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Don't Stop Believing in US Equities: This Time Might Be Different


There are some different dynamics in place to sustain this bullishness longer term.

Here's what I believe: First, according to Pensions & Investments, north of 80% of public/private pensions are underfunded and are not meeting investment goals or return benchmarks. Again, they need more yield. Second, I already pointed out the baby boomer effect since 2011. The Smartest Man in Global Capital Markets pointed out in July that he felt most large institutions were offsides on equity allocations, and that has not changed overnight; and there's contention that recent outflows from High Yield and IG are finding their ways to REITs and CMBS.

Third, I recently talked with my brother-in-law James Francis McCaffrey Sr; some of you probably know him as "Jimmy Mac." Biases aside, after Jimmy Mac was cut by the Boston Celtics, and after a token Nestle Crunch commercial with Larry Bird (rated one of the worst of the 80s): he's gone on to a successful career in commercial real estate. He currently is one of the Senior Managing Partners of Eastdil Secured, the "ninja" commercial subsidiary of Wells Fargo & Co. (NYSE:WFC).

Jim has spent the last few years traversing the perilous EU and the UK, helping PMs / finance ministers / sovereigns and banks we read about every day raise Tier I capital by selling real estate holdings. Suffice to say, Eastdil is one of the preeminent players in the industry. Jim was succinct. I asked him first about demand. As we know, there's a lot of talk about "bubbles" in the segment. Even Fed president Eric Rosengren recently weighed in saying as much.

So, in the context of my aforementioned thoughts on chasing / seeking yield, I asked Jim his thoughts on whether demand for quality paper for CMBs/REITs is sustainable. Jim replied: "We'll see. Feels like there is a ton of liquidity for the foreseeable future for hard assets."

I then asked him where we are in the cycle with regards to peak pricing dating back to 2006. He replied, "We are back to peak pricing in gateway markets like NYC, DC, San Francisco, and as you get to the secondary and tertiary markets pricing is still 70 to 75% of peak." Jim is on the front line in terms of facilitating this paper. Commercial real estate, maybe ex-retail, may have a ways to go, as peak pricing can be sustained, in Jim's estimation, "as long as rates are low, and inflation is relatively in check." So again, we're back to the Fed, right? What's the time frame? Shinzo Abe and Bernanke are probably in what, round seven or eight out of a 12-round fight?

Conclusively, this is simply my view. I just think there's some different dynamics in place this time to sustain this rally longer term. I feel, as a whole, investors seem to be regaining some confidence in equity markets, and as such, there are still bets to be placed. Demographically, the baby boomer generation is in full effect, and some are chasing retirement funds, perhaps a bit more aggressively. This is what the Fed wants. The 5-year record inflows we have seen in equity and equity ETF products has been, by most estimations, comprised of cash from the banks and from investors stung by bad perception of stock markets past. Jobs and real estate may be just starting to turn in some depressed markets / segments: Could that continue to get people feeling good again?

New Home Sales checked in on Tuesday, April 23 at 417,000 versus the 416,000 survey number. The homebuilders have seen recent selling / shorting given YOY runs, and have responded this week up approximately 13% as a group thus far. Barclays also helped with an upgrade of the homebuilders. Housing is getting better. Depressed markets, i.e. Arizona, Nevada, and Florida are seeing double-digit increases in sales, in conjunction with price gains.

Technically, the equity markets still seem to be demonstrating a buy-the-dip mentality. We see this from the market's Teflon nature, shrugging of any bad news that seems to be thrown at it. This market does not yet want to break. On March 5, the Dow first set a record new high of 14,253.77; for all the "Dow Theorists" this was confirmed by a record close of 6136.72 on the Dow Transports Index (INDEXDJX:DJT).

Subsequent new highs with regards to the Dow Jones have not been confirmed by the transports, but, clearly, a buy-the-dip mentality remains in place. Yes, we may correct, and that in fact may prove healthy, but I humbly believe there are different dynamics in place to take stocks higher over the long term...a lot higher. It also does not mean we cannot take measures to protect our portfolios for the longer term. I, for instance, instead of outright selling, sold longer-dated upside calls against a portion of all of my equity exposure, and used the proceeds to buy some SPY (NYSEARCA:SPY) puts (essentially a collar). If I'm called away on a portion, +4% to +10% from here depending, so be it. Overwriting is a great strategy, notably in tax-deferred accounts such as IRAs. Buy the dip. At least, that's what I heard from a trader at one top-5 institution in the throes of a recent sell-off. I presume he was not alone in coming up with that opinion: He told me this right after his morning meeting.

Also see: Will It Be the Macro Market Week From Heaven or From....


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