Taking stock of equities

"The monthly candle looks to be delivering a classic reversal signal, with prices rejecting the move below $40 in the strongest possible way. "   Ermmm....OK.   Someone forgot to tell the oil market that the monthly candle was so constructive, because yesterday's price action managed to eradicate all of Monday's stunning gains.   Perhaps oil traders are all actually physicists wishing to demonstrate Newton's third law of motion, e.g. that for every action there is an equal and opposite reaction.

Of course oil was just one of the storylines in what was a pretty ugly day for equity markets.   As a number of readers have pointed out, the failure of the VIX curve to disinvert during the rally was something of a canary in a coal mine; as anyone who's ever built a VIX trading model can tell you, the shape of the volatility curve is the most powerful signal that the vol market can give.

It's been mentioned before, both here and elsewhere, that price action such as that which we've observed is a function of the market incentive structure that's been in place over the past few years of rising equities and low/declining volatility.  It was too easy to make money clipping coupons/selling vol/playing tight ranges; that your author is blogging rather than trading a book professionally is testament enough to how the market viewed those with the temerity to try and run a long vol profile in 2012-14.

In any event, the analogue industry has been doing a roaring trade over the past couple of weeks, pumping out a seemingly never-ending series of  "x is at its y-est point since 2008" type comments.  It is certainly the case that for certain emerging markets and commodity producers, the current environment is substantially worse than in 2008, thanks to the structural and cyclical deceleration of China, lots of new commodity supply having come online in the last 7 years, etc.

It's worth reiterating, however, that for the G3 things aren't remotely as bad as they were then.  Japan at least has a tailwind of financial market dynamism thanks to Abenomics;  in Europe, there's the pragmatic Draghi rather than the trigger-happy Trichet in charge of the ECB, and in the US the slow steady plod continues without a housing market collapse.

It's worth noting that during the last equity peak, SPX earnings estimates were already declining steadily for a year before Lehman went bust and the world as we knew it ended.  There was certainly a hint of that earlier this year as the crash in oil caused widespread markdowns of energy earnings, but since then estimates have tracked steadily higher (albeit not quite yet to the peak.)


Lest anyone accuse Macro Man of naively swallowing whatever swill equity analysts spoon towards him, allow him to acknowledge that only a fool takes the consensus estimates at face value.  Markets, however, are ultimately priced on expectations, and his research over more than a decade indicates that consensus earnings estimates are a useful barometer for predicting medium-term equity performance.

Given the apparently divergent fortunes of sundry regions around the world, Macro Man thought it would be useful to break out a piece of work he did 15 months ago but hadn't looked at since he lost his Bloomberg subscription last August.  It's essentially a global equity scorecard, ranking a number of MSCI indices on a total of nine fundamental and technical factors.  Each index is ranked for each factor from 1 (the best) on down, and the scores are then summed to get an overall rating (with the lowest obviously the best.)

The full-cohort ratings are set out in the table below.


Macro Man was gratified to see that China, which ranked close to the top when he last ran the analysis last August, is now closer to the bottom....along with a whole host of other EM markets.  Interestingly, the US ranks as the worst of the developed markets despite outperforming most other markets on a price basis during the downturn.

Similarly, it is intriguing to observe that the top rankings are populated more or less exclusively by European equities; clearly this approach believes that they offer value vis-a-vis the rest of the world.   Please note, however, that this type of analysis makes no attempt to determine whether these indices will outperform cash.

The same holds true if we just look at the developed-market countries; the top is exclusively populated buy Europeans while the US is part of the bottom tier with Canada, the UK, and two large multi-country indices.


As for EM, didja ever think you'd see Turkey at the top?  Clearly, the analysis is focusing on local currency, rather than USD, returns.  Still, the dichotomy with fellow FX whipping-boy Brazil couldn't be more stark.



