Morgan Stanley’s Adam Parker has heard enough from self-styled contrarian investors.
In a note out Sunday, Parker asks why he keeps hearing from investors who declare themselves contrarians when all they want to know is why stocks went higher, an obviously superficial question about the price of an index that can and does move at nearly random splits.
“The main questions investors ask us today seem to be about the exterior appearance of the market and not fundamentals,” Parker writes.
Parker then lists the following as examples of questions he hears from clients — lots of clients — these days:
- “What is this price action telling you?”
- “What are other investors asking you about?”
- “How are other people positioned?”
- “What’s the current sentiment?”
Now, on the one hand Parker — chief US equity strategist at the firm — should be a compendium of knowledge on what investors are worrying about, thinking about, and calm about. And he probably is!
But it seems that these questions, in Parker’s view, are not coming from investors who have serious, independent thoughts on the market against which to weigh the answers to these questions.
And so here Parker goes for the jugular (emphasis mine):
They start by saying ‘I’m a contrarian investor by nature’ and then go on to say the same thing about their view that we have heard in several previous meetings. Romanticizing that you are a contrarian when you are indistinguishable from consensus can’t be good. Our favourite investor question lately has been “when Morgan Stanley’s Prime Brokerage data show net and gross exposures of the hedge fund industry are back to 2-3 year averages, where will the S&P 500 trade?”
We are flattered that someone thinks we can compute that, as if isolating a nine-variable problem to one provides us with an accurate answer. We should have answered “2137” or something that seems exact even though it would have been pulled out of thin air. Using the patient analogy, it seems like the stock market doctors are asking the wrong questions. They are looking at the price, or external appearance, in making their forecasts and not the fundamentals.
The thing about stocks is that they usually go up or down as the stock price reflects a multiple of future earnings expectations which the market judges as either too big or too small.
Asking, then, about recent price action and investor sentiment is not looking at a company’s income statement, its balance sheet, its business model, its industry, competitors and so on, and then drawing a conclusion about how to value estimated future cash flows.
Now, of course, not all investors Parker talks to are going to be single-stock analysts; the above might not necessarily apply.
You could be coming to Parker for an overview of what he sees in stocks as you look to hedge a macro-focused portfolio by buying long-term calls or puts (bets that stocks will go either up or down) on the S&P 500, for example.
But the overall point that Parker rails against — that everyone walks into the meeting and declares themselves a contrarian — is one that so often goes unchallenged.
“I’m smarter than these talking heads on CNBC; I’m a true contrarian,” someone may declare.
And this kind of bluster is what Parker seems to have had enough of.