22 noviembre 2017

Exuberancia irracional

¡Qué recuerdos, cuando lo decía Greenspan! Ahora va Goldman Sachs y lo cuantifica. ¿Qué pasaría, hasta dónde llegaría el SP500 en un contexto como el actual de subida imparables de los mercados y de nula volatilidad? Hasta 5300 el SP500 en el año 2020, una subida mayor del 100% desde estos máximos… El papel todo lo aguanta.
As discussed earlier, Goldman's entire S&P500 price forecast for 2018 and the next three years is based on two things: tax reform passing, but more broadly, something that David Kostin dubbed "Rational Exuberance", to wit:
“Rational exuberance” best describes our forecast for the trajectory of the S&P 500 during the next several years. Earnings drive stocks over time and should support the index rising to 2850 at year-end 2018, 3000 at the end of 2019, and 3100 by the close of 2020, representing a price gain during the next three years of 20%. Our price targets imply a modest expansion in forward P/E multiple to 18.2x at year-end 2018, a flat multiple in 2019, and a contraction to 18.1x in 2020.
As Kostin describes it, "rational exuberance" is defined by "above-trend US and global economic growth, low inflation, low albeit slowly rising interest rates, and underlying corporate profits boosted by pending corporate tax reform likely to be adopted by early next year."
So far so good, but as Kostin also explained, absent tax reform passing, the S&P will not only not hit 3,100 in 3 years, it may well be lower: "Assuming tax reform passes, we forecast S&P 500 adjusted EPS will jump by 14% to $150 in 2018. Equity investors will be rewarded as the index advances by 11% to 2850 at year-end 2018 and delivers a total return of 13% including the 2% dividend yield." Meanwhile, "If tax reform fails, S&P 500 will fall near-term by 5% to 2450."
It was not clear what would happen to Goldman's 2020 S&P price target of 3,100 if tax reform does not pass.
What was clear is what would - according to Goldman - happen if the rational exuberance is, in fact, irrational. Here the bank notes that it is impossible to know ex post what flavor the current exuberance has: "Unfortunately, it is only in retrospect that one can definitively establish that assets have reached unsustainable levels. Greenspan was prescient, but three years early. Following Greenspan’s speech warning of the potential for excessive valuations, the S&P 500 subsequently more than doubled (+116%) during the next three years before the Tech bubble finally peaked in March 2000 at a forward P/E multiple of 24x."
So what would happen if the exuberance that awaits the S&P is, in fact, irrational? To that question, Goldman has a ready answer: "We would deem it “irrational exuberance” if the S&P 500 during the next three years followed the exponential trajectory of stocks in the late 1990s."
In such a case, Goldman predicts that the S&P 500 would trade at 5300 by year-end 2020(a 105% rise from today). If slightly "less irrational" bubble over the next three years would mean stocks instead trade at a similar forward P/E to the Tech Bubble (24x), and would imply a year-end 2020 index level of 4050 (57% above today). During the three years post Greenspan’s speech, S&P 500 EPS rose by 26% ($40 to $50). Translated to today, Goldman calculates such a growth rate would imply 2020 EPS of $166 compared with our estimate of $163.
And for the visual traders, the light blue line in the chart below - i.e., the "irrational" one - would recreate the late 1990s exuberance in the context of today's market.
PD1: Sin embargo, Bank of America lo ve apocalíptico…
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).
Having read Hartnett for many years, we can sense an almost tangible undertone of anger and frustration at central banks for making his bearish forecasts for 2 years in a row go up in a puff of smoke. Which probably explains why one of BofA's best strategists has decided to double down, and raise the stakes beyond a simple market crash, and to a flash crash, if only for dramatic impact.
But before we get there, here is Hartnett's explanation why the market will peak in the first half of 2018:
The Big H1 Top
We forecast a H1 top in risk assets as the last vestiges of QE, the passage of US tax reform and robust early year EPS revisions incite full investor capitulation into risk assets. Potential targets are SPX 2863, CCMP 8000, with US government bond yields moving 2.75%.
We start 2018 with a pro-risk asset allocation of equities>bonds, EAFE&US, gold&oil, bullish US dollar.
We believe the air in risk assets is getting thinner and thinner, but the Big Top in price is still ahead of us. We will downgrade risk aggressively once we see excess positioning, profits and policy.
Peak positioning would be signaled by…
+BofAML Bull & Bear Indicator exceeds “sell signal” of 8 (Chart 2);
+Active mutual equity funds start to see inflows;
+BofAML GWIM equity allocation exceeds 63%, an all-time high (currently 61%).
How to know if/when peak profits arrived?
US ISM dips below 55: needs to end 2018 &55 to beat consensus global EPS estimate of 10.5% (Chart 3); Inverted yield curve, which in seven out of seven occasions in the last 50 years has been the prelude to recession.
