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Climbing A Wall Of Cliches

Tyler Durden's picture




 

From Nick Colas of ConvergEx

Climbing A Wall Of Cliches

If clichés reflect overly common (if therefore unappreciated) wisdom, then we finally have a good explanation for why risk assets continue to rally.  No, there are actually not “More buyers than sellers” – money flows are negative over the last month for both U.S. equity mutual funds and ETFs.  And forget about investors “Downgrading on valuation” as stocks climb higher and higher; truth be told, that’s not even really a thing (unless you work on the sell side).  Nope, this is a “Flight to quality”, “don’t fight the Fed”, “never short a dull market” environment with “easy comps” from a long rough winter.  Want to call a top somewhere around here?  Remember that “Markets discount events 6 months in the future.”  A “Santa Claus rally” in June?  That would fit the one cliché we know is actually the market’s True North: it will do exactly what hurts the most “Smart” investors.  And that would be to rally further as the doomsayers double down and the timid cling to their bonds and cash. 

“You don’t want to live in a world where the Federal Reserve can’t move stock markets.”  That is one of the most important observations I have heard in this business, and it came from a grizzled old veteran some 15 years ago.  The venue was one of those interminable “Idea dinners” and we young pups had been sniping about the whole “Follow the Fed” approach to equity analysis.  The old lion eventually swatted away our objections with his simple observation.  And he was exactly right.  If the Fed can’t move markets with its balance sheet and a little time, then you might as well hit up Youtube/Google for “How to skin a squirrel” and “bartering for surplus ammo”. 

So how did the famous phrase “Don’t fight the Fed” become such a derided and devalued cliché?  The short answer is that many overused phrases are still true.  That’s why they end up so often repeated in the first place.  Don’t play with matches.  Don’t run with scissors.  Cross at the green, not in between (that’s a little 1970s NYC cliché trivia there).  All good guidance, but over time and with repetition even the catchiest phrases turn from useful aphorism to forgettable, time wasting, and moldy word play. 

Wall Street phrases are especially susceptible to the reverse metamorphosis of swan-to-duckling.  For all its supposed sophistication, finance is still anchored in oral traditions more than most 21st century occupations.  In what other industry does a leading light go by the moniker “Oracle of…”?  After all, the original Oracle sat in Delphi, believed in the pantheon of Greek gods, and anchored her (yep, the Oracle was a young woman) cultural identity to the stories of the blind and illiterate Homer.  The modern one dispenses comforting wisdom anchored in a native optimism about human innovation and faith in capital markets.

Now, there are a lot of Wall Street clichés that feel distinctly flimsier than the overarching power of central banks.  Consider the following in the context of current market action:

  • “More buyers than sellers.” I suspect this must have come from a time when the New York Stock Exchange was the only game in town and $2 brokers crowded around various posts to make trades.  Five buyers in the crowd and only two sellers meant the stock in question was probably going higher.  In the end, however, there can only be one of each for a specific trade.   

The most interesting aspect of the move higher for U.S stocks in the past month is that it comes on the back of large scale outflows of capital from both U.S. listed exchange traded funds (negative $8 billion) and mutual funds (negative $9.5 billion).  There are, at least by this count, more sellers than buyers.  And yet prices rise.  Sellers may be sellers, but they aren’t particularly anxious to part with the holdings. 

  • “Flight to quality”.  I suppose the opposite is the “Dash for trash”, which typically comes early in a market cycle.  Once economic conditions begin to improve those companies which were closest to death’s door invariably rally the hardest.  Not only do their fundamental stories improve, but they can access capital markets to fix balance sheets ravaged by the preceding downturn.  Later in the cycle (like now), investors look for Teflon names just in case the next downturn is just around the corner.  Back in the 1970s, corporate procurement managers used to say “You’ll never get fired for buying from IBM” as an excuse to go with that company’s products.  Same goes now for stocks.  If the global economy is going to weaken, which company will do better: the large multinational or the plucky third tier player?   
  • Easy comps”. This one has a raft of near substitutes, but at its essence the concept is simple.  The investing world looks at everything on a year over year basis, to remove factors such as the seasonality of demand to the vagaries of corporate expense accruals.  If a company blows a quarter it is a whole year before we see it again, when it shows as a comparison point to the newly reported period.  The same goes for same store sales comparisons and other industry benchmarks.  And, of course, a bad report this year makes for an easier comparison next year. 

