Following FT Alphaville’s various posts this week on the growing debate about the equity market recovery - including Wednesday’s insights from The Pragmatic Capitalist and this from Gluskin Sheff chief economist David Rosenberg - Lex on Thursday notes the recent rise in “contrarian measures” of investor confidence:
The weekly Investors Intelligence survey, a poll of stock newsletter writers that has served as one of the best such gauges, exhibits significant complacency. The latest figures show the lowest level of bearishness since the market peak in October 2007 and the highest bullishness since January 2008. Another survey of individual investors’ optimism is near its highest level in over a year. Coming just five months after widespread fear of another Great Depression, this seems premature.
Investors, says Lex, “are putting their money where their mouths are, too”. Inflows into long-term mutual funds were positive for the 20th successive week, while short interest in shares making up the S&P 500 recently fell to the lowest level since February, according to Bloomberg. Another measure, the Chicago Board Options Exchange equity put/call ratio, is near multi-month lows. The ratio’s 21-day moving average hit a recent peak near the market’s March nadir.
Pessimistic strategists, meanwhile, delight in superimposing charts of the current 47 per cent rebound in the S&P 500 and the remarkably similar suckers’ rally after the 1929 crash, but “these prove nothing”, in Lex’s view:
Counter-examples show sustained rallies with steep initial trajectories. And exuberance can be self-perpetuating. Investor sentiment remained elevated and the “fear gauge”, measuring implied volatility, remained near record lows for prolonged periods in the last bull market. Betting against the crowd then was a recipe for short-term pain. In the longer-term though, those who heeded the signals preserved their precious capital.
All of which brings us to an interesting rundown from Damian Kestel, a CLSA broker in Singapore who does a nifty client newsletter, Bits & Pieces. He begins:
Great expectations. A look at how forecasts have been whipsawed both up and down by sector country and company indicates that the ability to forecast in such volatile times is a slippery art. We are presently in the midst of an almost across the board upgrade of earnings and target prices (chasing?) at the same time several market commentators suggest caution/profit taking. Others meanwhile warn of the dangers of a new credit bubble.
Among Kestel’s choice picks of the warnings-and-upgrades chopsuey being purveyed by uber-bears and perma-bulls:
“The benchmark MSCI Asia ex-Japan index has recently breached our 405-430 target level. We would book some profits in anticipation of a pullback to the 370-390 level” Technical analyst, Laurence Balanco
“GREED & fear’s view is that the more the S&P500 rallies from here in the short term, the more it is likely to be playing catch up with Asia and emerging markets in terms of relative performance. From a tactical perspective there is a decent case for those investors heavily overweight Asia and emerging markets to take some profits at this juncture”. Strategist, Chris Wood
“The media tells us earnings are coming in above expectations. But expectations have been lowered so much that the target is much easier to hit. Even then the “upside profit surprises” are coming from cost cutting, which is not sustainable as a profit center, at least if you are trying not to grow the business” John Mauldin.
Oh and by the way, Kestel adds:
The phrase “above expectations” has overtaken “green shoots” in my book of most overused and irritating comments. “Expectations” have initially proven too high, and now too low — it’s hard to know what to expect these days.
Here here.
In a wonderfully chilling antidote for the “above expectation-istas”, Ambrose Evans-Pritchard in Thursday’s Daily Telegraph seizes on the latest note from RBS’s chief credit strategist Bob Janjuah (whose view is about as “below expectations” as one could go) and throws in some contrasting views from Morgan Stanley’s equity guru Teun Draaisma for good measure:
After predicting a torrid “relief rally” over the early summer, Janjuah is advising clients to take profits in global equity and commodity markets and prepare for another storm as winter nears. As Evans-Pritchard notes, Janjuah has a “loyal following in the City”:
He was one of the very few analysts to speak out early about the dangerous excesses of the credit bubble. He then made waves in the summer of 2008 by issuing a global crash alert, giving warning that a “very nasty period is soon to be upon us” as — indeed it was. Lehman Brothers and AIG imploded weeks later.
This time he expects the S&P 500 index of US equities to reach the “mid 500s”, almost halving from current levels near 1000. Such a fall would take London’s FTSE 100 to around 2,500. The iTraxx Crossover index measuring spreads on low-grade European debt will double to 1250.
The article continues:
“We are now in the middle of a parabolic spike up,” he said in his latest confidential note to clients.
“I expect this risk rally to continue into — and maybe through — a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September ‘tipping zone’, driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets.”
The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a “surge higher” in these gauges can justify current asset prices. Results that are merely “less bad” will not suffice.
He expects global stock markets to test their March lows, and probably worse. The slide could last three months. “A move to new lows is highly likely,” he said.
Mr Janjuah advises investors to seek safety in 10-year German bonds in late August or early September.
While media headlines have played up the short-term bounce of corporate earnings, Mr Janjuah said this is a statistical illusion. Profits were in reality down 20pc in the second quarter from the year before. They cannot rise much as the West slowly purges debt and adjusts to record over-capacity. “Investors are again being sucked back into the game where ‘markets make opinions’, where ‘excess liquidity’ is the driving investment rationale.
Over at Morgan Stanley, however, equity guru Teun Draaisma thinks we are through the worst, Evans-Pritchard notes:
“We were on course for a Great Depression in February, but Armageddon was avoided. Governments did not repeat the policy errors of the 1930s.”
“We have seen the lows of this crisis. This is a genuine rebound rally, and it has been short by historical standards so far,” he said.
Mr Draaisma, who called the top of the bull market almost to the day in mid-2007, has crunched the worldwide data on 19 major stock market crashes over the last century. They show that the typical rebound rally (as opposed to bear trap rallies, when markets later plunge to new lows) lasts 17 months and stocks rise 71pc. The 1993 rally in the US was 170pc over 13 months. Finland’s rally in 1994 was 295pc. Hong Kong rallied 159pc in 2000. This rebound is only five months old. The key indexes have risen 49pc in the US and 42pc in Europe. Mr Draaisma advises clients to stay in the stocks for now, but stick to telecom companies, utilities, and oil.
Yet he too expects a nasty correction once this rally falters.
That said, Evans-Pritchard - and many others - conclude that we are, in the end, in uncharted waters.
Monetary and fiscal stimulus has been unprecedented. Russell Napier at Hong Kong brokers CLSA says a powerful bull market is already taking shape as the American giant reawakens. Perma-bears will be left behind. He said: “It is dangerous to be in cash.”
When the finest minds in the business disagree so starkly, the rest of us can only shake our heads in confusion.
As for the unpredictable business of predicting: forget the S&P 500 over coming weeks. As many forecast-junkies have noted, here’s an attempt to do it over the next 100 years by George Friedman, founder of Strategic Forecasting, what the New York Post describes as “a private intelligence agency sometimes called the ‘Shadow CIA’. And if you believe any of George Friedman’s more bearish predictions, you’ll need a sturdy tin hat that’s going to last a century.
Related links:
On the matter of group-think - FT Alphaville
Volume alert - FT Alphaville
Beware bottom-fishers, stocks aren’t as cheap as they look - FT Alphaville
