With Traders “Completely Lost”, Here Are The Consensus And Contrarian Trades

Overnight, Credit Suisse released an aptly titled report which author Andrew Garthwaite called “Client perspectives: lost and bearish” in which he writes that “two words summarise client marketing in the past month: ‘lost’ and ‘bearish’. This is the first time that we have come across so many people who say they are completely ‘lost’ in the current environment.”

Garthwaite notes that “the wall of bearishness was extreme in the US – roughly 80% of meetings – but much more balanced outside the US (maybe because markets started to rally in the meantime). Often in the US, the question was ‘why isn’t this a bear market?’. In Asia, on the other hand, most investors were less concerned about China (though, we have always found the closer you get to China geographically, the less concerned investors are about China).”

CS then breaks down the global wall of worry into the following 12 components:

1. Global growth decelerating

“Most of the clients we met were pessimistic on global growth. In fact, in our investor survey, which was conducted during the same time, respondents were almost the most negative on the growth outlook than they have been at any other time since we started the survey. China and emerging markets were identified as the main source of growth weakness, however, there were increasing concerns about an inventory-led soft-patch in the developed world, in particular the US.”

2. China facing the risk of a hard landing

“Unsurprisingly, this was the number one topic of discussion in every meeting. China accounts for 15% of global GDP, a third of GDP growth and 30% of global capex (which it exports as it slows) and thus it has never been so important for the global macro outlook.” The focus was essentially in the following areas: 1) Weakness in the real estate sector; 2) The degree of ‘zombie capital’; 3) Chinese policymakers losing their credibility; 4) Growth weakness extending beyond investment/manufacturing related variables; 5) Chinese wage growth not as sustainable as clients believe; 6) The Renminbi (Most clients believe that the currency will eventually fall significantly); 7) The lack of unwinding of foreign debt.

3. Credit blowing out

The worries here are that 1) The notion that US households are still overleveraged; 2) GEM private debt being high; 3) High yield credit spreads widening;

4. The risk of the Fed hiking too early

“Around two thirds of the clients we met believe, like ourselves, that a rise in Fed Funds rate in the current environment would be a policy mistake. A third believe it would remove the uncertainty, give a vote of confidence in the economy and ultimately it would be a ‘dovish tightening’, giving the Fed some capacity to ease policy into the next recession. However, most clients acknowledged that the Fed communication has been confusing recently and thus the chance of the market misunderstanding Fed policy was higher than usual.”

5. Policymakers running out of weapons – QE being proven ineffective

“Many clients argued that QE does not work. Interestingly, in the past such concerns have preceded a market rebound.”

6. Global FX reserves falling

“Global FX reserves have fallen by c$0.5trn since their peak (although after valuationadjustments they have fallen by only c$100bn, according to our FX strategists). Many clients claim that this is a bear signal and is, in effect, monetary tightening. We worry that this is an asymmetric argument, as it was never used as a bull signal when global FX reserves were rising.” ZH: Actually considering stock markets hit all time highs when FX reserves were rising, it most certainly was a bullish signal, it was just that nobody put two and two together.

7. Equities valuations being expensive

“We had a few clients asking questions about appropriate measures of valuations for equities, with earnings-based measures perceived by a few as a distorted metric. Equities are not cheap in absolute terms – on our four main valuation measures they are about 20% expensive… We do acknowledge, that when sentiment is poor, investors feel more comfortable with something that is cheap in absolute terms.”

8. Earnings revisions have fallen sharply

“Many clients were concerned about earnings revisions, which have, on a 4-week moving average basis, fallen close to a 4-year low. Nevertheless, we would highlight that 12-month forward EPS excluding resources have actually held up. Historically a decline of 5% or more in earnings is required for a bear market. We do not see this happening unless US GDP is sub-1.2%, wage growth rises above 3%, corporates overinvest or the interest charge rises by 100bps or more.” US GDP will be sub 1% in Q3.

9. The political landscape becoming less corporate-friendly

“There were concerns among clients that we are moving into a less capitalist-friendly environment. Corporate tax used to be a third of total tax in 1960, now it is only a fifth, so there could be more pressure on governments to increase corporate contribution. The living wage in the UK is also an example of governments trying to shift the burden of social responsibility onto the private sector.”

10. Limited signs of underinvestment

“A popular concern amongst clients is under-investment as a a result of buybacks, with this under-investment is resulting in lower productivity growth.”