While the analysis is of course not fail-safe, it may give readers something to chew on as the correction matures and people look for bargains to buy.  Clearly, not all markets (developed or emerging) are created equal, and it's interesting to note places like Europe where this approach at least thinks that the sell-off has created a decent pocket of relative value.

There will be no commentary tomorrow as Macro Man is heading to Vermont for some cycling in the hills.  He'll be back in time for payrolls.
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Anonymous
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September 2, 2015 at 7:28 AM ×

No commentary tomorrow?

A new round of QE so!

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Anonymous
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September 2, 2015 at 8:34 AM ×

in hindsight, given the little parade the SHCOMP was probably a buy at the open.

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Anonymous
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September 2, 2015 at 11:25 AM ×

on a simple PE based on rolling 12m foward EPS many european markets trade on the same multiple as they were BEFORE Draghi's qe started.

my interpretation is that the equity market anticipates a way stronger Euro from here, which will take away the entire EPS tail-wind that the region is still having.

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Macro Man
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September 2, 2015 at 11:33 AM ×

Funny, I thought US markets were pricing in a stronger dollar! ;) I'd be somewhat loathe to ascribe European equities pricing in much by way of a currency view that counters the prevailing trend; rather, it seems to me that the market got caught a bit over its skis in terms of positioning and has thus been punished, hence the low P/E's.

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amplitudeinthehouse
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September 2, 2015 at 1:13 PM ×

You saw that trend , Macro Man, in commodities...oh yes, Macro Man...the smart money knows if you want this market to meet earnings you gotta let it run where wants , when it wants...fuck day trading , only on plunge days.

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Anonymous
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September 2, 2015 at 1:54 PM ×

FT: Morgan Stanley issued an "all clear" to get long equities, based on their (pretty good) proprietary model (last 2 calls were get short in june 2007 an get long in 2009)

Bill Gross says go into short dated treasuries and cash....

I say: the new longs will get slaughtered within 4 weeks and DM equities will rise like the phenix from its ashes starting in October.

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Anonymous
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September 2, 2015 at 1:56 PM ×

@macroman: that's exactly my argument. If on does not take the view of a stronger currency unravelling the EPS story, there is loads of opportunity in Europe. Again, same starting point as before QE was announced.

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abee crombie
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September 2, 2015 at 2:10 PM ×

The real story with equities, at least in the US, is the carnage underneath the headline index levels. Just did a quick screen and about 216 stocks in the S&P are already down >20% from their 52week highs. Only 21% of stocks are above their 200day avg. This has been a narrow market for a while.

So while I am pretty confused at the moment and dont have a great deal of clarity, you could easily have the main market go back up with a large internal rotation.

In that sense, Stoxx 600 down 15% from the highs is more interesting to me vs S&P down 10%

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Skippy
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September 2, 2015 at 2:41 PM ×

The break of the primary up trend in the Spooz does suggest a change in trend. I guess the key question is whether it is more like 1998 or 2011, or something more sinister?

I agree that many of the facts in the US - service sector, housing, employment - suggest boom, not doom. But the manufacturing and global trade data might be consistent with a material cyclical slowdown in profits. Indeed, US forward earnings are now falling in year on year terms. That said, the point about the level or earnings integer is well taken. I see it, the bearish China/EM cyclical view is the consensus belief.

The 1998 or 2011 template (clearly material episodes for EM and commodities)would suggest more accommodative policy, rather than normalization, consistent with low inflation expectations.

It is also the case that many of us still suffer from elevated risk perceptions as a legacy of the 2008 crisis. Put another way, that might explain why the equity risk premium is still elevated and why valuations have never re-rated above neutral (with a few exceptions like Biotech).

My sense is that the odds probably favor a 2011 style correction. Therefore, I plan to add cyclical equity risk if we re-test the lows.

