One would think that after last week's market rout, the worst in years, that Goldman clients would have just one question: why just a month after you, chief Goldman strategist David Kostin said to "Buy Stocks Because Hedge Funds Suck; Also Chase Momentum And Beta", are stocks crashing? No really: this is literally what Kostin said in the first days of September: "investors should buy stocks which should benefit from a combination of beta, momentum, and popularity as funds attempt to remedy their weak YTD performance heading into late 2014." Turns out frontrunning the world's most overpaid money losers wasn't such a great strategy after all. In any event, that is not what Goldman's clients are asking. Instead as David Kostin informs us in his weekly letter to Jim Hanson's beloved creations, "every client inquiry focused on the same four topics: global growth, FX, oil, and small-caps."
Investors worldwide poured a net $15.8 billion into bond funds in the week ended Oct. 8. As Reuters reports, this is the biggest inflows in dollar terms since records began in 2001, according to EPFR Global. Money market funds also saw the biggest inflow since October 2013 as it appears the real great rotation is from stocks (biggest outflows in 9 weeks) into 'safe' assets. The up-in-quality, and up-in-capital-structure trade is alive and well, as BofA notes, investment grade inflows exploded as high-yield spreads widened further - now at one-year wides (despite small inflows). "Money is flowing out of PIMCO," warned one analyst but as BofA notes, PIMCO flows are reported monthly and so it is unclear as to the extent these flows are "overstated."
Just a month ago, Goldman Sachs' head progonsticator David Kostin went full bulltard, telling clients to buy high-beta, high-momentum stocks because (paraphrasing) "hedge funds suck" and will need to play catch-up. Today, his tune has changed. The "dash-for-trash" meme has outperformed dramatically in the last few years as Fed experimentation breathed life into the zombie-est weak-balance-sheet companies and traders rode that artificial wave. However,as Kostin notes, tightening financial conditions have the greatest impact on firms with high leverage and weak balance sheets; and thus, with the Fed more biased towards tightening than loosening (and the market discounting that), the "dash-for-trash" is over (as we noted in July).
It's Official: Hewlett-Packard To Split In Two, Fire Another 5,000; Goldman Notches Second Spin-Off Success After PayPalSubmitted by Tyler Durden on 10/06/2014 05:41 -0500
While the WSJ already broke the news yesterday that Hewlett Packard would split in two companies, and as such today's "shocking" announcement will hardly have the impact of the just as "surprising" split of PayPal which came on the last day of September, what is probably most notable - in addition to the news that HPQ will fire another 5,000 workers, bringing the total to 55,000 - is that just as in the case of PayPal, so for Hewlett-Packard, the financial advisor, i.e., the company which pitched the spin off to executives, was none other than Goldman. One wonders where else Goldman is advising on "spin offs" to take advantage of the bubbly stock market valuations. As a reminder, HPQ is only doing this deal and accessing the public markets now because several years ago it tried to do exactly the same thing in a private transaction with a strategic or financial buyer, and found no bids. Luckily, now we have central bank froth and pervasive risk euphoria to help management bail out at the highest possible stock price.
Market weakness, as BofAML reports, has taken a toll on mutual fund and ETF flows, with stocks (-$9.56bn), HY bonds (-$1.56bn) and levered loans (-$1.17bn) all reporting significant outflows last week (ending on October 1st). There is a clear "up in quality" and "up in capital structure" rotation among investors as investment grade bonds saw huge inflows. Notably, most PIMCO funds, including the Total Return Funds, do not report flows weekly, and hence the bulk of this outflow was not reflected in the last week’s data. In a statement PIMCO said that outflows from the Total Return Fund totaled $23.5bn in September, so we will have to see just where that outflow hit.
The wobble in world markets continues, with stock indices across all time zones down steeply in recent sessions. Investors are not only realigning their exposure in anticipation of tighter liquidity conditions as the US Federal Reserve finally brings its asset purchases to a close later this month (see More Fools Than Money?). After today’s European Central Bank (ECB) meeting they are also looking nervously at the magnitude of the task facing eurozone policymakers. And they appear to be coming to the conclusion that generating a rebound in growth may be too tough a job for Europe’s leaders to accomplish in the near term.
It appears the post-PIMCO-effect is not wearing off. Having had a weekend to soak up the reality of what outflows will mean for Gross' old shop, credit markets are once again flashing bright red this morning as managers reach for protection ahead of expected redepemtions which would force selling into an illiquid market. High-yield spreads are 25bps wider at their highest since early Oct 2013. Equity futures are legging lower with the weakness...
