Friday, September 16 2011
European News – mildly positive!
The market rally this week was driven by signs the Germans and the French will stand by and support the Euro. While this was largely motherhood statements with little substance to back it up, the rally in the market reflected the fact everyone is very short. At this point everyone in the market thinks Greece debt will need restructuring and European banks will need more capital. We all know the market is very short equities. However we lack clarity regarding whether the Germans are going to support the Europeans and how that support will transpire. So some small signs of support delivered an outsize reaction from the market. Further progress in this regard is critical to reducing risk and providing a better banking environment. We would like to see the recapitalisation of European banks and signs the Germans can bring their public with them in supporting Europe.
We have included some charts from Deutsche Bank which highlights recent market flows. These tend to be a good contrary indicator for the market.
Mutual funds saw large outflows of equities in the month of August.
And short positions have increased substantially. The net equity position for the average Hedge Fund has reduced 30% since December.
A massive US$100bn is net short at present.
Furthermore the supply of new equity has slowed (understandably). New issues have dried up but buybacks have continued. There has been $115m in buybacks in Q2 plus $100m in M&A and only $40m in new issues.
We came across an interesting chart from Goldman Sachs strategy team this week. It highlights the PE of the market based on the historical earnings of the market. They do this to remove the potential for unrealistic profit expectations from the market. They then adjust for inflation. In a high inflation market you expect a lower PE. The chart highlights the market has not been cheaper over the past 40 years except March 09.
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