Citi Warns Equity Euphoria at Highest Since 2002: Taking Stock

Citi Warns Equity Euphoria at Highest Since 2002: Taking Stock

(Bloomberg) -- U.S. investors have plenty of reasons to be concerned about the sustainability of the stock market’s advance.

They don’t seem to want to hear them. Wall Street is embracing the animal spirit at the fastest pace in decades, forcing skeptics to give in or fear missing out on a rally that could lead to a gap in performance they won’t be able to close.

To Citigroup’s strategists including Tobias Levkovich, the price action is the exact opposite of the rout in March, where one wave of liquidations triggered a cascade effect. Come June, the bank’s panic/euphoria model, which tracks metrics from margin debt to options trading and newsletter bullishness, showed sentiment at the most extreme level since 2002, when the tech bubble was dissipating. Positioning may be overly extended, the strategists warn, and investors may not be factoring all the potential risks.

“We are concerned that thoughtful approaches are being overwhelmed by the need to at least keep pace with price moves,” the bank’s strategists said. “People are ignoring joblessness, trade friction, social unrest, and risks that loom including possible Covid-19 reinfections, the end of bonus supplemental unemployment checks and the upcoming elections.”

The S&P’s 43% gain since late March has narrowed this year’s loss to 1.1%, reflecting expectations of a V-shaped recovery that Levkovich calls too optimistic. Companies are watching their costs after months of lockdown, he said, which will help profits. But they’re unlikely to re-hire all of the employees they let go, keeping unemployment in focus and thwarting an economic rebound. Yet, closing at 3,193 as of Friday, the S&P has shot above Citi’s target for mid-2021.

Stocks are rising premarket again, led by energy, airlines and cruise firms -- and that after stocks with the shakiest finances posted their best week on record relative to the S&P. Futures on the index are up 0.6%, while tech is trading 0.1% higher before the bell, after the Nasdaq 100 Index closed at a record. Friday’s rally following a jobs report that far surpassed analysts’ expectations pushed the S&P’s 14-day relative strength index into territory that signals securities have become overbought.

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AstraZeneca has made a preliminary approach to Gilead Sciences, maker of the only U.S.-approved Covid-19 treatment, according to people familiar with the matter. As restaurants prepare to reopen, the three largest U.S. food suppliers -- Sysco, US Foods, and Performance Food -- stand to benefit, Barron’s says in its latest issue. The Wall Street Journal says the Fed debated whether to reinforce low-rate pledge with yield caps.

A veto-proof majority of the City Council in Minneapolis, where George Floyd’s death set off a global wave of protest, pledged to “begin the process” of dismantling its police force as protesters marched in the U.S. and cities around the world over the weekend; Cross Fit’s CEO apologized for insensitive tweets about the protests after Reebok said it wouldn’t renew ties with the fitness group. The New York Times says its editorial page editor James Bennet resigned following public furor over the paper’s decision to publish Republican Senator Tom Cotton’s op-ed on sending in the military to quell violent protests.

Notes From the Sell Side

BofA upgraded its view on both Alaska Air and JetBlue, writing that the “leisure rebound is real.” The firm wrote highlighted Alaska Air’s “conservative” balance sheet, and called JetBlue a “pure play on recovering leisure.”

A recovery in leisure travel will have a negative impact on pricing, BofA wrote, adding that “the true catalyst for the group will be a return of corporate travel, which will take time.” Alaska was upgraded to buy from neutral, while JetBlue was raised to neutral.

Dunkin’ Brands Group was raised to overweight from sector weight at KeyBanc Capital Markets, which wrote that comparable sales were likely to improve as pandemic-related lockdowns in key markets started to end. “As the reopening wave pushes northward in the months ahead,” the company’s same-store sales “deficit” relative to other fast food companies “will narrow and potentially normalize,” the firm wrote.

Amazon.com’s price target was raised to a Street-high view of $3,300 from $2,700 at RBC Capital Markets, which cited positive trends for online retail. The firm pointed to an annual survey of online shopping, where the results “clearly support the idea that online retail is a structural winner from the COVID Crisis,” with Amazon “likely the best global play off of online retail.” Separately, Baird raised its target to $2,750 from $2,550, also citing strong e-commerce trends.

Sectors in Focus

  • Watch biotech companies after people familiar said AstraZeneca has approached Gilead Sciences about a possible merger. Moderna, Regeneron Pharmaceuticals, Novavax, Vir Biotechnology and Inovio Pharmaceuticals may move.
  • Watch oil companies after OPEC and its allies agreed to extend historic output curbs by an extra month. Noble is up a whopping 106% before the bell, while Extraction Oil & Gas is up 85%.
  • Watch airline stocks after Bank of America raised Alaska Air to buy from neutral and JetBlue to neutral from underperform on the view that the “leisure rebound is real.”
  • Watch tech stocks after the Nasdaq 100 Index closed at an all-time high.

Tick-By-Tick to Today’s Actionable Events:

  • 7am-- THO earnings
  • 1pm-- Mary Barra, General Motors CEO, on Bloomberg TV
  • 2:50pm-- Kristi Mitchem, BMO Global Asset Management CEO, on Bloomberg TV
  • 4:05pm-- SB, COUP earnings
  • 4:15pm-- REVG earnings
  • CSFL/SSB - Expected close

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