Just 2 months ago, the illustrious muppet catchers at Goldman Sachs stated that both stocks were 30-45% overvalued but lifted its year-end target in what we subjectively described as 'moronic drivel'. Then, 2 short weeks after that 'upgrade', the same thought-provoking sell-side strategist downgraded stocks on the basis that a 'sell-off in bonds could lead to short-term weakness in stocks'. Now, with the S&P 500 closing at new record highs on the worst employment data of the year, Goldman is at it again - upgrading equities to overweight for the next 3 months, rolling index targets forward, and piling investors into high-yield credit. Welcome to muppetville...
"two landmark firsts have occurred only recently, with the S&P500 breaking above 2,000 and the 10y bund yield breaking below 1%. Our Ice Age thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course. It is the equity markets where I have been consistently surprised. QE has been an essential driver for the equity market, providing the fuel for the heavy corporate bond issuance being used for share buybacks. Companies themselves have been the only substantive buyers of equity, but the most recent data suggests that this party is over and as profits also stall out, the equity market is now running on fumes." - Albert Edwards
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- Maliki says Abadi's appointment as Iraqi PM 'has no value' (Reuters)
- Iran Joins U.S. in Backing Replacement for Iraq’s Maliki (BBG)
- Kurds Push Attack in North Iraq as Maliki Clings to Power (BBG)
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- Israel, Palestinians pursue Gaza deal with ceasefire clock ticking (Reuters)
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The Loudest Warning Yet: "This Stage Should Lead To Increased Risk... System Less Able To Deal With Such Episodes"Submitted by Tyler Durden on 08/06/2014 10:29 -0500
"Suppression of yield and vol induces investors to take on more risk (QE III). The market clings to perception of certainty regarding outcomes, despite the Fed shifting commitment modes from time or level-based to data dependent. This stage of policy should eventually lead to increased uncertainty and risk." Translation: the TBAC itself - i.e., America's largest banks - whose summary assessment this is, is now actively derisiking.
The three charts below are still another reminder that the Fed’s heedless fueling of the third financial bubble this century has done enormous damage to the internals of financial markets. In this case, investors and savers being brutally punished by ZIRP were herded into bonds funds in a desperate scramble for yield. Yet the market’s structural liquidity condition has gone in the opposite direction. Dealer inventories of corporate bonds have plummeted by nearly 75% from pre-crash levels, meaning that the ratio of dealer inventories to bond fund assets has virtually been vaporized. The implication is no mystery. When the financial markets eventually succumb to a “risk-off” selling panic, the corporate bond market will gap down violently, "everyone is hoping to be first through the exit,” warns Citi's Matt King, "by definition, that’s not possible."
Yesterday, in what was probably a case of moronic drivel penner's remorse, the same firm which just upgraded its S&P price target by 150 points two weeks ago, decided to... downgrade stocks. But only kinda, sorta and only for the next 3 months: Kostin is unwilling to go so far as to tell the whole truth so while he did downgrade stocks to Neutral through October, he is still Overweight equities over the next 12 months. In other words, sell in July but don't go away, and keep on buying over the next 12 months, or something. To wit: "We downgrade to neutral over 3 months as a sell-off in bonds could lead to a temporary sell-off in equities. This makes the near-term risk/ reward less attractive despite our strong conviction that equities are the best positioned asset class over 12 months, where we remain overweight."
As we have been highlighting for a few weeks, something is rotten in high-yield credit markets. This week, the mainstream media is starting to catch on as major divergences in performance (high-yield bond spreads are 30-40bps off their cycle tights from just prior to MH17 even as stocks rally to new record highs) and technicals weaken. However, as BofA warns, flows follow returns and this week saw the biggest outflows from high-yield funds in more than a year. Investment grade bonds saw notable inflows as investors chose up-in-quality, rather than reach-for-yield, for the first time in years... equity investors, pay attention.
It appears "reach for yield" has consequences after all - and remember how exuberant the market (stocks) were after PR managed to get that bond off earlier in the year? Quietly behind the scenes and away from the exuberant stock market trading headlines of the mainstream media, Muni bond markets are in turmoil. Thanks to the 'shenanigans' in Puerto Rico - after lawmakers last month approved a bill allowing some public corporations to restructure debt - PR bonds have collapsed to record lows (and dragged a number of large Muni funds with them).