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Investors’ Cash Balances Struggling to Swallow Smart Money Supply

Corporations are doing their best to drain it. Investors have a near-record amount of cash ready to invest in stocks (or whatever else), a bullish indication…

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This article was originally published by Sentiment Trader

There are near-record amounts of cash ready to be deployed into markets…and corporations are doing their best to drain it.

Investors have a near-record amount of cash ready to invest in stocks (or whatever else), a bullish indication of “cash on the sidelines” as deceptive as that clichè is. According to the Investment Company Institute, investors hold more than $4.5 trillion (with a “t”) in money market funds.

And yet corporations are issuing a record amount of stock, a bearish indication of supply and smart-money selling pressure. Bloomberg data shows that U.S. corporations have issued more than $450 billion in stock via IPOs, secondary, and additional offerings over the past 52 weeks.

US corporate stock issuance

Bullish investors will give more credence to the former; bearish investors the latter. There is little question that both are factual, and it’s a relatively unusual situation. Usually, when corporations are issuing boatloads of stock, investors have small cash reserves and vice-versa; when corporations can’t issue shares due to lack of demand, investors are usually hoarding cash at the time.

It’s rare to see such high levels at the same time. If we look at a ratio of the two, then things become a bit clearer.

During the pandemic panic, the ratio neared 30 and was the highest in 30 years. In other words, there was 28 times more cash available than shares offered in supply. There are ways to quibble with the technicals, but it’s simply meant as a reflection of sentiment.

Over the past year, the ratio has declined steadily as supply ramped up. Corporations are “feeding the ducks,” as the saying goes. Even though money market assets haven’t been drained much, the skyrocketing supply has caused the ratio to drop below 10 for the first time since the year 2000. 


What else we’re looking at

  • A deeper look at money market assets and the ratio to corporate stock issuance
  • What it means when individual investors become bearish with stocks near their highs
  • A detailed look at the surge in natural gas prices and the futures curve
  • Small-cap stocks are entering a seasonal soft spot

Stat box

Natural gas futures prices have skyrocketed by 110% over the past 6 months. That’s the most since 2004 and ranks as the 5th-largest 6-month return in 30 years.


Etcetera

Less shiny. The Optimism Index on the GLD gold fund plunged below 11.5% on Thursday, one of its lowest levels in a year. Our Backtest Engine shows that GLD rallied over the next week after 13 out of 16 prior signals.

gold gld sentiment optimism index

Go big or go home. Over the past 3 sessions, the IWM small-cap ETF has lost an average of more than $500 million in assets per day. That’s the 2nd-largest amount since small-caps entered their trading range in February.

iwm small cap fund flow

A mostly pessimistic world. Our Optimism Index Geo-Map shows that investors in most parts of the world are showing pessimism (the deeper the green color, the more pessimism). Pockets of optimism are seen in Asia, including India and Japan.

optimism index geo map

Author: Jason Goepfert

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Economics

Edible Oil Prices Hit Record High As Food Inflation Treat Soars 

Edible Oil Prices Hit Record High As Food Inflation Treat Soars 

Prices of edible oils have been rising across the world. Palm oil, the world’s…

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Edible Oil Prices Hit Record High As Food Inflation Treat Soars 

Prices of edible oils have been rising across the world. Palm oil, the world’s most consumed vegetable oil, surged to a new record high, spreading concerns about persistent global food inflation

Malaysia’s palm oil futures soared more than 40% this year, while soybean oil is up more than 50%. Prices of canola oil are also at a record.  

Bloomberg notes the reason for the price surge is “because of the emergence of pent-up demand as economies reopen after COVID, the outlook for more use in renewable fuels as energy prices soar and production problems in major growers.” 

“Palm oil is not only riding on tight supply, which continues to sustain higher prices, but is also getting broader external support from energy markets,” said Sathia Varqa, owner of Palm Oil Analytics in Singapore. 

Production of palm oil in Malaysia has fallen this year because of a foreign worker freeze, exacerbating the country’s labor shortages. The Malaysian Palm Oil Board reported that production in the first nine months of the year was the weakest since 2017. 

“There are no stopping prices from going higher” until policies are implemented that are likely to cool the commodity market, such as higher interest rates,” Varqa said.

This means that the weight of vegetable oils in the UN’s Food and Agriculture Organization’s FAO Food Price Index will continue to pressure global food prices higher. Last month, the index hit a new decade high, which includes a basket of food commodities (such as cereals, vegetable oils, dairy, meat, and sugar). 

Global food prices surging to decades high is no laughing matter but an ominous sign for emerging market economies where households allocate more of their budgets to food. Rising food prices can cause discontent with governments and spark social unrest. SocGen’s Albert Edwards first warned about this right before the pandemic began. 

Tyler Durden
Sun, 10/24/2021 – 08:45




Author: Tyler Durden

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Economics

Visualizing The World’s Biggest Real Estate Bubbles In 2021

Visualizing The World’s Biggest Real Estate Bubbles In 2021

Identifying real estate bubbles is a tricky business. After all, as Visual Capitalist’s…

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Visualizing The World’s Biggest Real Estate Bubbles In 2021

Identifying real estate bubbles is a tricky business. After all, as Visual Capitalist’s Nick Routley notes, even though many of us “know a bubble when we see it”, we don’t have tangible proof of a bubble until it actually bursts.

