s Eric Peters, in which he shared an look into hedge fund psychology, explaining why despite the market being at all time highs, nobody has any faith in said “market any more:
“My company is in structural decline,” he said gazing across Gotham, high in the corner office. “Made it through denial, anger, bargaining, and given that we’re having this conversation, I suppose I’m mostly through depression.” Which leaves the final stage of grief and loss; acceptance.
The transition from active management to passive has been devastating for those who’ve devoted their lives to the former.
“I wonder whether the deep pessimism that we confront every day in our own businesses helps explain why we’re so skeptical of all time S&P highs.”
Perhaps, but it helps explain why as Bank of America reports in its latest weekly client flow update, the bank’s largest, institutional clients have now sold stocks for a record 21 consecutive weeks. According to BofA, last week, during which the S&P 500 fell 0.7%, BofAML clients were net sellers of US equities for the third consecutive week (-$0.9bn vs. -$0.4bn the prior week). Of these, institutional clients continued to lead the selling; this group has now sold US stocks for the last 21 weeks.
The reason for the relentless selling? They have no choice, as they continue to be bombarded with redemption requests by clients who can’t wait to shift from active to passive – and much cheaper – funds:
Record outflows this year from active funds—a large sub-set of the institutional client grouping—have likely been a big contributor here. (Meanwhile, passive funds have seen slowing but continued inflows this year, and we’ve seen a similar trend in BofAML clients’ purchases of ETFs—see Table 1). Hedge funds also sold stocks (for the second consecutive week), while private clients were small net sellers after three weeks of buying. Clients continued to sell both large and small caps but buy mid-caps, which are the most expensive size segment. Buybacks by corporate clients slowed slightly vs. the prior week, and month-to-date are tracking the lowest of any Oct. since 2010.
What were they selling? Pretty much everything, but especially consumer discretionary.
Clients sold stocks in six of the eleven sectors last week, led by Consumer Discretionary and Industrials—both of which have seen generally weak results and guidance so far this earnings season. ETFs and Financials stocks saw the largest inflows. Sales of Discretionary stocks last week were their largest since last December and the seventh-largest in our data history (since ‘08), led by both institutional and hedge funds clients’ sales. This sector continues to have the longest selling streak at 18 consecutive weeks; but as we noted earlier in Sept, the selling streak could have legs given how crowded the sector is by active funds. Industrials has the next-longest selling streak at nine weeks; meanwhile, Telecom continues to have the longest buying streak (in 15 of the last 16 weeks).
Finally, putting the “smart money” selling in context, both YTD and since the start of the Second Great Depression, it almost seems like “greater fool” retail investors are still deserpately needed for the final paper-to-cash handoff.
But aside from the relentless “smart money” selling, remember: There Is No Alternative to stocks…