LOCAL BRUSH FIRES IN A GLOBAL RALLY
Are the problems in the global economy really global or are they more localized? Analysts at JP Morgan say they are local problems and should not derail the global recovery. Unfortunately for the market bears, they’ve been spot on for well over a year. JP Morgan says the current problems should be offset by the global rebound:
“Is it local or global? That is the question asked by investors trying to assess the impact of the rising threats to the rally in risky assets. Our view has been, and remains, that these threats—from Chinese tightening to the Greek debt crisis and the global offensive on banks—remain largely local and sectoral in impact. They are offset sufficiently by the global rebound in economic activity and company earnings, keeping intact the rally in risky assets. This has indeed been what we have seen so far this year and over the past 13 months in the global equity rally. The impact of these local fires has been largely the underperformance by the affected regions—Europe and China— without slowing the global rally in risky assets.”
They see the risks of contagion increasing, but remain long for now as the bullish forces at work should continue to overpower localized fears in the near-term:
“At some point, one such local shock will spread and become overwhelming enough to bring risky markets down. Remember that the subprime crisis started as a local shock. We surely do not want to downplay the destructive power of the risk we face, but, at the same time, in the other corner sit the even more powerful bullish forces of the business cycle, company earnings, and the zero return on cash. It is our judgment that while the threats of Greek contagion and regulatory/tax overkill on banks have intensified over the past month, the risk-bullish forces have gathered even more strength, keeping us overall long risky assets.”
JP Morgan has been largely ahead of the game in terms of their economic forecasts and other market participants have been forced to play catch-up over the last few quarters. They see the recovery continuing into the back half of 2010 as the consumer recovers, industrial production increases and ultimately results in stronger than expected earnings growth:
“Our economists have kept their global 2010 growth forecast in a 3.3%-3.4% range since September. Over the period, the consensus has converged to our view. But the recent upside surprises on activity, and in particular in capital spending, retail demand, and industrial production, are inducing us to recognize clear upside risk, in particular in the US and Japan. Company earnings are looking even more impressive, with recent US earnings announcements already leading to a more than 10% upward revision to the 1Q consensus.”
What does this all mean? It means JP Morgan sees the risk trade continuing to work favorably as the recovery continues. Ultimately, they see the S&P 500 hitting 1,300 by year-end:
“The strength of the reporting season reinforces the case for staying long equities. We still see the S&P 500 at 1,300 by year-end but our risk balance has now shifted firmly to the upside.”
Source: JP Morgan
That is true that JPM has been right all along. I don’t have a position in indexes but I am still short X. I also think we cannot deny the possibility of a flat market for a month or two like Nov-Dec.
“remain largely local and sectoral in impact”
- remember the great long oil – short financial unwind in summer 2008?
- remember Bhatulism
- one cannot possibly know whether this is true or not
“underperformance by the affected regions—Europe and China— without slowing the global rally in risky assets”
- isn’t this contradicting their previous analysis that China would continue to power growth and European capital would continue to drive EMs higher?
All “contangion” thesis (for or against) is pure conjecture. No one can possibly know. They’ll be the first to hit the sell button when their positions move against them.
Some wisdom for this morning:
Uncontained local brush fires often spread to monstrous fires destroying everything in its path.
World is full of 1 hit wonders. Just because you were right 1st does not mean you will be right again. Roubini? Rosenberg? Garzarelli? Prechter?
JPM would never state that the think the Global recovery will stall as its bad for business. Not to mention, they wouldn’t change their outlook until AFTER they’ve unloaded their positions.
Mark my words, with each Capitol Hill grilling, the banks will punish the market to send a clear message: who do you think is holding this market up? More importantly, do you think they’ll wait until AFTER the regulations get passed to unload??
None of them has enough capital to cover prop positions and on a company wide level, the point can easily be made that everything is done for hedging (ie. hedging customer hedges).
But let’s wait and see…
Where did JPM publish this?