Monday, April 07, 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.   He doesn't really have a dog in the race with respect to the Hate Rotation (though he did take a few bucks out of EWZ before he became available to write the blog again), but it seemed to play rather a large role in the surprising weakness of the SPX on Friday...just as physical phenomena on a quantum scale occasionally intrude upon our visible universe.

Either way, by the end of that week he'll have a better idea of whether to shift the focus back to broad indices or to keep his eye on rotation, rotation, rotation....


amplitudeinthehouse said...

It's been over a week, Macro Man, and you still haven't thrown in a challenge word yet. Goodluck with the rotation, I'm off to stomach pump the stats teacher, the soccer begins in August.

CV said...

Some astute observations there MM, until proven otherwise by China, Ukraine etc I see the world post tapering as uncorrelated rather than unstuck. It seems to me that while global beta/short US duration in all its wonderful glory (and numerous definitions) may not really work here, the selective investor can still pick up good returns by picking the right horses.

EM equities for one has been a good 1Q14 play (more so in Asia than in Latam of course). Indonesia has been a real treat for me in a context where the rest of my long equity positions has not really had a stellar start to the year.

As for US healthcare (biotech) etc, well it was ripe for a down-trade. Healthcare stocks in the US look pretty toppy here I think.


Anonymous said...

Something completely different: could it be that the RSS feed is broken ?

Macro Man said...

Crikey it looks like it. Bear with me...I haven't had to deal with anything like this in a looooonnngggg time!

Macro Man said...

@ Anon, I think the RSS issue should be sorted.

Anonymous said...

Works again as designed, sir.

abee crombie said...

turn around tuesday?

selling off Schwab and Ameritrade on HFT fears, I dont get it at all. And they are the first to benefit from higher ST yields (though that is well known)

abee crombie said...

FB got unfriended
SPLK got ker-splunked
LNKD's premium free trial ran out
PANW found a security breach
AMZN got a negative review
NOW had a service interruption
DDD needs a new cartridge
XOOM's stock price has been exchanged into a new value

Macro Man said...

Surely XOOM's share price has faded out?

abee crombie said...

I like xoom here, trading at less than 4x revenues, 200M in the bank, should be CF positive for 2014 and taking market share from Western Union. If it can make 20% EBITDA margins at some point, its interesting. Regulatory hurdles for new (and current ) entrants are a big obstacle. Hackers in their basement will have a hard time competing with this one. But I'll like it even more when the price is lower. PLKL is interesting too, growing at 50% and "Big Data" idiot at GE/IBM would love to have thier technology

abee crombie said...

sorry SPLK not PLKL...

real time event processing!