Monday, 24 September 2018

On stocks and the all-red roulette table

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Anthony Peters on why he doesn’t entirely buy the equities analysts’ story driving the current bull run… but he will stay long anyway.

Anthony Peters, SwissInvest Strategist

The equity rally continues apace with the S&P closing yesterday at 1,551.15 points, another 5.05 points higher on the day and up 4.6% in the ten sessions since February 25th. At some point in the next few days we will surely stop to take a breather but the trend continues. Year to date, the index is up 9.12% which is dandy but if one annualises the figure, it comes out at just below 57%.

I would sincerely hope that there is nobody out there - and even less one reading this - who believes that we can achieve that annualised result and therefore it must be clear to all that there is a correction in the offing somewhere. However, based on the price of put options, the chance of a serious set-back in the index is being discounted as less and less likely. September 1450 strikes are now down at $33 from $80 at the beginning of the year when they were still more or less at the money.

To many, the current rally is a clear statement of intent and, as ever, there are plenty of analysts tripping over themselves to justify the move. Then, yesterday, I was made aware of a series of American economic stats which made me think and it went as follows:

“The Dow - back to 2007 levels. Let’s compare where everything else is:

  • GDP Growth: Then +2.5%; Now +1.6%
  • Regular Gas Price: Then US$2.75; Now US$3.73
  • Americans Unemployed (in Labour Force): Then 6.7m; Now 13.2m
  • Americans On Food Stamps: Then 26.9m; Now 47.69m
  • Size of Fed’s Balance Sheet: Then US$0.89trn; Now US$3.01trn
  • US Debt as a Percentage of GDP: Then 38%; Now 74.2%
  • US Deficit (LTM): Then US$97bn; Now US$975.6bn
  • Total US Debt Outstanding: Then US$9.008trn; Now US$16.43trn
  • Consumer Confidence: Then 99.5; Now 69.6
  • S&P Rating of the US: Then AAA; Now AA+
  • VIX: Then 17.5%; Now 14%”

Apart from the simple fact that there are, according to Winston Churchill, lies, darned lies and statistics, one does get quite a shock looking at the comparison for although it tells us little about the reasons and justifications for a Dow at 14,447 points, it lays bare the staggering deterioration in the nation’s overall financial position at the same time as making us aware of just how impossible it will be for the Fed to embark on a tightening cycle, irrespective of what insipid inflationary pressures might rear their ugly heads.

The near-zero interest rate policy is the glue that holds these divergent but scary figures together.

Analyse this…

Equity analysts – and I will be the first to admit that as a fully paid up fixed income beast I never have and likely never will begin to understand the equity tribe’s way of thinking – are telling us that their market is forward looking, that stock prices are discounting future positive developments and that earnings are now of a “higher quality” than they were in 2007.

Sorry, chaps, I don’t get any of that.

What I see is a simple case of a steady asset allocation shift into equities and, by way of the likes of Heinz’s and Dell’s putative delisting and talk of stock buy-backs financed by excessively cheap corporate bond market funding, more paper leaving the big board than joining it.

To me, the stock market currently looks more like a roulette table where all numbers are red than a source for businesses to raise money.

We should not underestimate the ferocity of the rally as, back in 2007, the banks were all flying high. Bank of America, now a healthy US$12.44 hit a low in May last year of US$6.72 and an overall low of US$2.53 in February 2009.

However, when the market peaked it was well above US$50. Citi, now no longer in the Dow, hit its high of US$570 in December 2006 and is now trading at $47½. These are large chunks of market cap which are missing in the indices which makes the breaking of old record highs even more impressive.

However, I cannot imagine a major sell-off ahead as the strategic asset allocation shifts which are still taking place are, in my view, far from completed and highly unlikely to be reversed in a major way in the foreseeable future.

Even tactical shorts don’t look like the way to go unless an unexpected flock of black swans were to appear on the horizon.

Stay long and go bird watching.                

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