One of the many lessons from equity investing during Japan’s Lost Decade is that in a secular bear market hope is a killer. In a secular bear market hope should only be flirted with briefly during cyclical upturns, but it must be ruthlessly rejected as the cycle turns. In a secular bear market being wedded to hope destroys portfolios as the bear slashes to ribbons the hard-fought gains of the previous bull market. Gains that have taken years to accumulate are gone in months. One key measure we monitor informs us conclusively: we are now in a bear market.
The ‘key measure’ SocGen strategist Albert Edwards is referring to here is one of six models developed by his quant-ist colleague, Andrew Lapthorne. And, in chart form, it looks like this: Read more
Title wise, That was nuts. Is this the crash? was already taken. In this exact context. Last week.
So… this time the Shanghai Comp has just closed down 7.4 per cent (with some 70 per cent of stocks hitting downward limits), Shenzhen fell 7.9 per cent while ChiNext dropped 8.9 per cent. Read more
Still rising until September based on broker capital, if you believe Macquarie.
And here is the bank, with our emphasis, after last week’s Chinese equity dive amid stories of broker crackdowns:
Last week’s sharp A-Share correction creates an opportunity for us to update our margin database and charts. It seems that hardly a day has gone by in recent weeks without some discussion of media reports about broker “crackdowns” on Chinese margin lending. But it may be more instructive to observe what brokers and their customers actually do rather than simply observing what the media reports they are doing. This is because the aggregate data on margin lending tells a very different tale from the “tightening” narrative.
Margin positions have continued to spike, climbing 16% MoM and 123% YTD to reach a new high of RMB2.3 trillion as of 18 June. This is 4.6x higher than a year ago. It brings the ratio of margin positions to market cap up to 3.4%, which is still below peak levels achieved in Taiwan in the 1990s. However, as noted previously, margin positions to free float – our preferred metric for considering the possible share overhang – is now 8.5%. Admittedly these numbers become less shocking with time, and cross-country comparisons are fraught with apples to-oranges risks, but we’ll say it one more time – this level of margins to free float is higher than any historical example that we can find.
From Morgan Stanley’s China Pulse survey first (via @jjeswani):
In June, more than half of the investors believed Shanghai A-shares were already in a bubble vs. only 12% holding this view in January.
There are lots of people in India. Nobody argues about that.
What’s also true is not many of them care about equities.
Of course, there are exceptions. In absolute terms, rather large exceptions. The Bombay Stock Exchange (founded in 1875 as the “The Native Share & Stock Brokers Association”) is Asia’s oldest and ever since Reliance founder Dhirubhai Ambani — the ‘guru of the equity cult’ as Hamish McDonald put it — tapped into India’s small investor to fund his company, they have been in the mix. Read more
Not an unhelpful way of looking at this weekend’s moves in China — the largest RRR cut since 2008 on Sunday following ropey growth data and a move to rein in the stock market, via more room for shorting and less room for leverage, on Friday — from Citi with our emphasis:
We reiterate H [shares of mainland Chinese companies traded on the Hong Kong stock exchange and denominated in Hong Kong dollars] preference over A [shares of Chinese companies listed on either the Shanghai or Shenzhen stock exchanges], following the 100-bp RRR cut and CSRC’s margin trading rule enhancement over the weekend. The “economic policy put option”, i.e., easing bias if economy weakens, is in line with our views post 1Q15 GDP. The RRR cut, more significant than expected, suggests urgency to ease and provides Rmb1.3tn liquidity. Our economists now expect two more rates cuts and two more RRR cuts ahead in 2015. MXCN gained 1% on average following 50-bp RRR cuts historically. For the gov’t A-share equity policy stance, however, we think an “equity policy call option”, i.e., tightening bias if equity surges, seems emerging given the high leverage and reasonable valuation
We assume we’ve made our position on this pretty clear… but apparently Citi remain unconvinced.
To wit: “If the Chinese market were to double from here it would indeed be in bubble. The same is true for Asia, a doubling would put us back at 3x book which over the last 40 years has been the peak – four times. When we get close to those levels we will be in a bubble, till then it’s a bull market.”
From their GEMs team, which has been preaching China equities for quite a while (with our emphasis): Read more
The China stock bubble is getting more and more bonkers. This from Deutsche Bank:
Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their dot.com peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!
