The Chart That "Amazes" SocGen How The Fed Has Broken The Market

6 years ago, nobody, and we mean nobody, would admit that the Fed was manipulating the "market", and especially that subset which has served as a policy tool to boost consumer confidence: equities. Now, one has to look hard to find the braindead "financial pundit" (usually a econ Nobel prize winning economist or an English major) who still doesn't get it.  Ironically it has gotten so bad, some of the banks are now eager to show to the world just how "amazed" they are - in this case SocGen - by just how completely and totally the central banks have crushed anything to do with fundamentals.

From SocGen's Andrew Lapthorne

Aided and abetted by QE, the last three years has seen the MSCI World Index rise by 38% whilst reported profits have risen by just 3%. This complete disconnection with fundamentals has been painful for short-funds looking to generate returns out of companies with weak business models.

...

With the global equity markets up almost 150% since the 2009’s low, fuelled by cheap money and central bank QE, it is little wonder investors have lost interest in shorting. Indeed, many dedicated short funds have simply closed up shop recently or have returned investor’s cash whilst awaiting richer pickings or at least some return to a market more focused on fundamentals, rather than central bank largesse.

Long/short equity strategies have struggled in this environment (see below) and dedicated short funds have suffered most. That short funds suffer during rising markets is not unusual, minimizing the pain in the good times and then delivering during a crisis is usually the objective. However the last few years have been particularly painful. For example during the bull market run in equities during 2003/07, whilst dedicated short funds underperformed, they held their ground in absolute terms. This allowed long/short equity to do well even despite the rapid market rise, i.e. the short side did not detract from the overall performance. The same cannot be said of more recent performance, where short strategies performance has been so painful that we suspect many have simply given up.

QE has helped kill off the dark arts

Why have short-strategies suffered so much? We suspect QE may be part of the problem. As is now well recognised QE has helped drive up equities, but has done little to improve underlying earnings, as such it has pushed up share prices well in excess of what might be justified by fundamentals.

We are still amazed by the chart [below], but it summarises the problem for those seeking to short stocks with fundamental weaknesses. In the last three years, the MSCI World Index has risen by 38% (11% per annum) whilst reported profits have risen by just 3% (that’s just 1% per annum!). As the events of last month attest, central bank actions–not profits–are driving equities forward.

Comments

[B2u]

Fuck you Bernanke, fuck you Yellen...

[Bloppy]

CNBC sez: cover your eyes! Do not read Zero Hedge!

MSNBC meltdown over new Senator Joni "Pig Castrator" Ernst:

http://tinyurl.com/kptmska

[Ward cleaver]

What's MSNBC? At least they have
a diverse round table /sarc. Sure the various
women's groups will come to her defense..,oh she's
a R, F her.

[virtualInsanity]

Let's not forget the machines. Fuck you SkyNet!

[Dre4dwolf]

When the central bank counterfeits money and uses it to buy stocks, what is shocking about this chart?

Banks are fraudulent.

They need to portray an image that they are helping you by robbing you.

Thus you have this.

[Ruffmuff]

Ben (bernanke) like this a hundreds of years. The formula is weakened and need of an overhaul. THis includes yours and everyone around you assess in the wind.

THey think you owe them everything, and will prove it by leaving you with nothing.

[Bell's 2 hearted]

luckily, banks are "people"  ... and since you can't throw a bank in jail ... a pinkie touch on the wrist will suffice

[Bell's 2 hearted]

The beauty of the Federal Reserve keeping equities sky high has been precluding / allowing congress to do nothing ... which will make the oncoming recession worse as no legislative action taken to avoid / lessen pain.

(probably a good thing ... as any remedy likely shortlived and benefit mostly the usual suspects)

[mpath]

Nothing matters in this market. The harder you look, the harder you fall. Try and make sense of it and you may find yourself in a funny farm. Just play the big moves up and down and when it falls apart-which it will-then just have a short only fund. 