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Skippy
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September 2, 2015 at 3:04 PM ×

This one was inspired after the brief rally in oil before yesterday's price action. With apologies to ACDC

Back in Black
Shale it the slack
Oil's been down to long,
it's bound to bounce back
Yes, OPEC's let loose
From the noose
That's kept shale from hanging around
Shale's been looking at the sky
'Cause it's getting real high
Forget the hearse, 'cause it will never die
It's got nine lives
Cat's eyes
Abusing every one of them
and producing high

'Cause oil's back
Yes, oil's back
well, oil's back
Yes, oil's back
Well, oil's back, back
Well oil's back in black
Yes' oil's back in black

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Skippy
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September 2, 2015 at 3:05 PM ×

Sorry, second line "shale hit the slack"

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Corey
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September 2, 2015 at 3:28 PM ×

Wonder how much/if any of the vix inversion is due to the VXX ETFs buying futures?

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abee crombie
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September 2, 2015 at 7:20 PM ×

If EM FX and HY hold as equities retest last weeks lows, that would be a good sign

Today you have a few different views of the world, IMO

1) EM is over, too much debt, commodities are done, China is an accident that is now starting to happen. USD adjustment has only just begun to be felt worldwide

2) The high yield market is warning of pending downturn. Rates need to go higher as marginal player is now a seller of ETFs

3) US Equities are due for a large correction, stealth bear market with internals for past 6 months. Signs of excess (buybacks, mergers, MoMo stocks). Valuation here not compelling and earnings topped out

4) US real economy is only just starting to get over GFC. Equities arent cheap but hey what else is there

5) Too much global liquidity still, buy EU and Japan as they reflate. Dont fight FED (ECB, BOJ etf)

6) Biotech revolution. Home Depot SSS are killing it. NFLX is a game changer. Just buy



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Leftback
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September 2, 2015 at 7:21 PM ×

If MM and LB were in a NYC bar eyeing the assembled talent (purely out of academic interest), LB would definitely prefer the sleek Europeans on display, with Ms. Spoos still looking a tad unattractive on a valuation basis at these price levels. A case of "don't fancy yours, mate" for the time being, MM. Regrettable also that the Brazilian fits into this category at the moment.

One wonders if yet another Goldilocks jobs number on Friday will release some of the fear of the Fed, although our feeling is that the Fed's 25bp rate hike has had very little to do with the recent market action, and that the US continues on its 2.0-2.5% growth trajectory almost irrespective of central bank gyrations here and elsewhere. Another limited bout of USDJPY carry trade unwind would seem possible, should the payrolls number disappoint, but a shocking number seems unlikely. We are tempted to remain hammock-bound other than our enthusiasm for things European.

At some point, hike or no hike, there is the possibility of FX regime change ahead, where the dollar turns down on the quite reasonable expectation of no further tightening and the (Buy USD, Spoos; Sell Yen) trade that has dominated for so long is replaced by the older more familiar theme (Sell USD, Buy commodities, energy, EMs, PMs and FX). The switch may be closer than we think, and will likely drive some nice gains for smart punters in Q4.

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Anonymous
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September 2, 2015 at 8:13 PM ×

@Leftback 7:21 pm
FT: if you look closely at correlation, there is a feeling of some change in the air....
For example: today, precious metals went down when equities broke and silver went back up with equities....
could we revert to a pre 2007 correlation regime? absolutely
Spot on

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Mr. T
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September 2, 2015 at 9:04 PM ×

A nice retest with a BTFD outcome. A fed meeting thats shaping up as a no-downside event, a hammering out of commodity downside, a firming of EM. FI is just fine. I dunno, this may not be an oct-14 V but its looking more and more like a good clean rotation than the start of something more. The mythical fall flow cavalry will show up soon enough.

Put me in the camp that buying here and now across the board, but particularly in the commodity and financials will produce good returns in year end.

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Anonymous
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September 2, 2015 at 9:38 PM ×

The PBoC bought $50bn of US equities on the close.

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Greatnews
admin
September 2, 2015 at 10:10 PM ×

hmm, this is an addictive site any day, rich in details.

