Beware of Billionaires Bearing Stock Tips?

Tae Kim of CNBC reports, Get out of the stock market, own gold:

Legendary billionaire investor Stanley Druckenmiller told Sohn Investment Conference attendees to sell their equity holdings Wednesday.

"The conference wants a specific recommendation from me. I guess 'Get out of the stock market' isn't clear enough," said Druckenmiller from the conference stage in New York. Gold "remains our largest currency allocation."

The billionaire investor expressed skepticism about the current investment environment due to Federal Reserve's easy monetary policy and a slowing Chinese economy.

"The Fed has borrowed from future consumption more than ever before. It is the least data dependent Fed in history. This is is the longest deviation from historical norms in terms of Fed dovishness than I have ever seen in my career," Druckenmiller said. "This kind of myopia causes reckless behavior."

He believes U.S. corporations have not used debt in productive investments, but instead relied on financial engineering with over $2 trillion in acquisitions and stock buybacks in the last year. This is finally showing up on the books of companies as operating cash flow growth in U.S. companies has gone negative year-over-year, while net debt as gone up, according to the investor.

Druckenmiller was negative on China's economy going forward and believes recent attempts at further stimulus in the Asian country will not work and "aggravated the over-capacity in the economy."

"Higher valuations, limits to further easing..the bull market is exhausting itself," he said.

Druckenmiller is chairman and chief executive officer of the Duquesne Family Office. His hedge fund track record is unparalleled, generating annualized returns of 30 percent during his investment career. The Duquesne fund never had a down year, according one of his investors Ken Langone.

It's that time of the year when all the top hedge funders gather at the Sohn Investment Conference to raise money for pediatric cancer research. It's a great cause so make sure you donate to it here.

You can get a rundown of all the top picks from the Sohn hedge fund conference here and here. But before you get all excited and buy anything based on their recommendations, just remember there's a lot of hype coming from this hedge fund event. And I mean A LOT of hype!

This year's conference comes under a terrible backdrop for the hedge fund industry. Hedge funds are being attacked from within and from outside the industry, and as they lose their swagger, frustrated investors are pulling out.

I don't pay too much attention to this conference and prefer to analyze individual portfolios when the data becomes available every quarter (Q1 top funds' activity will be out soon). Sure, you only get to see their stock picks with a lag and not their short book but it gives me a sense of their thinking and trading (not that I pay too much attention to their quarterly activity either).

I prefer to focus on the macro backdrop and I recently put out an important comment on why it feels more like 1997 than 2007 where I explained why deflation fears out of Asia and Europe still reign, and a lot of the risk assets that surged this year only did so because of US dollar weakness. As the greenback reverts back up in the second half of the year, you will see a major reversal taking place in the stock, commodity and currency markets.

Unlike Druckenmiller, I'm not buying gold (like other commodities, gold soared because of the weak greenback, nothing else) and I don't buy his nonsense that the Fed is reckless and borrowing from future consumption. The Fed and other central banks are the only game in town and they're desperately trying to stave off the deflation tsunami I've been warning of.

I do agree with Druckenmiller on China and their reckless interventionist policies. I also think Soros will turn out to be right on China but that only heightens my fear of another Asian financial crisis and possibly a Great Crash coming later this year (not my call in an election year but you never know).

What worries me is the surging yen. Following Friday's weaker than expected US jobs report, the yen gained on the USD and now stands at 106.7  but it's still hovering above the 105 mark which means there's no imminent danger of Japanese authorities intervening just yet.

And if the US dollar continues to weaken in the second half of the year along with the US economy, it will heighten currency tensions in Japan and Euroland, reinforcing deflation in their economies. I don't see this trend continuing in the second half of the year.

Interestingly, Gerard MacDonnell, formerly of SAC Capital and a former colleague of mine at BCA Research, reports there's nothing new on the jobless front:

The unemployment rate is hovering at about 5% and the so-called “true” unemployment rate is pretty much commensurate. The broader measure is marginally higher than what one might expect given the standard measure, but there is not really a story here. Those who claim otherwise are usually just asserting their bona fides as members of the Failure Caucus.

