Since we have been in the business, and well before, sentiment measures have been used to gauge the popularity of trades –everyone of age remembers the MarketVane sheets. It is our sense that there is a more rapid convergence to consensus than ever before – that is, investors, in response to changing data, coalesce around a forward view very quickly. We hope to add some statistical meat to this idea over the next few months, but for the time being let’s begin with an anecdotal example.
Diamond Offshore, a well-run company in a tough space, is followed by 18 analysts according to Bloomberg. Of those 18, not one has a buy rating. Not one analyst thinks there is any chance oil prices can rise from here, and make Diamond an attractive buy, despite recently trading 70% off the 2010 high. Clearly there was consensus in mid-March that oil prices would continue falling. That consensus converged not only in the crude market, but in other asset classes as well. We see such activity everywhere. How about the Bund market – zero yields forever with Euro QE.
Why might this be? It is certainly, at least in part, an artifact of current market structure, which provides extraordinary liquidity and market access combined with fast and complete information flow, resulting in rapid convergence to consensus. But at least as important, in our opinion, is the general level of risk aversion among risk takers. There is genuine fear of being outside the box, desirable as that may be from a diversification perspective. Better to fail with the consensus, as Keynes said.
From a larger perspective – does convergence of consensus represent a systemic risk — the Bund was a mess without an exogenous shock.
Certain funds that Mount Lucas manages hold positions in Diamond Offshore Drilling, Inc. and no representation is being made that such positions will continue to be held.”
Diamond Offshore Drilling, Inc. (DO) is a NYSE listed company that provides contract drilling services to the energy industry worldwide.