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Barclays Quant Market Commentary: R.I.P. Flight To Safety
Yet another confirmation that there is nothing left in this market for sensible stock pickers, courtesy of Lehman's head of quant strategy, Matt Rothman: "In summary, the lower the quality of the company the more they are helped by an easy monetary regime. In these situations, true fundamental investors who focus on such banalities as valuations, free cash flow generation, the repeatability of earnings and the return on shareholder equity find themselves struggling to generate returns." What is sad is that Fed's tinkering with the stock market has now eliminated even that old-time staple trade: the Flight to Safety. Why be worried when the Chairman will not let anything fail? "Bluntly, if you had laid out for us the headlines at the beginning of the month, given them to us in full detail, and asked us to predict how our Quantitative Factors would have performed, well, we would have been wrong. Embarrassingly wrong.... There was simply no flight to quality among investors...Aside from the Euro/Dollar trade, there wasn’t much of a quality trade really anywhere in the market." And with QE3 planning already in process, this inverse flight to safety trend, where increased risk means an even faster scramble for the shittiest assets imaginable, will only get more pronounced. Welcome to the true new normal.
Market commentary from Barclays' Matt Rothman:
This month surprised us. Not because we weren’t expecting North Korea to attack South Korea (we weren’t). And not because we weren’t predicting the Euro zone to be embroiled in another currency crisis (we admit that wasn’t on our list of worries, but, hey, we are equity quants, not FX strategists). And not because we didn’t forecast another round of QE (again, we didn’t). The reason, we found this month so surprising is that even after all those events happened, the market’s reaction (or, more precisely, lack of a reaction) had us completely off-guard.
Bluntly, if you had laid out for us the headlines at the beginning of the month, given them to us in full detail, and asked us to predict how our Quantitative Factors would have performed, well, we would have been wrong. Embarrassingly wrong. After May and June of this year, we would have expected that another severe Euro crisis would have set off yet another general flight to safety – a flight to Quality. After all that is what happened just recently and many times before. Macroeconomic shocks (as well as Geopolitical shocks) send investors scampering into less risky assets, coming back in off the risk spectrum. In May of this year, as currency markets and equity markets swooned, our Quality index was up +2.3%. In September 2008, as Lehman Brothers collapsed and the equity markets shuddered, our Quality index was up +6.4%. In times of turbulence, investors seek safety, they run to Quality and that is well captured by our Quality index. But this month, despite seemingly major macroeconomic events, our Quality index was down. This is not what we would have expected.
But interestingly (at least to us), it is not that our Quality index mis-performed. In fact, no “safe” asset out-performed its risky counterpart. There was simply no flight to quality among investors. Treasury yields actually increased slightly for the month, though, effectively remained unchanged. Broad U.S. equity markets remain effectively flat. Aside from the Euro/Dollar trade, there wasn’t much of a quality trade really anywhere in the market.
In fact, one can argue the opposite: in many respects higher risk was rewarded. One of the ways to see this is in the strong performance of the short end of many of our baskets. Within Quality, we saw a number of “risky” cohorts outperform – particularly those with poor historical growth trends. Companies with strong earnings quality underperformed those with poor earnings quality. Companies with low relative profit margins beat those with high relative profit margins. Companies with low ROEs beat those with high ROEs.
We understand this primarily as both the result and anticipation of the next round of quantitative easing – QE2 taking hold. In essence, easy monetary policy dominated global macroeconomic concerns. Companies with poor historical growth trends, weaker margins and lower historical profitability rose as the availability of easy money became a reality.
After all, a company that is generating lots of free cash flow and has a strong balance sheet and strong cash reserves will not be particularly helped by a cheap money regime. They have all the money they need. Free money doesn’t help them. Instead, it is a company with low free cash flow and no cash reserves, one that is in relatively more need of cash that will be disproportionately helped by what is effectively free money.
In summary, the lower the quality of the company the more they are helped by an easy monetary regime. In these situations, true fundamental investors who focus on such banalities as valuations, free cash flow generation, the repeatability of earnings and the return on shareholder equity find themselves struggling to generate returns.
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Zim-bab-we... when will these people get it?? Too right "there is nothing left in this market for sensible stock pickers"... that has been the case since March last year
There is only one chart anyone needs to look at to prove that economic stimulus doesn't work:
http://finance.yahoo.com/q/bc?s=%5EGSPC+Basic+Chart&t=my
Who in their right mind would buy this market? This is the most toppy chart in history.
POMO, Popo
Great observation. You can definitely tell where the easy money kicks in too. Tehcnically it does look like the market has room to run still though and the performance chasers are seeing the 400 points to the upside in the S&P without discounting for the 600+ downside potential. I see these patterns all the time in fx and if this goes anything like that I would still watch out for a blow off top before betting the house short.
http://www.youtube.com/watch?v=cKUvKE3bQlY
http://www.youtube.com/watch?v=vnXOAWoNADw&feature=related
The Ben Bernank uses the above 'Seinfeldology' in modeling his monetary policy.
