Monthly Archives: January 2013

Those hoping for a “great rotation” from bonds to stocks might start by looking for smaller rotations within the equity market. James Mackintosh, investment editor, says the signs are far from uniformly supportive of the bigger rotation.

One extra chart, before the video: monthly total returns on the US benchmark 10-year Treasury bond per month. January saw a loss of 1.94 per cent, including coupon payments, which isn’t great. But it is slightly less than last March’s loss, or October 2011, and pales in comparison with some of the monthly losses in the past. As the chart shows, this is far from solid evidence of the bond bubble bursting. Read more

US GDP dropped in the fourth quarter of 2012 for the first time outside a recession since 1977, thanks to surprise cuts in defence spending. James Mackintosh, investment editor, finds some good signs in the data, but worries that if good news comes through on the economy would be bad news for investors.

 Read more

Japan is the natural home of the bear, but its bull market from 2003-2007 looks very like the current US bull market. James Mackintosh, investment editor, looks at the parallels and considers what’s needed to keep the bulls running.

 Read more

John Authers

Has the Great Rotation already started? A couple of startling data points from the last month, covering treasury yields and flows into equity funds, certainly suggest so. But the picture is maddeningly unclear under closer examination.

First, there is the treasury bond market, as discussed in last week’s video with Mike Mackenzie, before 10-year yields had risen above 2 per cent (they’re back below today). Significant rises in yields would be an obvious sign of a rotation. You can see that video, and Mike’s emphatic argument that if the equity rally makes any sense at all then the rotation out of bonds must be coming, here:

Note that even with the brief move above 2 per cent, there is still a way to go before the inexorable downward trend in yields that has now lasted more than a quarter of a century is breached.

The other obvious data to look at concerns flows into equity mutual funds and exchange-traded funds. Until very recently, the trend to pull money from equities and transfer it to stocks has continued unabated. Stephane Deo of UBS discussed this with Ralph Atkins in the Note video available here:

Again there are signs of change, but not enough to make the call that the “Great Rotation” has already begun. Most startlingly, TrimTabs, which can publish flow data quickly because it uses algorithms to derive estimated flows from funds’ performance, found that inflows to all equity mutual funds and ETFs this month have already topped $55bn. That beats the previous monthly record, set ominously in February 2000 on the eve of the dotcom crash. Read more

James Mackintosh

Investors are desperately hoping for a return to normal markets, which would mean the end of the risk-on, risk-off paradigm. Risk-on, risk-off – which sees the price of pretty much all asset classes move together – has retreated a little, but is still a force in global markets.

One example is the global flow of money out of havens. Today’s video and column highlights one aspect of that: the rise in the US bond yield above that of neighbour Canada, as investors shift from the safety of US Treasuries to prefer the growth prospects further north. Rather than going away, this is typical of the risk-on phase of the risk-on, risk-off cycle. Read more

James Mackintosh

There’s been a lot of debate about the idea of a “great rotation” from bonds to equities, and every Wall Street strategist has a view (consensus: the equity bit will happen soon, but bond yields won’t rise yet as central banks keep on buying).

Alain Bokobza at SocGen has come up with a lovely chart to back up their view that money should be flowing into equity mutual funds, as indeed it has started to do. Read more

Just like Apple, companies are beating their low-balled earnings expectations, investors are lapping up equities but the growth outlook remains gloomy. James Mackintosh, investment editor, says eliminating extreme risks makes the lesser ones more palatable – for now.

 Read more

John Authers

Active investment still has some active defenders, at least in the UK, to judge by the reaction to a recent Long View on the subject. And digging into the reasons for active funds’ persistent problems, it is easy to see why. Despite the claims of the Efficient Market Hypothesis (EMH) that it is impossible to beat the market other than by luck, it appears that an impressive number of managers do achieve the feat.

The problem is that they do not manage to beat the index by enough to be able to pay themselves and still pass on a decent performance to their clients. In other words, to quote Jack Bogle, the founder of Vanguard and the spiritual father of index investing, the case for passive investing rests on the CMH (Cost Matters Hypothesis), not the EMH. Read more

Today’s the deadline for European banks that want to repay early the emergency three-year loans from the European Central Bank. James Mackintosh, investment editor, consider the implications for the ECB and the currency wars.

FT investment editor James Mackintosh suggests the warnings of monetary policy hawks about central bank independence may be a little premature. He says Japan’s central bank has paid no more than lip service to the demands of new prime minister Shinzo Abe.