How can you say this has “worked” when the true unemployment rate is 10%?! Whatever dude. You don’t have a point; and even if you did, it would not be bearish, because from the market’s perspective higher unemployment is more bullish anyway. I guess if you are wrong on the facts and get the implication backwards, then it is a wash.

The gap between the unemployment rate and CBO’s estimate of the natural rate, shown at right, ticked up this month for a minor technical reason. CBO’s best guess of natural goes from 4.9% for Q1 to 4.8% for Q2. At least so says FRED, who is updating very slowly today (click on image).

The unemployment rate is now within shouting distance of the level consistent with “full employment.” Yellen says there is still some slack and I would not fight that. She is quite a bit smarter and better informed than me, among other things.

But the unemployment rate has come down a long ways and the Fed is now more in stick-the-landing mode than in pedal-to-the-metal mode. To stick the landing they may not have to raise rates much, but that is a separate discussion. The precise number is arbitrary, but I think landing this baby means keeping the unemployment rate from going more than 50 bps below the natural rate.

So, means aside for one moment, the objective has changed, which makes the cyclical outlook for the economy a bit more dicey. While a recession is not imminent, the most important long leading indicator of recession risk has switched from green to yellow. In this regard, success is its own enemy. The business cycle moves along.

We'll see if the Fed raises rates. Goldman and others are rethinking any near term rate hike by the Fed. I still maintain that global economic weakness is a huge concern for this Fed and it's starting to seep into the US economy (see Warren Mosler's post here). I see no rate hike this year, especially if global economic weakness persists. And if the Fed doesn't raise, others will cut, boosting the USD.

The traditional thinking is that with the Fed out of the way, the USD will weaken more but it has already weakened a lot, wreaking havoc in Euroland and Japan which are suffering from deflation. In other words, don't bet on more US dollar weakness just because of this jobs report because inflation expectations outside the US have already fallen significantly, and as the US ones start declining, it will impact real yield differentials which will be USD bullish (see below).

What is crucial to understand is that as the US dollar index (DXY) reverts back up in the second half of the year, you'll see major reversals in risk assets that rallied thus far.

The stock market doesn't seem to care yet as everyone is long cyclical stocks. Interestingly, I had an exchange on this topic with Pierre Lapointe, founder of LuxArbor Institutional Positioning, when he posted something very interesting on LinkedIn (click on image):

Equally interesting is how hedge funds are positioning themselves right now:

Hedge funds firms are changing their bets as they seek to recover from a rocky start to the year.

They're betting that markets will stabilize and be less volatile, but are doing so by betting on volatility itself, rather than on the stock market, according to a report by Societe Generale.

In fact, they're not really upping their exposure to stocks at all. They are piling into US Treasury 30-year bonds, however, and they're still long the Nikkei.

Here is Societe Generale on the issue:

Increasingly short volatility but no new long positions on US equity. After a rough start to the year, hedge funds remain convinced that market fears will continue to fade. This is notably apparent through the increase in short positions on equity volatility, however without resulting in new net long positions on equity. Previous shorts on the S&P have only just been squared and, apart from a minor dent recently, net shorts on small caps (Russell 2000) were largely maintained. The long Nasdaq positions have been reduced, indicating that investors’ exclusive focus on growth stocks has started to crumble (click on image).

(CFTC, SG Cross Asset Research/ Global Asset Allocation)

Hedge funds have ramped up their long positions in silver and gold, and they're also betting that oil prices will climb. Net long crude oil positions have risen to their highest since July 2014, according to Societe Generale.

In the FX market, hedge fund are shorting sterling ahead of the Brexit vote, and are long the Swiss franc and the Japanese yen.

Investors are yanking money out of the hedge fund industry due to their poor performance. The HFRI Fund Weighted Composite Index, which measures hedge fund performance, was down 3.04% in the first quarter this year.

