Safety Dance

Your definition of Safety is very different from the safety sought by Wall Street professionals, and this latter form is what’s propelled the stock market to new record highs over the last 32 months.

The real Flight to Safety has been on since the beginning of 2012 and it has barely let up for even a single headline or emerging threat.

When the media uses the term Flight to Safety, they are typically describing a one-day or one-week period of time during which small caps and economically sensitive stocks sell off while large cap value defensive stocks, gold and Treasury bonds rally. But this is merely a tactical flight to safety. The strategic flight to safety is the real deal – the one that actually matters most and gets the least attention.

In a strategic flight to safety, practitioners whose job it is to allocate money for their firms or clients, run to the only thing that will allow them to keep their jobs 99 percent of the time – US stocks. The only safety that matters for these folks – career safety – is the driving force behind trillions of dollars of asset flows.

Portfolio managers have learned over the years that their biggest occupational hazard is not the possibility of a temporary market drawdown (which is what the media focuses on). No, the number one risk for a money manager is to stray too far from the US equity benchmarks and have them run higher without nearly-full participation in the gains. Foreign stocks or bonds can run up without quite as much risk to the manager, but an S&P 500 rally not harnessed is practically grounds for dismissal in most corners of the industry. This explains the home bias present even in professionally managed portfolios – whereby the typical equity mix looks more like 60 to 80 percent US stocks vs the global reality in which US stocks comprise just 48% of the world’s capitalization.

It is strategic – and in their personal best interests – for money managers to run to US stocks every chance they get, especially during a bull market. And as the economy has become more financialized, with more professionals involved in the business of Other Peoples Money (OPM), equity market multiples have gradually drifted higher. This is what the CAPE Ratio adherents haven’t been able to grasp – the answer to why US stocks have been “overvalued” by historical standards 98% of the time since 1989 is a behavioral one. Good luck finding “job security” in the data.

The close cousin of this strategic flight to safety, the flight to safety happening with corporate share buybacks, is almost never far behind.

Prior to 1981, public companies were limited in terms of how much of their own stock they could buy back and how they executed it. Back then shares were bought back at a fixed price tender offer, announced in advance. President Reagan’s Securities and Exchange Commission deregulated the buyback process and ever since it’s been open season. Shrinking one’s publicly available float has gone from novelty to condition of employment in the C-Suite.

Corporate managers now face an unprecedented job security threat level in the form of activist bazillionaire hedge fund guys who demand massive buybacks – whether with cash or newly issued debt – almost as a matter of course. It’s hard to find a 13D filing that doesn’t reference the filer’s desire requirement for a share repurchase bump. According to the Shareholder Director’s Exchange, activist hedge funds now have a warchest of over $100 billion – a triple from what these operators were playing with in 2008. The average market cap of a public company being targeted by activist investors has doubled from $4 billion to $8 billion in just the last three years, the SDX tells us, and with Carl Icahn banging on Apple like a gong, every CEO in America is vulnerable.

And you wonder why companies are buying back shares like there’s no tomorrow – between $75 billion and $159 billion a quarter for the past four years – the alternative is literally being fired.

The evidence suggests that the only net buyers of US stocks thus far in 2014 are corporations executing buybacks. Participants among most other categories of investors are shown to have been net sellers, and still the S&P drifts higher.

The next time you hear the term “flight to safety” being used to describe a 2 percent correction or a quick race into cash, remind yourself that what you’re really witnessing is more like a momentary un-rally, a tactical flight driven by a handful of panicky players or over-margined hedge funds.

Because the real flight to safety is the one that is measured in months, quarters, years and decades. And the destination of this flight, in the end, is toward US stocks.

This is the only flight to safety that really matters.

And yes, of course I’m hooking you up:

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. خرید وی پی ان commented on Sep 20

    vpn ایفون

    Fantastic website! Is your theme customized created or did you obtain it from somewhere? A layout like yours with a few straightforward adjustements would truly make my weblog stand out. Make sure you allow me know the place you acquired your design. B…

  2. خرید وی پی ان commented on Sep 21

    vpn ایفون

    Proper now it looks like Movable Variety is the prime running a blog platform out there appropriate now. (from what I have go through) Is that what you are employing on your weblog?

  3. خرید وی پی ان پر سرعت commented on Sep 22

    vpn ایفون

    Hey! I know this is somewhat off subject but I was asking yourself if you realized where I could get a captcha plugin for my remark type? I’m using the very same blog platform as yours and I’m possessing troubles obtaining one particular? Many thanks a…

  4. سرویس وی پی ان commented on Sep 23

    vpn ایفون

    Rather! This has been a really great article. Thanks for delivering this details.

  5. Armani parfum commented on Sep 23

    Armani parfum

    […]Every after inside a while we pick blogs that we study. Listed beneath are the newest web sites that we choose […]

  6. click here commented on Sep 14

    … [Trackback]

    […] Here you can find 49337 additional Information on that Topic: […]

  7. Small child commented on Sep 25

    … [Trackback]

    […] Find More to that Topic: […]

  8. Bitcoin Era Review 2020 commented on Oct 01

    … [Trackback]

    […] Information to that Topic: […]

  9. 안전공원 commented on Oct 18

    … [Trackback]

    […] Info to that Topic: […]

  10. commented on Oct 19

    … [Trackback]

    […] There you can find 69054 additional Information to that Topic: […]