Every evening, I get a mail from Nick Colas, Chief Strategist at Convergex and Jessica Rabe, his associate there, that highlights a topic of interest in the markets. You can sign up to receive the same Morning Markets Briefing on their site. Last night’s mail was particularly interesting to me since it dealt with why some of the truly great investors of our age were pulling out of the stock market. I’ll have some commentary of my own on this topic soon, but thought I would start by passing along their interesting comments now.



Many of the smartest investors out there hate stocks. Since May, we’ve heard negative equity calls from Stan Druckenmiller, George Soros, Carl Icahn, Jeff Gundlach and Bill Gross. Wall Street lore says “Never argue about markets with a guy who is much richer than you”. So we’ll take the discussion in a different direction: what do they know? Successful investors are always more plugged in than the market as a whole – hence their success. And while we can only guess at the lynchpins of their negative take on stocks, we do have some idea of how significant they must be. For example, in 2016 the S&P 500 is up 5.9% on a price basis after 1) the Brexit “Leave” vote, 2) dramatically disappointing Q1 and Q2 U.S. GDP, 3) a correction of 20% in oil prices, 4) a Fed that has incorrectly calibrated its public stance on monetary policy, 5) Donald Trump as the Republican candidate for president, and 6) the U.S. 10 Year Treasury at near record low yields. None of that has been enough to spook U.S. equity markets. So whatever the big boys think they know, it must be really bad. But what is it, and why is it so hidden from view?

“Someone is getting this information before you.” If you’ve ever worked at a hedge fund, you know this is the worst thing you can hear. It means you are behind the curve, providing yesterday’s news into an investment process meant to predict the future. “Titanic sinks!” or “man lands on the moon!” are the more playful retorts you’ll get from co-workers. But it all means the same thing: up your game, or get a white box from the mail room.

So when a cluster of high-profile hedge fund and long-biased managers go out of their way to give dire warnings about the U.S. equity market with stocks sitting at or near all-time highs, any sensible investor needs to pay attention. These are people with access to information that most market participants could only dream of having. Former heads of state and central bankers, private intelligence operatives, senior government officials, the best consultants in any industry… It is like having an all access pass to anything, anywhere, any time.

Here’s a partial list of bold faced names that have panned stocks and other financial assets in recent weeks:

  • Stan Druckenmiller (May 4th at the Ira Sohn Conference): “Get out of the stock market.”
  • George Soros (June 9th, as reported in the Wall Street Journal): “The billionaire hedge fund founder and philanthropist recently directed a series of big, bearish investments, according to people close to the matter.”
  • Carl Icahn (June 9th, on CNBC): “I don’t think you can have (near) zero interest rates for much longer without having these bubbles explode on you” while also saying it’s difficult to assess when exactly that might occur.
  • Jeff Gundlach (last Friday, in an interview with Reuters): “Sell everything. Nothing here looks good.”
  • Bill Gross (in his monthly investment letter, released today): “I don’t like bonds. I don’t like most stocks. I don’t like private equity.”

Fun fact: a group of bears is called a “sloth” or a “sleuth”. We can safely ignore the first reference; none of these investors made their considerable fortunes through laziness. That leaves us with “Sleuth” – as in, what have they discovered?

Whatever it is, it has to be something weightier than the headlines we’ve faced so far in 2016. The S&P 500 is, after all, still up 5.9% on the year. And none of these headlines have tanked U.S. equities:

  • Donald Trump wins Republican nomination for President of the United States against a field of well-funded and well established competition
  • U.S. GDP growth fails to deliver on 2% growth through first half; runs 1.0% average instead
  • After a good run earlier in the year, crude oil prices experience correction and break $40/barrel
  • One gold ETF draws the most fresh money of any exchange listed product YTD; yellow metal at +2 year highs
  • Global economic growth so sluggish that U.S. 10-Year Treasury yields reach 1.5%, far worse than even the depths of the Financial Crisis
  • Britain votes to leave the European Union
  • $13 trillion of global sovereign debt sports a negative yield, so great is the demand for “Safe haven” assets around the world
  • Federal Reserve guidance on future interest rate policy widely ignored. The U.S. central bank says 2 bumps to Fed Funds this year (25 bps apiece), but Fed Funds futures handicap less than one.

There’s no getting around it: that’s a lot of unexpected news. The connection between them and higher stocks has exactly one point: bad news drives interest rates lower, and as long as the S&P 500 earns +$115/share those lower rates support ever loftier valuations.

A bearish call, such as the ones our “Sleuth” has made, must therefore convincingly pull the rug out from the “Lower rates = higher stocks” paradigm. Don’t tell me that these big-money investors are just making a valuation call – they all know better than that. Try walking into any of their offices and saying “U.S. stocks trade at 18x earnings… Time to short em…” Your feet would barely touch the floor as security escorted you and your white mail room box out of the building.

No. It must be something larger. But what?

Certainly makes for thought-provoking reading. Thanks to Nick for giving me the go-ahead to re-post the article!