Monday, April 14, 2014

Rotation, rotation, rotation

It's been said that the three most important factors in property are location, location, location.  It's a bit of a hackneyed line, perhaps, but as anyone who has ever compared prices in New Cross and Blackheath (or Bridgeport and Darien) could tell you, it's not without a kernel of truth.  Similarly, to understand what's going on in equity markets recently, all you really need to know is rotation, rotation, rotation.

If broad equity index moves are the classical physics of finance, explaining the world on a large scale, then sector rotation can be considered the quantum mechanics, occasionally hiding a seething ocean of activity not always visible through a macroscope.

Such is the story recently.   Of course, to many macro punters, the word "rotation" brings to mind the theory of The Great Rotation out of bonds back into equities that was such a story in 2013 (and painful reversal in January 2014.)

Recently, however, there's been a different kind of rotation.   Erstwhile star performers, many of whom boast eye-watering valuations, have been trampled over the last few weeks while many popular shorts have screamed higher.   Nowhere is this more evident than in the case of biotech vs. emerging markets.  Perhaps we can call the last couple weeks' price action the "Hate Rotation"?

Indeed, the biotech/EM ratio has needed just six weeks to retrace a quarter of its entire move since 2010!

Unsurprisingly, more prosaic RV trades such as growth versus value have come under the cosh as well....

Unlike the IBB/EEM trade, however, the growth vs value pullback looks fairly orthodox and well within the scope of historical norms.   As such, it's probably premature to sounds the klaxons warning of a 2007-style Quantmageddon in equity land.

What's interesting to observe is that at least some of the buying in EM has been very real.  Anecdotes suggest real money managers are seeing inflows, and Macro Man himself pointed out the huge, rather institutional-looking inflow into EMB last week.  Should it continue, the Hate Rotation could keep chugging along.  As an aside, it's interesting to note that while EEM has seen an increase in shares outstanding, EWZ (the Brazilian ETF) has not, despite a 20% rally over the last 3 weeks.   As such, Macro Man will being keeping a weather eye on EWZ as an indicator of further pain.

Finally, earnings season kicks off this week, with companies no doubt ready with a plethora of weather related excuses for any shortfalls.  Macro Man has already circled the week of the 21st on his calendar and stocked up with popcorn, for in the span of a few days the top 5 largest holdings in the IBB biotech ETF all report.   

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.