11. Risk of lower oil prices

“We received surprisingly few questions on oil. One interesting question we got was whether Saudi Arabia may push the prices even lower than the level needed to stabilise its market share, for political reasons, in order to cause distress in an emergent Iran/Iraq.”

12. Recent rotations have hurt a number of our clients

“There has been a clear rotation in the past few weeks, which has been painful for many investors. This rotation is evident in the roll-over seen in momentum as an investment style, and we would note that, historically, momentum reversals tend to last longer than the current episode.”

* * *

Naturally, Credit Suisse’s intention is to calm investor nerves and to disagree systematically with every single one of the points raised above: after all, when traders are paralyzed by fear, CS trading desks can’t make any commissions and no deals are done leading to a plunge in i-banking revenues; we already saw the damage to Goldman’s institutional trading bottom line in the third quarter as a result of this particular wall of worry.

On the other hand, one can far more correctly point out that all these 12 points are merely the “wall of worry” finally coming home to roost, as all of these trigger points have been all too clear for the past 7 years, and while never actually resolved, were simply swept under the rug since 2009 with bout after greater bout of trillions and trillions more in central bank liquidity. It is only now that the liquidity tide is coming out that the world will finally see who was nakedly scrambling in “fear of missing out” (virtually everyone), and who actually did their homework (virtually nobody).

* * *

So while we realize that laying out trader fears will hardly help traders overcome said fears – as they realize everyone else shares them too – here, courtesy of BofA are the two major trading camps currently in the market.

First the consensus trade:

  • Consensus is currently: low growth/low EPS/low rates here to stay, but no recession; trading ranges hold (SPX 1850-2050, GT30 2.8-3.2%, DXY 93-100); sell rallies into strength; own (sensible) growth, (safe) yield, (high) quality; rent EM/resources/commodities.
  • Contrarian trader: FMS/flows argue for rotation to “weak dollar” plays e.g. CRB, EM resources/FX, industrials; breach of SPX 2050 requires ECB/BoJ to boost growth expectations without FX devaluation.

Which trade should one pick? Just flip a coin: after all that’s what the great and powerful, if now totally clueless, Fed does every single day…

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About the Author: Tyler Durden

  • Joe Cabot

    Of course your analysis showed that you aren’t getting enough. I wouldn’t expect anything different.

  • JohnDille

    NEW CENSUS BUREAU DATA CAME OUT A COUPLE OF WEEKS AGO, AND I ANALYZED IT. IT SHOWS THAT… IF SWHARES OF TOTAL AL SOURCES OF INCOME WERE THE SAME AS IN 1968, THE BOTTOM 80% OF THE POPULATION WOULD HAVE MADE MORE THAN 16 TRILLION DOLLARS THAN THEY ACTUALLY HAVE… AND THE TOP 20% HAVE BENEFITTED FROM THAT MASSIVE SHIFT OF INCOME. AND THAT 16 PLUS TRILLION HAS GONE ALMOST ENTIRELY THE TOP 5%, AND MOST OF THAT HAS GONE TO THE TOP 1%!!! A SIMILAR ANALYSIS OF DATA FROM ANOTHER SOURCE SHOWS THAT THE BOTTOM 90% HAVE LOST 26 TRILLION SINCE ABOUT 1968… AND THAT ALMOST ALL OF THAT LOST INCOME HAS GONE TO THE TOP 5%, AND THE LARGE MAJORITY OF THAT HAS GONE TO THE TOP 1%! SO… YEAH… YOU REPUBLICANS HAVE DRAMATICALLY SHIFTED INCOME… AND NET WORTH HOLDINGS ALONG WITH THAT… TO THE TOP INCOME PEOPLE IN THE USA!! AND YOU REPUBLICANS HAVE DRAMATICALLY CUT TAXES ON THE UPPER INCOME AND THE WEALTHY AND ON THE CORPORATIONS THAT ARE MOSTLY OWNED BY THE WEALTHY, VIA THEIR STOCK HOLDINGS AND ESPECIALLY VIA THEIR BOND HOLDINGS. YOU HAVE NOT ONLY ROBBED THE PEOPLE OF THIS COUNTRY ON A MASSIVE SCALE, BUT THOSE TAX CUTS HAVE HANDED 8 TRILLION DOLLARS IN TAX CUTS TO THE TOP 10% OF THE POPULATION…. PLUS AT LEAST 5 TRILLION MORE IN INTEREST GAINED BY LOANING MONEY TO THE GOVERNMENT, AND IS THUS RESPONSIBLE FOR MORE THAN 70% OF TOTAL FEDERAL DBT GROWTH! AND MOSTLY THIS HAS HAPPENED JUST SINCE GEORGE BUSH JUNIOR TOOK OFFICE!!! SO… YEAH… YOU REPUBLICANS ARE THE MASTERS OF TAKING WHAT IS NOT YOURS, AND THEN TELLING EVERYONE THAT SOCIALISTS AND COMMUNISTS AND LIBERALS ARE DISTRIBUTING INCOME AND WEALTH TO…. THE VERY SAME PEOPLE WHO HAVE BEEN ROBBED TOTALLY BLIND BY YOU AND YOUR RIGHT WING REPUBLICAN BILLIONAIRE MASTERS!!! BLAMING THE PEOPLE WHO ARE TRYING DESPERATELY TO HELP THE VICTIMS OF THE REPUBLICANS MASSIVE FINANCIAL CRIMES IS PRETTY MUCH PAR FOR THE COURSE… AND YOU RIGHT WING REPUBLICANS ARE THE MASTERS OF DOING THAT SORT OF THING!!! REPUBLICANS, JUST ANOTHER NAME FOR CRIMINALS AND TRAITORS AND CONGENITAL LIARS!!!

