Wednesday, April 8, 2020

Pre-Market Note: Present States of Mind

Equity futures are up 1.2% as I type; they traded nearly that much lower at times during the overnight session. Yesterday’s session saw the kind of action that, once again, isn’t seen outside of bear markets.

While the action is classic, in terms of its bear market character, it nonetheless -- given the severity of present circumstances -- seems befuddling.

Considering, for just one example, yesterday’s Financial Times poll where 73% of Americans are seeing their incomes fall due to the pandemic, while 50% say they can generate zero income if they become ill, one would think we’d see the market substantially lower than the present ~20% off record highs.

And never mind that share buybacks (virtually the only net buyer of stocks during the past bull market) will be hugely curtailed well into the future, dividends are likely to be cut en masse, and the obvious loss of support from 401(k) contributions speak ominously about the market's prospects going forward... not to mention earnings, outlooks, etc., on and on...

So what explains the market's buoyancy right here? Well, the blanket/copout answer is simply human nature, but off the top of my head:

  • Belief in the Fed
  • Wall Street (those who came in long) influence
  • Wall Street (") desperately pumping its positioning 
  • Performance mandates (pensions still buying, holding and praying)
  • Portfolio manager job risk (caught long, and, thus, buying, holding, pumping and praying)
  • Political pumping, and the popular belief that policymakers can essentially stimulate/legislate a swift recovery
  • FOMO (fear of missing out) among the retail investor; those who’ve never had skin in a bear market, or who've been lulled to sleep by the buy-the-dipness of the last bull market -- and who watch financial news networks

In terms of the first two bullet points -- how big money moves markets -- I believe the positioning coming into bear markets is hugely telling.

This from Bloomberg this morning highlights it perfectly:
“A JPMorgan Asset Management fund that emerged from the fastest stock sell-off in history unscathed is trading April’s febrile markets just like it did in March: hedged to the teeth.
Unlike managers such as the Goldman Sachs investment group who are scooping up stocks in anticipation of a rebound, JPMorgan’s lead strategist for macro is still touting short positions.
“We think we’ll have further volatility as markets really bake in the impact of Covid 19,” Nicola Rawlinson said in an interview.”"
Yes, Goldman, like Morgan Stanley, and others, was all in coming in. They’ve therefore taken huge hits, and, rather than capitulating, taking their losses and managing what’ll likely be more pain from here, they’re aggressively buying beaten down stocks -- hoping that stimulus will save the day. JPMorgan, on the other hand, came in hedged, didn't take the hit, and remains very cautious.

Clearly, if fundamental conditions truly warranted piling in right here, what a phenomenal opportunity JPMorgan -- unscathed thus far -- would have to knock it out of the park, and demolish the competition in the process. But they (fundamental conditions) absolutely don't, and JPMorgan absolutely knows it...

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