One of the rather disturbing things about today’s markets is that the sellside is increasingly incredulous and confused about what’s going on.
To be sure, you always want to approach anything the Street says with an appropriate level of caution - that is, take it with a grain of salt. That goes double if you’re reading individual stock “research.” If they’ve got an investment banking relationship with a company they’re covering (and they usually do), you can bet you’re never going to get a “sell” rating on that company’s shares.
The macro research is a bit of a different animal. Sure, we all know how benchmarks can be manipulated, but while you can move the price of Apple shares if you’re the analyst everyone listens to on iPhone channel checks, what you can’t very well do if you’re a macro strategist is control whether or not Iran test fires a ballistic missile with the range to hit Israel. Or whether Russia steps up the bombardment of Aleppo in Syria. Or whether Saudi Arabia flips out and cuts diplomatic ties with Tehran. Or whether the PLA Navy shoots at a US spy plane in the South China Sea. More to the point, one guy can push up the multiple on one stock for one or two days maybe, but what one guy can’t do is push up the multiple on all stocks - or at least not materially or sustainably.
The point is, the macro analysis is generally not as biased. So, when you see the macro guys and the Street economists scratching their heads and/or getting noticeably frustrated with how inexplicable the market is, you might want to pay attention. With that in mind, consider the following from Deutsche Bank out earlier this week:
“We haven't found a robust framework yet that explains why 1-2% long bond yields justify 20x or higher equity P/E. Moreover, what about negative bond yields - do P/E's then make sense at 100x? If the answer is no, then what determines what is too high — especially if valuations ‘don't matter’?”
Great question, right?
And it’s not just Deutsche. Goldman was out on Thursday almost demanding that you buy puts. The note is great in a “less is more” kind of way and although there’s five or so pages of analysis, they really don’t even qualify it or add any caveats - it’s just basically “long puts now please.” Here’s an excerpt:
“For the first time in six years, our proprietary model is saying to buy puts. We believe many investors have been ‘stopped into’ the market during the recent equity rally. We see evidence in the sharp decline in put-call skew, equity futures flows, the VIX decline and tightening of credit spreads. Many investors have asked us if equity puts are attractive and, for the first time in six years, the answer is yes for those with a directional view. Normally, equity puts overprice the probability of a down-move, but in the context of lackluster fundamentals and upcoming catalysts, puts are attractive. Over the past six years, SPX 1-month options have priced in a 20% chance of a 5% down-move, on average. Put prices dropped so low that they only price a 12% probability of a 5% drawdown, just in-line with the probability suggested by our model. Given upcoming central bank meetings, critical macro data and the ongoing earnings season, we see buying puts as attractive for investors long equities.”
For a firm that doesn’t mind publishing complex graphics, this one is pretty darn simple:
(Chart: Goldman)
A second note also out today from Goldman carried the rather amusing title “New Highs, New Whys.” “New Whys,” indeed. Here’s an excerpt from that piece:
“Can the equity market rally extend further from here? We see fading tailwinds.”
We’ve rarely seen commentary that’s so blunt. There’s virtually no equivocation in any of the analysis we’re seeing.
Just about the only disclaimer you’ll get is that the buyback blackouts are going to start rolling off soon, so the corporate bid may still be there, and as we’ve discussed elsewhere, it’s so strong and pervasive that really all everyone else has to do is stop selling for stocks to go higher.
Be that as it may, “hope” is about as promising an investment thesis as it’s proven to be as a political strategy. In the same vein, “everyone got stopped in” doesn’t exactly sound like a fundamentally sound rationale for asserting that a completely inexplicable rally can persist.
As always, trade accordingly and remember, Goldman has been known to be a contrarian indicator from time to time.
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