One Bank Reminds You That “Grumpy Isn’t Just One Of Snow White’s Dwarfs”

Who’s fired the fuck up about record high equity prices?!

Well, you can bet retail investors are. Because from the conversations I’ve had, they clearly do not appreciate the fact that they did not suddenly become gurus in early 2009.

Or, put differently, they have virtually no conception of the extent to which trillions upon trillions of central bank liquidity is the driving force behind their outsized returns.

So there is nothing to curb their enthusiasm.

It’s as though every average Joe/Jane believes that “buy SPY and hold it” is something only he/she was smart enough to think of. It doesn’t seem to have occurred to anyone that their neighbor is riding the very same benchmark to the very same promised land. And the neighbor’s neighbor is too. And the neighbor’s neighbor’s neighbor.

All of them convinced that it’s a complete coincidence that active managers just happened to stop finding alpha right when central banks started inflating benchmarks.

ActiveAlphaNO

(Goldman)

So yeah, retail investors are fired up, because central banks have made them all into geniuses.

Who else is fired up? Well, anyone selling vol and any and all programmatic strats that, thanks to the low vol regime, have the all-clear to mechanically and systematically leverage themselves to infinity.

Who’s not so fired up about record high equity prices? According to Citi, everyone else.

Read below as the bank explains, in a pretty amusing note, how “Grumpy isn’t just one of the Seven Dwarfs.”

dwarfs

Oh, and do note how hilariously long the list of worries (bolded and underlined) is…

Via Citi

If one were on a desert island and was told that the US equity market was at an all-time high, earnings were up nearly 14% last quarter and the unemployment rate was 4.4%, we suspect the individual would think investor sentiment must be quite upbeat.

Yet, such feelings seem elusive as the Street has been worried about politics (Trump, Merkel, Le Pen, Wilders, Grillo, Hard Brexit), geopolitics (North Korea, Syria, Iran, Libya, Venezuela, Brazil) and central bank policy (Fed, ECB, BoE and BOJ) as well as economic growth (US, China and Europe) plus valuation, profit margins, money flows, inflation expectations, fiscal initiatives, automation replacing workers and retailers closing shops leading to layoffs, not to mention auto sales sustainability given signs of subprime pressures. Investors also bemoan sluggish business loan growth, an alleged lack of capex, weak M&A trends and low volatility.

Yet, our Panic/Euphoria Model is stuck in neutral territory (see Figure 1) and Market Vane trader sentiment is not at an extreme either, though it is elevated (found in Figure 2). Notably, even neutral panic/euphoria readings can generate a slightly better than 90% chance of higher stock market levels in the subsequent 12 months.

Citi1

Other measures suggest investor attitudes are subdued. S&P 500 futures contracts show a decline in commercial net longs (shown in Figure 3) and the premiums paid for puts vs calls (presented in Figure 4) also do not show abject complacency, in contrast to what many think the VIX might imply.

But, the worries continue. We recently took an unscientific poll of Citi clients, internal research analysts plus sales people and traders (both equity and credit) to get a sense of their top concerns. President Trump led the pack (given a sense of unpredictability), but China slowdown fears were evident (versus far more comfort on this front from the Asian investors we met with last week on that side of the Pacific), as was Fed policy especially with respect to its balance sheet and the recent flattening of the yield curve.

Interestingly, some investors highlighted recent subprime debt concerns citing used auto prices, which one leading lender indicated at Citi’s Beyond the Basics conference could slide 6%-7% this year and further 6%-7% deterioration in the following 12-18 months. At the same conference, another bank hinted at 70 basis points of higher long-term Treasury yields, if the Fed unwinds its $4.5 trillion balance sheet. The notion of greater interest rate sensitivity for consumers remains the primary US economic risk to us, outside of geopolitical shocks.

Citi2

The mood of money managers is somewhat dour due to poor fund flows. As Citi’s global equity strategist laid out in his recent report, Global Equity Strategist: Passive Market Ownership, institutional clients are feeling inordinate pressure, essentially explaining existential career anxiety.

Indeed, this singular factor may clarify the seeming lack of joy that typically would accompany higher share prices. The impressive S&P 500 rally since early 2016’s low of 1,829 has been met with reluctance and almost grudging disrespect. Intriguingly, if one tracked fund flows as a measure of true sentiment, the numbers would confirm caution. Specifically, Figure 5 provides the total dollar flows for US-oriented equity mutual funds and ETFs over the past few years as well as the net amount of the two. In our opinion, it demonstrates quite vividly the discomfort with the equity asset class. Arguably, investors are worried that the US comprises too much of the global stock market capitalization (depicted in Figure 6) and combined with lower valuation elsewhere makes many more bullish on Europe.

Citi3

 

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