We have no day games. There's not an ounce of sports, where you have winners and losers after a terrific contest.
Or is there? Are we experiencing a whole new set of binary games that start at 9:30 and end at 4 and can, sometimes, go extra innings? Could the sports gamblers, devoid of anything else to do, have descended en masse to the stock world? And can they be behind some of the big moves that we have seen of late, including today? Or is it just endless retail participation in the market, pouring money into the same new high participants, with a winners win philosophy? Or could it be foreign buyers driven, as almost always, by momentum winners?
Or could it be all three. And is the market more dangerous because of these new constituencies?
I believe the answer is that this move, at this point, is a combination of all three.
First, let me do some cribbing off of some first class work by my friend David Kostin, the master of research at Goldman who, in his US Weekly Kickstart, a must read, he talks about how foreign investors were the largest net buyers of U.S. stocks in the first quarter. He notes that there has been a surge in retail trading. And he had determined that there have been recent equity inflows. It's a noticeable amount an equity allocation of 44% up from 40% since the start of the second quarter. And then the "kicker". Since our estimate does not fully account for the jump in retail investor activity, actual equity allocations could even be higher.
All of these constituencies are playing a role in this rally and I have to point out that while they all have plenty of fire power and can keep the rally going if they increase their level of investment, historically, it's not a great base to build on. All three of these kinds of buyers, foreigners, retail speculators and equity mutual funds - not index funds, but actual manned, funds, can produce a toxic combination if they continue to run stocks higher.
No, I am not being a killjoy. I am simply acknowledging history and emphasizing that history is, ultimately, not on the side of any of these contingents because they are momentum players, not fundamentalists and momentum does end with a retailing wall crash, not a smooth stop at the bank.
The problem, and I am going to spend a lot of time on this issue, is timing. This morning I saw a beautiful tweet from a viewer who had made a ton of money in a short time. I did not hesitate. I told her to take some money off the table right now. She can't let those gains turn into losses. I think she heeded me, but will you?
Let's talk about all the investing style of all three groups.
First, foreign investors. They, notoriously, have come in at the end of moves because they seek the hottest markets and we have one hot market. They have been involved in some of the greatest bubbles of all time. The one I most recall is the inflation of stocks ahead of the 1987 crash. At that point Tokyo reigned supreme in the world's markets, with a 45% share. The U.S. represented only 33%. The United States is now at 54% and Japan is 7%.
Near the end of the 80s the Japanese, who were notorious for choosing stocks to take up before each session allowing the insiders to get in ahead of the retail surge, decided to go into the U.S. market in a big way. They would control the opening and buy the same handful of stocks no matter what the price. They were responsible for a lot of the run-up ahead of the devastating Great Crash of 87, a market that, at its peak, was valued at 29 times earnings, the highest I have ever witnessed. The Japanese seemed to have no price sensitivity whatsoever. Lots of firms were long stocks and tried to develop a stop out system called portfolio insurance, using the futures to hedge stocks. The insurance broke down when the insurance failed to work and overwhelmed equities.
Given that the Japanese sought momentum and there was no momentum to be had, they became horrendously stupid sellers of stocks for ages after the crash. They were the ultimate buy high sell low investors.
Second, people are always blaming individual investors for the run up in stocks into the millennium and they played a direct role. They were in trading alright. But the big moves came from portfolio managers who just kept buying the same stocks because they got huge amounts of money over the transom every day and they didn't know what else to do with it. Their charter basically demanded that they put the money to work. They are the ones who keep buying Apple's (AAPL) stock which is responsible for an astounding 12% of the move off the March lows. They are the ones who keep buying Microsoft (MSFT) , Amazon (AMZN) , and Facebook (FB) . They are enamored of momentum and they self-justify their purchases by saying that the earnings in the outyears - meaning, say 2024, can explain why they are buying now. In some cases they just say it's the outyear revenues that justify their purchases. Sometimes I think they con themselves into buying, reacting to rampant target boosts. You know they are involved because typically there would be a run up into the Apple developers even and then a selloff. We got the run up and we got further buying today even as there were almost no real revelations. Don't get me wrong, I like the innovations but in a normal market there's a sell the noise component. Not this one.
Given that individuals want big returns they are plowing into these funds. My advice: be careful, they never know when to quit and almost none of them has ever said that their methodology has allowed them to sell high.
The final group, the retail traders, are the ones that seem transplanted by the sports world, looking for a binary winner or loser at the end of the day. Kostin has provided us with a list of their favorites: Penn National (PENN) , the casino company, Moderna (MRNA) , thought to be in the lead in the vaccine against Covid-19, Tesla (TSLA) , the tech car company, Royal Caribbean (RCL) , one of the big three cruise companies that can't cruise, Snap (SNAP) , the recovering internet play, MGM Resorts (MGM) , another casino, Spirit Air (SAVE) , a challenged airline, Norwegian Cruise (NCLH) , another of the troika, GoPro (GPRO) , the device company that's always waiting for a takeover, and Marathon Oil (MRO) . This is a curious amalgam of low dollar stocks which have winners and losers at the end of the day, and airlines and cruises. But let's not close our keen eyes to the obvious: these are the stocks that Dave Portnoy rules over in his Davey Day Trade guise. Dave's got a huge investment in Penn Nat and he's active in airlines and cruises. He has a huge following. He's moving these stocks. His people want action. He's giving it to them in spades.
Of course there are plenty of other stocks that retail investors and Europeans and mutual funds run: the Cramer Covid-19 list comes to mind. These stocks combined make up about $14 billion of the market and they do well in this environment where work is being done at home and on the internet in a remarkable, shot gun fashion. They are all swept up in the buying which is met by few sellers because the sellers expect the buyers will be back tomorrow just like the Japanese were in 1987.
I can't educate the foreigners. They have their styles. The professional mutual fund managers think I am dead wrong and this will go on forever. But I can help teach the new retail folk who have come in and believe that stocks can only go up and you can cash in, cash out and make money every day. Here's my advice. Take some of those winning and invest them into high quality stocks with good sized dividends or wait for a pullback of some size to get involved. And by all means, recognize that a ton of money can be lost unless you take something off the table. Or as my late mother would say, sometimes it's best to walk out of the casino and go buy yourself a beautiful cashmere sweater, one that can last.