There is no end to the list of ‘real world’ problems underlying cuirrent equity market price levels and velocities (slumping ‘hard’ economic data, record high valuations, global thermonuclear war, Washington uncertainty, Fed balance sheet normalization to name a few). However, as former fund manager Richard Breslow points out, “equities continue to have friends in high places.” In other words, there’s a lot more to fight than just ‘The Fed’.
When most asset prices go up or down we talk in terms of some investing dynamic thesis. There’s a theory, a set of facts and forecasts and then we see how it plays out. What iron ore or wheat futures end up doing today affects the P/L, if you have a position, but it doesn’t validate your worth as a human being.
Not so with equity prices. Especially indexes.
It’s become a matter of principle to equate falling prices as proof that the investing citizenry is finally taking a stand against tyranny and rising prices as a craven capitulation. Looking at the markets through this prism is a logical consequence stemming from the seeming failure of more mundane analysis to explain what’s going on.
Commentators have fallen into the trap of assuming every equity investor is a day trader. The reality is only at the very margins are buy and sell decisions based on anything likely to be said or done today, tomorrow or even a year from now.
We see the market move and assume everyone is thinking the same way, has the same objectives and constraints, and will, for some reason, be forced to react. Except for the little people, equities have become the ultimate in long-term plays and that has to be taken into consideration no matter the laundry list of potential negatives it’s easy to concoct.
Norway enjoys the world’s largest sovereign wealth fund. It has steadily been increasing its percentage allocation to equities. And has been mandated to step it up even more. They’re looking to put another $100 billion into the market even though they already own 1.3% of global equities. That’s not a typo and it represents very sticky money.
Just listen to the comment from the fund’s deputy chief executive Trond Grande, “We don’t have any views on whether the market is priced high or low, whether bonds and stocks are expensive or cheap.”
They also share the investing attitude of Denmark’s largest private pension fund. Brace yourself, this might hurt. They spend less and less time thinking about current politics, because despite the news drumbeat, “politics and economics have decoupled a lot in recent years.” That was the comment from the CEO of the Danish fund, not me. And he has oodles of money to put to work.
And need I tell you that the SNB’s U.S. equity portfolio amounted to $84.3 billion at the end of June, up from $62.4 billion last November? Lest you think this is just another government entity throwing the dice on behalf of future generations, the SNB has private investors, too. Did you know that a German businessman owns over 6% of the bank?
Looking at VWAP over some arbitrary period of time and concluding it will force investing decisions is the ultimate in mistaking the trees for the forest. Again, you can’t take a day trading concept and graft it onto the big picture. If any trading takes place based on it, there’s just a transfer of positions from weak to stronger hands. It’s a big part of why buying the dip always happens. It’s not done to frustrate you.
And then, of course, there are those pesky stock buyback programs. Whether they are ill-advised and dangerous, or not, they are a steady one way flow only increasing the scarcity value of the shares.
[ZH: Cuts in the amount of stock that U.S. companies are buying back are likely to persist, according to Andrew Lapthorne, global head of quantitative strategy at Societe Generale SA. In a report Wednesday, he cited an increasing debt burden and a tendency for repurchasers “to be the weakest and cheapest” companies relative to peers. Buybacks by S&P 500 Index companies peaked in June 2016 and dropped 14 percent through Wednesday on a per-share basis, according to capital-stock data compiled by Bloomberg.]
I’ve no idea whether the market is going up or down. I can see the benefits of both outcomes. Although I would note that in the face of great provocation, equities remain a lot closer to all-time highs than any other measure. I just would caution against using bad logic to analyze a market, whether it turns out to be correct or not.
The question is, can the SNB and Norwegian SWF replace the buying power and leverage implicit in The Fed’s policy-constant of the last few years?