Category Archives: Stock Market

Are We Going For A Year End Rally ?

Well for sure you must know my view on that. Now that the ECB as delivered some stimulus by making a surprise cut and that the market is looking forward to further stimulus from the Fed. With Yellen speech coming up and the fact that there does not seem to be much event risk left out there all m y risk metrics gives a green light for the risk on

Also the data released today by the Investment Company Institute is quite clear. there are no abating the appetite of mutual fund for Equity investors. However the dislike for bonds is evident and my view is that if Yellen comes on the dovish side this should not be a surprise to the market and probably will give opportunities for bond holders to sell their holdings at a better levels potentially.

However it is clear from the above charts that we are now dealing with an establish trend of selling bonds for equities and that there is still a massive amount of bonds to get rid of by investors….better not to say yes too quickly for this job at PIMCO and to hang on those equity portfolios then……

Told You So…..

Ok I have been talking about an asset allocation shift away from bonds and into equities for a while now as you can note from my previous posts…Clearly as you will see from my next post where I will update my analysis on US mutual funds inflows there is still a massive inventory remaining to clear and there is more of this to come still…..Now this is no joke for bond managers as highlighted by this link from Bloomberg ( http://www.bloomberg.com/news/2013-11-04/gross-loses-world-s-largest-mutual-fund-title-to-vanguard.html )….Bill Gross has no longer the biggest bond funds…. maybe there is a good trade to make in equities… buy asset managers who have a focus on equities and sell short the one who are predominantly bond managers….must be worth something across the next few years surely…..

Buy Global Equities…Sell Bonds !!!

My favourite data is out again and since it has been a long time that I have not published my fancy charts and that we are at the 11th hour of debating the debt ceiling in the US this could be quite topical. Agree or disagree about what the typical US investors does and its predictive value I think they are right so far. Clearly the pattern of selling bonds is an on-going theme and favouring foreign equities against domestic one is now an established trend for US investors as can be seen from the charts below. The one on the right shows how significant has been the inflow/outflow in each of the asset classes across different time periods whereas the one on the left shows the inflow / out flow in US mutual funds so far this month.

So what now ? I guess if we get some kind of resolution it will be good short term for those treasuries as it will support the US credit rating (what does Fitch know about it anyway ?….) . Clearly it should be good for risk appetite so I still think long international equities is a good bet and get ready to sell some dollar after the next couple of days of exuberance …else I guess it is the idiocy that Buffet refers to…god save us all….nowhere to hide this time….

S&P500 Where Now ?

Not that I am a great believer in using past market patterns to forecast the future, I however think that it may be helpful to put things in perspective bearing in mind the current debate on the US debt ceiling and the possible outcome of tonight’s vote. So I have used an R script posted on the “Systematic Investor” to look at what the S&P has done over period of 125 days and to compare it to period in the past where it exhibited the same type of behaviour whilst posting also the following 125 days…..

Looks pretty much middle of the range to me, so there is plenty of room left to express yourself as a bear or a bull….I am of the later… 🙂

US Mutual Funds Flow Data…They Are Still At It !

Ok it is ICI data release time again…and guess what ? US investors are still buying shedload of global equities and dumping bonds. And the latter goes on despite the latest Fed statement being more dovish than expected and the retracement in Yields.

I ‘ll remain stubbornly long equity then…..and still look forward to a weaker dollar as those flows are currency un-hedged.

Thank you Chairman Bernanke for Bringing Christmas Early!

Yes it is Wednesday and you know what the ICI released my favourite data , so here it is in my pretty charts…..and guess what it is still about buying equities and selling bonds…the herd of private investors is on the move and there is not turning back… no surprise that global equity markets have held so well despite the worries about Syria, the FOMC statement and the German elections…..

It looks to me that now that we have two event risks out of the way, the German election will be another storm in a tea cup stirred by attention grabbing analysts paid by the headline…..Let’s be clear, the Fed has brought Christmas forward in their communique of this evening…how dovish do you need to be to support this year end rally ? As can be seen from my last chart there are still a significant amount of bonds to sell for equities…. so its not too late to participate in this move…. Could even make sense to build an EM position if you ask me….

