Buffett Dumps IBM Shares, Ray Dalio Starts Shorting Japanese Equities, Lots of “Changes” by Remarkable Well-Known Investors
Many stock traders on Wall Street are concerned about “another trouble” while the markets are gradually settling after the global stock market turmoil. The concern is whether portfolios should be reviewed now. Lately, people are paying attention to news on the “changes” in positions and predictions by the major investors. Ray Dalio and Warren Buffett have changed their positions, and Abby Cohen of Goldman Sachs, who is known for her bullish prediction, has toned down. What do these changes, which are taking place one after another, mean?
There are still concerns about rising interest rates in the United States. Italian elections in March and FOMC (Federal Open Market Committee) are coming soon. The is not much time left to draw a conclusion as to whether portfolios should be reviewed.
Here are the summarized positions by well-known investors and predictions by the major financial institutions.
“Giant” Dalio’s Short Bets in Europe and Japan
Bridgewater, the world’s biggest hedge fund, managed by “hedge fund giant” Ray Dalio, has increased short wagers against the biggest companies in Europe and Japan. Bridgewater reportedly changed its portfolio in January before the global stock market got into turmoil, and the hedge fund shorted Japanese equities while significantly raising its long U.S. equities.
In addition, Bridgewater increased short wagers against Europe’s biggest companies to $22 billion, four times as much as ever around the beginning of February. Dalio said, “The risk of a recession in the next 18 to 24 months is rising. While most market players are focusing on the strong 2018, we are focusing more on 2019 and 2020”, implying a fragile economy.
Furthermore, Dalio is alarmed over the bearish bond market in January. It is likely that the balance between company profits and interest rates are lost. In other words, the spurt in growth in profits is faster than the rise in interest rates.
According to Bloomberg, Bridgewater has been building short positions against Italian companies including Intesa Sanpaolo Bank, power company Enel, and oil company Eni. With Italian’s elections on March 4 in the background, that vote is unlikely to produce a clear winner, hindering the country’s ability to produce economic reforms. Seemingly, the hedge fund’s short bets were taken based on the country’s situation.
In addition, the stock prices for energy, manufacturing, and construction companies in Europe are expected to drop according to Dalio, and Bridgewater is reportedly shorting Europe’s big companies such as Germany’s Siemens, Adidas, France’s Total, Airbus, BNP Paribas, Dutch ING, and Finnish Nokia.
Drastic Cuts in Emerging-Market Stocks – Once Dalio’s Specialty
Bridgewater also cut its holdings in three of the largest emerging-market equity ETFs (exchange traded funds) last October through December, a filing showed on February 13. Specifically, Bridgewater halved its holdings of the iShares MSCI Emerging Markets ETF, and reduced its holdings in the “Vanguard FTSE Emerging Markets ETF” and the “iShares Core MSCI Emerging Markets ETF” by more than 20 percent and little less than 40 percent respectively.
Bridgewater generates high performance by aggressively investing in emerging markets, which was once its “specialty”. The hedge fund invests approx. $5.6 billion in emerging-market ETFs of $160 billion under management, which are only 3.5 percent assets.
Debts in US dollar were raised with the benefit of low interest rates by FRB (Federal Reserve Board) in emerging markets. Higher interest rates and strong US dollar due to normalization make companies more difficult to service their debts, which brings volatility in financial markets. It seems Bridgewater is watching the risks of capital outflows from emerging markets closely.
“God” Buffett Finally Dumps IBM Shares
Besides, Berkshire Hathaway, managed by “God of Investment” Warren Buffett, sold a little over 90 percent of IBM shares last October through December. It was disclosed in a securities report filed to SEC (Securities and Exchange Commission).
It was 2011 when Buffett, who had famously avoided hi-tech stocks, invested in IBM for the first time. The news drew people’s attention then, but Berkshire practically exited a position in IBM six years later. Besides IBM, Berkshire ditched shares of General Motors, American Airlines, and Wells Fargo, while the company bought more shares of Apple and USB.
In addition, 2017 was the strong year for the markets, and star investors’ struggles stood out. First of all, Greenlight Capital, managed by David Einhorn, returned a meager just 1.6 percent in 2017, the worst record in the past 20 years, and Greenlight lagged rival hedge funds and benchmark markets. The average hedge fund gained 6.5 percent and the S&P 500 Index returned 22 percent.
Einhorn predicted the Lehman bankruptcy prior to the 2008 financial crisis, and he made huge profits by short-selling Lehman shares. He acquired new stakes in Twitter, Time Warner, J.C. Penney, and Best Buy, and exited his positions in Gold ETFs, Hewlett Packard, and Rite Aid. He also cut stakes in General Motors.
Furthermore, Pershing Square, which is managed by Bill Ackman, an activist investor, did not have good results with a net loss of 4 percent in its investments in 2017.
According to Pershing Square, the total assets under management fell to $8.77 billion at the end of 2017, down from $18.3 billion in 2015.
Cohen of Goldman Sachs Unusually Being Cautious
Abby, a strategist at Goldman Sachs known for making bullish predictions, is being cautious in her outlook. This raises concerns among investors.
In a Bloomberg radio interview on February 13, Cohen suggested that the S&P 500 Index would have trouble topping its Jan. 26 record of 2,872.87. She seems unusually bearish. S&P 500 closed at 2701.33 on February 21.
Cohen expects the S&P 500 will rise to 2,850 by the end of 2018, and she said, “We need to watch closely if it can reach that number.” Several years of ongoing profit growth and no recession are required to achieve the S&P 500 at around 2,850. Cohen is concerned that bond yields will rise not just in the United States but around the world, and tax reforms by Trump Administration is not supportive of economic growth.
Close to 3 Percent Threshold, Not Much Time Left
The 10-year Treasury note yield hit 2.95 percent on February 21 and is now so close to the 3 percent yield threshold.
A week prior to that, Societe Generale suggested that S&P 500 would fall to 2,500 once the 10-year Treasury note yield reaches 3 percent. The company explained in a Bloomberg interview that higher bond yields drive up companies’ borrowing costs and lower their profits. Furthermore, Treasury notes seem more attractive than equity investments if the Treasury note yield crosses 3 percent. We will soon find out if Societe Generale’s predictions are right.
The markets are settling after the global stock market turmoil, but there are still concerns about rising interest rates in the United States. Stirs are expected anytime soon, such as Italian elections in March, FOMC, and reactions in emerging markets.
In addition to those factors, what stock traders on Wall Street are concerned about is that Dalio, Buffett, and Cohen of Goldman Sachs have drastically changed their positions. There is not much time left to consider “whether or not portfolios should be reviewed now”.