With the lousy weather of Q1 2014, we essentially have the “Mother of all” (Iraqi cliché, I believe) easy comps now.  Not only should we be able to accelerate economic growth in 2014 due to pent up demand, but Q1 2015 should be a layup for a 4-5% growth rate since the comparison is dead easy.  We’ll see how that turns out, but never underestimate the power of the “Easy comp’ cliché.  You are seeing its effect right now. 

  • “Downgrade on Valuation”.  This is a popular catch phrase among Wall Street analysts, but it doesn’t mean what you think it means.  In point of fact valuation is a remarkably slippery topic. It suffers extensively from noisy chatter in the oral history of markets.   We try to parse past cycles and what investors who are long dead might have paid for similar stocks in similar situations, adjusted for things like interest rates and long term growth rates.  While all this analysis may be comforting, it does little to help us understand what is moving stocks today.  And tomorrow. 

Market valuation is probably the single most talked about objection to U.S. stocks at the moment.  Given the sensitivity to bubbles from the 2000 and 2007/2008 experiences, that’s natural.  But language is powerful in this debate, so let’s recast the discussion.  What if I told you that U.S. large stocks are 3.3% more expensive than they were at the end of last year?  And that small cap stocks (we’ll use the Russell 2000 here) are actually 2% cheaper than in December 2013?  Those are the year to date returns for each asset class, and their modest moves are much less scary than calling “Bubble” in a crowded market.  After all, if we are in a “Bubble”, it is proving to be made of steel rather than soap film. 

But here is why valuation is really a red herring of a discussion: math is not an investment edge.  That’s not a cliché; it’s the most important thing to remember about anything in capital markets.  Everyone has a calculator on their phone.  Division is one of the four basic functions, and literacy rates among investors are essentially 100%.  So don’t mistake the ability to do long division with the help of a machine for anything useful.  It isn’t. 

Now, here is the real call: “Downgrading our view of the market because there is simply no way we avoid a recession in the back half of 2014.  We’ll be lucky to avoid a deflationary spiral after that, and corporate earnings will be down 10-15% in 2015 despites the supposed “Easy comps” of Q1 2014.”

If this is your scenario – and long rates on bonds certainly support it – then you are right to be bearish.  The trouble is that you are ignoring the observation with which we started this note.  Do you want to live in a world where +$3 trillion of central bank liquidity can’t spark some economic growth?  And even if you do, is worrying over an equity portfolio really the best use of your time?  And don’t think that bonds will bail you out if this all comes to pass.  Deflation does funny things to government and corporate finances, as existing bonds and future deficits/CapEx spending must be repaid with declining tax/revenues in future years.  Just ask Japan. 

In the end, there is one cliché I trust more than any other: “The market will tend to do what hurts the most ‘Smart’ investors.”  There is some logic behind that – just look back and see how many smart people where short U.S. Treasuries in December and long small cap stocks.  Or long emerging markets.  Once the smart money figures something out, the trade is over.  I hear enough worry over U.S. stocks to make me think that the smart money is cautious.  ETF money flows seem to confirm that sentiment.  That caution may end up being right.  But probably not just yet.

 

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Fri, 05/30/2014 - 15:06 | 4810471 Renewable Life
Renewable Life's picture

"Buy Guns, Food and Gold (silver)"

There's one I like, (and subscribe too)!

Fri, 05/30/2014 - 15:25 | 4810545 bania
bania's picture

The money on the sidelines would beg to differ. They're seeing green shoots. 

Fri, 05/30/2014 - 16:32 | 4810825 Bill the Cat
Bill the Cat's picture

Pfthwbtp!

Fri, 05/30/2014 - 15:04 | 4810472 ParkAveFlasher
ParkAveFlasher's picture

How long until it's exposed that the financial media hires OUT-OF-WORK ACTORS WITH NO BONA FIDE PROFESSIONAL WORK IN FINANCE AND ECONOMICS to sell stawks?  T

Fri, 05/30/2014 - 15:05 | 4810473 Temporalist
Temporalist's picture

"It's for the children!"

"It seemed like a good idea at the time."

"The government IS the people."

Sat, 05/31/2014 - 08:18 | 4812259 fattail
fattail's picture

"I was just following orders."