US markets now just all about 'scoopin the poop', the worse the fundamentals the better, because Bernank will buy it. Wow just great.
Shit floats in a sea of liquidity.
Investor's Business Daily has a ratio of relative strength of growth stocks vs. large cap value stocks. Right now, the relative strength of the large cap value stocks is at a 2-year low, which means the Heatmappers are going to start a rotation soon. You can see it already with FFIV, CMG, NFLX getting hammered, and boring names like HD, MRK, VZ doing much better the last few days.
So far so good in the overbought indexes this morning, usual pump .5% on the bad news where we'll sit all day of course...until tomorrow mornings .5% pump by the Bernanke.
He must be royalty! How can you tell? Because he hasnt got shit all over him like everyone else from scoopin the poop!
http://www.youtube.com/watch?v=rAaWvVFERVA
Another thing to watch is the NYSE Summation Index vs. the Nasdaq Summation Index. The Nasdaq one has been turning up, but the NYA has been flatlining, mainly because of the heavy weighting of closed end fund ETF's and emerging markets. So keep an eye on EEM, FXI, you may see a rotation out of Nasdaq and back into the NYA groups soon.
http://stockcharts.com/charts/indices/McSumNYSE.html
Failure is prevented and mediocrity rewarded. Shelf life is forever.
There's really nothing to watch. The thing goes up until Ben says stop. Buy the .... never mind; everyone should already know. Of course the dips are getting harder to find (one minute bars maybe?) so eyes open gentlemen.
It could not be more clear or simple.
Inflation? Only for the poor. Don't like it? Come here to ZH and complain. Because that is the only thing anyone can do when the banks own the government.
Merry Christmas!!
'Buy the dips', yet there are no dips...brilliant strategy! Shouldnt you just be saying 'buy the tops', since there will be a new fresh top tomorrow? No thanks, you can have this stupid game all to yourself I dont care how many bulls are yelling to put your neck in the noose.
Dog,
I think there is going to be quite a nice dip today...although I would not advise buying it.
Just sayin'....
That reminds me of one of my favorite SNL skits ever: The lost ending to "It's a Wonderful Life".
http://www.hulu.com/watch/4267/saturday-night-live-its-a-wonderful-life-lost-ending
If only we could act out this ending on the macro level in real life. It really would be a Merry Christmas and a Wonderful Life!
+1 The bitter truth. The more I think about it the more I realize that the Corpacracy, the state, the Oligarchy or what ever you want to call is so fucking powerful that there is very little hope.
I would replace the word "sad" here with "satisfying" as what is revealed in this well done article is the fact that many, many criminal syndicate bankers will be released from duty after the first of the year. Their services will no long be necessary to do such pesky things like stock picking. This will be good for our country.
I would also state that when the below comment happens, and surely it is happening in a big way and in all directions out from here, it represents the final phase of a rally...as shorts cover last that which is crap...and reshort at higher prices [think bank rally]:
A good night's sleep and some good ole fashioned truth pumping from the ZH world-wide channel. I am pumped! There may be hope for all of us yet....but I would not let that slow down my stocking up of cans of Chunky Soup, however.
Sweet!
This is kind of like junk bond financing. Bad companies suddenly look better and the rising tide of shit lifts all boats.
I'm confused, who was Matt Rothman? is he "Lehman's head of quant strategy, Matt Rothman" or "Barclays' Matt Rothman"
It seems that nothing else matters anymore. Famine, Best buy , Humans, Poverty, Unemployment.. Its all good. As long as the market is up. Sad.
May I ask what is in their "Quality Index"?
Would it be possible for the federal government to access the system(s) which calculate the DJ and S+P indexes and change the formula or numbers or other factor in order to raise the end number? In other words ... alter the end number independent of the underlying value of the equities in the indexes in a way that would be difficult (or impossible) to determine.
Just wanted to start a REALLY good conspiracy theory.
What's going to be REALLY sad is when we finally see the equity sell off, it is going to drag every other asset class down with it. The reality will finally be realized... and Joe Public will again be wondering what happened and how he lost 50% or more in his 401k... again. The long term damage that will be done to the equity asset class will be painful and persistent.
8/13/1979 BusinessWeek cover story.
That was at the very beginning of Boomer peak spending years... The demographics are WAY different this time. And so are the holes in various public/private balance sheets. :)
Well, this is not exactly news. In credit expansion cycle, most heavily leveraged companies do well, extremely well. In credit contraction cycles, unleveraged companies do better. This has obvious implications: buy most debt laden companies that have somewhat stable business units when credit expansion starts to propagate.
Good one- the rising tide of shit, lifts all boats. Joel & Ethan Coen could use that one- No Country For Shitless Men
I would venture to say that risk is ill-defined by the majority of money managers.
((They probably think the maximum risk would be to use zero hedge.))