Private equity (PE) firms are selling stocks at the fastest pace in history.
According to Bloomberg, PE firms have sold $73 billion of their holdings to the public so far this year. That’s the most ever for a six-month period.
PE firms often buy struggling companies and try to fix them. They’ll reorganize the company and install new management. Then, they’ll try to sell the leaner and more profitable business to the public in an initial public offering (IPO).
Like all investors, PE firms want to sell their investments at the best price possible. So they sell the most when they think the market is topping out.
The best PE firms are truly “smart money.” They employ MBAs from elite schools like Harvard, Yale, and Wharton. PE firms are also insiders. Before buying a company, they can examine its private accounting records, interview its executives, and learn every detail about the company.
In other words, PE firms have access to information that the public doesn’t have. So when they’re selling, it’s a bearish sign.
Two years ago, Apollo Global Management (APO) founder Leon Black made headlines when he said his firm was unloading assets due to rising valuations. Specifically, he said that Apollo was selling “everything that’s not nailed down.” Apollo is one of the largest PE firms in the world.
Other big PE firms are now following Apollo’s lead. They’re selling because they’re worried that US markets are expensive. The S&P 500 has now rallied 204% since bottoming in March 2009. And it hasn’t had a 10% correction in more than three years.
Lise Buyer, founder of initial public offering advisory firm Class V Group, said:
It’s clear that we are currently in an environment of frothy valuations…the insiders — those with the most knowledge — are finding this a very good time to take some money off the table.
While the smart money is selling in the US, it’s buying emerging markets…
Bridgewater Associates, the largest hedge fund on the planet, now has 60% of its portfolio invested in emerging markets (EM).
EMs are countries that are on their way to “developed” status but aren’t quite there yet. Think India, Thailand, Brazil, China.
Ray Dalio is the founder of Bridgewater. He’s one of the best and most respected investors of all time. According to DealBook, he’s crushed the performance of the S&P 500 by six percentage points per year over the last 20 years. He even made money during the financial crisis in 2008/9, when a lot of hedge funds went out of business.
Dalio built his amazing track record by buying what others are selling. Dalio has said:
To make money in the markets, you have to think independently and be humble. You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price.
Dalio has increased his bet on EMs in recent years. In 2012, he had 35% of Bridgewater’s portfolio invested in EMs. That number jumped to 58% last year. Now its 60%.
Dalio’s 60% bet on EMs is huge. It amounts to tens of billions of dollars. It takes serious conviction to invest that much money all in one place.
There’s a lot to like about EMs. About 80% of the people on earth live in EMs. EMs produce 50% of the world’s goods and services. Yet EM stock markets make up just 15% of the global stock market. In time, EM stocks will rise to close the big gap between what EMs produce and what their stock markets are worth.
But right now, EMs are unloved. As a group, EM stocks have gone nowhere for a decade. They’re the same price as when George W. Bush was president:
Recently, The Casey Report explained that EMs are a bargain. We explained how to use CAPE ratios to measure EMs’ cheapness.
The CAPE ratio is the price/earnings ratio with one adjustment. Instead of using just one year of earnings, it incorporates earnings from the past 10 years. It smooths out the effects of booms and recessions and gives us a useful big-picture view of a country’s stock market.
By using CAPE ratios, we found that Chinese stocks are 46% cheaper than big US stocks. Brazilian stocks are 67% cheaper than US stocks. Russian stocks are 80% cheaper.
And these EMs aren’t just cheaper than US stocks. They’re also cheap compared to history. Chinese stocks are about 20% cheaper than their historical average. Brazilian stocks are 45% cheaper than their historical average. Russian stocks are about 32% cheaper.
The Casey Report’s specialty is buying cheap, unloved assets like EMs today. Cheap, unloved assets are where investors can often find the biggest returns. You can find our favorite way to play EMs by taking a risk-free trial to The Casey Report.
Switching gears, regional bank stocks are on fire…
68 regional bank stocks hit 52-week highs last week. KRE, a regional bank ETF, has broken out to a post-recession high. Its largest holding, Bank of the Ozarks (OZRK), is up 21% for the year.
Regional banks are soaring because interest rates are rising. The rate on 10-year Treasuries has jumped from 1.88% at the beginning of 2015 to 2.43% today. Regional banks make money by charging interest on loans. When interest rates rise, they make more money.
Real estate investment trusts (REITs), on the other hand, are struggling with higher rates. The MSCI US REIT Index, which tracks the performance of REITs, has lost 8% this year.
REITs are publicly traded companies that invest in real estate. Some REITs own income-producing properties like shopping malls, hospitals, and office buildings. Others just own mortgages.
REITs usually pay fat dividends. With rates near historic lows, investors have been buying REITs for income. 2014 was the best year for REITs in a decade. The MSCI US REIT index rose 30% in 2014, doubling the S&P 500’s 15% gain.
But when rates start rising, REITs aren’t as attractive. High-quality bonds are generally less risky than REITs. So when high quality bonds are paying a decent income, there’s less reason to own REITs. That’s why several big REITs, like Annaly Capital Management (NLY) and HCP Inc. (HCP), are near 52-week lows.