All Eyes On Ukraine

The Ukrainian situation seems to have changed some of the underpinnings and hallmarks of the recent rally in the market. If one were to look at the internals of the market rally one would see that small caps and biotech have been leaders in the market and there has recently been talk of a bubble having formed in biotech. The biotech sector began to give back some of its gains this week and small caps began to lag the market. Another hallmark of the rally has been the pain inflicted on short sellers. One strategy that has been successful for investors has been to be long the most shorted names. They would fall the least in down moves and rallied the most when markets reversed course. That was not the case last week. The following is courtesy of Bespoke Investment Group.

After the last couple of days of market weakness, the most heavily shorted stocks have gone from leading the market to lagging.  Through this morning, the average return of these stocks during the month of March is a decline of 1.41% compared to a drop of just 0.55% for the S&P 1500 as a whole.  

It will be interesting to see how long this underperformance of the most heavily shorted stocks lasts.  Prior periods where this has been the case have proven to be brief, so if it lasts for an extended period of time, the market’s recent weakness may prove to be a little more long-lasting.

http://www.bespokeinvest.com/thinkbig/2014/3/14/shorts-catching-a-break.html

More smart money is selling as we pointed out last week that insiders at investment firms Carlyle and Oaktree were selling large amounts of stock. This week had publicly traded hedge fund manager Fortress insiders selling stock as well.

In a recent report from Mark Hulbert at Market Watch comes insight on corporate insider actions in the US.  According to Hulbert, corporate insiders are more bearish than they have been since at least 1990. Hulbert’s analysis leads him to believe that corporate insiders are selling at pace more than double the average since 1990.

 http://www.marketwatch.com/story/in-the-know-insiders-are-dumping-stocks-2014-03-14

Finally our attention turns to Seth Klarman founder of the Baupost Group and one of the more successful money managers out there. In Klarman’s recent investor letter he noted that “most” investors are downplaying risk noting that most people are not prepared for anything bad to happen. “No one can know what the future holds, but any year in which the S&P 500 jumps 32% and the NASDAQ Composite 40% while corporate earnings barely increase should be cause for concern, not further exuberance,” .

“Our assessment is that the Fed’s continuing stimulus and suppression of volatility has triggered a resurgence of speculative froth,” while citing numerous examples of overvalued internet stocks that defied value investing logic.

Comparing the economy and the Federal Reserve’s management of it to the movie The Truman Show, where the lead character lived in a false, highly-orchestrated environment, Seth Klarman notes with insight, “Every Truman under Bernanke’s dome knows the environment is phony. But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end and no one wants to exit the dome until they’re sure everyone else won’t stay on forever.” (H/t Zero Hedge)

The outcome to the Ukrainian crisis may have an outsized effect on markets in the weeks to come. Investors may just be looking for an excuse to take some profits and exit the dome as the mood becomes less euphoric especially if bullets start to fly. Keep an eye on US Treasuries. They had a whopper of a move last week and are the temperature gauge of geopolitical risk.

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

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Published in: on March 16, 2014 at 7:37 am  Leave a Comment  
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