The latest portfolio strategy from JP Morgan continues to favor the bullish side of the trade.   They see the Dubai dip as an opportunity to buy into some emerging market names at a discount.   Dubai does little to change their outlook as the risk of contagion remains very low.  This means the risk trade lives to fight another day.  Thus, they continue to favor a broad overweight of emerging market bonds, credit, equities and currencies.  In other words, they like the highest of the high beta.   They are now forecasting the S&P 500 at 1,160 by year-end.  They continue to believe money managers will chase performance into the end of the year and that positioning for strong Q4 earnings could provide a further boost to the market.  Our expectation ratio confirms this belief.

JP Morgan also remains very bearish on the dollar, which we all know is the tail wagging the dog these days.  They maintain that the dollar will be weak for three reasons:

• The Fed is proving more comfortable with a zero rate environment than almost every other G-10 or EM central bank but the Bank of England
• cash positions (domestic and cross-border) remain too high for the 2010 interest rate environment
• and reserve diversification has accelerated to a record pace. Although the structural

“arguments for a dollar collapse (even crisis) are less credible than the alarmists claim, cyclical dynamics are powerful enough to drive this overshoot of fair value, much like in the late 1980s and 2007/early 2008.”

What do they not like?  They like a tactical short hedge position in oil.   These guys have been uncannily accurate over the last year.  Ignore their strategy updates at your own peril….