Believe those who are seeking the truth. Doubt those who find it. Andre Gide


Wednesday, January 26, 2011

Binky Chadha: Non-investors are overweight stocks

With the Dow closing near 12,000 today, I thought I'd peruse the CNBC (First in Business Worldwide) webpage to see what analysts were talking about. I'm not sure why I do this...I am almost always left scratching my head afteward. A deficiency on my part, no doubt. Maybe some of you out there can lend me a hand.

Take this, for example. Here is a CNBC segment entitled "Pick a Pro's Brain," a short interview with Deutsche Bank's Binky Chadha labeled "Investors Are 'Very Underweight' Stocks." The entire interview sounds like gibberish to me. The man is speaking in a language that I trouble understanding.

What does it mean, in particular, for investors to be underweight stocks?

I think we can all agree that the outstanding stock of equity shares is owned...by someone, at least. It is therefore impossible for the population as a whole to be under or overweight in stocks. It is only possible for different groups holding different positions to be considered  under or overweight.

Now take the set of potential owners. It appears that this set can be divided into two subsets: investors and non-investors. I'm am not entirely sure what governs this division.

In any case, the claim is that investors are underweight stocks. Fine. But simple arithmetic then implies that non-investors must be overweight stocks.

So I am wondering: Is this, in fact, what Binky is saying? And if it is indeed what he is saying, then why is knowing this interesting, and how is knowing this important?

10 comments:

  1. David,

    I wish you would have contacted me when you were feeling the temptation to look at CNBC. We could have done an intervention or something.

    After years and years of being in finance, I have no idea what "underweight" means in an aggregate sense. It's only sensible as a concept for an individual.

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  2. Trying to ascribe a coherent meaning is dangerous but I'll give it a go anyway...

    Presumably it refers to some benchmark aggregate portolio allocation. In aggregate there is some stock of nominal wealth, say in bonds, stocks, real estate and money.

    Equities account for say (a made up number) 50% of the total nominal wealth (so for some more made up numbers say, aggregate market cap is 5 trillion, total nominal wealth 10 trillion at current market prices).

    Thus, in aggregate we're holding 50% of our wealth in equities, he thinks it should be 60%.

    He's saying equity prices should rise.

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  3. Presumably he means that investors have less money in stocks (relative to some recommended % of their total portfolio) and more money in other asset classes (bonds, commodities, etc.).

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  4. Adam P:

    I think you are exactly correct: He must be saying that equity prices should rise (relative to other asset classes). But if this is what he means, then why doesn't he just say it in this way?

    By the way, what do you think he means by "zero inflows into equities?" Prof J, maybe you know?

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  5. David,

    Zero inflows into equities probably means no net increases in public ownership of stocks.

    I think part of the story Binky is missing is that net stock repurchases (net of issuance) is on the rise again.

    It seems he's talking about portfolio asset allocations, and he wants more institutional managers to buy stocks en masse. Maybe he holds call options on the S&P 500?

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  6. Prof J: Not sure I understand. How is the "public" defined? Who are the "non-public" agents?

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  7. Hilarious! Yeah, why doesn't Bindha Chadha simply say: "... that equity prices should rise (relative to other asset classes)?" Not that over 90% of the population wouldn't understand that statement either.

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    "By the way, what do you think he means by "zero inflows into equities?" -DA

    Chadha said something a little different. He said that accumulated inflows into equities had been zero up until a few weeks ago. I believe he means to say that net contributions to equity from cash savings, fixed-income assets, the sale of real estate have been zero. For every new dollar, somebody sells one dollar of equity and goes to cash or some other asset.

    This works with rising equity values. It is the willingess to pay for equity has been steadily going up since bottoms in late 2008, early 2009. I used WTP because I feared 'demand' might be misinterpreted as 'quantity consumed'.

    Going forward, he expects individuals and institutions to dedicate a larger percentage of the portfolio to equity. Large enough to require asset sales elsewhere.

    Much of his strategy is based on rather standard cyclical portfolio reallocation practices. 2006 through to late 2008 was the time to overweight bonds. Early 2009 was the time to increase exposure to equity as risk tolerances permitted.

    FWIW, I like energy but am not sure of using materials to hedge energy and the rest. For one, I expect material prices to keep rising. Shorting an ETF leveraged to oil (HOU.to) might be cheaper and more effective.

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  8. David,

    The public is everyone that is not the company itself. So, I'm excluding treasury share purchases which is something that, presumably, Binky is not discussing. If he is, then he's way off the mark.

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  9. So now that we are on about challenging jargon, what does "normalizing the labour market" or a "normalized labour market" mean in the context of Fed chair Bernanke discussing monetary policy objectives?

    Bernanke said "normalized", and I heard "full employment". Does anybody else share my particular hard-of-hearing problem?

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  10. westslope: A "normalized" labor market is one that will not compel Congress to tear strips out of timid central bank types. Ah, the good ol' days...when all we had to worry about were 25 basis point changes in the overnight rate...zzzzzzzz.

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