We remain a little overbought here but equities have rotated and worked off a little of the over bought momentum. Here the main SP500 index:


We have come a long very quickly so logic tells you a correction should occur here. We (inc many commentators) have been expecting a minor pull back for the last four weeks or so. None has come but a consolidation period has occured. We must accept that there is no guarantee that equities will see any correction given the monetary stimulus occuring by most of the developed world’s central banks. A correction will come eventually but for now we have so much monetary debasement across the world it is easy to make a case that asset prices are still badly lagging the stimulus that has and is under way. Oil is simply in catch up as the old repriced in gold chart indicates.

For now, the US LEIs remain very strong and, on the latest data, continue to climb.

The LEIs are likely to get stronger still as central banks continue their race to stimulate. Europe’s austerity budgets will have an effect but these budget’s deleveraging damage is likely to be more than compensated for by the ECB’s LTRO and LTRO II later this week. China’s recent changes should start hitting their LEIs in the next month. The ECB bought no bonds last week as their LTRO policy compressed euro debt yields. The BOE’s easing will feed into the UK nos soon enough and the FED’s ‘twist’ stimulus program continues and a likely policy focus on the US mortgage market very soon. Little reported, the G20 finance ministers meets this very weekend in Mexico city. The IMF has tabled a motion to increase the SDR program to assist world wide easing. I anticipate this will be approved signalling even more monetary easing. The BOJ continues on their easing and bond buying program. Against this back drop asset markets will boom and such things as overbought technical levels may be rendered compelety meaningless. If we do see a correction it will be shallow, imo. An attack on Iran would, of course, rapidly change things.

A key medium term indicator that i believe is very useful is the money flow data as to where retail investors are placing their funds. Contary to what we might expect to see retail investors continued to withdraw money from equities in Feburary. They don’t believe the rally at all. They continue to move to cash and bonds and away from equities.

'U.S. fund investors sold domestic-focused equities in the week ended Feb. 22, a second straight
week in which selling far outweighed the net new cash flowing into foreign-focused funds,
data from Thomson Reuters' Lipper showed on Thursday. In the latest week, investors pulled
a net $2.8 billion from U.S.-domiciled equity funds. Domestic-focused funds accounted for
the entire burden of outflows with $3.73 billion in net redemptions. In the course of the
reporting week, the U.S. benchmark Standard & Poor's 500 stock index rose 1.07 percent.
Exchange traded funds reported net outflows of just over $4 billion. The State Street SPDR S&P
500 ETF saw net redemptions of $4.64 billion. "Most of the flows were pushed by ETFs.
We actually saw an inflow into mutual funds, which may be a little bit of a lag on the retail
side," said Matthew Lemieux, analyst at Lipper. "Even though there has been mixed news,
a lot of what has been going around in the markets, such as the Dow touching 13,000,
and the S&P 500 approaching a 10 month high and small cap stocks approaching an all-time high'. 
Reuters 23rd Feb

We continue to see money flow to EM bond and DM bond markets.

http://blogs.ft.com/beyond-brics/2012/02/24/fund-flows-insatiable-bonds/#axzz1nObg2mwR

As an aside, there seems no investor concern, from money flows, as regards to EM inflation or over heatedness at present. If anything EM equities, in many sectors, remain unloved and fears remain of a recessionary period ahead for EM markets. Money flows to EM fixed income far outweight EM equity money flows.

Whether Lipper or ICE reports on fund flows fixed income flows are continuing to massively outweight equity flows. And equity positive fund flows have been very slow to date. Certainly no signs of euphoria as yet. Here a chart comparing bond fund flows and equity fund flows with SP500 performance from 01/2007.

The global hedge fund index is another indicator for investor’s preference for equities. Although it looks as though the lows are in the index is hardly indicating euphoria. Equity strength will come and money will one day flood out of cash and bonds into equities and the hedge funds due to monetary expropriatons via the printing presses but this seems a million miles at present.

Here also id just mention again ‘The land of the Rising Sun’. If you think equity ownership is at a low level in the west take a look at Japan and then consider what occurs when a busy crowd decide to collectively try exist through a narrow door way. In asset markets when capital holders rush to enter markets and buy assets this creates a enormous bubble. This is almost certain to occur in asset markets across the world, in my opinion due to monetary reasons. The question can only be when.  Here the Japanese equity allocations after years of allocating to cash and bonds. If JPY is to trashed this has serious capital market implications!

Equally, when EM consumer balance sheets look as follows below (ie with large cash allocations) this also has ‘door way’ implications..

Note here how asian em consumers allocations to cash are significantly higher than their S.American cousins whose governments have a history of issuing more debt than their asian rivals. Ie Asian consumer’s purchasing power is more liquid than S.American consumers. EM asians are very likely to increase allocations to risk assets as inflation bites.

And here a few more charts restating the case for emerging markets.

Here retail sales compared:

Here exports compared:

Markets are a discounting mechanism and they have discounted a severe recession for EMs in 2012. The rebound so far has been good but is still in very early days as the ratios still demonstrate.

Ofcourse the demographics of allocations should also not be overlooked. As we get towards retirement we tend to allocate less to equities. As developed market demographics are for an increasingly old population allocations to equities have been in decline and continue to decline as above re fund flows seems to indicate. EM consumers, on the other hand, are very likely to increase allocations to equities due to their relatively much younger demographics.

So when add all the secular as well as near term indicators together, shallow pull back & Iran issue aside, time spent selecting preferred’ equity targets for a continuation of this rally looks time well spent. On this basis, here a useful report by JPM on equity targets for the near and medium term.

JPM-EquityRecommendations

Also here from CS on European equities that i posted up on the forum pages earlier this week.

82238279-CS-EuroEquityResearch

EM market research continues.

Here a report from McKinsey Global making the secular case for emerging markets.

MK-EMSECULARCASE

Here a CS view of the EM bull market case reviewing index performance and projections with a focus on some of the particular indexes and relative ratios.

CS-EM-feb2012

Lastly here the SF economic indicator roundup..

WF-Econindicators-24-02-12

All the best for now.. Rich

 

 

 

 

1 Star2 Stars3 Stars4 Stars5 Stars (5 votes, average: 5.00 out of 5)
Loading...