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There Has Been Just One Buyer Of Stocks Since The Financial Crisis

There Has Been Just One Buyer Of Stocks Since The Financial Crisis

Over the weekend we showed a chart which demonstrated that the bulk of the 21st century has been characterized by equity retail fund outflows offset by a tsunami of bond inflows, i.e. a reverse “great rotation.” The chart also illustrated that periods of “big bond inflows often preceded big policy changes”, hinting that some major event was coming; meanwhile big bond outflows (e.g. 2008/13/18) tended to coincide with the most bearish returns across asset classes, which may explain why in a time of record bond inflows, i.e., right now, stocks are trading near all time highs…

… even if it did – as we said on Sunday – pose a question: “just who is buying stocks here?”

Now, in his latest Flow Show weekly report, BofA CIO Michael Hartnett confirms that the flows continued for one more week, as another $11.4 billion flowed into bonds, while $8.4 billion was redeemed from stocks (a clear sign investors are not worried about bond bubble for now, with chunky inflows to both IG ($7.9bn) & govt bond ($3.5bn) funds).

More importantly, when looking at the bigger picture and finding $213 billion in redemptions from equity funds stands in stark contrast to $337bn inflows to bond funds; Hartnett answered our pressing question: who is buying stocks here? 

His answer: “the sole buyer of US stocks remain corporate buybacks, not institutions” as shown in the chart below.

This is notable not only because it means that without the buyback bid (made possible by record cheap debt, which is used to fund corporate stock repurchases) stocks would be far, far lower, but because it is a carbon copy of what we observed almost exactly two years ago, suggesting that between the summers of 2017 and 2019 absolutely nothing has changed.

 …click on the above link to read the rest of the article…

BofA’s Apocalyptic Forecast: Stocks Flash Crash, Bond Bubble Bursts In H1 2018, War May Follow

BofA’s Apocalyptic Forecast: Stocks Flash Crash, Bond Bubble Bursts In H1 2018, War May Follow

Having predicted back in July that the “most dangerous moment for markets will come in 3 or 4 months“, i.e., now, BofA’s Michael Hartnett was – in retrospect – wrong (unless of course the S&P plunges in the next few days). However, having stuck to his underlying logic – which was as sound then as it is now – Hartnett has not given up on his “bad cop” forecast (not to be mistaken with the S&P target to be unveiled shortly by BofA’s equity team and which will probably be around 2,800), and in a note released overnight, the Chief Investment Strategist not only once again dares to time his market peak forecast, which he now thinks will take place in the first half of 2018, but goes so far as to predict that there will be a flash crash “a la 1987/1994/1998” in just a few months.

Contrasting his preview of 2018 with the almost concluded 2017, Hartnett sets the sour mood with his very first words, stating that he believes “2018 risk asset catalysts are much less bullish than in 2017” for the simple reason that the bearish positioning going into 2017 has been completely flipped: “positioning now long, not short; profit expectations high, not low; policy close to max stimulus; peak positioning, peak profits, peak policy stimulus means peak asset returns in 2018.”  He also goes on to point out that the historical omens are poor:

  • Bull market in S&P500 would become the longest ever on August 22, 2018 (and the second biggest ever at 2863 on S&P500).
  • Equities have only outperformed bonds for seven consecutive years on three occasions in the past 220 years (the last time was 1928 – Chart 1).

…click on the above link to read the rest of the article…

“The End Of The QE Trade”: Why Bank of America Expects An Imminent Market Correction

“The End Of The QE Trade”: Why Bank of America Expects An Imminent Market Correction

Last Friday, when looking at the historic, record lows in September volatility and the daily highs in US and global equity markets, BofA’s chief investment strategist Michael Hartnett said that the “best reason to be bearish in Q4 is there is no reason to be bearish.

That prompted quite a few responses from traders, some snyde, a handful delighted (some bears still do exist), but most confused: after all what does investors (or algo) sentiment have to do with a “market” in which as Hartnett himself admits over $2 trillion in central bank liquidity has been injected in recent years to prop up risk assets.

To explain what he meant, overnight Hartnett followed up with an explainer note looking at the “Great Rotation vs the Great DIsruption”, in which he first reverted to his favorite topic, the blow-off market top he dubbed the “Icarus Rally”, which he defined initially nearly a year ago, and in which he notes that “big asset returns in 2017 have been driven by big global QE & big global EPS.

But mostly “big global QE.”

