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Bank of America Spots A "Watershed Data Point"

Retail investors are back with a bang: in the last week, investors plowed $13.9BN in global equities (of which $18.3BN was in the form of ETF inflows, while active money saw another $4.5BN in outflows) with another $0.7BN flowing into bonds, $0.4BN out of gold (as has been the case lately). Of note: a return of the big inflows to tech funds ($1.1bn), while EM funds also saw a change in sentiment with the biggest inflows in 8 weeks of $0.5BN.

These reversing flows are clearly manifesting in the market: after a sharp selloff...

from 2018 highs: Eurozone -12%, global banks -15%, Emerging Markets -17%, industrial metals -18%...

... all now bouncing hard (see Amazon versus Turkish Garanti Bank)...

... as SPX & INDU hit new highs and US dollar rolls over despite epic rate differentials.

With the weekly flows out of the way, here are the other salient observations from BofA's latest weekly Flow Show. In it, author Michael Hartnett coins a new term: the "cannibal sector" namely buybacks: Hartnett notes that the largest buyer of corporate equities has been... corporates themselves, as the Fed asset purchases of $3.6TN since Lehman now easily surpassed by $4.4TN in US stock buybacks.

The next question is arguably the most important: how are investor positioned? According to the latest BofA data, the “pain trade” is  risk assets up next 3-5 weeks (buyback window closes Oct 5, Q3 EPS begins Oct 12); Meanwhile, professional investors are very much underinvested, as BofAML Fund Manager Survey revealed cash levels at 5.1%, an 18-month high. This may also explain why hedge funds have continued to underperform the market, and are still negative for the year even with the S&P hitting all time highs.

And with BofA's Bull & Bear Indicator at 3.6, Hartnett's reco is that shorts should wait for SPX >3000, while the 10Y rising to 3.3% would be pricing in of 3 (currently 2) Fed hikes in 2019, a level that would likely cripple equities.

Meanwhile, central banks around the globe are even further behind the Fed curve, and are scrambling to catch up with no less than 40 rate hikes in 2018, the fastest pace of hiking since 2011. According to BofA, rising rates will start to bite when:

1. higher rates = lower US bank stocks

2. higher rates & higher corporate debt levels - as corporates, not consumers or banks, will cause the next recession - increase defaults & credit spreads (watch US IG BBB, EU IG & fund flows into private equity).

Summarizing BofA's 3P metrics, Positioning indicates tactical upside; while the peak in Profits & Policy means that returns will stay low & volatile, while assets with strong cash flows will outperform assets with weak balance sheets, until the Fed stops tightening.

Finally, for all the inflation watchers, BofA notes that it has seen a "watershed data point": for the 1st time since 1991, Japanese land prices rose 0.1% this year. Or, as Hartnett explains, "$100 of Japanese land in 1991 is now worth just $47 which is positive for Japan banks... who have lost 80% of their market cap since 1991."

With all due respect to Albert Edwards, could it be that a global inflationary tide is about to cover the globe?

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