More to the point, how to know that peak central bank policy has arrived?
+Q2 peak in G4 central bank liquidity of $15.3tn: net central bank buying of financial assets drops from $1.5tn in 2016 and $2.0tn in 2017 to nearly zero in 2018;
+US tax reform passed, after which investors must discount tighter, not earlier economic policies.
Which brings us to Bank of America's "big long" trade: volatility, and the stark prediction that in just a few months, a 1987-type flash crash which will wipe out trillions in market cap, is imminent.
The Big Long: volatility
Second, we believe that peak positioning, profits, and policy in 2018 will engender peak asset price returns and trough volatility. In 2017, stock market volatility fell to 50-year lows, bond volatility fell to 30-year lows, ETFs accounted for 70% of daily average global equity volume, the AUM of quant hedge funds is now $432bn (up $271bn since 2009).
A flash crash (à la ’87/’94/’98) in H1 2018 seems quite likely, in our view, as the major sedative of volatility, the central banks, start to withdraw liquidity.
According to Hartnett, the right way to to trade the upcoming flash cash and the "Big Long is throguh a combination of  long 2yr/short 10yr Treasuries, long TIPS steepener vs flattener in OATei, long SPX put ratio calendar, long Russian equities.
As an added "bonus", in addition to a "big long", the BofA strategist also has a "big short" trade, which perhaps not surprisingly, is in credit.
The Big Short: credit
Third, we believe that higher inflation, higher corporate debt levels, higher bond volatility and the end of the QE era will be most damaging for corporate bonds.
The big 3 consensus assumptions are: Goldilocks, no Fear of Fed/ECB, and no Mean Reversion. The game-changer is wage inflation, which on our forecasts is likely to become more visible. Wage inflation would shatter consensus via higher credit spreads. 3½% US wage growth, 2½% US CPI, and 2% Eurozone CPI are all inflation levels likely to increase volatility and credit spreads.
For those looking to trade in advance of the bursting of the credit bubble, BofA's advice: go long CDX HY & iTraxx XOVER.
* * *
Finally, if that wasn't bad enough, in addition to the combined bursting of the short-vol and long credit bubbles, BofA has one final prophecy: "the biggest risk of all is that the structural “Deflationary D’s” (excess Debt, aging Demographics, tech Disruption) cause wage inflation to again surprise to the downside." Here's why:
The Big Risk: tech bubble
Finally, we believe the biggest risk of all is that the structural “Deflationary D’s” (excess Debt, aging Demographics, tech Disruption) cause wage inflation to again surprise to the downside. The era of excess liquidity, bond yields fall, and the Nasdaq goes exponential. 2018 calls for the big top, big volatility long, big credit short, all once again prove to be way too early. An “Icarus unleashed” bubble nonetheless could end in 2019 with a bear market on hostile Fed hiking, Occupy Silicon Valley and War on Inequality politics.
Translation: the Fed - having created the record wealth, income and class divide that resulted in Brexit, Trump and a wave of nationalism across Europe - is unable to stop, and unleashes civil, and perhaps world war as its final act.
PD2: Interesante lo que se decía antes de 1928 el fundador de Merrill Lynch:

Merrill Memo

“We think you should know that, with few exceptions, all the larger companies financed by us today have no funded debt. This situation is not the result of luck but of carefully considered plans on the part of the management and ourselves to place these companies in an impregnable position. The advice we have given important corporations can be followed to advantage by all classes of investors. We do not urge that you sell securities indiscriminately, but we do advise in no uncertain terms that you take advantage of present high prices and put your financial house in order.”
. . . Charles Merrill, founder of Merrill Lynch, March 31, 1928
Charles Merrill issued the aforementioned memo to clients on March 31, 1928. At the end of the first quarter in 1928 the D-J Industrial Average was around 240. It subsequently rose to a September 3, 1929 peak of 381.17, which was the price peak for the Industrials that would not be surpassed until 1954, not that we are predicting anything like that here. As Charles Merrill found out back then, calling stock market “tops” in the 1920s bull market, even in a cautious , warning manner, was a hazardous occupation (just like it was with our “top calls” with the Dow Theory sell signals of September 23, 1999 and November 21, 2007). Especially when the roaring Twenties buy-the–dips strategy continued to be successful with investors thoroughly conditioned to buy and hold stocks for the long term and to ignore market fluctuations (sound familiar?).
A case in point in the conditioning process was the December 1928 price breakdown from 296 to 258. The Industrials suffered nearly a 13% correction in just eight trading sessions. Imagine, a 13% dive in just eight trading days! But the market came right back, made new highs again, and rewarded once more those who bought the dips. Indeed, it went on up, overcoming other subsequent dips until it was some 48% higher at the 1929 parabolic peak. Along the way even the biggest bears, and the most determined Doubting Thomases, became bull believers. Virtually everyone grew greedy, fearless, and conditioned to believe that even a sharp market decline was always followed by not only a recovery rally back to the old highs, but to significantly higher highs!