  • Joe Cabot

    Yeah, we know. You want what isn’t yours. Why does it always take you so long to say it?

  • JohnDille

    WHEN YOU REALLY THINK ABOUT IT… WHICH RIGHT WINGERS AND OTHER REPUBLICANS SEEM INCAPABLE OF DOING… ANY FORM OF CIVILIZATION… AND ANY FORM OF GOVERNMENT THAT AT LEAST TRIES TO SERVE THE BEST INTERESTS OF THE LARGE MAJORITY OF ITS PEOPLE… ARE INHERENTLY SOCIALISTIC. WHICH SHOULD BE NO SURPRISE… THE WHOLE IDEA BEHIND SOCIALISM IS THE EXTENDED FAMILY… THE TRIBE… THE CLAN… WHICH HAS BEEN THE BASIC UNIT OF ALL CIVILIZATIONS FOR MANY THOUSANDS O YEARS! AS CIVILIZATIONS EVOLVED FROM SIMPLE TRIBES INTO MORE COMPLEX COMMUNITIES THAT USUALLY CONSISTED OF A NUMBER OF TRIBAL GROUPS OR CLAN GROUPS, IT WORKED OUT THAT THE BEST WAY TO KEEP ALL THESE FOLKS WORKING TOGETHER, AND NOT FIGHTING AMONGST THEMSELVES… WAS TO DEAL WITH ALL OF THE DIFFERENT PEOPLE AND GROUPS AND CLANS AS ONE BIG FAMILY…. AND THUS… THE ROOTS OF MODERN SOCIALISM WAS BORN. AND IT ACTUALLY WORKS VERY WELL…. AND CAN BEST BE SUMMED UP BY SEVERAL WELL KNOWN SAYINGS…. ALL FOR ONE… AND ONE FOR ALL… THE 3 MUSKETEERS SLOGAN… DESCEIBES SOCIALISM QUITE WELL. FROM EACH ACCORDING TO HIS ABILITY… AND TO EACH ACCORDING TO HIS NEED… DESCRIBES COMMUNISM… WHICH IS SIMPLY A VERSION OF SOCIALISM WHEREIN THE STATE CONTROLS ALL THE ESSENTIAL MEANS OF PRODUCTION.. AND DISTRIBUTION…. WHILE ACTUAL SOCIALISM CAN MEAN A WIDE VARIETY OF SYSTEMS OF PRODUCTION AND DISTRIBUTION. COMMUNISM AND CAPITALISM ARE ACTUALLY IDENTICAL… EXCEPT FOR THE FACT THAT IN CAPITALISM, IT IS THOSE WITH THE MONEY WHO MAKE ALL THE CRITICAL DECISIONS…. AND THESE MANY DIFFERENT DECISION MAKERS TEND TO MAKE FOR EXTREMELY INEFFICIENT SYSTEM… WHILE COMMUNISM SEEKS TO ELIMINATE ALL THOSE INEFFICINCIES AND BLUNDERS BY CENTRALIZING THE WHOLE SYSTEM. OTHER THAN THAT, CAPITALISM AND COMMUNISM ARE IDENTICAL! IN A WORLD OF OVER 7 BILLIN PEOPLE… AND THAT WILL HIT 30 BILLION WITHIN ABOUT A HUNDRED YEARS IF WE KEEP GROWING OUR POPULATIONS AT THE CURRENT RATES… THE MANY BLUNDERS AND INEFFICINCIES THAT ARE THE HALL MARKE OF CAPITALISM WILL ALMOST CERTAINLY HAVE TO BE REPLACED WITH MUCH MORE CENTRALIZED PLANNING AND DECISION MAKING AND EXECUTION… OR BILLIONS WILL DIE TOTALLY NEEDLESSLY… AS HAS LONG BEEN THE CASE WITH CAPITALISM IN GENERAL… BUT WHICH WILL BECOME UNNACCEPTABLY HORRIFIC AS WE PROGRESS INTO THE FUTURE!!! RIGHT WINGERS WILL SCREAM BLOOODY MURDER… BUT FOR THE SAKE OF THE HUGE MAJORITY OF PEOPLE, SOCIALISM… AND PROBABLY OUTRIGHT DEMOCRATIC COMMUNISM, ARE VERY LIKELY TO BECOME THE DOMINANT SYSTEMS OVER THE NEXT CENTURY OR SO… BECAUSE THE CAPITALISTIC AND INDIVIDULAISTIC ALTERNATIVES SIMPLY WILL NOT BE ACCEPTABLE TO THE HUGE NUMBERS OF PEOPLE WHO WOULD SUFFER… TERRIBLY… HORRIFICALLY… UNDER THE SO CALLED CAPITALISTIC SYSTEMS OF OUR DAY! SO SCREAM AND RANT AND RAVE, RIGHT WINGERS… YOUR DAYS ARE NUMBERED… AND GOOD RIDDANCE TO MOST OF YOU ARROGANT GREEDY SELF CENTERED CRIMINALS!!!