And by then, it’s too late.

The map above, based on data from the Real Estate Bubble Index by UBS, serves as an early warning system, evaluating 25 global cities and scoring them based on their bubble risk.

Reading the Signs

Bubbles are hard to distinguish in real-time as investors must judge whether a market’s pricing accurately reflects what will happen in the future. Even so, there are some signs to watch out for.

As one example, a decoupling of prices from local incomes and rents is a common red flag. As well, imbalances in the real economy, such as excessive construction activity and lending can signal a bubble in the making.

With this in mind, which global markets are exhibiting the most bubble risk?

The Geography of Real Estate Bubbles

Europe is home to a number of cities that have extreme bubble risk, with Frankfurt topping the list this year. Germany’s financial hub has seen real home prices rise by 10% per year on average since 2016—the highest rate of all cities evaluated.

Two Canadian cities also find themselves in bubble territory: Toronto and Vancouver. In the former, nearly 30% of purchases in 2021 went to buyers with multiple properties, showing that real estate investment is alive and well. Despite efforts to cool down these hot urban markets, Canadian markets have rebounded and continued their march upward. In fact, over the past three decades, residential home prices in Canada grew at the fastest rates in the G7.

Despite civil unrest and unease over new policies, Hong Kong still has the second highest score in this index. Meanwhile, Dubai is listed as “undervalued” and is the only city in the index with a negative score. Residential prices have trended down for the past six years and are now down nearly 40% from 2014 levels.

Note: The Real Estate Bubble Index does not currently include cities in Mainland China.

Trending Ever Upward

Overheated markets are nothing new, though the COVID-19 pandemic has changed the dynamic of real estate markets.

For years, house price appreciation in city centers was all but guaranteed as construction boomed and people were eager to live an urban lifestyle. Remote work options and office downsizing is changing the value equation for many, and as a result, housing prices in non-urban areas increased faster than in cities for the first time since the 1990s.

Even so, these changing priorities haven’t deflated the real estate market in the world’s global cities. Below are growth rates for 2021 so far, and how that compares to the last five years.

Overall, prices have been trending upward almost everywhere. All but four of the cities above—Milan, Paris, New York, and San Francisco—have had positive growth year-on-year.

Even as real estate bubbles continue to grow, there is an element of uncertainty. Debt-to-income ratios continue to rise, and lending standards, which were relaxed during the pandemic, are tightening once again. Add in the societal shifts occurring right now, and predicting the future of these markets becomes more difficult.

In the short term, we may see what UBS calls “the era of urban outperformance” come to an end.

Tyler Durden
Sat, 10/23/2021 – 22:00

Author: Tyler Durden

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Precious Metals

JPMorgan Turns Positive On Crypto, Sees “A Bullish Outlook For Bitcoin Into Year-End”

JPMorgan Turns Positive On Crypto, Sees "A Bullish Outlook For Bitcoin Into Year-End"

The launch of the first Bitcoin ETF, BITO, even if based…

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JPMorgan Turns Positive On Crypto, Sees “A Bullish Outlook For Bitcoin Into Year-End”

The launch of the first Bitcoin ETF, BITO, even if based on futures, was the culmination of seven years of anticipation for bitcoin bulls and it certainly did not disappoint: the leaks and the actual news propelled the cryptocurrency to a new all time high above $66,000 (with some profit-taking to follow).

Yet despite the clear impact on the price of bitcoin, which has more than doubled from its July lows, not everyone is uniformly bullish on the impact of the first bitcoin ETF. As JPM’s Nick Panigirtzoglou writes in his latest widely-read Flows and Liquidity note, “the bulls are seeing this ETF as a new investment vehicle that would open the avenue for fresh capital to enter bitcoin markets” while the bears “are seeing the new ETF as only incremental addition to an already crowded space of bitcoin investment vehicles including GBTC in the US, ETFs listed in Canada since last February which have been already accessible to US investors, regulated (CME) and unregulated (offshore) futures, and plenty of direct investment options using digital wallets via Coinbase, Square, Paypal, Robinhood etc.”

For its part, JPM – not surprisingly – falls into the skeptics’ camp (we say not surprisingly because for much of 2021, the largest US bank has been publishing bearish note after note, as we have repeatedly detailed, urging clients to ignore the largest cryptocurrency and if anything, to take profits. In retrospect, this has been a catastrophic recommendation for anyone who followed it). 

According to the JPMorgan quant, the launch of BITO by itself will not bring significantly more fresh capital into bitcoin due to “the multitude of investment choices bitcoin investors already have. If the launch of the Purpose Bitcoin ETF (BTCC) last February is a guide, as seen in Figure 1, the initial hype with BITO could fade after a week.”