It seems everyone in the country is racing to open a brokerage account – 1.67m new accounts in the latest week, according to the China Securities Depository and Clearing Co. That sounds a lot, although it is growth of only about 1 per cent a week in the total of new accounts: China, remember is big.
But a quick bit of Excel work shows just how silly the bubble in Chinese domestic stocks, known as A shares, has become. Read more
European stocks as measured by the Stoxx 600 index finally passed their March 2000 high this week. As measured by the FTSE Eurofirst 300 they are set to pass their 2007 closing high if they can hold on to today’s gains.
Great news for investors in Europe, right? Well, sort of.
First off, record highs for shares are only good news if you are selling: investors should care about the future, and the higher the price, the lower the future returns, so record high prices are not obviously good news for buyers.
Second, these are capital only measures, which exclude dividends and take no account of purchasing power. Third, share prices are not a great guide to economic performance for all sorts of reasons, but most obviously because multinationals garner much of their income from outside their listing location.
A Chinese rendering of jusqu’ici tout va bien courtesy of Bloomberg:
The chief China strategist at Bocom International Holdings Co. points to soaring price-to-earnings ratios, the shrinking yield advantage that stocks offer over bonds and the fact that mainland-listed equities now trade at a 34 percent premium over nearly identical shares in Hong Kong.
So what’s Hong’s advice to investors?
Keep buying, of course.
Sentences to remind us of the nuttiness of Chinese equities over the past few months from BNP Paribas’ Richard Iley (and yeah, the Shanghai Comp fell 0.8 per cent today we have to admit, but that just broke “a 10-session winning streak — the longest in 23 years, according to Bloomberg data — that had taken the index to its highest since May 2008″):
Against all odds, the best performing asset class on the planet over the last nine months or so has been Chinese equities. After languishing for the first seven months of 2014, Chinese stocks have since been on an incredible tear, ending 2014 up a remarkable 49% in USD terms, even outstripping the c.28% annual return posted by Bunds (Chart1). And the strong gains have continued so far in early 2015. Up almost 12% in USD year-to-date at time of writing, Chinese equities continue to sit atop the heap of global asset returns. All told, the Shanghai and Shenzhen markets have surged almost 80% in local currency terms since mid-2014 (Chart 2).
Yes, yes… “必有牛市” – “There must be a (dynastic) bull market”. Read more
These came out yesterday courtesy of BofAML’s 2015 look at looong term trends in financial markets by Harnett and Leung…
The obvious place to start:
And the obvious place to continue, asset prices: Read more
Biggest fall in five years that, even if it’s still up 35 per cent this year. Might be time to talk about the potential consequences of all this, no? Read more
Nice from Simon Rabinovitch at the Economist:
One middle-aged man, Mr Xu, had come to meet a manager to inquire about how to subscribe to initial public offerings; their average first-day gain has been about 40% this year. He said he had taken the afternoon off work for the meeting and could hardly conceal his glee. “I’ve been trading since 1992 (just two years after the Shanghai Stock Exchange was established) and I guarantee you this bull market will last,” he said. He confessed to getting badly bruised by the last big one – his portfolio of 500,000 yuan had swollen to 3 million yuan by 2007 at the peak of the market, before falling back to its original level.
At the other end of the spectrum in terms of experience was Ms Zhou, 25, an interior designer with dyed-blonde hair. Like many other young professionals, she had previously put a big chunk of her savings in an online investment fund marketed by Alibaba, an e-commerce company. The fall in interest rates has reduced the return on that fund, pushing her to look for alternatives. “I had been thinking for a while about buying stocks but I had to travel for work and missed the best opportunity,” she sighed. “I will be conservative at first. Just one or two thousand yuan. Or maybe ten thousand.”
Which says a lot about the mechanical nature of this “super-bull” run. There’s simply quite a bit of money in China and a limited number of places for it to go. Once one is found… Read more
Consider this from Gavekal’s Chen Long on the run up in China’s A-shares:
Charts. Do stop us if you’ve heard this one before.
Unless we’re mistaken, Goldman has come up with its own “This is nuts” top ten. Decent effort:
1. Since the low in the global equity market on March 9, 2009, the MSCI The World index has risen roughly 180% in total return terms, generating an annualised return of a remarkable 20%.
2. 2013 was one of the strongest years on record for the equity markets. The US managed a price return of 30% and the Sharpe Ratio of the S&P 500 ranked in the 98th percentile since 1962.
