Earlier this year, bond yields were sinking, macro was disappointing to the downside and company sales and earnings were confirming disappointing growth. It looked dire, yet equities put in arguably the most impressive rally in over 15 years. It was a notable disconnect.
The tables have now turned. Rising bond yields suggest future growth and macro has been beating expectations to the upside by the widest margin in two years. Moreover, the outlook in Europe has brightened, with the Euro 350 index reaching new highs this week. Riskier tech and small caps have been leading. You would think US equities would be celebrating, yet the Dow has just had its worst two weeks of 2013.
US equities are having a banner year. The short term trend has weakened but the longer term uptrend is firmly in place (chart). And strength in the Euro Zone is a major positive (so long as it lasts) as half of SPX earnings are from outside the US.
Our view, as laid out two weeks ago (in several well-timed, otherwise known as luckily-timed, posts) is that investor exuberance has exceeded fundamentals (post) and that the V-bounce is likely to fail, resulting in a retest of the June lows (post). There does not appear to be any reason to change that stance yet.
Arguably, a correction through time is needed more than a correction through price. By percent, the fall in June this year and the falls in April-May and Oct-Nov last year are nearly the same (8-10%). But the corrections last year took twice as long (9-10 weeks) as the one this year. Time allows investors to exit equities, establish defensive positions and to become bearish. Ideally, equities correct through late September which, happily, coincides with the dominant seasonal pattern.
Sunday, August 18, 2013
Friday, August 16, 2013
Emerging Markets: The Global Macro and Sentiment Trade
The case for investing in emerging markets (EEMs) right now is this: funds are at a record underweight and macro expectations are beating to the upside by the largest amount in the past two years. That is a potent combination: in addition to growing local consumption, EEMs are export-driven, especially of commodities, that would come back into fashion with improved G10 macro growth.
Moreover, EEM equity markets are highly sensitive to foreign fund flows: rebalancing in the past has led to outperformance. But, and this is key, that works both ways: when developed markets fall, EEMs do as well and more often than not, they fall harder. That, in short, is the risk/reward for EEMs.
Correlated sympathy plays on the same dynamics are steel (SLX) and copper (JJC).
EEMs are the most out of favor equity region among fund managers right now (green line). A net 19% are underweight at the moment, the lowest in 12 years. The last time EEMs were this out of favor was late 2008 and EEMs outperformed SPX through the concurrent trough. In comparison, in February, EEMs were the most favored equity market (43% overweight) and they subsequently have been the worst performing equity region of 2013.
In comparison to all asset classes and on a relative basis, EEM equities are the single most out of favor and under-owned asset.
Moreover, EEM equity markets are highly sensitive to foreign fund flows: rebalancing in the past has led to outperformance. But, and this is key, that works both ways: when developed markets fall, EEMs do as well and more often than not, they fall harder. That, in short, is the risk/reward for EEMs.
Correlated sympathy plays on the same dynamics are steel (SLX) and copper (JJC).
EEMs are the most out of favor equity region among fund managers right now (green line). A net 19% are underweight at the moment, the lowest in 12 years. The last time EEMs were this out of favor was late 2008 and EEMs outperformed SPX through the concurrent trough. In comparison, in February, EEMs were the most favored equity market (43% overweight) and they subsequently have been the worst performing equity region of 2013.
In comparison to all asset classes and on a relative basis, EEM equities are the single most out of favor and under-owned asset.
Tuesday, August 13, 2013
Fund Managers' Current Asset Allocation - August
Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones. These managers oversee a combined $700b in assets.
Overall, fund managers are extremely bullish on risk. In August, they further reduced their exposure to bonds (57% underweight) and increased their exposure to equities (56% overweight). Fund managers equity weighting is now in the top 5% since 2007.
Managers are now overweight the US equities by 30%, an increase of 5 percentage points in the past two months. They were 3% underweight the US in January, for comparison. Managers increased Europe to 17% overweight, the highest in 5 and 1/2 years, from just 3% in July. They decreased Japan to 19% overweight from 27% last month. Meanwhile, emerging markets are now 19% underweight, the lowest since the survey began in 2001.
You can see from the data that it should be looked at from a contrarian perspective. Fund managers were overweight EEM more than any other market at the start of the year, and it has been the worst performer so far. They are now bearish EEM, so keep it on your radar. In comparison, they were 20% underweight Japan in December and it has been the best equity market in 2013.
The US is now the largest consensus long. In the history of the survey, the current weighting is the third highest. This is consistent with the AAII asset allocation survey and fund flow data showing July to be the largest inflow into equity funds and ETFs ever.
Overall, fund managers are extremely bullish on risk. In August, they further reduced their exposure to bonds (57% underweight) and increased their exposure to equities (56% overweight). Fund managers equity weighting is now in the top 5% since 2007.
Managers are now overweight the US equities by 30%, an increase of 5 percentage points in the past two months. They were 3% underweight the US in January, for comparison. Managers increased Europe to 17% overweight, the highest in 5 and 1/2 years, from just 3% in July. They decreased Japan to 19% overweight from 27% last month. Meanwhile, emerging markets are now 19% underweight, the lowest since the survey began in 2001.
You can see from the data that it should be looked at from a contrarian perspective. Fund managers were overweight EEM more than any other market at the start of the year, and it has been the worst performer so far. They are now bearish EEM, so keep it on your radar. In comparison, they were 20% underweight Japan in December and it has been the best equity market in 2013.
