Morgan Stanley's Adam Parker double, quasi-metamorphosis from bear to full fledged bull (as of about two years ago), and then back to outright skeptic (as of a month ago), has been a sight to behold, or perhaps text to read. Two months ago he admitted that "Our Advice Has Been Horrendous", blaming "Bizarro World", and then one month ago he sink deeper into cognitive dissonance when he advised "When You Think Of Something, Do The Opposite."
His latest report, in which he tries to justify his ongoing bearish stance (or maybe it's bullish - we aren't sure after reading the note below), is not only no less bizarre, it is downright schizophrenic as you can read below, because not only does he compare chasers of the current market rally to cockroaches, and says that "we are in "sell the rip," not "buy the dip" mode for US equities" adding that "for now, we want to be cockroaches so we can survive, but we are only human", and then completely loses it when saying "we don't want to be cockroaches, even though that has been the right strategy year-to-date."
Alas, we can not do full justice to his latest stream of consciousness, so here it is:
Cockroaches survive because they travel with the wind at their backs, not into the wind, reversing course when the wind changes directions so they don’t fight the elements. Their adaptability has enabled cockroaches to survive nuclear explosions and even function for long periods of time with their heads cut off. Most investors want to survive, but prefer to keep their heads on during the process. Certainly the investors who have done well this year have been acting like cockroaches, reversing course when the winds changed direction in mid-February. The fundamentals haven't really changed that much, but prices certainly have. The cockroach mindset is admittedly tempting during sustained "gusts" like those the market has experienced over the last 7 weeks.
Then things get bizarre. Initially, Parker says that he refuses to be a cockroach, and that he has been bullish...
Try as we might, however, we just can’t be cockroaches: we remained bullish early in 2016, while markets sank, and we are increasingly cautious now, as markets have roared back to essentially all-time highs. Our natural disposition is always tilted towards anticipating (or at least trying to anticipate) wind shifts, rather than simply reacting to the change. It was certainly painful for us to remain bullish in January and into early February when the market continued to decline, as we were in essence crawling into the wind at that point. Obviously, we are now happy we stayed the course and remained positive, but there is no doubt that our heads almost blew off. But today, given the huge market rally, we can’t help but start wondering when we will get the next reversal, and when we should become more cautious again. After all, the S&P500 is just a few NYC-sized cockroaches from its all-time high.
... And then, right after that, he contends he was no longer bullish:
We have been arguing since our Spring Outlook a few weeks ago that we are no longer bullish and have a more balanced view of the market than we did late last year. As the market continues to rise, we are getting more negative, not more positive. The underlying fundamentals, in our view, were not as negative in early February as price action indicated. Today, we don’t think fundamentals are as positive as price action is indicating. Our base case is for earnings to grow around 4% this year.
The reason Parker refuses to be a cockroach is presented below:
The consensus may still be structurally bearish, but many investors are now tactically bullish, confident the wind will keep blowing in a positive direction for a while. Positioning data showing more exposure to markets from hedge funds seems to be the main signpost many investors are evaluating to determine whether and when the rally will end. These data show that investors could still be more offensively positioned than they currently are, and hence, it is hard for short-term oriented investors to see the rally ending soon. In addition, our sense is that investors think the February lows are unlikely to be seen again this year, and that the risk-reward is more balanced today than it was earlier in the year. In February the consensus seemed to be that there was more downside to the bear case than upside to the bull case, and that the bear case was more probable. Now, the S&P500 has rallied strongly to near all-time highs, and some investors seem to think the risk-reward has improved. We disagree. How can investors think that markets will remain volatile and also be more bullish after a market rally? The cockroaches will turn around as soon as the wind blows in the other direction, which is likely to happen in the second quarter. It is hard to forecast what will cause it, but we think it is prudent to expect the S&P500 will pull back some from today’s levels. We don't want to be cockroaches, even though that has been the right strategy year-to-date.
And then things get even more bizarre, because just a few paragraphs after this he says precisely the opposite:
Absent a further improvement to our already above-consensus view of earnings, we see risk-reward as skewed to the downside. We think the market rally is probably a bit more tenuous and subject to a reversal. We recommend investors start to change course, as we are assuming the winds start to blow from a different direction in coming weeks. In short, we are in "sell the rip," not "buy the dip" mode for US equities. For now, we want to be cockroaches so we can survive, but we are only human.
So... which is it, Adam: you do, or don't want to be a rally-chasing cockroach, because your readers have no clue. Finally, if anyone still cares, this is what Parker thinks will change the narrative. Er, something.
So what’s the catalyst that will cause the wind to change course again? This is always hard to call, just as it was difficult to call the market drawdown in December and January and the subsequent rally since mid-February. It just seems prudent to think that if winds are blowing back and forth, and they just blew pretty hard from one direction, they may reverse course. The cockroach would wait, but we just can't; we are not as experienced – after all, we are only human.
And there you have it: in the span of 3 pages, a market strategist for a major Wall Street bank first compares rally chasers to cockroaches, and says that he himself is a cockroach, then just a few lines lower contends he is not a cockroach, and finally says he is only human.
Is it any wonder that nobody has any idea what is going on.