3. Perhaps even more striking is that bond markets have continued to perform strongly. Since the 2009 low in equities, the JP Morgan GBI global bond index has risen 24%.
1,823.06 -54.64 (-2.91%)
- at pixel. DJIA off by a similar margin. What to say? Let’s fall back on charts…
Had to share. It’s doing the rounds by email…
The original title of this post read: What do you call a stock market crash that only lasts half an hour? Read more
Looking at the sea of red in the markets over the past two days, it is easy to be disheartened. The Dow Jones Industrial Average fell 334 points and the broader S&P 500 was down 2.066 per cent, matching the fall in Germany’s Dax 30 at pixel time.
It is worth putting the fall into context, even if valuation, complacency and the scale of crowded trades all suggest good reasons for concern. Over the past 50 years, the market’s been down this far in a day 289 times, or almost six times a year. It is nasty, but on this basis it looks normal. Read more
In which Citi look for the next Apple, our emphasis:
Apple’s valuation has been through a spectacular round-trip over the past couple of years (Figure 2). Its total market cap first broke through $600bn in August 2012, but then collapsed to $341bn in April 2013. Since then, the recovery has been equally remarkable, moving back above $600bn in the past month. In the process, it has regained the title of the world’s most valuable company ($187bn ahead of Exxon at number 2). To put this in context, Apple has lost and then regained the value of the Russian stock market in just two years.
The narrative associated with this spectacular journey often focuses on the never- ending pressure for Apple management to maintain the company’s product pipeline. A lower share price reflected concerns that Steve Jobs’ midas touch had been lost. The subsequent rebound was associated with increasing conviction that it had not.
If you buy this…
… keep reading. Read more
Your recent flight to safety and the pain of carry trades in the face of Ukraine and the FOMC, charted and worded by Hartnett and BofAML:
Looking at total returns, stocks and bonds are up around 4% year-to-date while commodities are down 1.4%. But since July 16th, the day prior to the downing of flight MH17, the US dollar has outperformed all major currencies, cash has outperformed all major asset classes (see Table 1) and the only equity markets showing gains are China, Kazakhstan, Saudi Arabia & Egypt. Of particular note, the combination of a geopolitical flight to quality and concerns about the end of the era of excess liquidity appears to have caused the three big “carry trades” of 2014, high yield bonds, European peripheral bonds and EM debt, to be “carried out”
From Goldman on the state of European corporate investment… or what happens when a yield hunt meets corporates who are running out of investment ideas:
That uneasy feeling when everything is going well. Is it deserved? Can it last? Should you cash in and go paint watercolours in that studio on the Pembrokeshire coast?
Strategists are not immune, with a summer bout of the temporaries upon us. Goldman is the latest, downgrading its view of stocks over the weekend but without really committing to it:
We also downgrade equities to neutral over 3 months. We are concerned that a sell-off in government bonds will lead to a temporary sell-off in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower than it was back then.
When your bet is on policy certainty in India, maybe it’s time to reevaluate that bet…. From BofAML:
Ignoring the risk-love silliness, we think this means a whole load of policy certainty has been priced into Indian markets ahead of the Modi-led BJP’s presumed victory in the just finished elections. From BofAML again: Read more
We’re fans of The Reformed Broker. Reluctantly, sometimes. But fans nevertheless.
So we should just note that a Josh Brown post from Wednesday, looking at the relentless growth of passive asset management and its effect on equity markets has, quite simply, gone viral.
In fact, if you are a market professional and it’s not in your inbox already this morning, you are a failure.
To save your blushes, here’s the link to the original, here’s Josh’s follow up, and here are some choice quotes to memorise quickly… Read more
A new year is a new country, so far as the investment prognostication world is concerned. What will people do with their clean slates, we wonder?
Buy equities is a strong contender. It appears to be what retail investors finally did last year after years of revealing their preference for bonds, and they aren’t done yet. If you don’t believe us, well, we have charts… Read more
One-year total return of the Athens stock index, to the end of October 2013: +50%
One-year return of the Bloomberg Greece Sovereign Bond Index, same period: +134%
One-year net return of Dromeus Capital’s Greek Advantage Fund: +107%
Yep — FT Alphaville hears that the first-year performance of Dromeus Capital’s Greece-focused fund would make it one of 2013′s best-performing, having already made a strong start at the beginning of the year.
It’s another indicator of how much both Greek equities, and the sovereign’s restructured debt, have recovered this year… Read more