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Pragmatic Capitalism

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RECENT SENTIMENT READINGS FAVOR THE BULLS

The latest sentiment readings from small investors and fund managers reveal that near-term prospects for stocks favor the bulls.  The latest Merrill Lynch fund managers survey, which was conducted prior to last week’s 7% rally and earnings, shows that fund managers have become increasingly confident about the long-term prospects for economic growth, but have turned increasingly bearish about equities.  The latest readings from last weeks AAII survey show that small investors remain overly bearish.  Both surveys should be viewed as contrarian indicators in a classic case of what Art Cashin would refer to as the markets ability to make the most people look stupid most of the time.  In other words, as I often say, when one side of the boat is over capacity it’s best to jump off or move to the empty side.

The current outlook for global growth is at a 6 year high.  Based on recent data, this appears to be a bit of a lagging indicator as fund managers became optimistic in 2001, well before real recovery, and turned more bearish in 2003 which was well before the actual global economy weakened.

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This optimism is global now as Chart 3 displays.  The weakest region going forward is clearly Europe and China is the strongest.  There appears to be near universal optimism with regards to the Chinese economy in the coming years.

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Expectations for corporate profit have shot up in the most recent quarter. Despite this sharp turnaround, expectations remain well below their highs of 88.

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In terms of asset allocation, investors remain fairly risk averse.  Bonds and cash are still heavily favored while requities remain an underweight.  This likely represents a scenario where investors remain under invested in stocks and over invested in risk averse assets.  This has little near-term impact on market direction, but could pose a bullish case for long-term investors.

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Alternative assets are more of a mixed bag.  Commodities overall remain in no mans land.  The Merrill survey says:

“The thirst for commodities was quenched rather quickly as commodity prices tumbled”

Gold and oil both remain neutral holdings for most fund managers.  In terms of currencies the fund managers currently believe the Euro and Yen are overvalued while emerging market currencies appear more attractive:

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Merrill’s Chief Global Equity Strategist has a few key takeaways:

There is no conviction; investors finding lots of excuses to do nothing.  Everyone expecting a further modest equity correction; surprise for investors would be summer rally or a real summer crack in markets.

A big second-half rally in equities is not consensus (but remains our view).

H2 strong dollar + weak commodities + higher equities is even more non-consensus.

Most contrarian longs: Anglo-Saxon real estate; European banks; Japanese domestic demand, global small cap + Korea, Taiwan, Mexico, South Africa in EM.

Most contrarian shorts: EM & China.

Meanwhile, individual investors remain fairly bearish.  The latest AAII bullish poll came in at 28% which is a level that has generally favored the long equity trade.   All in all, I believe this data is bullish for equity investors.  Fund managers and small investors remain too bearish.

Source: Merrill Lynch

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services.He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.
Cullen Roche

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