“Author’s note: Back in July, my firm, Mischler Financial, featured “The Smartest Man in Global Capital Markets” for the first time. We were not able to identify him by name, nor can we now, but we can tell you that he is a respected international banker at one of the world’s largest financial institutions. We can also tell you that he has been spot-on since the summer, both in time frame and levels. (See the end of this article for a reprint of his July commentary, which you can judge against the current market situation.)
Our access to the “The Smartest Man in Global Capital Markets” is through Ron Quigley, Mischler’s Head of Fixed Income Syndicate and Primary Sales. Ron had a chance to speak to his source recently about where the markets are going now and over the next few months, looking into 2014. What follows is quoted directly from that conversation. Enjoy! (With thanks to Ron!)
The Outlook
So, it’s mid-March 2013 and, the S&P 500 (INDEXSP:.INX) is at 1550, right where I said it would be nine months ago. Allow me to update my thoughts as to where we go from here; vastly more relevant than where we have come from:
The three major drivers of equity index valuations have been:
1. The generational low ownership structure of the asset class.
The major brokerages went into the end of FY 2012 with about 38-40% of total assets in equity-related securities; that has crept up to about 43% in the year-to-date move we have seen to the upside. This remains meaningfully below the norm for the 1980-1990s, which was estimated around 65-70%. Of course, if one subscribes to the PIMCO mantra that the equity culture is effectively “dead”: (they have been wrong), then maybe nothing changes. If, however, Washington can be functional, the equity culture will continue to resurface as that’s what the Fed wants.
2. The historically overvalued nature of just about all the alternatives asset classes (i.e. fixed income).
Just about every aspect of the fixed income asset class is overvalued. From IG bonds to HY, from EM to REITs, and from MLPs to Preferreds, et al; the excessive liquidity situation has effectively arbitraged yield-to-maturity to historically low levels across all these product lines. It is quite possible, arguably likely, that this situation will persist a bit longer as the Fed maintains its QE stance and effectively provides a “backstop” to valuation deterioration. One day, this will end. We will get to that.
3. Expectations of continued upward revisions to US corporate earnings that may result in more multiple expansions, so long as Fed policy remains so accommodative…..”
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