 

And my favorite.  "I have been at the mercy of men just following orders...never again."

Fri, 05/30/2014 - 15:05 | 4810475 The Endless Pump
The Endless Pump's picture

Buy The Fucking Dip..........

Fri, 05/30/2014 - 15:07 | 4810482 Temporalist
Temporalist's picture

There's never been a better time.

The more you spend, the more you save!

Fri, 05/30/2014 - 15:54 | 4810665 CheapBastard
CheapBastard's picture

'Don't be locked out of the housing market.... Buy Now!'

I watched my colleague be suckered into that one ... he bought a $786,000 house which has plunged to less then $400,000 ... where it has remained for the last 5 years ....

ugh

Fri, 05/30/2014 - 19:37 | 4811381 Redneck Hippy
Redneck Hippy's picture

At least he has a place to live.

Fri, 05/30/2014 - 15:05 | 4810476 Sudden Debt
Sudden Debt's picture

My question is: does the FED not already own the entire stockmarket?
be bit like in Commi Russia back in the days where everything was state owned?

Fri, 05/30/2014 - 19:10 | 4811295 blindman
blindman's picture

THE SHOCKING TRUTH HISTORY CHANNEL CAN’T BROADCAST — BIX WEIR
http://www.silverdoctors.com/bix-weir-history-channel/
.
the truth is no one knows anything, it is the
law.
go figure ...

Fri, 05/30/2014 - 15:12 | 4810491 buzzsaw99
buzzsaw99's picture

look back and see how many smart people where short U.S. Treasuries...

there were zero. idiots every last one.

 

You want cliches? I'll give you a few:

1) Never short the hole.

2) Don't fight the fed.

3) BTFD

Turn off cnbc, that shit'll rot your brain.

Fri, 05/30/2014 - 15:18 | 4810514 CrashisOptimistic
CrashisOptimistic's picture

 

buzz, the thing is the entire industry isn't just committed to the concept that all is going to be sunny.  It's more than that.  Their lives depend on it.

There have been 6 years of trillion dollar deficits (aka fiscal stimulus) and about that many years of monetary stimulus amounting to about on average, what, 700 Billion pear year.

This is the problem they can't face.  All that stimulus is supposed to do what it used to do.  "Prime the pump" and get things going again. And if you phrase this as "it didn't work", there will be an outcry that "no one rational would say that the stimulus didn't help, think what would have happened without it!"

But that's not the goalpost.  Better than otherwise is not the metric.  Fixed is the metric.  Back to normal is the metric. Are we back to normal?

What do we see?

We see a Sequester budget of only $600B in stimulus (aka deficit this year) and QE tapering down.  The result?  -1% for Q1.  And horrendous retail sales numbers (reported just last week) for the first month of Q2.

They cannot accept that $100 oil trumps all the stimulus.  They just can't do it.

Fri, 05/30/2014 - 15:23 | 4810536 buzzsaw99
buzzsaw99's picture

you always cut through the bs Crash. If $100 oil trumps all the stimulus what will things look like with $200 oil, a crashed market, with attendant budget cuts on entitlements and military spending? I think we both know the answer to that one.

Fri, 05/30/2014 - 15:56 | 4810673 CheapBastard
CheapBastard's picture

I checked the reports from several oil drillers and they all expect oil soon to be over $125.

Makes sense.

Fri, 05/30/2014 - 15:13 | 4810501 TalkToLind
TalkToLind's picture

"Back The Truck Up!"

...which I want to do so badly right now.  Yet I know the moment I do, some BRICS members will announce additional plans to abandon the US Dollar as reserve currency...which of course will cause PMs to crash even further.  

Fri, 05/30/2014 - 15:14 | 4810507 AccreditedEYE
AccreditedEYE's picture

Who is editing for ZH today? I mean, WTF? "The timid will hold their bonds and cash". Let's first get something straight: most all of these market-isms came about during the Boomer generation climb to maturity. Over the past 30+ years, they had the disposable income to buy stocks and push assets higher. Today is totally different story... Large part of population working PT jobs... No 401k, no extra money to "run with the Bull". You will be waiting a long time for retail participation of the likes you saw in 2000; that kind of investor is dead and buried. The Fed alone owns this market Nick. Sad you can't figure that out while you collect your million dollar bonus. Retail is dead.