John Authers

Hedge fund returns should not be compared directly to equity benchmarks. Hedge fund marketers will always say this, and with some reason: hedge fund strategies have a different risk-return profile from equities. Many allocate a lot of money to “short” positions, betting against the market. So it is not necessarily that surprising or damning when equity hedge funds suffer a very bad year compared to the index, as happened last year. That was a big part of my discussion with Hedge Fund Research’s Ken Heinz in the latest Note video:

But it is interesting to look at how hedge fund investors seem to have behaved. And in aggregate, they look a lot like classic retail mutual fund investors, chasing performance and piling in after a good run. Inflows to hedge funds last year were slightly lower than they were in 1993, according to HFR (and obviously far smaller in percentage terms). The great boost to hedge funds’ assets came in the years after the dotcom crash of 2000, when many funds managed to rise. Read more

In his first term, US president Barack Obama oversaw the second-biggest rise in the stock market of any US president since the second world war. James Mackintosh, investment editor, says his second term hopes of economic recovery rest more on the housing market than equities.

James Mackintosh

My post on the inherent bias towards bullishness among Wall Street’s analyst community prompted an interesting response from Ian Harnett at Absolute Strategy Research.

He agrees in principle that sell-side analysts and strategists tend to be pro-cyclical, raising predictions as the market rises (his London research house is on the sell-side too, it’s worth noting).

But he argues that when analysts refuse to raise their forecasts in line with rising markets, that is a good sign for investors – and that this is exactly what’s happening now. When it happened in 2005-6, the market soared even as analysts became more cautious.

Analyst buy and strong buy as % all European recommendations, vs European market

Source: Absolute Strategy Research

 Read more

James Mackintosh

It has long been known that Wall Street analysts working for investment banks (the sell side) are biased towards shares going up, from which they and their employers benefit.

This chart from Kevin Gardiner, head of European investment strategy at Barclays Wealth (part of the bank on the buy side, not the sell side) shows analysts tend to start each year optimistic, then become less optimistic as the year goes on. Each line shows how S&P 500 profit forecasts for a single year developed as time went by. Only in 1988, 2005 and 2006 did they end up more positive than they started, yet hope continually overcame reality.

EPS forecasts year by year

Source: Barclays Wealth

There’s an intriguing explanation for the bias of sell-side strategists from Dhaval Joshi at BCA Research. The way for a strategist to prosper is to be right as frequently as possible – and he should know: he is a sell-side strategist himself. Assuming that the strategist can’t forecast the market with any accuracy, that means it is best to ignore the odd period of big losses and instead focus on the higher likelihood of rises.

It is quite reasonable to assume forecasts will not be accurate, partly because of their history (chart below) but mostly because if a strategist could accurately forecast the market, they would not need to work for a living. Read more

Calm in the eurozone has come at a cost to the havens. James Mackintosh, investment editor, points to the sliding Swiss franc and sterling, and warns the premier haven of choice, London property, could be next.

  Read more

Small caps in the US have hit their fifth new high of the year and UK smaller companies soared past their previous peak a month ago – both climbing 172 per cent since 2009. But James Mackintosh, investment editor, warns that if the current rally peters out small caps look particularly exposed.

 Read more

The yen’s collapse was rudely interrupted on Tuesday. James Mackintosh, investment editor, points out that the yen’s premium as a haven from the global crisis has now evaporated, and examines the implications for the carry trade.

  Read more

John Authers

Goldman Sachs’ strategists are currently roaming Europe on their annual Global Strategy roadshow. As nobody can lightly ignore what Goldman is saying, the themes emerging from the London event were interesting.

Of particular concern are the prospects for corporate earnings; Japan; and the hope that 2013 will at last be the year for a “great rotation” out of bonds and into stocks.

On earnings, David Kostin, their US equity strategist, explains their view in the video below. In a nutshell, margins are high, but without a recession (which nobody expects) there is no need for a sharp reversion to the mean. Instead, forces such as shale gas will help profitability, but there will be little increase in margins as in many sectors they are already at historical highs. So margins stay at their plateau, and earnings rise gently thanks to the gentle recovery of the economy.

On Japan, bullishness is what might almost be called a “consensus contrarian” call. Many people are talking bullishly about Japan, despite its decades of under-performance. So many, indeed, that it is hard to call this call contrarian any more. Read more

James Mackintosh

If you go down to the woods today, you won’t need a disguise: the bears are all at their annual picnic (OK, conference) in west London, led by uber-bear Albert Edwards of Société Générale.

He’s picked a good day to warn of looming disaster: yet another indicator suggests investor complacency is approaching danger levels thanks to the new year rally.

Short-term momentum indicators were flashing red in Europe last week, and even after falling back slightly remain very high. Read more

More than half European companies have dividend yields above corporate bond yields for the first time, while mutual fund sales saw their biggest weekly inflow into equities since the US stock market peaked in 2007. James Mackintosh, investment editor, analyses whether this is the long-awaited rotation from bonds back into stocks – and how to compare them.