The Great Crash commenced on September 3, 1929 at ~381. By November 13, 1929 the Industrials had collapsed to ~198, a devastating dive of 48% in just over two months. Many speculators were immediately blown out of the market by margin calls. Still, most held on to their stocks, not willing to take such a huge loss, continuing to hope the market would come back yet again. After the Crash, the buy-the-dips crowd was mostly professionals, and the Dow did come back from the November 13th low to 294 by April 17, 1930, but the average stock never really recovered along with the flight-to-quality blue chip Dow. Instead, the bear market resumed. The dreadful fooler was how low the market was ultimately fated to go – down, down, down – to the shocking low of 41.22 on July 8, 1932 with the Dow yielding an astounding 10.3%.
Even veteran Wall Streeters like Benjamin Graham were shocked by their losses. Verily, it was said more money was lost by the buy-the-dip bottom pickers and professionals after the Crash than during it. The pruned public for the most part were said to have sat with their losses all the way down, and didn’t really start selling out to salvage what they could until 1935, when the market finally began to rally again. No longer believing in the long term after the horrific bear market, the post-Crash crowd virtually shunned stocks as the Depression wore on and World War II loomed. Moreover, when they did buy equities thereafter, they bought them primarily for yield. Sure, they hoped that their stocks would go up, but no longer greedy and fearlessly like the Roaring Twenties, yield was the first priority. Even as late as 1949, when the post WWII great bull market began, the Dow was still yielding 5%, while bonds were returning only 2.7%. Investors had learned painfully that stocks were inherently riskier than bonds. No longer did they scoff at yield and buy stocks solely in anticipation they would go up, that a greater fool would always buy higher from them as they did during the manic phase of the late 1920s, when Charles Merrill and every Babson-like-bear was discredited, when Charles Dow’s advice given at the turn of the century was:
“There is always a disposition in people’s minds to think that existing conditions will be permanent . . . when prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which makes it unlike its predecessors and gives assurances of permanency. The one fact pertaining to all conditions is that they will change.”
To put it simply, as yet another discredited bear recently said, “You always forget how hot it gets in the summer and how cold it gets in the winter!”
Now we are not saying the current market environment is going to end up like the 1920s, but we do want you to note on a short-term trading basis the momentum monkeys, the buy-the-dips, yield ignoring, always-recovering-to higher-highs, greed-over-fear characteristics continue to suggest caution in the short run. That is consistent with our intermediate-term model that flipped negative in August. More recently there have been other cautionary readings from the Hindenburg Omen and the Titanic Syndrome. Both of those technical indicators have registered sell signals. The first did so last Tuesday (11/14/17) and the second on Wednesday (11/8/17).
Clearly we continue to believe that nobody can consistently “time” the stock market. But, if you listen to the message of the market you can certainly decide whether you should be playing the markets “hard,” or not so hard. Indeed, as Benjamin Graham wrote, “The essence of investment management is the management of risks, not the management of returns.” To be sure, the concept of “limiting losses” is one of the traits successful investors possess. The importance of staying invested and limiting losses can be seen in the attendant chart (see page 3). Studying the chart, one should think about the fact that the S&P 500 recently broke the record for the longest streak of days without having a 3% pullback. Accordingly, investors and financial advisors are somewhat skittish about committing capital to equities currently. To this point, we met with Cougar Global Investment’s portfolio managers, namely Abe Sheikh and Susanne Alexander, last week. Cougar Global is a wholly owned affiliate of Raymond James and has a unique definition of risk, based on the probability of losing money rather than volatility (post Modern Portfolio Theory). They are a global tactical asset allocator with a macroeconomic-driven investment process. We liked their investment model because it tends to be risk adverse.
The call for this week: As one savvy seer said a long time ago, “Only fools and liars buy at exact bottoms and sell at exact tops!” So you have to develop a staying-alive, staying-liquid philosophy on Wall Street. Allow yourself to be wrong with your opinion, but don’t allow yourself to stay wrong with your money. Manifestly, despite our near/intermediate-term caution we have still been able to find a number of stocks to buy within the Raymond James research universe. We continue to invest and trade accordingly. This morning at 5:00 a.m. the S&P futures are flat (-1.75) despite the bad news out of Germany and China. There is a triple bottom at 2566 and last Wednesday’s low of 2557 is important support, while the October low of 2544 is critical support.
PD3: El Padre Pio decía con frecuencia una oración muy breve pero muy buena que podemos usar: “Mi pasado, Señor, lo confío a tu misericordia, mi presente a tu amor, mi futuro a tu providencia”