Confused about the market's relentless melt up, if briefly slowed down by yesterday's odd hiccup which saw the biggest intraday reversion in two years?
Don't worry, you are not alone: as Bloomberg's macro commentator and former FX trader, Richard Breslow writes, "all I heard yesterday morning was, “What the hell is going on with equities?"
In light of recent reports that pension funds - such as Norway's, the world's largest - and various sovereign wealth funds are becoming increasingly activist in stocks, in many cases with leverage, not to mention central banks such as the SNB which keeps buying and the BOJ which holds 75% of Japanese ETFs, the simple answer is staring everyone in the face.
Here is Breslow's explanation:
Stocks Are Rallying for a Very Simple Reason
All I heard yesterday morning was, “What the hell is going on with equities?” They were of course looking like they had become untethered from reality and wanted to simply go to infinity and beyond. Then, at day’s end, I kept being asked, “What the hell is going on with equities?” They had, by then, come down to Earth. At least for an afternoon.
The year-to-date move has been so impulsive that for once the setback wasn’t described as the beginning of the end or a technical canary. And no one tried to tell me how much wealth had been lost since brunch. Instead it was helpfully described as a healthy correction. After all, prices were already threatening to surpass some of the more conservative full-year forecasts. And that might have proved to be inconvenient for a number of analysts.
So what the dickens is happening? Yes, the global economy is doing well. But we knew that. The U.S. tax changes have caused investors to ratchet up their earnings forecasts. Share buybacks that are expected to be super-sized have even the most couth asset managers openly salivating. All reasonable excuses to buy. But why the frenzy? There’s a simple reason and you don’t even need an Excel spreadsheet to calculate the implications for the market. But Microsoft is playing a role here.
The missing piece of the valuation pie is factoring in the growth rate and expanding mandates of sovereign wealth funds and central banks that are looking at equity markets as great, long- term investments. And an asset they are prepared to be aggressive with
Go to the major holders list of one huge company after another and you will see the likes of the Norwegian sovereign wealth and the SNB. And the list is growing. Lo and behold, they’re only too happy to report publicly just how well they’ve been doing. Want to see a Canton smile? Report the kind of profits the SNB has been racking up. Norway keeps adding to its FANG holdings and being complimented on its enhanced investing acumen for doing so. In fact using the better results to argue for even greater investing latitude
I’m not even going to debate the desirability, distortive externalities or ethics of this practice. It’s real, big and only going in one direction. Now these funds are not only investing proceeds on hand but are discovering, surprise, surprise, leverage. Norway did its first real estate deal in Asia last month and financed 49% of the purchase price with bank loans. Saudi Arabia, we learned this week, is for the first time considering bank borrowing to fund it’s push for returns.
Public funds picking winners and losers, let alone doing it with leveraged money, is a good place for any debate about moral hazard to begin. Getting more heavily involved in private equity is all the rage. What next, venture capital? Oh wait, the Saudis have $3.5B in Uber. Does that give you a Lyft?
Much has been made about the liberalization of Saudi society. Women may now attend certain sporting events and movie theaters have been made legal. They’re getting their first multiplex in March. All good. But I did have to smile when it was reported yesterday that PIF was negotiating an investment in Endeavor which runs entertainment and sports businesses. They are looking to join Singapore’s wealth fund and the Canadian Pension Board. They must all like Matt Damon movies and good seats for the Miss Universe pageant.
Quantitative easing was child’s play compared to this new form of financial condition activism. At least with bonds, we generally knew how much and when and that there was a stated commitment to let it roll-off at some point. With equities, as far as we can tell, there’s a big element of buy without warning and hold as the front-runners push the prices up.
I wonder if that dip was the last chance to buy.
Incidentally, ZH readers already knew this thanks to Citi, which over the weekend revealed the reason behind the market's melt up: reserve accumulation by EMs and various other sovereign wealth funds - highlighted by the red circle in the chart below - which have offset the modest decline in central bank balance sheets.