  • Peter Klein

    Well said, the future will be some form of socialism.
    In the Middle Ages it was clear who the villains were and they were overthrown by revolutions. Most of the monarchies did not survive.
    Now we have banks and large corporations controlling government.
    The debt based society will only go as long as people have faith in the currency which is backed by nothing.
    Pete

  • JohnDille

    ANY STUDENT OF ECONOMIC HISTORY WOULD KNOW THAT YOU GET SOLID GROWTH ONLY DURING TIMES OF A MAJOR PARADIGM SHIFT… THE INDUSTRIAL REVOLUTION THAT TOOK A BILLION PEOPLE OFF OF THEIR FARMS AND PUT THEM INTO CITIES AND FACTORIES…. OR A MAJOR SET OF NEW TECHNOLOGIES…. STEEL AND RAILROADS, THEN CARS AND ROADS AND POWERLINES AND HUGE NUMBERS OF ELCTRIC APPLIANCES… AND LATELY, THE WHOLE COMPUTER AND TELECOMMUNICATIONS REVOLUTION. BUT… ULTIMATELY… THOSE SHIFTS AND REVOLUTIONS MATURE… AND THE ECONOMIC AND SOCIAL AND POLITICAL ACTIVITIES THAT THESE SHIFTS AND TECHNOLOGICAL REVOLUTIONS BEGINS TO TURN STAGNANT. THAT IS WHERE THE USA AND THE WORLD… GENERALLY… ARE TODAY. LIBERALS AROUND THE WORLD ARE PUSHING FOR THE NEXT HUGE TECHNOLOGICAL REVOLUTION…. GOING SOLAR ON A MASSIVE SCALE IN ORDER TO ESCAPE OUR DANGEROUS AND EXTREME DEPENDENCE ON FOSSIL FUELS… BUT THE PROBLEM THERE IS THAT THE SPENDING ON SOLAR, AND THE JOBS AND BUSINESS ACTIVITY GENERATED BY GOING SOLAR AND BY CREATING A TRULY SUSTAINABLE INDUSTRIAL AND ECONOMIC AND SOCIAL SYSTEM… CAN REALLY ONLY SUPPLANT THE CURRENT FOSSIL FUELED SYSTEM. GOING SOLAR WILL BE A VERY GOOD THING… BUT ONLY MARGINALLY SO, BECAUSE THE FOSSIL FUELED SYSTEM THAT THE SOLAR POWERED SYSTEM ULTIMATELY REPLACES WILL ONLY CREATE A RELATIVELY FEW MILLION EXTRA JOBS, AND ONLY A COUPLE OF EXTRA TRILLION IN ECONOMIC ACTIVITIES. SO… EXPECT LONG TERM STAGNATION….. UNLESS… WE FINALLY REALIZE THAT WE LIVE IN A WORLD FULL OF DESPERATELY POOR PEOPLE, AND THAT CREATING GOODS AND SERVICES FOR THOSE PEOPLE… ABOUT 6 BILLION OF THEM TODAY… AND NEARLY 10 BILLION OF THEM WITHIN 75 TO A HUNDRED YEARS OR SO…. COULD LEAD TO AN ECONOMIC BOOM AND SOCIAL AND POLITICAL REVOLUTIONS THAT WOULD DWARF ANYTHING