In the mean time-follow the sentiment-which is at extremes now-and make money both ways. 

http://www.sentimenttiming.com/free/

[ebworthen]

Why beat somebody over the head, steal their cash and jewelry, rape their Daughter, and kill their Son - when you can wear a wool suit, a fancy tie, wingtips, and work on Wall Street or in Washington and get hailed as a "leader" and a "hero" of the modern world?

[Stained Class]

QE is half the reason, the other half is the ETFication of the Russell and S&P

A rising tide floats all boats, literally, in weighted unison at 3:30 pm daily.

[Keltner Channel Surf]

Horse-hockey !!!

While SocGen's 'analysts' were busy being 'amazed' by the obvious, their algo department was buying the crap out of every futures index and leveraged ETF in the book at precisely 10:14 a.m. every POMO day for the past several years.  

Christ, that's like Genghis Khan saying:  "Surprisingly, it seems we may have killed a few Khwarezmids today."

[Think Like A Crook]

KCS, you seem to be in pretty good lock step with this theatre we have going here that we call a market. In your opinion, does the divergence of the Russell (IWM) today, does that foretell the start of at least a pullback. The volume was pititful but volume really doesnt mean jack like it used to. The Russell has been the harbinger of what is to come for some time this year.

[Keltner Channel Surf]

Thanks, Crook, I do pure technical daytrading of the Russell (100% cash by 4:00), so my crystal ball is intentionally myopic.  

I’m not sure I believe markets necessarily look to the Russell for guidance, just did an IWM vs. S&P 2-yr chart comparison, and rather than lead the bigger indices, RUT seems to often react in lock step, but more violently.  

Today was purely technical, from the chart you can see the early Sept RUT high was approached, perfect for a pullback after an incredible, short-squashing tear for nearly a month (!).  I can say the daily chart from the Japan gap up (10/31) through yesterday was the oddest, hardest to trade period I’ve seen in years.  It looks suspiciously like either:  a) pros were goosing daily just to load up on shorts at the highs;  b) big players were building for a big, crazy end-of-year hedge fund-a-rama breakout up, or perhaps someone knows something about an imminent European announcement.

I don’t decide until 9:29 each day, but if I had to guess, I’d say the Russell may try for the 11/4 low of the recent horizontal pattern, or even fill the Japan gap, but unless there’s some big news, algos may try to press recent highs again before even touching the 20 DMA, which is astonishing.  No doubt about it, something’s odd, which means something big is in the works, either direction wouldn’t surprise, they’re rather clever that way.

[Think Like A Crook]

Thanks for the detailed analysis of how you are looking at it. Very interesting points. I'd feel much better about the sustainability of the move higher IF this would pull back in some reasonable semblance of order. I have the feeling the jpy might provide the impetus for a pullback but onviously not sure. I mean damn, look at the angle of ascent. Id say its unsustainable and it is but WHEN??

You r a smart trader in attacking it on a daily basis. I think that may be the only way for success.

I believe we are at the peak of manipulation of the stock market, probably in ways Im not even capable of understanding. You may think the same. If so, do you find it altering your TA analysis?

[Keltner Channel Surf]

I was somewhat forced into a trading career after a layoff in 2007 after a 20 yr career just before the crisis that led to 4 yrs of unemployment.  So, starting in 2011 and teaching myself, I quickly learned everything in EVERY trading book didn't work, but didn't know why.  After realizing algos were to blame, it took me 3 yrs to figure out their schemes and master the psychology to buy/sell at key points and wait thru 3 hours of their mischief before the 30 sec window to take profits before they take it all away in a pin bar.  People rail against HFT, but it's algorithmic trading by big houses that controls nearly every intraday price point, not just sub-second penny-pinching, but big dollars.  So, I use a complex array of TA to confirm what I assume the bastards are doing as part of an over-arching pattern, but not as stand-alone signals, if that makes sense.

[Think Like A Crook]

That makes perfect sense. I hadnt really thought of it like that. Im going to do some more studying. I really appreciate you taking the time to correspond.

Thanks

[besnook]

i'd like to see a longer term chart. one episode means diddly. there is no context.

[q99x2]

All broken.