Here, once again, JPM’s superficial “analytical” approach shines through and we are confident that Panigirtzoglou, who has been dead wrong about bitcoin for the past year, will once again be wrong in his take on BITO. Instead, for a much more nuanced – and accurate – view of the daily happenings in bitcoin ETF land we recommend Bloomberg’s inhouse ETF expert, Eric Balchunas who points to what is clearly an unprecedented, and rising demand for crypto ETF exposure (one can only imagine what will happen when Gensler greenlights an ETF based on the actual product not spread-draining and self-cannibalizing futures). Indeed, as Balchunas pointed out on Thursday, BITO – which is “maybe too popular for its own good”, has already “used up 2/3 of its total bitcoin futures position limits, only about 1,700 contracts ($600m) left bf it hits 5k total. Could hit in next day or two.”

But what about the ramp in bitcoin prices in recent weeks? Surely the anticipation of the ETF launch was the main catalyst? Well, according to JPM the answer is again no, and instead the JPM strategist writes that “while we accept that bitcoin momentum has shifted steeply upwards since the end of September, we are not convinced the anticipation of BITO’s launch was the main reason.”

Instead, as the Greek quant explained before (see “JPMorgan: Institutions Are Rotating Out Of Gold Into Bitcoin As A Better Inflation Hedge“) he believes that rising inflation concerns among investors “has renewed interest in inflation hedges in general, including the use of bitcoin as such a hedge.”

As he further explains, “Bitcoin’s allure as an inflation hedge has been strengthened by the failure of gold to respond in recent weeks to heightened concerns over inflation, behaving more as a real rate proxy rather than inflation hedge.” This is actually correct, and as we have shown previously gold indeed correlates much more closely to real rates that nominals, although in recent months, even real rates suggest that gold prices should be notably higher, perhaps confirming ongoing precious metal price suppression of the kind we have previously documented to be emanating from the BIS.

In any case, JPM also updates a chart we showed previously, the shift away from gold ETFs into bitcoin funds, which was very intense  uring most of Q4 2020 and the beginning of 2021, has gathered pace in recent weeks.

In turn, by putting upward pressure on bitcoin prices, JPM argues that this shift away from gold ETFs into bitcoin funds likely triggered mean reversion  across bitcoin futures investors which had reached very oversold conditions by the end of September. This is shown in Figure 3 via the bank’s position proxy based on CME ethereum futures. Looking at Figure 3, JPMorgan now claims that “there had been a steep decline in our bitcoin futures position proxy” which pointed to oversold conditions towards the end of September triggering a bitcoin rebound. This rebound appears to have accelerated over the past days ahead of BITO’s launch with the blue line in Figure 1 fully recapturing all the previous months’ unwinding. In other words, the price ramp into the bitcoin ETF launch was just a coincidence. Yeah right, whatever.

Where JPM is however right, is in its assumption that a significant component of bitcoin futures positioning encompasses momentum traders such as CTAs and quantitative crypto funds. Previously, the bank had argued that the failure of bitcoin to break above the $60k threshold would see momentum signals turn mechanically more bearish and induce further position unwinds; it also claims this has likely been a significant factor in the correction last May in pushing CTAs and other momentum-based investors towards cutting positions. At the end of July, these momentum signals approached oversold territory at the end of July and have been rising since then in reversal to last May-July dynamics. The shor-tterm momentum signal has exceeded 1.5x stdevs, a z-score that we would typically characterize as overbought for other asset classes but still below the exuberant momentum levels of January 2021.

So with both With Figure 3 and Figure 4 pointing to exhaustion of short covering and more crowded bitcoin positioning in futures, Panigirtzoglou sees bitcoin relying more on other flows outside futures to sustain its upswing. To him, this elevates the importance of monitoring Figure 2, i.e. the importance for the current shift away from gold ETFs into bitcoin funds to continue for the current bitcoin upswing to be sustained.

In our opinion, the main problem for bitcoin over the previous two quarters had been the absence of significantly more fresh capital as shown in Figure 5 and Figure 6. Figure 5 shows our estimate of retail and institutional flows into bitcoin with an overall downshift in Q2 and Q3 of this year. Similarly, Figure 6 shows that the previous steepening in the pace of unique bitcoin wallet creation has largely normalized returning to pre-Q4 2020 norms, again implying an absence of significantly more fresh capital entering bitcoin.

And yet, despite this latest (erroneous) attempt to downplay the impact of the bitcoin ETF, which JPMorgan says “is unlikely to trigger a new phase of significantly more fresh capital entering bitcoin”, by now too many JPM clients are invested in the crypto asset as Jamie Dimon (whose opinions on bitcoin have been an absolute disaster for anyone who traded on them) recently admitted, and so while tactically staying bearish on the impact of BITO, not even JPM’s house crypto “expert” can objective stay bearish in general, and as he concludes, “istead, we believe the perception of bitcoin as a better inflation hedge than gold is the main reason for the current upswing, triggering a shift away from gold ETFs into bitcoin funds since September.”

So with Bitcoin now perceived as the best inflation hedge among non-traditional assets, Pnaigirtzoglou concludes that this gold to bitcoin flow shift “remains intact supporting a bullish outlook for bitcoin into year-end.”

 

Tyler Durden
Sat, 10/23/2021 – 19:10


Author: Tyler Durden

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