Friday, September 24, 2010

'Macro' Forces in Market Confound Stock Pickers

More and more investors aren't bothering to pore through corporate reports searching for gems and duds, but are trading big buckets of stocks, bonds and commodities based mainly on macro concerns. As a result, all kinds of stocks—good as well as bad—are moving more in lock step.


On a "risk on" day, the mood of investors is confident and they flood into stocks and other investments perceived as risky, such as junk bonds, emerging markets and commodities. But when it's "risk off," money comes sloshing out of those investments and into so-called safe-haven investments such as U.S. Treasurys, the U.S. dollar or Japanese yen. Shortly before the May 6 "flash crash," for example, a macro concern—the yen's sudden rise against the euro—triggered a wave of stock selling.

Some stock pickers are trying to adjust by folding more macro analysis into their thinking.

"For years I had believed that I didn't need to take a view on the market or the economy because I considered myself a 'bottom-up investor,'" said hedge-fund manager David Einhorn of Greenlight Capital last year. "The lesson that I have learned is that it isn't reasonable to be agnostic about the big picture."

Mr. Einhorn, known for his high-profile bet against Lehman Brothers right before it collapsed, has placed a big macro bet that gold prices will rise because of concerns about the U.S. budget deficit and its damaging effect on the U.S. dollar.


Dylan Grice, a strategist at Société Générale, says, "Most of us are rubbish at seeing macro events coming, let alone timing them."

Most stock pickers have portfolios with dozens or hundreds of investments, so getting a few calls wrong generally doesn't make a big dent in returns. But macro funds tend to have a lot riding on a handful of bets.

John Burbank, founder of Passport Capital LLC, a San Francisco-based macro-hedge-fund manager, thinks the macro-driven environment will persist for some time. The reason, he says, is the difficulty of solving some of the issues that have led to the macro-dominated markets, such as the U.S. budget deficit and economic overcapacity that has resulted in persistent high unemployment rates.

Mr. Burbank says he is building a network of sources in Washington in an effort to get a better read on political and regulatory issues. He compares investing in the U.S. to investing in emerging markets, where he started his career.

"What is happening with the country, with the government, and what are their policies? These are the questions as an emerging-market investor that you ask before you do any bottom-up work on stocks," he says.

Many stock pickers, bound by rules that require their funds to keep investing in stocks, can only tweak their strategies and hope that the current environment doesn't last much longer.