There is No Going Back !

My favourite data is out and guess what ? US investors are still selling bonds and buying foreign equities.

So I guess by now you must know my thoughts if you have read my previous posts. We are clearly heading for a bond crash and higher US yields is not a supportive factor for the dollar when money is going abroad…Looks to me like private investors are tapering ahead of the Fed….

Time to Think FX…

It seems that the risks flagged for September are slowly vanishing and that the risk agenda is now relatively clear for the remainder of the year. Syria is still a concern but there is now a possible alternative to a direct military intervention which is somehow good news. The German elections are nearing and though some uncertainty remains as highlighted by recent surveys, Merkel remains the likely winner. Of course there is the Fed meeting on the 17th & 18th and the market eagerly speculating on the semantics of the Fed communique. Tapering or business as usual ? My thought is that all this is overblown and that we have been given a clear path of what will be the Fed monetary policy in the forthcoming cycle…so no real tradable surprise…Anyhow the equity market is taking this pretty well so far as reflected by last month performance and the low level of risk implied by the VIX. So business as usual…long those equity betas and short bonds….

FX market have been correlating fairly well with the equity market and we have seen commodity currencies recovering significantly over the last few sessions . Also the Yen carry trade still in favour with USDJPY breaking the 100 level. That being said most of the currencies have remained within statistically normal boundaries as indicated by the below charts which show the current T-Stats for major dollar crosses and also their rolling 3-month T-Stats relative to a 95% confidence interval.

The below charts shows the sensitivity of the BTOP FX to major dollar exchange rates and therefore and idea of the portfolio content of most FX managers. The USDJPY seems to be the trade favoured by the speculative community as well as dollar long generally speaking. Maybe more interesting is the second chart that shows an estimate of the leverage used by the FX managers peer group. It is derived by comparing the variance of the BTOPFX index and the Variance of the estimated sensitivities for an unleveraged portfolio.

Overall the level of positioning seems to be pretty average by historical standard. This lead me to think that there are still some good opportunities left in FX going to the end of the year. Assuming that no event comes to spoil the party I would hope to see a continuation of the recent trends…namely a sell off of the dollar as US investors focus on international opportunities and more upside in yen crosses as they re-leverage…that being said I probably would remain cautious on outright long USDJPY due to the current positioning and equity flows potentially weighting on the Greenback…

Unrelentless Love for International Equities…..

Ok the ICI has just released their latest dataset for August and there is no abating for International equities buying by US investors and conversely selling of bonds….

This may explains why the 10 years is currently trading close to a 3% handle…It looks like those payroll data may bring some further volatility to this.

As mentioned in my previous posts, I think we are still at the beginning of the spiral and that we have not as of yet seen much change in the velocity of the asset allocation shift taking place, so I believe all fundamentals being equal there are some good opportunities that remain in my scenario… I am still adding on my equity portfolio and ponder about the future effect of an unavoidable bond market crash…and yes I still think the dollar will weaken as those flows amplify and the appetite for international equities accelerate….

Quick Update on US Mutual Funds Flows…

Ok I have to admit last month was not as rosy as the previous 9 months if you invested in equity markets, but clearly this is not a disaster unless your time horizon is that short.

The good thing is that despite the short term underperformance of stocks the appetite for global equities and the hatred for bonds is relentless as seems to indicate the latest release of the ICI data.

Bearing in mind the overall size of the US Mutual Funds market and the outstanding disproportionate bond holdings this should be comforting to the equity bulls. Even more comforting is that all my equity risk metrics and my regime switching model give a green flag for holding equities.

Of course there is Syria, the forthcoming discussion (or speculations) of tapering at the September Fed meeting as well as the German election to potentially exacerbate financial markets risk premium. However September is generally a month where liquidity comes back and this tends to dilute market risk….my bet is for a good old fashioned year end rally…sit tight !