WHY IS THIS HAPPENING MORE NOW? WHAT DOES IT MEAN?
- As we wrote about in our piece in February, post-2007 there has been an explosion in a number of new products: more ETF’s; more “passive funds”; more “tail insurance”. When people decided to sell now, through an ETF rather than having a diverse group of long-only mutual funds, there would appear to be…nothing. No bidders. Barron has a piece this morning on it as well.
- And how can we back up this assertion? I provide you one anecdote. Signature Bank of New York (SBNY) is a stock we are long (well-run bank). We are also long Wells Fargo (again like it, but for different reasons). Both US banks, though one is Small Cap stock, the other a Mega Cap. Now normally into a risk off day in say 2008, SBNY would have a horrendous day. Yet 10 minutes in Wells Fargo was down 10%, SBNY was down 5%. The only way one can rationalise this, is that Wells Fargo is in the SPX futures and large ETFs, SBNY doesn’t feature anywhere.
- Last night was “righted” because the cash market wanted to buy. The cash market is dominated by the much maligned active bottom up long only Fund Managers. The ones who no one wants to use as they are too expensive and destroy value.
However, there may come a night or time when there are few of them left as everyone goes passive in the world or they decide they have run out ammunition.
I’m trying not to think of that night…