Friday, June 15, 2012

The G20 Endorses SYRIZA

The story came across the tape in the last hour of trading yesterday:
'Central banks ready to combat Greek market storm.'

Central banks from major economies stand ready to stabilize financial markets and prevent a credit squeeze should the outcome of Greek elections on Sunday cause tumultuous trading, G20 officials told Reuters.

Say What!
I nearly fell off my chair! Did the G20 really say that ahead of the Greek elections this weekend? Apparently, the answer is yes.

"The central banks are preparing for coordinated action to provide liquidity," said a senior G20 aide familiar with discussions among international financial diplomats. His statement was confirmed by several other G20 officials.

In effect, the G20 just told the Greek population, "Don't worry about how you vote this weekend, the world won't fall apart whatever you do. Everything will be fine."
Isn't that just encouragement for Greeks to vote for SYRIZA? The G20 just told them that any adverse consequences of a SYRIZA government won't be that serious and the fallout will be contained.

Not Enough Capitulation
Here's what worries me. While most sentiment models are indicating excessive bearishness, which is contrarian bullish, I am concerned that there hasn't been enough capitulation for the market to make an intermediate bottom.

The Fear Factor
I have heard anecdotally that investment advisors are getting calls from their individual clients asking if it's time to buy. That's generally not a sign that sentiment has been washed out and not the sign of a capitulation bottom.
In addition, the latest BoAML fund manager survey was encouraging and discouraging from a sentiment viewpoint. On one hand, fear is definitely rising, which is bullish.

Fears of a global economic slowdown have come sharply back into focus, and expectations of decisive action by policy makers have grown, according to the BofA Merrill Lynch Survey of Fund Managers for June.
A net 11% of the global panel believes that the global economy will deteriorate in the coming 12 months -- the weakest reading since December 2011. Last month, a net 15% believed the economy would strengthen and the negative swing of 26-percentage points is the biggest since July-August 2011 as the sovereign crisis built. The outlook for corporate profits has suffered a similarly negative swing. A net 19% of the panel believes that corporate profits will fall in the coming 12 months. Last month, a net 1% predicted improving corporate profits.

Risk Off
Investors have adopted aggressively “risk off” positions. Average cash balances are at their highest level since the depth of the credit crisis in January 2009 at 5.3% of portfolios, up from 4.7% in May. The Risk & Liquidity Composite Indicator fell to 30 points, versus an average of 40. Asset allocators have moved to a net underweight position in global equities and increased bond allocations.

On the other hand, investors haven't capitulated yet, which is bearish [emphasis added]:

Investors have taken extreme ‘risk off’ positions and equities are oversold, but we have yet to see full capitulation. Low allocations in Europe are in line with perceptions of growing risk levels in the eurozone,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. What's more, central bank intervention is almost taken as a given. That begs the question, how big a bazooka will the Fed, ECB et all have to wield this time around?

“Hopes expressed last month of a policy response have now become expectations. Markets are keenly anticipating decisive action from key policy meetings in June,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. Another BoAML analyst, Mary Ann Bartels, also wrote that she was not seeing sufficient capitulation [emphasis added]:

The Volume Intensity Model (VIM) has had a negative reading since 09 April, but last week accumulation (up volume or buying) rose while distribution (down volume or selling) declined, narrowing the spread between distribution and accumulation. Since VIM remains negative and VIGOR continues to decline, this mild improvement in the VIM only supports the case for a tactical rally.

One concern is that distribution did not reach the “capitulation” readings near 80 seen in May 2010 and August 2011. The risk is that sellers are not yet completely exhausted and an adverse macro news event could trigger a future shakeout.

 Asad Khan
Financial Analyst  (CFB)