‘Still Plenty Of Room For Stocks To Rise Further From Here,’ JPMorgan Says
As a group, investors are not overextended in equities despite the surge from the March lows.
It's a familiar refrain reflected in positioning, and JPMorgan's Nikolaos Panigirtzoglou reiterates the point in the latest edition of his weekly "Flows & Liquidity" series, which carries the rather straightforward headline: "Still plenty of room for equities to rise further from here".
"We continue to find that, collectively, investors are still underweight equities and signs of overextension are
How does all that “liquidity” reach the stock market? In recent years companies took advantage of it to issue debt to fund share buy-backs. That has been throttled back. How else does that great lake of liquidity actually fund the purchase of stocks? Curious.
Via the bond market. QE and now ETF purchases along with Repo facilities ensures that spread between the Fed’s Fund Rate and “private” (and the pips are intentional) rates for corporations (bonds) and overnight lending between banks and hence all other interest rates remain close, stable and therefore predictable. With the bond market stabilized a whole variety of programmed investing strategies such as “risk parity” become very predictable especially when volatility is squeezed (the Fed as reticulated python may not be such a bad image here). This encourages (although I think we may want to say “incites”) “momentum” investors to build a wave and ride a wave ever upwards. Couple these dynamics with corporations able to meet their funding needs via the bond market rather than by issuing equities and there is not a big supply of new issuance to dilute share prices. Whether it can be sustained on Hopium Momentum alone without buybacks is a great question. It is not as if the Fed is demanding the corporations whose bonds it’s buying cut dividends or suspend buybacks. And then there is always the logical conclusion to all of this that the Fed will ultimately purchase equities and so a whiff of front running the Fed may be faintly detected.
For 10 years, buy backs were the “only” source of new buying of equities. the other flows netted out. For a number of reasons they are dropping off.
Now the stock market is being dominated by momentum “investors” via trend-following and correlation models.
Buy-backs have a longer-term impact on supply and demand. From reading these columns it is clear that the model-driven systems have no long-term impact. They can and do turn on a dime. This explains why stocks are no longer “forward-looking”. The models just look at and act upon current price movement.
The Fed won’t be in buying unless/until the market craters again and the models flip. That would have a good headline effect, but BOJ buying has not exactly sent the Nikkei and Topix flying.
Ah well.
Through Feb 2018, since the Great Financial Crisis, JPM was fined $43.7B. I would suspect that in the two, subsequent years, the total volume of fines imposed on JPM has increased. Why should any sensible person listen to a research note from JPM? The organization does not have a lot of trust in the community of citizens at large. Further, the charts don’t matter.
All that is matters is the Fed balance sheet. We all are familiar with the superlatives being used to explain the situation the US is in. Let’s just say riots and looting and all the rest are bad. Yet, the market is up this morning. Using my powers of deductive reasoning, the Fed’s balance sheet expanded.
JPM units and and such are substantially “a lot of empty mouths that are being fed.” They are not adding to the productive economy.