Are There Any Stock Bears Left in America?By and
Short Sellers heading for their worst year since 2013
Euphoria signs: falling cash, rising leverage, bitcoin mania
Something’s missing from Craig Callahan’s long-short fund. The shorts, namely.
“Morningstar kicked us out of their category,” said Callahan, who helps oversee $2 billion as president at Icon Advisers Inc. in Greenwood Village, Colorado, and hasn’t bet against a stock in two years. “We’re in a great bull market. This market is going higher. Why short now?”
Everyone’s got a bull case nowadays. Legendary short Marc Cohodes tells anyone who’ll listen to buy Overstock.com for its blockchain platform. Credit crisis savant Gary Shilling says deregulation is driving equities. Even Jeremy Grantham, venerated advocate of buying cheap, says it’ll be a long wait.
“Jim Grant put me in the title a few months ago under the heading of ‘The Apostasy of Jeremy Grantham,’ that I was forswearing my religion,” the 79-year-old chief investment strategist for GMO LLC in Boston said. “It’s an exaggeration, but it picks up the idea that I’ve temporarily broken ranks with the general tone of the value community.”
With the S&P 500 trading at 22.5 times earnings, Grantham has been moderating his tone for a while. “My view was, starting five years ago, that you shouldn’t expect a rapid market decline to a much lower level,” he says, while noting that too fast a climb could still end in tears. “You should brace yourselves for continued high prices, or even rising prices if the Fed didn’t change its policy.”
Maybe it’s the Fed, maybe it’s Donald Trump, maybe it’s bitcoin froth seeping into equities. But lately, daring, animal spirits and greed have supplanted fear as the bull market powers toward its ninth year. Bears that once roared at any sign of trouble now seldom make a peep. Too many dire predictions failed to come true.
It’s not just anecdotal. A recent survey by the National Association of Active Investment Managers found that even the most pessimistic mutual fund overseers are fully invested in stocks. Equity exposure rose to the highest level in data going back to 2006.
Numbers illustrate the conundrum for bears. Up 20 percent on the year and 46 percent from its 2016 low, the S&P 500 has gone 71 days without a 1 percent move in either direction, the longest stretch since 1995. Turbulence is nowhere: the Cboe Volatility Index has held below 10 about 20 percent of the time in 2017 as the S&P 500 hit a record once every four days.
Bear has become bull in the ranks of Wall Street handicappers, who’ve been forced to raise forecasts to catch up with the rally. Take David Kostin at Goldman Sachs Group Inc. After under-estimating this year’s advance by roughly 10 percent, the strategist last month boosted his 2018 target by 350 points to 2,850.
“You have people just throw in the towel and ride the wave,” said Jim Paulsen, Leuthold Group Inc.’s chief investment strategist. “It’s been such a strong year, such a strong rally, and the pressure builds.”
On Wall Street, ascending prices have a tendency to breed more bulls than bears. It’s conditioning: if every time you issue a sell and the market climbs 10 percent, you’ll probably stop issuing them. And while betting against stocks has been a losing proposition since 2009, this year the futility has turned epic. A Goldman index tracking the most-shorted shares has climbed 18 percent since January, burning anyone on the wrong side.
It’s not that nobody is short, it’s that they don’t want to talk about it. Bearish bets as a percentage of total U.S. shares available for trading is hovering around 4 percent, higher than the average of 3.8 percent, according to exchange data compiled by Bloomberg that goes back to 2008.
“I don’t think the bears have left the market. I just think they’re very quiet after a year like this,” said Joseph Tanious, a senior investment strategist at Bessemer Trust in Los Angeles, which oversees more than $100 billion. “Bears will always be bears and bulls will always be bulls, but they may go dormant from time to time, or they may be less vocal.”
Right now nothing can drown out the din of euphoria, a missing ingredient for more than a decade. According to Morgan Stanley, unspent money is disappearing from individual brokerage accounts as the rally lures buyers, driving cash levels to a record low. Leverage among hedge fund managers who speculate on rising and falling shares is approaching its 2007 high.
Then there’s bitcoin mania, sending everything tied to the crypto/blockchain bloc skyrocketing. One repentant bear is Trump himself, who in 2016 called equities a “big bubble” and now regularly tweets about the glory of the bull market. Is all this optimism a good thing?
“Running with the bulls can be dangerous,” Jeff Hussey, chief investment officer at Russell Investments, said in a report earlier this month. “It’s easy to get swept up in the elation of the crowd and underestimate the risks.”