Spot the Wise-Guy (KBE,XLK)

We’re going to lead off today with a bit of a quiz.

 

We want to see a) who can spot the investing ‘wise guy’, and b) in so doing, declare himself an investing ‘wise-guy’ himself.

 

So we’ll start with this –

 

It came to our attention yesterday that Atlanta investment powerhouse Invesco had looked into the matter of central bank equity purchases and came away with the following, stunning data.

 

Consider –

 

Compared with last year, twelve out of fourteen of the world’s largest central banks responded that they were planning to significantly INCREASE their investments in both equities and corporate debt issues in 2017, the former by as much as 80% over numbers they posted last year.  The other reserve managers surveyed declined to answer the question, which for our part indicates, at a minimum, a willingness to engage in equity purchases of some variety and scope.

 

Have a look here –

This is plain astounding.  A decade ago it would have been unthinkable that central bankers would go all-in on such a stock buying splurge.  Today, it’s hardly debated.

 

A look at the following chart shows just how crazy the practice has become.

This is the Bank of Japan’s equity buying history for the last five years.   The white line indicates what percentage of that country’s overall ETF issuance is owned by the Japanese Federal Government.

 

Surreal.

 

If anyone had told you in 2010 that the BOJ would come to control nearly 70% of the total ETF market in that country in a matter of a short five years, you would have scoffed.

 

And now…?

 

No one seems to notice.

 

Or care.  After all, central banks have to make money, too; and now that interest rates on sovereign debt are next to nil globally, well… maybe they figure they can turn a buck in a riskier market?

 

So it goes.

 

Part One Concludes.  Part Two Commences.

 

That’s your first data set for the quiz.

 

Now consider the following –

 

  1. Executives at the nation’s biggest brokerages have sold their own stock at a rate unseen for any year-end period over the last decade.
  2. Some $100 million in cash-out selling occurred from bigwigs at Goldman Sachs, JP Morgan and Morgan Stanley since election results were made public.
  3. In addition, another $350 million in stock sales occurred in options-exercise dumping, a sum that more than doubles the full-year period leading up to the election.

 

Did we already use the term ‘surreal’?

 

Have a look –

The heavyweights have used the latest equity rally to lock in an un-godly, this-worldly, gotta-go-badly fortune in cash, cash, cash.

 

Each of the red icons on the chart above depicts a single, brutal financial killing.

 

And now the test!

 

Very simply, based on the foregoing information: who is right?

 

Do the central bankers, with their apparent optimism in the future of equity returns, speak the truth?

 

Or do Wall Street’s wonder workers, whose recent sales activity indicates an apparent doubt in the continued rise in stocks, have it right?

For our part, the question is not so categorical.

 

Indeed, there’s little reason to make anything monolithic out of the above data.

 

We understand that both parties include smart individuals who are registering their sentiment with respect to the stock market and nothing more.  The central bankers are encouraged and feel they need to nearly double their exposure to equities, while the bankers feel that, for the time being, anyway, there’s not much more that can be squeezed out of financial juice machine.

 

These are feelings.  Nothing more.

 

And us?

 

Well, we actually like the idea that these wise-guys present to us on a sentiment level.  That is, we see the run-up in the bank stocks and agree with Wall Street’s big shooters that this is a time to be out of the big financial names.

 

We also find favor with the central bankers’ notion that stocks are a go for at least another six months or a year.  And we’re rather happy with the choices they’ve made in terms of stock selection.

 

Take the Swiss National Bank (SNB) as an example.  Equities now make up a full 20% of that country’s foreign reserves, up from just 7% in 2009.  And where have they focused their buying?

 

Where else?  The big techs!  The SNB currently has a $2 billion stake in Apple (NASDAQ:AAPL) and a $1.2 billion Microsoft (NASDAQ:MSFT) holding, to name just two.

Because the reserve managers are big into the mega-cap tech and internet names, like Google and Facebook, Amazon, Netflix, Twitter and Paypal, all names that we, too, at one time or another have jumped into bed with on getting a wink.

 

And so we’re going to be wise in our own way today and recommend you do the same.

 

We’re going to suggest you trade like the central banks, and hop on board the tech train.  And at

the same time, do like the honchos on Wall Street and flee the financials.

 

The question, as always, is how to play the two sides?  Do we pick a single stock to represent the bunch or go with a pair of ETFs?

 

In normal times, we’d dig down deep and attempt to find the weakest of the banks and strongest of the techs, and play them head to head.  But in today’s market we see a greater risk in doing so, as all these issues have been extraordinarily erratic of late.

 

So we’re sticking with the broad sectors to initiate the trade and employing the SPDR S&P Bank ETF (NYSE:KBE) and the Technology Select Sector SPDR ETF (NYSE:XLK).

 

Have a look –

The gap between the two is bound to shrink, and we say it happens in the next thirty days.

 

We’re selling CALLs on the former and buying them on the latter.  And it looks like this –

- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]

And note, too, that the short leg of the trade expires a week earlier!

 

Many happy returns,

 

Matt McAbby

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