THAT HAS GONE ON BEFORE IN ALL OF HUMAN HISTORY. OF COURSE, REPUBLICANS AND OTHER CONSERVATIVES WOULD OPPOSE SUCH A REVOLUITION, BECAUSE DESPERATELY POOR PEOPLE MAKE GOOD SLAVES. BRINGING REAL PROSPERITY TO MANY BILLIONS OF PEOPLE WOULD DESTROY CONSERVATIVE REGIMES ALL OVER THE WORLD, AND WOULD MAKE CONSERVATIVES IN THE USA AND OTHER RICH NATIONS LOOK LIKE THE CRIMINALS AND OBSTRUCTIONISTS THAT THEY REALLY AND TRULY ARE! ON THE OTHER HAND… WHERE WILL WE GET ALL THE BASIC RAW RESOURCES WE NEED TO SUPPORT GLOBAL INDUSTRILIZATION??? GOOD QUESTION! WE CAN GET THE ENERGY FROM THE SUN AND WIND AND FROM THE MASSIVE ENERGIES STORED IN THE WORLDS OCEANS… BUT WHERE COULD WE GET ALL THE COPPER AND OTHER SUCH MATERIALS WE WOULD NEED??? FROM ASTEROIDS, PERHAPS? OR… BETTER STILL… WE COULD SIMPLY INDUSTRIALIZE IN A WAY THAT LIMITS HOW MANY RESOURCES WE ALL WOULD NEED TO LIVE DECENT REASONABLY PROSPEROUS LIVES. BICYCLES AND BUSSES ADN TRAINS INSTEAD OF CARS FOR EVERYONE. SMALLER HOUSES AND APARTMENTS FOR EVERYONE, INSTEAD OF MCMANSIONS AND SUCH. AND SO ON! THE BASIC IDEA HERE IS WHAT IS IMPORTANT…. UNLESS WE TAKE THE NEXT LARGE STEP IN OUR ECONOMIC AND SOCIAL AND POLITICAL HISTORY, AND TRY TO BRING A MIDDLE CLASS EXISTANCE TO THE 85% OF THE WORLDS POPULATION WHO CURRENTLY HAVE LITTLE OR NO ACCESS TO THAT KIND OF LIVING STANDARD, OUR CURRENT SYSTEM WILL… AT BEST… STAGNATE… AND AT WORST, WILL FALL APART… AS IT ALREADY SHOWS MANY SIGNS OF DOING! THAT WOULD NOT NECESSARILY BE A BAD THING…. CONSIDER THE MANY BENEFITS OF HUNDREDS OF TRILLIONS OF DOLLARS WORTH OF DEBT AND OTHER PAPER ASSETS ALL BECOMING WORTHLESS IN A FAIRLY SHORT PERIOD OF TIME. MANY MILLIONS OF PEOPLE AND A LARGE MAJORITY OF ALL BUSINESSES WOULD BE BETTER OFF WITHOUT THEIR CURRENTLY LARGE OR EVEN HUGE DEBT LOADS…. AND SUDDENLY… MOST OF THE WORLDS RICH PEOPLE… WHO ARE RICH BECAUSE EVERYONE OWES THEM SO MUCH…. WOULD NO LONGER BE RICH… OR NOT NEARLY AS RICH… OR POWERFUL… AS THEY CURRENTLY ARE…. AND THAT WOULD BE A GOOD THING FOR ALMOST EVERYONE!!! WHICH IS WHY REPUBLICANS AND OTHER RICH CRIMINALS WOULD BE SO OPPOSED TO SUCH AN ECONOMIC/SOCIAL/POLITICAL REVOLUTION!!!