Fri, 05/30/2014 - 15:15 | 4810513 disabledvet
disabledvet's picture

Where are those two cartoon characters you have with the one guy explaining "just buy the all time high bitch"?

No need to make it complicated.

Why not invade Russia?

Fri, 05/30/2014 - 15:22 | 4810516 Dubaibanker
Dubaibanker's picture

There is another cliche...that there is no inflation in this world.....but...here we have run away inflation and talk of conflicts in various countries (37 since 2007) by the World Bank.

Is it because the World Bank is now run by a Korean born American and dares to speak the truth? http://en.wikipedia.org/wiki/Jim_Yong_Kim

Why no one adds the inflation over a 5 or a 10 year period cumulatively, for certain basic products or services like school fees, milk, rents, utility bills, bus fares, shoes, vegetables, meat etc (that are mandatory use by each person on this planet regardless of affluence), is beyond me....Cut this CPI and WPI crap...Enough of it to mislead the gullible!

World Bank alarmed as food prices rise

 

Fri, 05/30/2014 - 15:17 | 4810519 nosoeawe
nosoeawe's picture

the big eared jihadist in chief and his bitch ol yeller can't let this market go down because

1. instead of the midas touch, our very own terrorist in chief has the diarrhea touch. everything the ill bred melon head touches turns to shit
2. ol yellen can't admit that 8 trillion in counterfeited USDs didnt do a damn thing
3. any correction will quickly turn into a crash

you literally have two of the most vile, dispicable, inhumane, pathetic, evil egomaniacs that have lots to lose if this market goes down

Fri, 05/30/2014 - 15:49 | 4810643 huggy_in_london
huggy_in_london's picture

What?  No "low hanging fruit" in the back half of 2014??!!

Fri, 05/30/2014 - 15:53 | 4810659 Quinvarius
Quinvarius's picture

"The market will tend to do what hurts the most ‘Smart’ investors"

Now I know how Colonel Kurtz felt while he was looking at that big pile of vacinated baby arms.

Fri, 05/30/2014 - 16:00 | 4810687 ptoemmes
Fri, 05/30/2014 - 17:50 | 4810790 blindman
blindman's picture

"the market"..., funny.
.
Tom Waits - Small Change
https://www.youtube.com/watch?v=EH2E-AUi7Eo
....
.."small change got rained on with his own .38
nobody flinched down by the arcade
now the burglar alarm's been disconnected
and the newsmen start to rattle
and the cops are tellin' jokes about some whore house in Seattle
and the fire hydrants plead the 5th Amendment
and the furnitures bargains galore
ah but the blood is by the juke box
on an old linoleum floor
it's a hot rain on 42nd Street
and no the umbrellas ain't got a chance
and the newsboys a lunatic
with stains on his pants cause...
.
small change got rained on with his own .38
and you know that no one's gone over to close his eyes
and there's a racing form in his pocket
circled Blue Boots in the 3rd
and the cashier at the clothing store
why he wouldn't breath a word as the
siren tears the night in half
and someone lost his wallet
well it's surveillance of assailants
if that's whachawannacallit
but all the whores, well, they smear on revlon
and they all look like jane maedows
as they hike up their skirts
they fish for drug store prophylactics
but their mouths cut just like
razor blades and their eyes are like stilettos
and her radiator's steaming
and her teeth are in a wreck
now she won't let you kiss her
but what the hell did you expect
and the gypsies are tragic and if you
wanna to buy perfume, well
they'll bark you down like
carneys...sell you Christmas cards in June
but..." ... t.w.
.
http://www.tomwaits.com/songs/song/230/Small_Change/

Fri, 05/30/2014 - 16:27 | 4810801 esum
esum's picture

the ussa economy under negrodomus is like a dog walking down the sidewalk sideways. every single member of congress impaled   vlad style would be a glorius site... or set afire hanging from lamp posts... 

Fri, 05/30/2014 - 16:32 | 4810826 esum
esum's picture

this economy is so feeble my neighbor downgraded from bespoke brioni to buying suits removed from stiffs at the local funeral home... the home is right next to a KFC... they say it tastes like chicken.. ever see a cemetary in china.... i haven't 

Fri, 05/30/2014 - 16:44 | 4810874 Max Cynical
Max Cynical's picture

"Full faith and credit of the U.S. Government"

Do NOT follow this link or you will be banned from the site!