Charts Indicate Central Banks Must Tighten Monetary Policy: Part II

the Curmudgeon with Victor Sperandeo










Curmudgeon Observations from BoA Merrill Lynch:


·       Security Analysis -a book written by professor’s Benjamin Graham and David Dodd laid the intellectual foundation for what would later be called value investing. On the December 6th BoA Merrill Lynch (BoAML) webcast, Savita Subramanian, chief .U.S Equity Strategist at BoAML said she used that book while studying at Columbia University Business School (she received a MBA in Finance in 2002), but "we don't even use it anymore,” which implies it’s no longer relevant.


Obviously that’s because “the old rules of valuing stock prices no longer apply.”  That’s typical “new era” thinking, which we heard non- stop during the dot com boom.


·       Are you surprised that stock valuations, based on historical data, only account for 10% of stock price movement?  “They matter in the long run, but not in the short to intermediate timeframe, Savita said.

·       BoAML’s Sell Side Indicator [1.]: Equity optimism is on the rise.  In November, the BoAML Sell Side Indicator – a measure of Wall Street's bullishness on stocks - ticked up for the 2nd month in a row to 56.1 from 55.9. That’s near a six-year high!  This model is based on comparing today's sentiment levels vs. the prior 15 years.  BoAML says there is evidence that sell signals have higher efficacy relative to shorter histories and imply a more bearish outlook. The ongoing shift from skepticism to optimism likely reflects the march towards euphoria that we typically see at the end of bull markets and had been glaringly absent for most of this cycle.


Note 1. BoAML’s Sell Side Indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month. We have found that Wall Street's consensus equity allocation has been a reliable contrary indicator. In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa.



BoAML Quick Takes/Talking Points (December 8, 2017):


·       "Growth" trade reverses: big (7th largest ever) redemption from U.S. equity growth funds, inflows to tech funds waning; coincides with bout of weakness in tech (e.g. EMQQ -11%, SOX -10% in 10 trading days).


·       "Yield" trade fades: smallest IG inflows in 50 weeks ($1.4bn), 6th consecutive week of HY outflows; largest EM debt inflows in 26 weeks ($2.2bn) buck trend but note both EM debt & equities struggling in recent weeks.


·       Rotation needs wages: "growth" in equities, "yield" in bonds = QE-leadership: ends when "end of QE + start of fiscal stimulus + start of inflation = higher bond yields"; missing evidence is inflation…US tax reform needs wage growth to cause higher yields and sustained rotation to QE-losers; wage data critical in coming months.


·       Big Inflows…Poor Returns: record inflows 2017 into bonds ($347bn), stocks ($286bn); but years of big equity inflows (2010/13/14) were followed by poor returns (2011/14/15 - see Table 1); this especially case when BofAML Bull & Bear high (currently 6.4); we believe upside for risk assets in Q4/Q1 big but both credit & stocks peak early-18)




Victor's Closing Comments:

U.S. T-Bills have yielded less than the CPI for 9 years. The German 5 and 10 year Bunds have negative real yields as do other foreign bonds (many have negative nominal interest rates).  

As long as global central banks never allow a yearly market loss and keep rates in repression, why would corporations do anything but buy back their own stock? The biggest shareholders always win. Investing in a business (capex and opex) can lose if there's not a positive return on investment (ROI).


The USA is totally corrupt and as long as it pays to do so it will continue till it blows up!


Curmudgeon’s new email address:


Good luck and till next time...

The Curmudgeon


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Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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