As a result, Hartnett’s “blow off top”, or Icarus, targets for Q4 are: S&P 2630, Nasdaq 6666, 10-year Treasury 2.85%, EUR 1.15. At this rate, the S&P could hit BofA’s target in about 3-4 weeks, and thus Hartnett lays out the following 11th hour trade recos for Q4

  • long US$ vs EM FX,
  • long oil,
  • long barbell of uber-growth (IBOTZ, DJECOM) & uber-value (BKX) = Icarus trade;
  • further unwind of extended “long disruptor, short disrupted” trade likely (i.e. death of old Retail, Media, Autos, Advertising by Tech Disruptors);
  • rotational outperformance of oil>credit, EAFE>EM,
  • value/growth

…click on the above link to read the rest of the article…

Central Banks Have Purchased $2 Trillion In Assets In 2017

Central Banks Have Purchased $2 Trillion In Assets In 2017 

In his latest “flow report”, BofA’s Michael Hartnett looks at the “Disconnect Myth” between rising stocks and bonds and summarizes succinctly that there is “no disconnect between stocks & bonds.”

Why? The best, and simplest, explanation for low yields & high stocks is simple: so far in 2017 there has been $1.96 trillion of central bank purchases of financial assets in 2017 alone, as central bank balance sheets have grown by $11.26 trillion since Lehman to $15.6 trillion. Hartnett concedes that the second best explanation is bonds pricing in low CPI (increasingly a new structurally low level of inflation due to tech disruption of labor force) while equities price in high EPS (with little on horizon to meaningfully reverse trend), although there is no reason why the second can’t flow from the first.

The result is an era of lower yields & higher stocks, or as the chart below shows, an era in which the alligator jaws of death are just waiting for their moment to shine. Here are the three phases:

  • 1981-2009 (disinflation/Fed put), 10-year Treasury yields down from 15.8% to 3.9% = 10.7% annualized S&P 500 returns;
  • 2009-2016 (Fed QE/global ZIRP) yields down from 3.9% to 2.4% = 14.9% SPX ann. return;
  • 2017 YTD (ECB/BoJ QE) yield down to 2%, SPX annualizing 17.5%.

BofA then gives a list of how to time the endgame, or when bonds become bad for stocks:

  1. yield curve inverts,
  2. lower yields lead to higher credit spreads (particularly high yield & EM bond spreads…watch tech spreads in coming months),
  3. The deflation bonds discounting starts to negatively impact EPS,
  4. flip side is never good sign to see rising yields coincide with falling bank & housing stocks;

The good news is that none of these 4 conditions are being met, for now.

…click on the above link to read the rest of the article…

BofA: “Central Banks Are Now In A Desperate Dilemma”…”Start Buying Volatility”

BofA: “Central Banks Are Now In A Desperate Dilemma”…”Start Buying Volatility”

One week after the second biggest weekly inflow to Wall Street on record, the “risk on” rotation ended abruptly in the ensuing five days, when as Bank of America writes overnight, it observed “Inflows to structural “deflation”, outflows from cyclical “inflation”; with oil the “poster child” for this trend.”

Half a year after central bankers around the globe rejoiced that the Trump victory may finally spur the long-delayed period of global reflation, that hope is now dead and buried (even as the Fed keeps hiking into some imaginary inflation wave) which BofA’s Michael Hartnett observes not only in asset prices, but also in fund flows.

As the BofA strategist writes in a note aptly titled “Bubble, bubble, oil & trouble”, the big flow message “is structural “deflation” dominating cyclical “inflation” (oil price is the “poster child” for victory of deflation): outflows from TIPS; first outflows from bank loans in 32 weeks; outflows from US value funds in 8 of past the 9 weeks; 1st inflows to REITS in 11 weeks; biggest inflows to utilities in 51 weeks.

More importantly the tsunami of recent inflows, mostly into US equities, appears to finally be slowing: following sizable inflows to equities & bonds last week ($33.5bn in aggregate), a week of modest flows: $5.0bn into bonds, $0.5bn into equities, $0.8bn outflows from gold. Additionally, after the recent “tech wreck”, flows show confirm that contrarians – or simply stopped out algos – have flirted with sector rotation as inflows to energy ($0.4bn) were offset by outflows from tech ($0.2bn) & growth funds ($2.1bn);

Looking at BofA’s client base, Harnett notes that private clients were also sellers of tech past 4 weeks; and adds that despite the 20% YTD decline in oil price, energy funds ($2.8bn) and MLPs ($2.6bn) see inflows in 2017.

…click on the above link to read the rest of the article…

Prepare For “Manias, Panics And Crashes”: An Ominous Warning From Bank Of America

Prepare For “Manias, Panics And Crashes”: An Ominous Warning From Bank Of America

Bank of America’s Michael Hartnett is back with another controversial note overnight, reminding readers that “it ain’t a normal cycle” for one overarching reason: central banks.

