No point putting anybody else’s strategy up because they’re all wrong. BofA has been and remains spot on.
The World in a Nut: inflation in America, stagflation in Europe, deflation/devaluation inChina/Japan, bear market on Wall Street.
The Biggest Picture: S&P500 loss adjusted for inflation YTD =18.1% = US stocks in real terms on course for worst annual drop since 1974(Chart2).
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Tale of the Tape: world government bond loss YTD = 7.0% = bonds on course for biggest loss since 1920 (Chart3).
The Price is Right: epic stocks & bond losses of‘22 reflect coming flip by central banks from QT (bullish cash, volatility, commodities) from QE (QE beneficiaries credit, private equity, tech losing big)…Nasdaq market cap loss since Nov’21 high = $4tn.
Weekly Flows: $60.0bn to cash (largest inflow since Oct’21), $0.6bn from gold (1st outflow since Jan’22), $1.2bn from equities, $6.7bn from bonds.
Flows to Know: largest 3-week equity outflow since Mar’20 ($31.6bn–Chart 6), largest outflow EM debt since Apr’20 ($4.0bn–Chart 7), largest inflow MBS since Nov’21($0.5bn), redemptions Europe stocks 11thweek ($3.4bn), outflows financials for 5th week($1.2bn–Chart 8), big inflows utilities ($0.7bn).
Tipping Point: huge $1.1tn inflows to stocks since Jan’21 have average entry point of4274 on S&P500…means “pain” & “exit” requires <4000.
Zeitgeist: sentiment on bonds & stocks just awful, finally starting to see stock outflows, positioning says “pain trade” up, but we think won’t be big “up”, and would sell it; good news on EPS, war, China COVID, Fed finally hiking properly can aid sentiment near-term, but…
Macro risks v high: Asian FX devaluation discounting weaker Asian export growth which discounting weaker US consumer; supply chain disruption remains huge; inflation slowdown is v likely to be “transitory” given secular shift in globalization & inequality; US consumer will slow and risk is not weaker consumer confidence but weaker business confidence that stalls improvement in labor market…risk in unemployment in H2 would be recessionary.
Market risks increasing: end of QE means volatility anchor has gone, biggest story of‘22; asset price carnage has occurred before QT, and lots of $11tn of QE past 2 years to unwind; disorderly rates & currency moves (market panics often associated with divergent central bank policy objectives…compare Fed & BoJ next 6 months), bond/stock/real estate deleveraging in risk parity (RPAR), private equity (PSP–Chart4), sovereign wealth funds, credit events in speculative tech, shadow banking, US consumer buy now, pay later models, Emerging Markets, zombie corporations, goes up with every rate hike.
Analog: still think 1973/74 analog worthy, inflation means Fed must tighten until it breaks the economy or the market; until it does asset prices must reset lower (Chart5).
There is an interesting question tactically, though. An always bullish Goldman argues for short-term relief:
1. US Corporates return back to the open window on Monday with dry powder. I calculate $5Bof demand per day, every day until mid-June. US corporates are the largest buyer of equities in2022 and have authorized record YTD (AAPL = $90bn; GOOG = $70bn; MSFT = $60bn; FB =$50bn, etc).
2. We estimate that pensions have flipped to buy for tomorrow given the outperformance of bonds vs stocks in April. +$9B worth of equity demand. Does this carry over into next week?
3. S&P Index gamma turned negative yesterdayfor the first time since March.
4. Synthetic ShortGamma through CTA and Vol-Control strategies supply will fade over the next week. (today’s move will lower some of the supply expectations and our estimates will dramatically change tomorrow).
5. Liquidity is simply not available to try to cover liquid macro. Top book liquidity in the S&P500 futures is $2.8M. This ranks in the 1st percentile in the last 10-years. This is as low as it gets.
6. Sentiment is as bearish as I have seen since 2008. I have done more bearish zoom calls these past two weeks, than I can recall. The bears (AAIIBEAR) published a reading of 59.40 today. This was the highest level since March 5th 2009 (70.27). S&P500 rallied 8.54% in March 2009 and 9.39% in April of 2009.
7. Money Market Inflows Logged a massive +$60B inflows this week, which was the largest weekly inflow since Covid 2020 (and typically another fear gauge.
8. For the fixed income watchers our CTA models show some impressive demand.. We have+$20B of bonds to buy in a flat tape, but +$117B of bonds to buy in an up tape, and $37B ofbonds to buy in an down tape. This should ease some of the pressure on long duration equitie sand largest construction of market cap.
9. Professional investors. HF exposure. Gross and Net Exposure are currently at 2-year lows. And vs the past 5 years, Gross ranks in the 21stand Net ranks in the 38th. US TMT Megacap L/Sratio declined by-48% in the past 1-month. (~right before earnings).
10. Short leverage (with options) ranks in the 98thpercentile in the last 5 years.
11. New month = New Inflows. There should be some decent inflows to start May per normal rebalancing cycle in retirement accounts.
I am not a trader and have a natural suspicion of flow of funds arguments. As well, this was written on Thursday night before Friday’s rout so some calculus may have changed.
As it did for Nomura’s robot whisperers:
The Put Spread Collar I mentioned this morning was re-struck around 3pm—so the today 4270 Puts are deep in the money now, and Dealers have since had to sell ~$3B of futures since yday’s highs, as we’ve slipped and then accelerated lower, in order tostay hedged.
Well, the new trade is SPX 29Jul 3320 / 3940 / 4385 PS Collar 12,700 x’s (Put Spread over), so the customer bot 4k SPX today 4000Calls to offset this immediate “negative Delta” impact of the June hedge.
BUT…the Call settles into Cash on today’s close, so theDealer needs to short ~$3B in futures on the bell to replace it(h/t J Pierce and H Homes).
When you add that to the projected~$10.8B of Leveraged ETF flows for SALE we are currently estimated on their rebalancing into the close, we are talking pound-town.
And look, these mechancial flows matter…but as far as helping to get the macro ball rolling, there is no doubt in my mind too thatthe1) US Equities market “shooting the Generals” of mega-cap FANG+ lore(AMZN shocker -15%, and mind-you, a top 5“placeholder Long” position for the entire Global Equities manager universe)…and the2) “hawkish re-escalation”globally due todata in both US(Employment Cost Index signaling “wage / price spiral” concerns, plus the Personal Spending upside surprise =OVERHEAT)and EU(where Core Inflation jumped +3.5% and forces the ECB’s hand for July, fully priced-in now)is also partially behind this latest wave of deleveraging and “Tightening Tantrum”—where this data is so dicey with both CB’s being viewed as“even further behind the curve” thatwe now see Fed Funds Futs ascribing ~40% odds of a Fed 75bps June(was actually 44%earlier before the Equities total meltdown)…all of this is part of this story today.
And hilariously, after yet another massive “high to low” reversal in US Equities today, the CTA Trend potential “buy /cover” triggers that were in reach, which we spoke about this morning? Well,we are now a non-zero chance of seeing the S&P500 position go from the current “+25% Long” signal to FLIPPING “-100% Short” on a close under 4083 in ES today, which would~$16B estimated for sale.
RIPieces to my “Tactical Long” in Equities.
MB Fund remains very underweight stocks. Moderately long bonds. And very long cash. Our base case is a global earnings recession as the European war and energy shock slam into the Chinese property and OMICRON shock and the US inflation and rates shock exacerbates both.