Deutsche Bank’s Binky Chadha is a guy who isn’t afraid to be bullish.
He is, in fact, one of Wall Street’s biggest bulls.
For those interested in hearing the argument (which hasn’t exactly aged well on the Treasury forecast side) straight from the bull’s … errr…. straight from the “horse’s” mouth, you can watch him explain things in a Bloomberg TV interview posted back in February.
And while we’re not particularly enamored with his general outlook, what we will say for Binky and his partner in “crime” Parag Thatte, is that the duo churn out some aesthetically pleasing charts.
Well, their latest was out last week and although it’s characteristically optimistic on the prospects for an upturn in US growth and for “a broader-based more sustainable move up in the S&P,” they do flag an interesting anomaly that appears to have coincided with a downturn in US macro. Consider this:
[In late May] the S&P 500 tentatively broke out of the unusually tight +/-1.3% trading range (2340-2400) that it had been in since mid-February.
Such tight trading ranges for the S&P 500 that extended for 3 months or longer have been very unusual historically, with only 8 such comparable prior episodes (since 1928).
What kept the equity market range bound? In our reading: A flattening in the macro data and negative surprises.
Deutsche goes on to note that were it not for the ubiquitous corporate bid (which, you’ll recall, has accounted for the lion’s share of equity demand over the past several years), stocks might have moved materially lower. In other words, buybacks put a floor under things:
Invariably, Chadha finds a way to rationalize the disappointing macro data. To wit:
In our reading the range reflected negative macro data surprises. But these were relative to consensus forecasts that had been steadily upgraded following a long run of positive surprises rather than any declines in the data.
And on top of that, he’s calling for an “imminent turn up in growth and a positive data surprise phase” which he imagines will propel Treasury yields higher and thereby provide the “missing piece” for equities:
We do not see the break out of the S&P 500 from an unusually tight range by itself as significant. But we do see a turn up in growth in the face of muted consensus forecasts resulting in data surprises bottoming and beginning to turn up. The missing link for equities remains rates, with the 10y yield like equities having been in a range, but unlike equities closer to the bottom of its range. But with a Fed increasingly communicating a willingness to hike and begin normalizing its balance sheet but the term premium in rates negative, speculative positioning in bond futures long, and abnormally strong inflows into bonds ytd heading into a seasonally weak period, in our view this is not a matter of if but of when.
Yes, “it is not a matter of ‘if’, but ‘when.'”
Of course if Chadha is correct in his assessment – that is, if it was indeed a tug-of-war between dismal macro and buybacks that caused the S&P to trade range bound for an anomalous period – then one wonders what happens if he’s wrong about the supposedly “imminent” data upturn.
Especially considering the market is beginning to punish companies that financial engineer their way to higher earnings by leveraging their balance sheets to buy back shares.