I disagree with these hedge funds and would be long sterling ahead of the Brexit vote, short the yen, CAD, Aussie, oil, gold and other commodities going into the second half of the year. If the yen breaks below 105 and keeps going lower, I would definitely be long vol fearing a crisis.

In fact, the best trade I've heard of is of some trader betting $5.6 million on metals and mining meltdown:

In a sizable trade on Thursday, someone bet more than $5 million on a nearly 35 percent decline in the S&P Metals and Mining ETF, the XME (XME). In the specific wager, the trader bought more than 50,000 of the September 20/15 put spreads for $1.12 each. Since each put option accounts for 100 shares of stock, this is a $5.6 million bet that the ETF will fall as low as $15 by September. The ETF is currently trading around $23.

The XME is up more than 50 percent in 2016, driven by massive moves from some of its biggest holdings. Cliffs Natural Resources (CLF), Coeur Mining (CDE), U.S. Steel (X), Consol Energy (CNX) and Freeport-McMoRan (FCX) are up a respective 143, 220, 140, 91 and 77 percent year-to-date.

"The XME had broken down at this $25 level. It went all the way down [to $11 a share] and then had an almost 100 percent rally back," Dan Nathan told CNBC's "Fast Money" on Thursday. The metals and mining ETF is down more than 8 percent from its 2016 high of around $25 hit on April 28. "If you look at the decline it's had in the last week and a half and then you look at the long-term downtrend, you see it's failed right below that," explained the founder of RiskReversal.com. "This kind of bet could be a downright bearish bet looking to get some leverage to the downside," he added.

The XME was higher by more than 1 percent early Friday.

Maybe this was a hedge, maybe it wasn't, but either way, it's a sizable trade and one that I think will pay off in a big way if Soros turns out to be right on China this year (it's an option trade so theta can kill it if the timing is off but I'm sure this trader knows all that and more).

Enough rambling, it's Friday so let me take a breather here and let you digest all this. Make sure you read my comment on why it feels more like 1997 than 2007 where I explain why deflation fears out of Asia and Europe still reign, and a lot of the risk assets that surged this year since mid January only did so because of US dollar weakness.

Importantly, be very careful reading too much into some global economic recovery which just isn't there. Global deflation risks haven't magically disappeared, they're intensifying and I think a lot of investors betting on a global recovery are going to get crushed in the second half of the year.

Below, CNBC's Kate Kelly and Melissa Lee discuss presentations at the Sohn Conference on Wednesday. They also discussed oil bulls at the conference.

There are quite a few oil bulls in the hedge fund world, including big traders who think it can go much higher but I remain skeptical and would steer clear of risk assets related to global growth like emerging market bonds and commodities, commodity currencies like the loonie, the Aussie, the Kiwi, high yield bonds (HYG) which benefited from the rise in oil prices, and various cyclical stock sectors like energy (XLE), metals and mining (XME), industrials (XLI) and emerging markets (EEM).

If the US dollar reverses course in the second half of the year as real yields in the US rise (see below), all these risk assets are going to get pummeled.

On that last point, Kit Juckes, global strategist at Societe Generale, discusses currencies and why he says it may be a make-or-break moment for the U.S. dollar. He speaks with Guy Johnson on Bloomberg Television’s “On The Move.” Listen to his comments below.

In a recent note, Juckes puts his finger on how the forex game has changed, explaining the real story behind the US dollar's decline. The world's reserve currency is being driven not by nominal yield differentials but real ones; that is, interest rates adjusted for inflation, he said. With the Fed on hold as US economic weakness begins, expect real yields in the US to rise relative to those in other countries. This will be USD bullish in the second half of the year.

Lastly, Jonathan Glionna, head of U.S. equity strategy research at Barclays, outlines where to look for safety stocks that can provide stability in risky markets and which areas to avoid when building your portfolio. He speaks on "Bloomberg ‹GO›."

Please remember to kindly support this blog via PayPal on the right hand side under my profile picture. I wish you all a great weekend and hope you enjoy reading my comments.