WSJ Accidentally Identifies Macro Investing’s Probable End of the Line

Tuesday, September 28, 2010

Last Friday, The Wall Street Journal published a lengthy, front-page article that unwittingly described why the powerful macro investing trend might be close to ending. “Unwittingly” because the article attempts to explain why the trend should be with us forever.

The article,Macro’ Forces in Market Confound Stock Pickers(By Tom Lauricella and Gregory Zuckerman, September 24, page A-1) is one of those fortuitous indicators that can occur very near a trend change. By marshalling all the reasons why the trend is strong, the reporters have exposed the key weaknesses that will lead to its undoing.

Let’s start with their description of what’s going on:

  • “More and more investors aren’t bothering to pore through corporate reports….”
  • … long-held investment strategies are no longer working very well.”
  • “… company earnings no longer drive stock prices as they once did.”

Next, let’s look at the signs that this trend is ripe for turning. These are classic signs, and they are at a high (warning) level.

  • Investors have poured in “As investors grow frustrated with stock picking, they’re flocking to mutual funds that specialize in macro investing.”
  • Wall Street has actively created new products“Goldman Sachs Asset Management, Dreyfus Corp., Pioneer Investments and the Hartford Mutual Funds are among those that have launched macro-driven mutual funds this year. Hedge funds are moving in the same direction.”
  • Managers are throwing in the towel and changing their investment approaches“Some stock pickers are trying to adjust by folding more macro analysis into their thinking.”
  • And now the capper: The claim that times have changed (remember “new paradigm” and the “new/old economy” arguments to defend stock valuations in early 2000?) – “’Stock picking is a dead art form,’ contends James Bianco of Bianco Research. ‘Macro themes dominate the market now more than ever.’”

Finally, let’s see where we can profit by taking advantage of what the fad has wrought. In this case, a fad that shifts money based on macro reasoning treats groups of investments alike. This means that, when an investment type/sector/industry is bought or sold, individual characteristics are ignored. From the article:

  • “As a result, all kinds of stocks – good as well as bad – are moving more in lock step.”
  • “Some stock pickers say the current macro focus is only temporary, and will generate great investment opportunities simply because companies with different outlooks shouldn’t be moving in lock step long-term.”
  • “’When you have securities that are all moving in the same direction, that by its nature opens up opportunities,’ says Cindy Sweeting, one of the managers on the $17.3 billion Templeton Growth Fund.”

We know there has been a continuing avoidance of US stocks. Therefore, there are potentially good “double bonus” opportunities awaiting those investors that engage in US stock picking.

So… Let’s stop here for today. I know the approach of swimming against this powerful current can seem risky. Tomorrow we will discuss some examples of previous, similar situations.

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John Tobey on Seeking Alpha

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September 2010