Buffet unloaded IBM and Dalio shorts on Japanese stocks… what do these shifts of iconic investors imply?
While gradual recovery from the global selloff in the stock market, many market participants in the Wall Street are now facing ”next question”. Should we consider a shift in our portfolio? We have been seeing notable changes in portfolio or outlook of well-known investors.
Looking at change in the portfolio of Ray Dalio or Warren Buffet or changed the tone of outlook of Abby Cohen of Goldman Sachs, known for her bullish outlook, what do they imply to us?
Concern for interest rate hike is still lagging. The Italian general election is approaching in March followed by the FOMC (Federal Open Market Committee) meeting. We are running out of time to make a decision on shift on the portfolio.
In this article, we introduce and summarize the re-positioning of well-known investors and some of the major financial institutions.
Titan, Dalio shorts on European and Japanese stocks
It caught attention that Bridgewater, lead by Hedge fund titan Ray Dalio has started to bet on short for European and Japanese stocks. It is said that the hedge fund switched the portfolio, by massive long on US stocks while short on European and Japanese stocks.
The hedge fund reportedly has further ramped up its short position since February on European stocks by $22 billion, quadruple of what the fund used to own. Dalio expressed a concern on the outlook for the economy, adding “They are likely to be in recession in 18 to 24 months. While most of the market players are preoccupied with 2018, I am eying on 2019 and 2020.”
Dalio also warned that bond market had entered the bear market in January, suggesting that Corporates profit earnings and interest rate are not in a good balance. Return on bonds has been increasing too quickly compared to the pace of growth in corporate earnings.
According to Bloomberg, Dalio is accumulating short position on Italy’s Intesa Sanpaolo bank, utility Enel and Oil Company ENI. What concerned him was the general election scheduled on 4th March. He suspects that the election will not result in black and white victory but rather leave the country delayed in the economic reforms.
In addition, Dalio bet short on Germany’s Siemens and Adidas, France’s Total, Airbus and BNP Paribas, Netherland’s ING, Finland’s Nokia as he is bearish on energy, manufacturing and construction sectors in Europe.
Cut back on once their specialty, Investment in emerging economies
Bridgewater also cut back on ETF (Exchange Traded Fund) holdings on the three major ETFs for emerging markets over the period between October and December last year, according to the report filed on 13th February. More specifically, the fund cut back its holdings into half of “i shares MSCI emerging markets ETF”, by 20% of “Vanguard FTSE emerging markets” and by almost 40% of “I shares core emerging markets ETF”.
The fund had been known for aggressive investment strategy and high performance in emerging markets, however, as of today, its holdings on emerging markets account for only 3.5% or $5.6 billion, out of its USD 160 billion managed assets.
Emerging economies have been accumulating USD denominated debt with which they benefit from FRB (Federal Reserve Board) low-interest policy. However, since the normalization of interest rate and appreciated USD increases their repayment costs and lead concern about the credibility of these countries. As a result, the capital outflow has become a potential risk as the fund fears.
God of stock investing, Buffet finally unloaded IBM
Berkshire Hathaway, led by Warren Buffet, known as God of Investing, is said to have sold more than 90% of its holding stock of IBM in between October and December, according to its holdings filed to SEC (The U.S. Securities and Exchange Commission).
It was 2011 when Mr. Buffet who was known not to invest in the high-tech sector, acquired IBM stock. 6 years after the big news, he effectively existed from IBM. Besides IBM, he also sold GM, American Airline and Wells Fargo while adding long position Apple and USB.
While terrific year for the stock market in 2017, we find some of the well-known investors were struggling.
Greenlight Capital, led by David Einhorn recorded the worst year in performance in the last 20 years, which is merely +1.6% in 2017, below competitors and benchmarks. The average performance among hedge funds was +6.5% while S&P 500 performed +22.0%.
Mr. Einhorn made fortune from the short sale of Lehman Brothers back in 2008 as he predicted the collapse of the investment bank. He acquired Twitter, Time Warner, J. C. Penney, Best Buy while he exited long positions in Gold ETF, HP, and Rite Aid. He also trimmed his position in GM.
Activist investor, Bill Ackman led Pershing also had rough 2017, ending with -4% only.
According to Persing, the asset value under the management of hedge fund was $8.7 billion at the end of 2017, way down from $18.3 billion in 2015.
Abby Cohen unusually bearish
Market players also noticed that not an investor, but a strategist, Abby Cohen of Goldman Sachs, known for usually sunny view on the market, turned bearish.
S&P500 hit 2872.87 on 26th January. However, Ms. Cohen said in the interview with Bloomberg radio on 13th February that the index would not reach the highest record in 2018. That is the unusually bearish tone for her. As of 21st February, S&P500 is at 2701.33.
She made year-end 2018 forecast of 2850, however, she warned that we should be cautious if reaching that level”, explaining that her outlook was assuming sustainable growth of profit earnings and without a recession. Furthermore, she showed concern that Trump’s tax reform would not improve the growth, pointing out the risk of higher interest rate, not only in the US but also other parts of the world.
Interest is likely pushing toward Red-line, we are running out of time
10 year US Treasury Yield is reaching 2.95% as of 21st February, it is almost crossing Red-line, 3%.
A week ago, Société Générale had warned that upon 10y US Treasury Yield reaching 3%, it is likely to push S&P500 down below 2500. Responding to interview with Bloomberg, the bank commented that rising interest rate would drive the cost of funds up and cause a decline in earning. The bank added that above 3% yield, bonds are looking more attractive than dividends in stocks.
Sooner or later, we will see if the bank was right on the outlook.
The market is in the recovery from the worldwide stock plunge. However, concerns about rising interest rate remain. In March we will face destabilizing factors such as Italy’s general election, FOMC and following reactions from emerging markets.
Besides these factors, what makes Wall Street players worry is that market icons such as Dalio, Buffett, and Cohen of Goldman Sachs have flipped their view on the market. “ Should we consider a change in a portfolio?” We are running out of time.
（Susan Green, Journalist in NY）