MERRILL LYNCH: FUND MANAGERS MOST BULLISH SINCE APRIL HIGHS
More signs of very high bullishness. This morning’s Merrill Lynch Fund Managers Survey shows optimism surging to April highs. Merrill Lynch warns that this could be a red flag. The survey of 200 international fund managers with $630B in assets shows that institutions have positioned themselves bullishly:
The November FMS shows market sentiment at its most bullish since April 2010. Put simply QE2 has raised both global growth & inflation expectations, reduced cash balances to dangerously low levels and caused capitulation into risk & inflation assets. The bullish consensus makes a normal year-end rally very vulnerable to a deflationary rally in the US$. Progress in the EU sovereign funding concerns and/or strong economic data that boosts bank stocks are now needed to prolong the Autumn risk rally.
Loose policy…surging growth and inflation expectations. The net percentage forecasting stronger global growth jumped from 15% to 35%, while inflation expectations surged from 27% to 48%. The perception that monetary policy is “too easy” rose to its highest level (45%) since July 2004. There was an intriguing decline in Chinese growth expectations while the biggest consensus “tail risk” is a European sovereign debt default.
Risk on: feel the quantity, not the quality. Asset allocators have drained cash reserves (a rare U/W reading of 5%) with average cash holdings falling to just 3.5%; this triggers a contrarian tactical sell signal for equities. Our risk appetite index rose to 45 (the highest since April) and with less than 1 in 5 investors believing a Fed rate hike is likely before Q4 next year, investors raised equities up to net 41% O/W from 27% in Oct and cut bonds to a net 36% U/W (from -24%).
Maximum Bullish on EM & Materials. The proportion of allocators O/W EM increased to a net 56%, close to an all time high. Despite sovereign debt concerns, rotated into Eurozone equities, and the 15% O/W is the largest since 2004. Japan remains the most unloved equity region. In sectors, Tech and Energy remain the favoured global sectors but investors rotated aggressively into Materials (9% to 21%) and out of consumer, pharma and industrials. Banks remain the largest U/W among global investors.
For the contrarians. Despite tail risk concerns in Europe, a clear risk-on message emerges from the survey; but with cash levels falling to low levels there are contrarian signals embedded in that message. At the very least we could see a balancing out of defensive vs. cyclical buying but the risk of a market correction now looks high. For contrarians the sells are commodities, EM equities, global tech and materials and the buys are cash, Japanese equities, global banks and utilities.
Source: Merrill Lynch
Interesting.
However, nearly everybody I talk to, both buy-side acquantainces and casual ones who invest on their own, all say the same thing…
“Why would I be invested in anything but equities when rates are this low?”
They are all well aware of the tail risks here and are fine with those.
There are a complete lack of sellers out there and more importantly, ones with urgency. You need those for the market to decline no matter how fully invested funds are.
Barring some serious, exogenous event, it’s going a lot higher I think.
Gauging from this action it looks like irrationality to me. How does the market just rally 2% on no news? We were up 1% overnight before overseas markets even opened!
The move down was all predicated on destroying values of calls maturing on Friday. There was no news to move the market down, everyone knows about Ireland and the rest of the euro zone woes, along with the state deficits. Nothing is changed I expect new highs for the year on light volume next week.
That’s not really true. If you trade overnight futures, as I do, you would have noticed that the market traded down specifically on the Shanghai market tanking on Monday night. In lock step. Today’s rebound is largely based on the rebound in China. If the move down in China persists the USA will follow. This entire recovery is in China’s hands. If they slow you can expect a slowing in US revenues and recovery. It’s sad, but we’ve become the caboose in China’s train. Well, Europe might be the caboose, but we’re not many cars ahead of them….
You do not think the big boys on Wall St can shake the Shanghai down to get the US markets down? Stocks/hard assets are the only game in town…if you want to hold fiat or 3% long term bonds be my guest. I would not want to be short going into a low volume week in which the hft’s could jam the market every day on low volume. I will admit I am not liking the price action in the GM IPO today though.
Foreigners can’t trade the Shanghai A Shares due to Chinese govt restrictions.
They are terrified that the govt will step on the breaks too hard over there and cause the economy to slow sharply. I believe there is going to be a rate hike tonight. We’ll see how markets respond. I truly believe this is the key to the next few months. If China turns down sharply the US markets will soon follow.
This is the sort of market action we would see in 2009. The market would have this huge rally and then just go flat as people sold and the government propped it up. They just want their GM victory. It’s sad.