JP MORGAN’S TOP 10 TRADES OF 2010
JP Morgan has been one of the more prescient banks on Wall Street in the last few years. Not only did management steer them clear of many of the troubles the other banks were in, but their analysts have been spot-on with regards to the trading environment. They were believers of the reflation trade before the term was even coined. Now, they see many of the trends from 2009 continuing into 2010 and here’s how their 10 favorite ways to play it:
Our top 10 trades are:
(2) short USD versus EM FX;
(3) short USD versus EUR and JPY in 1H;
(4) short US agencies and MBS outright;
(5) long US HY outright;
(6) overweight US HG and EM external debt versus USTs;
(7) long EM corporate credit;
(8) overweight cyclicals within equities;
(9) long lower-tier II bank bonds outright and versus government debt;
(10) long AAA CMBS/RMBS and A-rated CLOs.
Source: JPM
This is a one-sided bet against the dollar. This means it will be politically acceptable for oil to keep going up, the money printing to keep going, and the middle class continue to be squeezed by higher commodity prices. Seems unlikely politically but of course every day I am amazed by the next political giveaway. I wouldn’t take the other side of that bet today but I think after Feb when the political class begins to realize how pissed off the “regular” person is (not that they care) this will have to be reversed.
Was anything done in 2008 to prevent oil from going to 150 barrel? No. There is no political will. The public doesn’t really care. The various bubbles now forming will probably have to collapse under their own weight.
Most middle class who have 401Ks are probably happier to see oil prices and the stock market going up and the dollar going down rather than vice versa. Their 401Ks are still down quite a bit more than higher oil prices will hit their pocketbook in the near term and I don’t know too many Americans who really care what the value of the dollar is so long as there is no domestic inflation beyond energy prices.
TPC,
Do you have any concern that the first quarter earnings season is being front-run before it even starts? Looks like the S&P500 may very well end the year at about 1150-1160. How much potential upside is there beyond that, maybe 1,200 for 1Q? Timing that market based on earning surprises didn’t work as well in Q3 as in Q2. It might even be less fruitful in Q4.
It seems to me that in Q1 the dollar and interest rates will have at least as much influence on market direction and the magnitude of the move(s) as earnings will.
Key questions: Will the 10YT hit 4% and reverse or go higher? Has the dollar reversed its brief rally or will the rally continue in the new year? Will the Fed really end its MBS buying in March as promised? Who will buy MBS if not the Fed? How high can mortgage rates go? How high do mid-long interest rates need to go before investors are lured from stocks to bonds based on return potential?