BoA: No Love for Stocks Yet Higher Prices
Forecast; Victor Disagrees!
By the Curmudgeon with Victor Sperandeo
BoA Research- Fund Outflows, Deflation Assets Lead, Higher Stock Prices Forecast:
On Friday, March 22nd, BoA Merrill Lynch Global Research reported weekly inflows: $12.1bn into bonds, $20.7bn out of equities, which was a complete reversal of last week's "green shoot" $14bn equity inflow. “There is simply no love for stocks,” the bank concludes. Here’s a jaw dropping chart of tech stock flows collapsing in a waterfall decline:
Cumulative flows to tech funds have stalled
YTD flows: $63bn into credit + Emerging Market (EM) debt, $15bn into EM stocks, $82bn out of US/EU/Japan stocks.
According to BofA, this shows the following:
1. All-in central banks = all-in credit investors = all-time highs for credit ETFs (e.g. PFF, LQD, JNK, EMB)
2. Lust for yield is the primary driver of EM inflows
3. US/EU/Japan stock gains are solely driven by corporate stock buybacks (see Victor’s comments below) /derivative call buying/short-covering/ retail single stock buying.
The mega-trend is deflation assets are trouncing inflation assets (but what about rising Gold prices?):
Inflows to "deflation assets" e.g. IG, HY, EM debt, and REITs continue to trounce inflows to "inflation winners" e.g. EU, Japan, EM, energy, and material stocks. There’s been $1.3tn inflows into "deflation" assets since 2009, but just $0.5tn to "inflation" assets, according to BoA.
Despite BoA’s favorite EPS lead indicators still poor, the bank forecasts the S&P 500 (SPX) will be >3000 in 1st half of 2019 as stock prices catch-up with credit. As of March 21st close, the bank notes that the S&P 500 P/E multiple has risen from 14.6 to 16.6 in 2019.
BoA’s position is that global central bank easy money
suggests higher P/E multiples as per this chart:
Global central banking easing implies higher P/E multiples
Victor’s Comments - It’s Still a Bear Market!
I want to reinforce my October through December 2018 call that stocks are in a Bear Market, and that the U.S. will be in recession by July 2019, or shortly thereafter. This forecast was initially based on the extreme economic weakness throughout the world. In order of economic weakness, I would subjectively rate, Europe first, followed by China, then Japan with the U.S. the least weak (but hardly strong).
The fundamental foundation for the bear market were confirmed by two key technical long-term market indicators: 1] Dow Theory, and 2] U.S. stock index prices closing below the 200-day moving average (MA) and with those MA’s sloping downward.
My recession forecast was confirmed by the Fed’s U turn monetary policy. Members of the FOMC voted unanimously to raise rates in late September (the 8th rate hike) and again on December 19th with more rate increases penciled in for 2019. That policy persisted for 16 days – until 1/4/19, when the Fed flip flopped saying it would now “be patient” on raising rates.
After its March meeting ended last Wednesday, March 20th, the Fed said they no longer anticipate any more rate hikes this year. Readers should realize that “NOT RAISING RATES” is not a new round of monetary stimulus.
The Fed said it would stop reducing their bloated balance sheet this September. The U.S. central bank said its current practice of allowing up to $50 billion of Treasuries and mortgage-backed securities (MBS) to roll off its balance sheet each month will come to an end if the economy evolves “about as expected.”
The Fed currently holds about $3.8 trillion in U.S. treasury and mortgage bonds. By September 30th the Fed’s balance sheet will be a staggering $3.5 trillion (it was ~ $800 billion before QE started after the 2008-2009 financial crisis). That’s about 17% of U.S. GDP. As the Curmudgeon previously explained, retiring maturing bonds reduces bank reserves and the money supply so is therefore 100% “TIGHTENING” of monetary conditions.
Therefore, after the Fed’s post meeting policy statement, U.S. equity markets retreated less than 1% virtually across the board. The anomaly came on Thursday March 21st, when the markets rallied strongly (>1%), in most key indexes without any obvious reason?
In my view, the Fed thought it was giving the market a big bonus, and it did not take the bait, so the PPT came in, and bought up the markets to “show” that the Fed’s not raising rates was a big positive? This is my speculation.
Despite extensive time-consuming research, neither the Curmudgeon nor I can prove that the PPT even exists, let alone intervenes in the U.S. equity markets by buying stock index futures and/or ETFs.
On Friday March 22nd, the European PMI/Manufacturing data was reported to be lower than expected. In fact, it was terrible! This caused a reversal of the equity markets, causing a material decline, while debt prices increased with the German 10-year bund moving to a negative yield.
In the U.S., bond prices rallied sharply with intermediate term yields declining such that the yield curve become inverted. The 3-month T-Bill yield closed at 2.46%, while the 10-year US Note yield was 2.437%. An inverted yield curve has been a 100% recession signal going back to the 1970’s. Of course, it has to be maintained to be effective.
Importantly, the rally from 12/26/18 was buttressed primarily by “corporate stock buy-backs” and short covering. But after 3/31/19 the buy-backs will end till after earning season at the end of April, and obviously short covering has been cut back significantly. Currently the rally is within historic norms.
Meanwhile the market divergences all point to an intermediate bear market top. Due to the buybacks, the market was much stronger than normal. As we have written about at length (our last post on Stock Buybacks Exposed is here) corporate buybacks increases the net worth of corporate insider, but does nothing to help the companies grow sales, earnings or even market share.
"Safety. Considering the downside is the single most important thing an investor must do. This task must be dealt with before any consideration can be made for gains" by Irving Kahn.
Good luck and till next time………………..
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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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