25 Jul COMMENTS ABOUT VALUE AND LIQUIDITY
Two consistent themes of these remarks is the discrepancy between value and growth stocks and the lack of liquidity. In many regards I believe they are connected.
Commenting about value stocks, Bloomberg wrote yesterday the last time value shares were doing this badly compared with growth companies was in the dying throes of the dot-com bubble.
Bloomberg writes a total return measure of value versus growth just slumped to the lowest since early 2000. That marks almost two decades since shares dubbed inexpensive traded as such depressed levels versus those with the best earnings growth. Bloomberg further writes value rose about 50% in the following three years following the NASDAQ implosion.
JP Morgan opines there is “once in a decade opportunity” to love an unloved sector.
To further support value, “value” earnings growth may be greater than growth shares. For value investors it may not get any better than this.
Commenting about liquidity, the chief investment officer of Europe’s biggest independent asset manager made similar to comments as those of the Bank of England Governor [equivalent to the FRB Chair] that investment funds that promises daily liquidity are “built on lie.”
Amundi SA’s CIO wrote “market liquidity can melt away faster than a dropped ice-cream in a heatwave.”
In the wake of the global financial crisis, regulators have obliged investment banks to bolster their balance sheet which in return has reduced the amount of capital those institutions are willing to commit to the securities market.
As a result market making has fallen off a cliff which has created a systemic problem where market risk has now been shifted to the “buy side,” increasing risk rather than diminishing risk given the propensity of the “buy side” to disappear at times of crisis.
The BOE states such an environment “can generate an adverse feedback loop in which lower asset prices cause solvency/liquidity constraints to bind, pushing asset prices lower still.” In other worse the new market structure may be worse than the old.
To write it differently, both the BOE and Amundi state the potential difficulty is finding sufficient cash to repay exiting investors while preserving the structure of the portfolio without distorting market prices in times of crisis.
In my view regulators are slowly coming to realize this potential systemic risk.
What do the above comments about liquidity have to do with the massive difference between value and growth?
What are the odds of market meltdown in growth and a market melt up in growth? Wow! This is aberration. But I ask is it? Is this not what occurred from 2000-2005? If things are never different, there are just different people maybe such will occur but only on steroids.
What will happen today?
Last night the foreign markets were up. London was up 0.15%, Paris up 0.20% and Frankfurt down 0.17%. China was up 0.48%, Japan up 0.22% and Hang Sang up 0.25%.
The Dow should open flat amid a cloudy picture for earnings. The 10-year is up 6/32 to yield 2.03%.