‘From Meltdown To Stock Bubble In A Matter Of Weeks’: Market Marvels At New Mania

“That this is all happening during one of the biggest economic crises and collapses in profitability in living memory is incredible”, SocGen’s Andrew Lapthorne marveled, in a Monday note.

Andrew isn’t one to mince words, although he’s not quite as animated as his famous (in the world of bears, anyway) colleague Albert Edwards. Lapthorne’s Monday note carries the title “From market meltdown to stock market bubble in a matter of weeks”.

He’s correct, of course. It is incredible and it is a bubble – at least from a common sense perspective.


I’d venture to say that nobody writing regularly about markets for public consumption can argue both sides of any coin as adeptly as I can, and regular readers are fully apprised of my capacity to make a reasonably convincing case for why the surge in equities makes sense (e.g., “It’s the liquidity”, stocks “pull forward” expected outcomes, multiples aren’t as stretched as they seem if you assume earnings normalize more quickly than anticipated, etc).

But, at a basic (i.e., common sense) level, the S&P’s ~45% surge since the March lows is objectively silly. Nobody knows for sure whether consumer preferences have changed forever. Nobody knows what the lasting impact on airlines will be. Nobody knows what the actual time table on a vaccine is. Nobody knows what the debate on tax policy is going to be a year from now. Nobody knows if the recovery in revenues and cash flows will be sufficient for corporate America to service all of the $1 trillion+ in new debt taken on during the first five months of 2020. And on and on.

Let’s face it: Nobody knows anything, really, other than central banks are determined, and fiscal policy is not just awake, but in fact bright-eyed and bushy-tailed.

(BofA)

And maybe that’s enough – monetary and fiscal policy working together, that is.

But it’s far too early to say, especially in an environment where GOP lawmakers will be reluctant to countenance more virus relief in the US as long as stocks are climbing (and yes, that is absurd given that the Americans who need more help don’t own much in the way of stocks, but alas).

Ostensibly, there’s room for the rally to run given still lackluster participation from everyone other than CTAs. That’s a cartoonish oversimplification, but the point is that positioning across retail, institutional and foreign investors isn’t stretched by any means.

(Goldman, BofA) 

And do note that the “stuff” which is suddenly working (i.e., cyclicals, value, energy, high beta, etc.) are long-time laggards, which means there’s still some catching up to do assuming the narrative behind the pro-cyclical rotation holds up.

But this “dash for trash” (to employ a cliché) isn’t something that usually goes over well, and this time is no different in that regard.

JonesTrading’s Mike O’Rourke called Monday an example of “gluttonous greed”.

“The madness continues”, he sighed, in an evening note. “The biggest surprise in [Monday’s] trading was that Tailored Brands’ shares actually sold off when it was reported the company was considering bankruptcy”, he quipped. “In this tape, bankruptcies have become the flavor of the day”.

“Value rallies driven by ‘trashed’ stocks rebounding always accompany market inflection points, and from experience these are typically met with contempt”, SocGen’s Lapthorne writes, in the same note cited above. “Weak companies are bouncing back despite a very uncertain outlook, creating a very uncomfortable rally”.

Or at least it’s uncomfortable for those who haven’t bought into it which, judging from some positioning metrics, is a large crowd indeed. It’s a good thing misery loves company.

Quantifying the CTA re-leveraging in global stocks, Nomura’s Charlie McElligott notes that “the capitulation back into ‘Long Equities’ [is] complete for CTA Trend, with the aggregate notional position seeing a +$460 billion net swing (covering shorts and long buying) off the early March ‘max short’ to now ‘long’ +$60 billion across 13 futures in the model”.

“Just over the past one month alone, we estimate +$54.5 billion of US Eq futs bot, +$47.6 billion of EU Eq futs bot and now +$51.5 billion of Asia Eq futs bot for CTA Managed Futs Funds”, Charlie goes on to say (figure below).

