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WALL STREET ALWAYS HOPES there are more free lunches than are ever served.
This faith results in crowded trades, the kind that can cause congestion and trampling when trying to exit. Here are a handful of crowded trades, each a facet of one big one.
First, the bet against the U.S. dollar. As with all popular stances, it makes all kinds of sense. The Federal Reserve has told us clearly it's likely to go creating lots more of them. But, inevitably, short-term switchbacks tend to confound the comfortable consensus.
One day last week, the PowerShares DB U.S. Dollar Index Bearish (ticker: UDN) traded double its average volume, while call-option volume (bets that the fund will rise on a declining dollar) was 4.5 times the average. The Daily Sentiment Index of futures traders on the dollar hit just 3% bulls. The Wall Street Journal's lead headline Friday was "Dollar's Fall Roils World," implying this trend is pretty mature and well-recognized.
The other side of that bank note is enthusiasm for gold, which as it hit a record high last week inspired a 95% bullish tally in that same sentiment index. The recent surge looks like an extended spike primed for a setback before long, but within an ongoing bull market that hasn't likely culminated yet.
These lopsided trades grow from perhaps the most pervasive belief in the market now, that the Fed is preparing a second "quantitative easing" asset-purchase program–thus the record lows in Treasury yields, as investors front-run the Fed bid, and the resilient stock market. Again, this expectation is logical; Fed talkers have flagged this for weeks. Yet not only does the market expect so-called QE2. It believes it is imminent and that it will be large, and effective, and a boon to pretty much every asset class.
Those of us who scratch our heads over the enthusiasm for QE2—given that it amounts to hoping either for continued subpar economic numbers or reckless central-bank asset inflation—might conclude that whatever possible positive market reaction we might expect to such a program has been front-loaded. Goldman Sachs economists Friday ventured that a good portion of any benefit has been priced in. (Some smart money, as detailed by Randy Forsyth in his www.barrons.com column the other day, is thus looking to buy what the Fed isn't buying, such as bank loans.)
At minimum, even if the Fed meets expectations and details such plans Nov. 3, it would be a logical "sell on the news" event, coming just a day after another one, an election where all expect a Republican rout and the "typical" midterm rally. Even if the Republicans do grab the House, as appears priced into the market, looking ahead it probably makes sense to "take the under" on any resulting fiscal austerity, as Height Analytics analysts put it. Gridlock, sure, tends to be market friendly. But in this go-'round, that translates into neither material fiscal stimulus nor significant deficit reduction, displeasing both major market factions.
None of this would jeopardize an ultimate run in the stock indexes back to the April highs. But it could come among some crowd reversals—and despite, not because of, the Fed's potential largess.
ONE PLAUSIBLE SCHEME TO sift for worthy and "uncrowded" stocks now is to locate names disdained by Wall Street, down from their springtime highs far more than the market is, with good valuation support. Such as a couple of off-the-radar financials, disability insurer Unum (UNM) and asset manager Janus Capital (JNS). The stocks are down 14% and 27%, respectively, from their April peak, more than the broad market or the Financial Select Sector SPDR fund (XLF). Only about a third of Street analysts call either stock a Buy.
Unum, which is a few years past a major stumble related to mispriced policies, is about to benefit from an upswing in policy pricing, says Deutsche Bank. The $7 billion-market-value company has substantial excess capital, trades at less than 90% of tangible book value and is busy returning cash to shareholders through a large buyback.
Janus, manager of some $150 billion, mostly equity mutual funds, has seen outflows ease a bit and has shown strong three-year relative fund performance across its complex. A new CEO is diversifying the asset mix. Its $2.3 billion market value is a modest 1.3% of assets when equity-oriented managers routinely trade above 3%. For anyone banking on continued strength in equities, Janus shares are a levered play on rallies. For the cautious, the ample cash flow of the business provides a downside buffer.
E-mail: michael.santoli@barrons.com
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