FAANG + BAT Considered The Most Crowded Trade
The chart below shows the fund manager survey which asks what the most crowded trade was in April. As you can see, long FAANG and BAT was said to be the most crowded although it lost ground, falling to 33%. With NFLX’s rally on Tuesday after its subscriber beat, it’s clear that stock is crowded. However, some of the tech stocks have had significant corrections in the past two months. Short term action is all about sentiment, but earnings will be providing the direction for these firms in the next couple weeks. Even if the group is overbought, they will rally with strong results. AAPL reports May 1st; AMZN reports April 26th; Alphabet reports April 23rd; and Facebook reports April 25th. TSLA surprisingly hasn’t announced its earnings date. That’s disconcerting because it’s expected to be in 2 weeks.
Investors Have Lost Their Greed
I think the FAANG being selected as the most overcrowded trade occurred because there wasn’t anything else to pick rather than it being extremely overbought. As I mentioned previously, the cash position had a high z score. As you can see from the chart below, the AAII sentiment survey went from extreme greed to near fearful. The CNN Fear and Greed index had gone into the single digits. The latest update in that indicator is 32 out of 100 signaling fear as the market has done well this week. Part of the reason stocks didn’t rally as quickly as after a normal correction is because the extreme optimism needed to be removed.
Balance Sheets Growth Rates
I’m not sure completely sure of what the changes in central banks’ balance sheets will do to equities. January was a big month for the slowing of the ECB’s purchases, so some investors were fearful it would cause volatility. This ended up occurring late in the month, but I think that had more to do with the slowing growth, fears of inflation, and the unwind of the short VIX trade. If stocks rally at any point this year, the narrative that central banks’ asset purchases cause equities to rise will be broken. Clearly, causation doesn’t equal correlation, but the narrative still exists if there are charts with manipulated axes to prove it.
The chart below shows the rate of change of each balance sheet. The Fed’s 2.2% decline will increase in the next 12 months and the ECB’s balance sheet will slow to 0% by the end of the year putting the JCB as the fastest grower. There’s uncertainty about what these changes, which have just started happening, will do to the market, but assuming a crash will occur goes against the facts. Stocks might be weak in 2019, but that’s only because the central banks waited until near the end of the business cycle to unwind crisis era policies.
Weak Loan Growth
Morgan Stanley reported an amazing result as EPS was $1.45 which was 20 cents better than estimates. Unlike some of the other banks, Morgan Stanley beat estimates for fixed income, commodities, and currencies trading as revenue was $1.9 billion which beat estimates for $1.67 billion. Equities trading had $2.6 billion which beat estimates for $2.24 billion. Even with this great report, the stock barely increased. The financials have been stagnant or down in the face of great headline results as both PNC and Goldman Sachs also beat estimates and saw their stocks fall.
The worry on Wall Street is that the stocks were bid up in the past 12 months yet the core business is weak. Credit card loans, auto loans, and student loans are down across the board. Mortgage banking revenue declined at JP Morgan and Wells Fargo. The banks aren’t selling loans and charging fees as much as they used to while costs are up. The chart below shows the cyclical weakness. As you can see, real estate loans have seen a sharp deceleration; auto loans and C&I lending growth are also weak. The C&I growth is used as a signal for the business cycle. Low growth puts us at risk of declines which signal a recession is coming. This is clearly the weakest point for banks since 2011 when the effects of the financial crisis were still hurting loans.
It appears investors in these banks were already expecting trading to improve and net interest margins to improve, but they were hoping for an improvement to the core business. Without this improvement, banks could be a value trap as the one time improvement of volatility and the cyclical improvement to net interest margins aren’t enough to push the stocks up. If volatility was enough to push the banks up, they would rally during bear markets, but they don’t because lending seizes up. A weak financial sector is bad for the market for obvious reasons; it’s also a signal economic activity is slowing. 2018 looks like the last gasp for this bull market in equities.
Weakening Manufacturing PMI
The chart below shows the survey update for global manufacturing. In the past, the soft data has been extremely strong especially for manufacturing in America. However, global manufacturing has been weakening as there are only 6 countries out of 29 which have a manufacturing PMI that’s up over 3 months. Most countries are above 52.5, but if they continue the recent trend, we will see that number fall sharply in the next 3 months. Even though I’ve been talking about the recent slowdown for a couple months, it still is in its beginning stages, so I’m not expecting a rebound yet.
Conclusion
It’s interesting to see the divergence between equities and economic data as stocks have emerged this week from the sharp negativity in the past few weeks, but the data continues to look weak. People continue to subscribe to Netflix, but they aren’t taking out loans, so much of the economy looks weak. I’m very interested to see the ISM manufacturing report for April to see if the most optimistic indicator I follow shows signs of weakness like the other global PMIs.
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