hedge fund manager @ml: where is the confidence coming from?
--- allons, ne crachons pas sur une bonne petite dose de miel après toutes cette herbe ruminée depuis la mi-mars… ---
The ability of the market to shrug off bad news and ignore it or even take encouragement from it is truly remarkable. Rampant bullishness in the midst of the worst recession in 75 years.
A sampling of the way strategists and analysts are receiving the bad news:
Weak employment? Lagging indicator.
Deflation? Will not be a problem for long.
Bonds collapsing? Sign of growth to come!
Exploding delinquencies? Fewer left to become delinquent!
Numbers revised lower for last month? Means the uptrend is better!
Housing starts shrinking? Less supply, good for house prices.
House prices still falling? The lower they are the less they can fall further.
European banks 750BN of losses unrecognized? Not the problem anymore!
Data is bad? Confidence is good!
Where is this confidence coming from? Apparently humans do not like to be depressed for very long after losing half their wealth. Look - a greenshoot here and a tulip there! When the greenshoots were undeniably exposed as weeds, a strategy report read: Brownshoots are enough.
This has striking similarity to Nasdaq 98-99. Buy because momentum is strong, there is a wall of money on the sidelines that has to buy, no one is long, cash levels are high, everyone will have to chase into month end, everyone will have to chase into quarter end, everyone will have to chase into year end. And by the way - be ready to jump off the train first in case it starts going the other way.
Here is a gem from an unnamed bank: The main driver for a further rally globally will be the continuing need for professional fund managers to increase beta given the continuing reality that the vast majority of long-only and long-short managers have substantially underperformed equity indices so far this year.
You do not hear much about cheap valuation anymore with the S&P P/E ratio of 15, and analysts earning expectations for 2010 vastly optimistic.
You also hear that a lot of hedge funds are not on board. While that may be true in the skeptical macro community, this group is small in number and size relative to hedge funds in general. Hedge funds on whole had the best month in 9 years in April, followed by a strong result again in May. The S&P was up 9.4% and 5.3% respectively. The community is certainly on board.
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Past bear market rallies went 50% and even 100%. Coming back to the Nasdaq bubble. It was widely thought to be overvalued at 1500 in mid 1998. It rallied for another 21 months and over 200% before the wheels fell off at 4800. If this equity rally is a QE driven bubble of its own, with newly printed money somehow seeping into the equity markets since no one wants bonds or property and businesses are not borrowing to invest, then one has to be very careful trying to stand in its way.