The US is now the largest consensus long. In the history of the survey, the current weighting is the third highest. This is consistent with the AAII asset allocation survey and fund flow data showing July to be the largest inflow into equity funds and ETFs ever.
Sunday, August 11, 2013
Weekly Market Summary
SPX seems likely to be approaching a key juncture.
On Monday, both COMPQ and RUT made new closing highs. The Euro 350 also made new highs this week (chart). A majority of sectors are near their highs and key moving averages are rising (chart). It's difficult to be bearish when the trend is this strong and, seemingly, expanding outside the US.
Macro expectations are also rising. US macro is now exceeding expectations by the most in 2013; G10, by the most in nearly two years (chart). This matters, since these rising measures correlate with better EPS growth and higher PE multiples.
The rub is that the V-bounce pattern in SPX from the June low has failed every time in the past 20+ years (read today's post here). In each case, a retest of the recent low (8% lower from here) has ensued. So, while returns for 2H 2013 have a 80% probability of being net positive, the near term risk is equal or probably greater than forward returns.
These downside risks are enhanced by very bullish investor sentiment (read today's post here). Schaeffer's remind us that the last time Investors Intelligence bears were this low, SPX dropped 20% in the ensuing months. Likewise with the equity-only put-call ratio (chart).
The 2Q13 reporting season is almost over. 90% of companies have already reported and the results are mediocre. 2Q EPS growth is tracking just 2.1%, the third lowest growth rate in 4 years. Excluding banks, EPS growth is actually negative 3.1%. Revenues are tracking 1.8% growth, which is in-line with GDP and EPS (i.e., margins are flat). This is concerning, as consensus EPS growth is 7% and 11% in FY13 and F14, respectively. The market is at risk of revaluing lower when consensus shifts to meet reality. Already, 68 of 85 SPX companies (80%) have issued negative 3Q EPS guidance.
On Monday, both COMPQ and RUT made new closing highs. The Euro 350 also made new highs this week (chart). A majority of sectors are near their highs and key moving averages are rising (chart). It's difficult to be bearish when the trend is this strong and, seemingly, expanding outside the US.
Macro expectations are also rising. US macro is now exceeding expectations by the most in 2013; G10, by the most in nearly two years (chart). This matters, since these rising measures correlate with better EPS growth and higher PE multiples.
The rub is that the V-bounce pattern in SPX from the June low has failed every time in the past 20+ years (read today's post here). In each case, a retest of the recent low (8% lower from here) has ensued. So, while returns for 2H 2013 have a 80% probability of being net positive, the near term risk is equal or probably greater than forward returns.
These downside risks are enhanced by very bullish investor sentiment (read today's post here). Schaeffer's remind us that the last time Investors Intelligence bears were this low, SPX dropped 20% in the ensuing months. Likewise with the equity-only put-call ratio (chart).
The 2Q13 reporting season is almost over. 90% of companies have already reported and the results are mediocre. 2Q EPS growth is tracking just 2.1%, the third lowest growth rate in 4 years. Excluding banks, EPS growth is actually negative 3.1%. Revenues are tracking 1.8% growth, which is in-line with GDP and EPS (i.e., margins are flat). This is concerning, as consensus EPS growth is 7% and 11% in FY13 and F14, respectively. The market is at risk of revaluing lower when consensus shifts to meet reality. Already, 68 of 85 SPX companies (80%) have issued negative 3Q EPS guidance.
The technology sector, which has been leading the market, has had some of the worst earnings figures. 2Q EPS growth is tracking negative 8.2% and expected 3Q earnings growth has fallen to 1.6% from 5.5% on June 30. Read more here.
In the short term, the SPX pattern we have been tracking on twitter is shown here. It triggers with a move below 168 and becomes invalid with a sustained move over 170.
Saturday, August 10, 2013
How Are Investors Positioned and What Does It Imply Now and in 2014?
If you are fully-invested long and in a profitable position, you would feel even more confident if you knew a majority of investors were in cash wanting to get into the market. This is an assertion heard frequently, but is this the case at present? A look at the data and the implications below.
Individual investors ('retail') are now more long equity (65%) than they have been since September 2007 (blue line, below). Their cash balance (18%) is 6 percentage points below average. Their holding of bonds (17%) is at a 4 year low. In short, retail investors are already in the market. Can they get even more long? Of course, but the point is we are not at the beginning of the cycle. Readers of this blog know that professionally managed funds are likewise positioned long equity, short bonds (here).
Moreover, investors are continuing to pile into equities. In July, fund flows into mutual funds and ETFs reached an all-time high, surpassing the highs from the tech bubble peak in February 2000 (data from Trim Tabs).
Individual investors ('retail') are now more long equity (65%) than they have been since September 2007 (blue line, below). Their cash balance (18%) is 6 percentage points below average. Their holding of bonds (17%) is at a 4 year low. In short, retail investors are already in the market. Can they get even more long? Of course, but the point is we are not at the beginning of the cycle. Readers of this blog know that professionally managed funds are likewise positioned long equity, short bonds (here).
Moreover, investors are continuing to pile into equities. In July, fund flows into mutual funds and ETFs reached an all-time high, surpassing the highs from the tech bubble peak in February 2000 (data from Trim Tabs).
Subscribe to:
Posts (Atom)