Listen, you guys, I don’t know Boris Rjavinski.
Two other people I don’t know are Mike Schumacher and Zachary Griffiths.
But while I don’t know Boris, Mike and Zachary, I do know two things about them.
The first thing I know is that they work at Wells in the FI department and last week, they got together and penned a 3-page note on pension rebalancing flows called “We Expect a Historically Large $60 Billion Outflow from Bonds to Equities.”
The second thing I know is that today, Friday, they are probably feeling some combination of vindicated and amused now that the above-mentioned 3-page note escaped from the lab, stormed up the stairs, ran out of the castle, charged down the hill into the village and took the market narrative hostage.
The thesis itself was pretty straightforward to the point of being self-evident. That’s not to downplay the significance, it’s just to say that all you really needed to do was scan the first three bullet points from the executive summary and say “mmmhmmm, ok that makes sense, now is this something I should try to trade or otherwise get out in front of?” Here, I’ll show you what I mean:
There are a lot of superlatives in there (“historically large”, “largest we’ve ever seen”, “jarring”, “bigly”, “big league”, “tremendous”, etc.), but other than that, it’s a pretty common sense-based assessment.
As “assessments” go, those based on common sense are usually the best (there’s elegance in simplicity) and sure enough, the above appears to have played out in pretty dramatic fashion on Thursday, as evidenced by the biggest reversal for the S&P since 2010 and the concurrent selloff in bonds.
There was also this:
That’s the NYSE Uptick Minus Downtick index, and the purple circle (1,662) represents the fourth-highest reading of the bull market. This was flagged here (see linked post below) and also by anyone who was generally paying attention, a group that includes Bloomberg and the usual suspect (singular) in the financial blogosphere.
As noted, everyone is grasping at straws when it comes to “explaining” this week’s market action and while Monday’s sea of red, Wednesday’s sea of green and Donald Trump’s sea of insanity made drawing conclusions exceedingly difficult, Thursday was obviously more clear-cut in terms of the rebalancing story.
And so, on Friday, Bloomberg ran an entire article on it called “One Theory for the Giant Stock Rebound Is a $60 Billion Pension Frenzy“. Boris, Mike and Zachary are now famous – or at least their call is.
Needless to say, the fact that any rebalancing flows would have collided head-on with a dearth of liquidity likely exaggerated the effect on Thursday.
We’ve talked a ton lately about lack of market depth and in addition to all the quotables and various ruminations you’ve read here, there’s a bit of additional fun color floating around Friday. The following quotes come courtesy of a JPMorgan note that Robin Wigglesworth saved me the trouble of having to track down because like all notes that find their way to Wigglesworth’s inbox, this one was tweeted out in giant chunks to 26,000 people.
So there’s that and it helps to round out the liquidity narrative. (Protip: If you’re going to follow Robin on Twitter, don’t you dare say anything about Norway’s SWF).
Meanwhile, Nomura’s Charlie McElligott was out on Friday with what he described as “a few quick-hitters” before he packs it in for the next couple of days into the new year. Fortunately, when Charlie said “a few quick-hitters”, he meant market observations and not, oh I don’t know, any of the other things that might mean.
McElligott flags “low institutional exposures / participation via the Q4 performance beat-down and year-end constraints / VaR-down for both buy- and sell-side (non-existent dealer balance sheet)” as the proximate cause(s) of a “lack of fundamental/active trading”, before noting that it’s “all happening against large recent mechanical buy- and sell- flows over the past month—meaning poor liquidity at times against price insensitive flows.”
As far as what happened on Thursday, Charlie echoes everything said above as follows:
Yesterday specifically resembled fading “tax-loss selling” flows being overwhelmed by the “pension rebalancing demand for stocks” buzz saw, with some notional estimates of upwards of +$60B of US Equities to buy vs Bonds due to the MTD / QTD massive underperformance spread (which through two days ago had been the largest monthly US Bond outperf vs US Equities since 2008)
This “wall” of program buying in US Equities saw the TICK index (NYSE Uptick Minus Downtick) reach 1662, the fourth highest “buying impulse” measured since the bull market began in March 2009 (3 priors: Feb ’18 and twice in Aug ’11.
So, there you go, guys/gals – some possibly useful and mildly entertaining color on what’s happened over the past couple of sessions, with an emphasis on Boris, Mike, Zachary and their pension flow call.
I told you Friday would be a “random musings” day.