By Anthony Mirhaydari
In the pantheon of the market, there is no smarter money than corporate insiders. They are watching the data flow in real time. Revenues. Earnings. Customer traffic. So when they stop buying, it's time to worry.
Moreover, given the Federal Reserve’s zero-interest rate environment, one of the main motivators of this market has been the use of low-cost leverage — via bond flotation — to fund share repurchases and dividend hikes. Remember that much ballyhooed Apple /zigman2/quotes/202934861/composite AAPL -1.30% float? That $17 billion deal was the largest in history, but didn't turn out so well for buyers as long-term rates drifted higher all summer.
According to research from JPMorgan /zigman2/quotes/205971034/composite JPM -0.29% "Flows & Liquidity" analyst Nikolaos Panigirtzoglou, non-financial corporates in the G-4 economies have stopped soaking up their own equity in the second quarter for the first time since the Lehman Bros. crisis in 2008. And based on an analysis of announced share buybacks and leveraged buyouts, the situation worsened further in the third quarter.
Not only have purchases slowed, but issuances are up, with more IPO and secondary offering activity. You don't have to be an economist to understand the message CEOs are sending as they offer more supply and bid less demand. They think equity prices are topping. At least, in terms of bond prices.
Why are CEOs bailing out? This is news to speculative investors who are overweight stocks vs. bonds to a degree not seen since 2005. The evidence suggests they've set themselves up for disappointment by taking the opposite side of the trade from those in the know.
Jason Goepfert of SentimenTrader notes that the relationship between stock prices and bond prices (stock prices high vs. bond prices low and yields high) has moved so far out of normal that the ratio of the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.41% and the 10-Year Treasury yield is three standard deviations from normal. In layman's terms, that only happens 0.1% of the time.
So this is rare. The only other times bonds have underperformed stocks to this extent in the last five years was in May of this year and in September 2012. Both times were almost immediately followed by stock market declines.
For this reason, I continue to recommend clients look for opportunities on the short side via picks such as UltraShort Emerging Markets /zigman2/quotes/209030699/composite EEV +3.02% ETF , up 10% since I added it to my Edge Letter Sample Portfolio on November 4. My short against Tesla Motors /zigman2/quotes/203558040/composite TSLA +3.21% is up 17% since October 29.
Disclosure: Anthony Mirhaydari has recommended EEV long and TSLA short to his clients.