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rp
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September 2, 2015 at 10:15 PM ×

PBoC is a mook

Bloomberg is for mooks, and know-nothing sales mooks.

What is the 2 minute macro for NFP? My thinking is 1998 mode, but not committing to equities until the fat end of October is out of the way.

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September 3, 2015 at 4:47 AM ×

Interesting point re the decline in earnings estimates a year prior to the 2008 debacle. My guess, is that this time, after the above mentioned period of low vol, and elevated valuations, scrutiny of the market will be swifter. While being relatively optimistic on the US economic outlook, I'm quite sure there will be a notable corporate earnings recession in the US. USD strength alone will cause sales misses and gross margin pressure. Some of these catalysts are happening in real time (see BRL). Reduced estimates, with China recession in the backdrop, is likely enough to send the SPX to 1,800 between now and year-end. That will be a much better entry point for equities - though it won't feel very good at the time.

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Anonymous
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September 3, 2015 at 5:54 AM ×

In funnymoney we trust

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Ghost of FunnyMoney
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September 3, 2015 at 7:38 AM ×

@Anon 5:54 Amen.

JBTFD forever.
It is that simple.

When Central Banks push the SP500 up 1% in the last 30 mins of yesterday's US session, you know this game is far from over.

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Anonymous
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September 3, 2015 at 2:23 PM ×

Steen echoes LB:
https://www.tradingfloor.com/images/article/max608w/ec1920c5-9a3d-4142-9eae-e3626aebce9c.png

https://www.tradingfloor.com/posts/steens-chronicle-the-old-and-the-new-economic-order-6153337

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Leftback
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September 3, 2015 at 3:46 PM ×

NFP BIngo is now officially Open. Eyes Down.... we are going with a luke warm 205k this time.

It seems to LB that USDJPY positioning will be weighted in favor of a strong number, and that a <175k number might lead to some selling of USD and Spoos. The Goldilocks zone (175-225k) doesn't seem likely to move the needle much. An unusually strong number would presumably see a renewal of USD strength and commodity weakness. All things considered, with the jobs number tomorrow before a 3 day US holiday weekend we might see profit taking and position squaring begin this afternoon.

One can't escape the feeling that (at least) one more dump of equities remains ahead of us before the pre-FOMC chop ends and the next month or two of trading begins. We still like to JBTFDump in Europe as our main strategy, however lacking in nuance though that may be. Locking in 6-7% dividend yields under conditions of monetary easing in the EZ has an undeniable appeal.

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Ghost of FunnyMoney
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September 3, 2015 at 4:00 PM ×

So: the ECB left interest rates unchanged, Draghi talked down the euro, the BOJ sold yen & bought equities, and stocks went up (Dax +300pts on the day). In other words, it's been like every other ECB presser day for the past 6 years.

Do remind me not to JBTFD, and not make in excess of +1% for a single day's return. Thank you.

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abee crombie
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September 3, 2015 at 4:03 PM ×

I sure hear you LB on the low hanging dividend fruit. I just dont see how far down the gutter markets will sell off yields like that, and i am seeing more and more individual securities like that. Perhaps if eco numbers really start to turn and ppl get worried about defaults etc, but the name of the game is still financial repression, IMO

sure risk assets need to reprice every-once in a while, but until this financial market sell-off starts effecting the real economy you have to be constructive. I do leave open the possibility of a feedback loop where markets drive corporate sentiment and thus cause some sort of small recession but it would be much easier to make that argument if there were some signs of inflation and thus too much inventory and capacity build. It seems like we are going to have to use a new playbook if that is the case.

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rp
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September 3, 2015 at 8:22 PM ×

Locking in 6-7% dividend yields under conditions of monetary easing in the EZ has an undeniable appeal.

My Thoughts exactly, but no garbage, want some Semiconductors for just a bit less than that though.

that, and a Bund puke.

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Hwa Jurong
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September 8, 2015 at 2:55 PM × This comment has been removed by a blog administrator.
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