And, in keeping with the allusion above to everyone else (again, an oversimplification, but it gets the point across) being left out, McElligott reminds you that macro hedge funds were “caught flat-footed” by the melt-up (their beta to Japanese, European, US and EM stocks is very low).

Clearly, there are headwinds. Like an ongoing, global depression. I jest. But only a little. It’s true that the COVID panic is looking more like a “growth scare” and less like a “real” recession with each passing day, but as the skeptics are keen to remind anyone who is still listening, there will be scars from what the global economy just went through.

Importantly, we have yet to see how the anticipated changes ushered in by the pandemic will affect markets and economic activity globally.

Remember, you’re guaranteed to see more on-shoring of supply chains, more protectionism, more nationalism, more scapegoating xenophobia, and so on, and so forth.

There are knock-on effects from that, with the most obvious being the curtailment of global trade and commerce and everything that comes with a turbocharged de-globalization push.

Near-term, Nomura’s McElligott reminds you that the current melt-up headed into OpEx has the potential to “reverse engines for approx. one week to two weeks coming out, with ~42% of the Gamma rolling off just as the corporate buyback blackout begins”.


 

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11 thoughts on “‘From Meltdown To Stock Bubble In A Matter Of Weeks’: Market Marvels At New Mania

  1. Thanks for the BoA chart. Finding the “salient” charts is never easy, despite my including this adjective in my Google search phrases.

    Not sure how Italy, and Germany second, can be so up there considering they just started last week, when the EURUSD exploded out of nowehre. There’s an asterisk. Could just be commitments, promised, kind of like funding letters from government agencies saying they approve your research proposal.

    Thanks for the hat tip on the buyback blackout.

    1. This is a good question. I’ve never thought retail, even with new RH’ers and professionals at home could really move the needle that much in stocks and options, but who knows.

    2. The brokers are all busy. These “unprecedented times,” as they say when you contact them and they explain the long wait times, could mean a large influx of new traders looking for options (in the sense of alternatives) in moving forward without the same jobs they had before. And with the market going up, those on the sidelines who already have trading accounts don’t want to be left out.

  2. Weeks and months of what I thought of weeks and just a few months ago has happened in days. I feel like I have had an inside track with Heisenberg Report. You know what has been going on and on many levels of thinking as quickly as this has all been happening. It all has a feel of we are somewhere for the moment.
    Politically, socially, medically, economically…….what a whirlwind. Live long enough and…..always more.
    Thanks.

  3. I wonder how much higher stocks need to go before some from the political left propose (once again) a tax on financial assets…

    1. I am sure they will be coming soon, but I don’t wonder what Bill Dudley, former chief economist for Goldman and former president of the NY Fed, suggested that the Fed start charging risk premiums based upon the risk associated with trades and trading strategies because as of now the Fed looks more and more like an insurance company that doesn’t charge premiums. Just like car insurance premiums could be tiered, which may direct traders toward activities that have less of a chance of melting down the entire system. Now that an activist Fed is here to stay it will need to change how it interacts with markets to address moral hazard, adverse selection and free riding problems, all of which raise transaction costs and facilitate misdirecting capital.

  4. The June quarter earnings releases should be very interesting- not because of the actual results (which will mostly be awful) but because of what management says about the rest of 2020. By the time the June quarter earnings are released (end of July through mid- August), management will have enough of an idea about the recovery to provide some guidance….unless they “punt” again.

  5. I found this website really insightful it tracks how many users in Robinhood (used primarily by Millenials and Gen Z) are buying what stocks… there are some very clear correlation of price and demand movements on certain stocks:
    http://robintrack.net/popularity_changes

    2 generations that barely experienced a recession or a crash and have a buy the dip mentality (sponsored by the Federal Reserve).

    1. I have a friend who makes Tom Lee look bearish. He is convinced fractional shares, zero trading fees, and bored gamblers jumping into the stock market will drive markets much higher from here. There are too many people out there that blindly believe nothing can go wrong. Fundamentals will ultimately win and unfortunately tears will fall for many of these new retail buyers.

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