As Hartnett explains, the catalyst for bull in equity and credit markets since 2009 was the “revolutionary monetary policy of central banks” who, since Lehman, “have cut rates 679 times and bought $14.2tn of financial assets.” And, once again, he warns that this central bank “liquidity supernova” is coming to an end, as is “the period of excess returns in equities and corporate bonds, as is the period of suppressed volatility.”

With an entire generation of traders having grown up “trading” in centrally-planned markets, few can make sense of the fundamentals that accompany the market. As a result, Harnett writes that “risk markets continue to climb a wall of worry, defying bearish structural trends in the financial industry, taunting skittish skeptics by paraphrasing Margaret Thatcher…”You turn if you want to. The market’s not for turning.”

Demonstrating how insane just the past year has been in markets, Hartnett reminds us that just eight months ago belief in debt deflation & secular stagnation induced lowest interest rates in 5000 years.

  • On July 11th 2016 Swiss government could have issued 50- year debt out to 2076 at a negative yield (of -0.035%)…
  • …and in 1989 the Imperial Palace in Tokyo worth more than all real estate in California…
  • …and in March’2000 the market cap of Yahoo was 25X greater than market cap of Chinese equity market (MSCI)…
  • …and in 2008 the combined assets of Iceland’s three biggest banks were 14 times the size of the nation’s GDP…
  • …all manias, all over now.

While the current mania almost ended in early 2016, it was once again China that was responsible for the latest leg higher:

…click on the above link to read the rest of the article…

Why According To One Bank, Massive Central Bank Intervention Is Imminent

Why According To One Bank, Massive Central Bank Intervention Is Imminent

Any time the relative performance of global financials to US Treasuries has stumbled as far as it has, as shown in the chart below, it has meant one thing – a major central bank intervention was imminent. 

At least that’s the interpretation of BofA’s Michael Hartnett, who shows that in order to provide the kick for the bounce in this all too important “deflationary leading indicator”, central banks engaged in major unorthodox easing episodes, whether QE1-3, or the ECB’s QE.

Why intervene now? Here are the problems according to Hartnett:

  • Problem 1: US economy in “bad Goldilocks”, i.e. US economy not hot/strong enough to lift global GDP & EPS; but not cold/bad enough to induce global coordinated response 
  • Problem 2: global policy-maker rhetoric in recent days shows “coordinated innocence” not stimulus, all blaming global economy for weak domestic economies(“Overseas factors are to blame”…Japan PM Abe; “drag on U.S. economy from greater-than-expected-slowdown in China & other EM economies“…FOMC minutes; “increasing concerns about the prospects for the global economy”…ECB Draghi; “the change in China’s growth rate can be attributed in part to weak performance of the global economy”…PBoC)

Problem 2 is static, meant for media propaganda and jawboning; it can easily be removed once the global economy takes the next leg lower.  Which incidentally would also resolve the gating factor of Problem 1 – as we have said for months, the Fed and its central bank peers need the political cover to launch more stimulus.

And in a reflexive world, where the “economy is the market”, this means just one thing – a big leg lower in stocks is the necessary and sufficient condition to once again push stocks higher, as policy failure is internalized, and global risk reprises from square 1.

…click on the above link to read the rest of the article…

Bank Of America Begins 66-Day Countdown Until The Terrible Ghost Of 1937 Returns

Bank Of America Begins 66-Day Countdown Until The Terrible Ghost Of 1937 Returns

In 66 trading days on September 17, 2015, the Federal Reserve will, according to Bank of America, hike rates for the first time since 2006, which according to BofA will “end the era of excess liquidity.”

We disagree entirely, but let’s hear what BofA’s Michael Hartnett has to say:

On September 17th the Fed will hike the Fed funds rate by 25bps according to Ethan Harris & our US economics team, the first hike since June 2006. 

Recent US economic data support this view, in particular the solid May payroll & retail sales reports. Note that after a Q1 wobble, one of our favorite cyclical indicators, US small business confidence, has also bounced back into expansionary territory. Ethan Harris forecasts 3.4% US GDP growth in Q2, after 0.2% in Q1, and US rates strategist Priya Misra forecasts a Fed funds rate of 0.5% by year-end, and 1.5% by end-2016. Like Ethan & Priya, the futures market also looks for a modest Fed tightening cycle: Eurodollar futures contracts are currently pricing in 3-month rates in the US rising from 0.01% today to 0.65% by year-end, and to 1.54% by end-2016.

Yes, the US economy is so strong the Bureau of Economic Analysis has tofabricate double seasonal adjustments to goalseek GDP data that is non-compliant with the narrative. As for economists being wrong about a rate hike, or overestimating future US growth, let’s just say it won’t be the first time they are wrong…

Still, one thing BofA is right about: this time the normalization process will be different.

 

…click on the above link to read the rest of the article…

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