BofA: "Bad News Is Good News Has Played Out", Any More Weak Data "Will Be Met With Market Skepticism"

Tyler Durden's picture

Unlike Morgan Stanley's Adam Parker, who yesterday opted to flip back from bearish to bullish after previously berating and mocking those would blindly buy this "market" (even as he boosted his target S&P500 P/E multiple from 18x to 19x in the "bullish" case), one of our favorite junk bond analysts, BofA's Michael Contopoulos refuses to throw in the towel. Instead, he continues to watch in quiet amazement at what is taking place in the "market", where even Bloomberg has now admitted that "Mario Draghi is creating a monster credit bubble, and he doesn't seem to care. In fact, that seems to be his goal."

His latest notes from his brand new must read series "Coffee with Conto" are a useful glimpse into the mind of those who are forced to provide clients with actionable advice yet refuse to be dragged into the central banks' zombification field.

Here are some excerpts of his thoughts:

Last Friday’s jobs report was weaker than expected, with the US adding 151k jobs in August, compared to the expected 180k and previous 275k. Additionally, wage gains were softer than expected, with average hourly earnings only increasing 0.1% MoM, compared to a consensus +0.2% gain. However, in terms of market performance, this report hit the sweet spot in terms of being just bad enough to delay the Fed from going in September, but not so bad that it sparked growth concerns. Although this wasn’t necessarily a weak report, the logic of bad news is good news is something we have never felt  comfortable with, although we acknowledge its impact on markets. We continue to be concerned about a point where investors decide that monetary stimulus no longer works and the reasons for low rates trump the low rates themselves, although think the capitulation from such a change in sentiment may not occur until 2017.

Risk assets rallied in response to Friday’s payrolls report: the S&P gained 0.42%, while high yield returned 0.46%. Perhaps more of a concern than investors losing patience with the efficacy of monetary policy on growth is the market’s reaction to a surprise hike. However, in our economist’s opinion, the Fed will not be able to hike this month if the market-implied odds do not appreciate substantially. In this environment, we think the technical support for high yield will continue to outweigh fundamentals in the near term and the bias will be for additional spread-tightening in September.

ISM non-manufacturing came in considerably lower than expectations, falling to 51.4 in August from 55.5 in July, for the lowest index value since February 2010 (Chart 2). Since at least 1997, the only time the ISM services index has been this low outside of a recessionary environment was a brief two-month dip in 2003. And, while our economics team does not expect a recession within the next 12 months, in our opinion, sub 1.5% GDP growth and a declining services sector is not ideal for high yield in the longer term. In such an environment, we would much rather be invested in higher-quality companies, especially when considering that ex-Energy HY revenue growth has consistently underperformed what is implied by GDP since 2014 (Chart 1).

HY ex-Energy revenue growth has underperformed GDP since 2014

The market response to the disappointing ISM Services was similar to that of Friday's payrolls report, with the S&P rallying 0.30%, high yield +0.15%, and the market-implied odds of a September hike falling to 24%. We think the 'bad news is good news' theme has mostly played out in the near term, and any additional weak economic data will likely be met with market skepticism. Additionally, payoffs are asymmetrically skewed at the moment, with hawkish commentary or a surprise hike likely being met with a much fiercer selloff compared to additional tightening caused by a continuation of the norm.

ISM Non-Manufacturing fell to its lowest level since February 2010

* * *

While we would be delighted if Conto was right, alas we are confident that with a record $2.5 trillion in annual liquidity injections by central banks, we are far beyond the point of no return, for normality to return without a very violanet market reaction.


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Bryan's picture

Bad news is what now?  I stopped paying attention a while ago.  All I see is stuff swirling around in a clockwise fashion and heading toward that hole in the bottom that leads to the sewer.  I'm not sure when the handle was pulled, but it was a while back.


This:  "we are far beyond the point of no return, for normality to return without a very violent market reaction."  Whatever the markets or TPTB say from now on is just academic and moot.

espirit's picture

Just goes to show you the cucks at BofA are clueless in their attempt to churn the markets.

Do they really think nobody with a room temp IQ sees them moving the Goalposts?

PlayMoney's picture

As long as the Fed is juicing, bad will continue to be good

DavidC's picture

Has today's JOLTS been released yet?


SomethingSomethingDarkSide's picture

Yeah-mother-fucking-right.  BNIGN aka "Benign" is here to stay, BAC Twat Nuggets.

south40_dreams's picture

Truth is over rated

DavidC's picture

Bad news = good news has been the paradigm for the last eight years, why should it change now?


DontFollowMyAdviceImaDummy's picture

bullshit... the only bad news that's actual casino"market"-destroying bad news is that all the "ctrl-p" buttons simultaneously broke on every computer at The Fed.

venturen's picture

why would the billionaires and wall street criminal think it is bad for the central banks of the world to continue to give them unlimited 0% or negative rate money. Until a politician fires a Goldman Alumni Central will be the same. I am voting for the guy from the Philippines for US that is what I would like to see! 

brada1013567's picture

We have to have negative vix first

Infield_Fly's picture
Infield_Fly (not verified) brada1013567 Sep 7, 2016 9:24 AM

...a negative employment rate would be far more impressive.

brada1013567's picture

Here comes the Trump ATH

Infield_Fly's picture
Infield_Fly (not verified) Sep 7, 2016 9:23 AM

Hey BOA - did that fucking cunt yellen tell you to say this???  Just asking.

Hohum's picture

"In the near term."  What's that?  This week?

Riquin's picture


I see problems in the economies of the world in one year or two because too many countries trying to manipulate their currencies and commodity prices, we know that will not work. We need the market to be the controlling force, stay away from manipulations and we then may avoid problems. 


The USA elections this year will also influence the economies, you need to understand that Clinton is too sick to be president and if the elites manipulate the election to block Trump from the presidency it will be a complete disaster. Trump and Putin are top negotiators and together may be the market forces spark to avoid economies from dangerous disruptions.   


Trump and Putin are inheriting nasty terrorist and confusing wars in the Middle East creating tremendous immigration problems, Putin has the Ukraine that can explode anytime and China with the South China Sea dispute that affects a bunch of countries. .  With the negotiating knowledge and power of Putin and Trump these conflicts could be defused and stopped.  


It is imperative that Trump and Putin stop these stupid and destructive wars or wars in the making by negotiating disputes. It is not going to be easy but will definitely work. Peace works. Wars do not. Peace requires intelligent people behind. Peace creates wealth, Wars create poverty and destruction.



We need TRUMP ASAP, Obama is not respected and Clinton is too sick. Just hope nobody presses the “red button” before Trump gets in. 


Elco the Constitutionalist's picture
Elco the Constitutionalist (not verified) Sep 7, 2016 11:10 AM

When (((big banks))) speak, I know they are full of shit.