A Very Prominent Fully Invested Bear Didn’t Growl

This morning, the famed investor Leon Cooperman proclaimed himself a “fully-invested bear” in a CNBC interview.  This is a concept that we discussed last month in a piece entitled “Fully Invested Bears”.  In light of that widely-watched interview, it seems appropriate to discuss the concept once again. 

The term is one that we both have been using for months.  It appears that it first surfaced in a Cooperman interview on or about June 29^th, and I confess to being unaware of that interview when I used it in an interview of my own with Bloomberg a week later.  It appears that we share misgivings about the long-term health of the market amidst massive monetary and fiscal stimuli, particularly because the asset price inflation that has resulted from those moves seems quite susceptible to reversal if a reduction in monetary accommodation is handled improperly. 

Yet we view the markets through somewhat different lenses.  Cooperman is a long-term, bottom up investor, while my focus on options markets often results in a shorter-term view.  That led to my concerns that although markets have been moving steadily higher, the persistently high levels of put skew indicate that there is an undercurrent of nervousness among investors large and small.  I believed that was driven largely by “TINA FOMO”, a combination of fear and greed that kept markets buoyant.  I assert that institutional investors who are driven by competitive pressures to stay fully invested are buying puts as insurance. 

Indeed, buying insurance can be a drag on returns, but the whole point of insurance is to spend a manageable premium to defray the costs of a low-probability, high-outcome event.   We insure our homes against fire because it would be a financially devastating event, but we actually hope that those insurance premiums are wasted.  We really don’t want our fire insurance to kick in.  I believe that many investors view their put purchases in that light.  They’re not rooting for a 10-20% drop in markets that would be financially injurious, but are protecting themselves against the possibility that it could occur.

Quite frankly, it rarely behooves investors to fully “fight the tape”.  Despite three days of minor declines at the start of a seasonally difficult month, broad indices and market leading stocks remain in long-term uptrends.  We recognize that valuations are stretched and that there are echoes of prior market bubbles, but Cooperman and I agree that not all valuation measures are as stretched as they were before those bubbles popped.  We also agree that this run, like all, will come to an end – a potentially ugly one — but we don’t know how or when that moment will arise. 

For today, at least, investors preferred to focus on “fully-invested” rather than “bear”.