Agree to disagree

I’ve noticed something curious unfolding over the last several weeks that has got me scratching my head. I’m normally a reasonably ok guy when it comes to this market stuff but every once in a while I get the feeling that maybe I just don’t “get it”. It seems to me like this is one of those times when everyone is agreeing on something and I’m left feeling out on my lonesome. If we’re talking about what movie to put on or what restaurant to go to, sure, agreement is a good thing and makes life easier. But when I see it happening in the markets, it usually means a lot of people are about to get a surprise.

So what’s everyone agreeing on?

The first thing I’ve noticed came from the Bank of America Merril Lynch Fund Manager Survey. BAML regularly produces this report showing how fund managers controlling a total of about $600billion are allocated to various assets. In the latest report we see those managers are holding the least amount of global and US equities since 2011. In fact, US equity exposure is down to levels not seen since 2009. Notice how those years marked major bottoms in the stock market. So if they’re not holding stocks, what are they holding? It turns out allocations to cash are highest since 2001 (also a major market bottom that year). It’s safe to say there’s general agreement amongst the professionals on a negative outlook for stocks. That doesn’t even begin to describe the outlook of the non-professionals…

Speaking of general investors, the second thing I’ve noticed is that the pop news media and retail investors are again going gaga for gold. The funny thing is that the news articles hailing the virtues of gold investment are being published after a near 80% rally in the price of gold mining companies over the last six months. To anyone who nailed that trade, congratulations. Granted I’m the guy who doesn’t believe in the long term economic potential of gold mining companies in the first place (just look at their long term track records), so I’ve “missed out”. But no matter what way you look at it, a growth rate of 13% per month is not sustainable.

The third thing I’ve noticed is the huge spread between implied volatility and realized volatility. That’s geek speak for: the cost to insure your portfolio against a stock market decline is really quite high. Much higher than normal. So high, in fact, that in order for the insurance to pay off, you’re going to need A LOT of volatility. But as anyone with a drivers licence knows, the cost of insurance goes up after the accident, not before. In my opinion, a high cost of insuring what are judged to be high probability events sort of defeats the concept of insuring them in the first place.

Finally, there’s Brexit. Obviously we have yet to see agreement from the UK on whether to stay or go, but everyone seems to agree that the vote on June 23 matters to the market. I am prepared to take a lot of heat on this one: Brexit, yawn. Even if the results of the referendum indicate Britons want to leave the EU, it doesn’t mean they’re leaving the EU. There is a whole legislative process beyond a referendum that would still have to pass, and that’s highly doubtful. As far as Brexit goes, it’s too early for newspapers to cover the Olympics, and too late for them to cover the oil price decline. Does anyone remember Grexit?

So I guess that makes me the guy wondering why so many people are bearish on stocks after a year of price declines, why so many people are bullish on gold after a huge rally, and who is going to remember Brexit nine months from now? Maybe I just don’t get it and we should all be preparing for the worst. But if everyone is already prepared for that, then who’s prepared for the upside?


Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc offering investment management and planning for high net worth Canadians. Ben focuses on the Growth and Income Portfolios and reducing tax.