Month: May 2016

The pressure of tonight’s “must-win” Indiana primary appears to have gotten to Ted Cruz who one week after being hailed as Lucifer and a “son of a bitch” by John Boehner, exploded in an epic anti-Trump rant of his own, calling the republican frontrunner “an utterly amoral, narcissist,” a “serial philanderer” and a “pathological liar.”

As The Hill adds, Cruz prefaced his comments by saying that for the first time, he wanted to say exactly what he though of Trump after the GOP frontrunner suggested his father might have had something to do with the assassination of John F. Kennedy.

“I’m going to do something I haven’t done the entire campaign. I’m going to tell you what I really think of Donald Trump. This man is a pathological liar. He doesn’t know the difference between truth and lies. He lies practically every word that comes out of his mouth. And in a pattern that I think is straight out of a psychology text book, his response is to accuse everybody else of lying.”

He went on to accuse Mr. Trump of bragging about infidelity, lacking in morals, harboring negative sentiments towards women in public life and being a bigger narcissist that President Barack Obama.

“Donald Trump is such a narcissist that Barack Obama looks at him and says, ‘Dude, what’s your problem?'” Cruz said. “The man is utterlly amoral,” he added.

“Donald is cynically exploiting that anger and Donald is lying to his supporters,” he continued. He went on to insist Trump would betray his supporters by not doing what he promises, including on building a wall on the Mexican border.

Cruz also slammed Trump for going after his wife, and saying she wasn’t good-looking enough for him. “Donald has a real problem with women,” said Cruz, accusing the frontrunner of being “terrified” of strong women.

He dug into Trump’s past as a Manhattan playboy, savaging Trump for bragging about his infidelities. “Donald Trump is a serial philanderer and he boasts about it,” Cruz said. “This is not a secret, he’s proud of being a serial philander. I want everyone to think about your teenage kids. The president of the United States talks about how great it is to commit adultery. How proud he is, describes his battle with venereal disease as his own personal Vietnam. That’s a quote from the Howard Stern show. Do you want to spend the next five years with your kids bragging about infidelity?”

Cruz’s surprising blow up came the same day that Trump made a likewise strange media statement when he went on Fox News and suggested that Mr. Cruz’s father Rafael Cruz was involved in the assassination of President John F. Kennedy in 1963. Mr. Trump offered little evidence for his assertions. The National Enquirer supermarket tabloid published a story last month alleging a photograph showed Mr. Cruz’s father in a photograph with assassin Lee Harvey Oswald.

“His father was with Lee Harvey Oswald prior to Oswald’s being shot. I mean, the whole thing is ridiculous,” Mr. Trump told Fox. “What is this, right prior to his being shot, and nobody even brings it up. They don’t even talk about that. That was reported, and nobody talks about it.”

It did not end there. Cruz continued: “Let’s be clear: this is nuts. This is not a reasonable position. This is just kooky. And while I’m at it, I guess I should go ahead and admit that my dad killed JFK, he is secretly Elvis and Jimmy Hoffa is buried in his backyard.”

As the WSJ adds, a Trump victory in Indiana would put the New York businessman on track to clinching the Republican nomination by the end of the primaries in June. A Cruz victory in the state, however, would significantly increase the chances of a contested July Republican convention.

Aside from his outburst, Cruz pled with voters in Indiana, where over the past month he has squandered his substantial lead: “the entire country is looking to you right now. It is only Indiana that can pull us back. It is only the good sense and good judgment of Indiana that can pull us back. We are staring at the abyss. And I have incredible faith.”

In his tirade, Cruz also singled out Rupert Murdoch and Roger Ailes, the media titans who control Fox News, accusing them of being in the tank for Trump. “Network executives have made a decision to get behind Donald Trump,” Cruz said. “Rupert Murdoch and Roger Ailes at Fox News have turned Fox News into the Donald Trump Network, 24-7.”

Cruz said Murdoch has a history of “picking world leaders” abroad but said he’s never before asserted that kind of influence in the U.S.

Donald Trump’s son reacted as follows on twitter:

That was an impressive meltdown… Desperate but impressive. Reminded me of my 3 year old coming off a sugar high. https://t.co/3lqwHIRWo6

— Donald Trump Jr. (@DonaldJTrumpJr) May 3, 2016

In a few hours we will learn if Cruz’s outburst has generated any sympathy points for the candidate who was lagging badly behind Trump in the latest Indiana polls.

Cruz’ entire rant is on the clip below.

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From our friends at Fasanara Capital we get their latest contrarian – and very bearish – Investment Outlook, which can be summarized as follows: “Reflation Phase To Be Temporary, More Downside Ahead“, and which also contains four key conviction trade ideas over the next 12 months.

This is what fund manager Francesco Filia cautions about the market over the next year:

Earlier on in 2016, markets went off to panic mode out of (i) fears over China’s messy stock market and devaluing currency, (ii) plummeting oil price to levels where it could trigger covenant breaches/defaults, (iii) FED hiking rates and a strong US Dollar strangling Commodities and their producing countries. In response to such risks, market action was legitimate but exaggerated in magnitude and speed, leading us into calling for ‘random and violent markets’ (Read). ‘Random’ as they often refuse to follow the logic of fundamentals, ‘violent’ because they shift with great momentum when the narrative changes and the tide turns.

 

Today, we believe markets are similarly illogical and over-reacting, this time on the way up. Illogical in believing those underlying risks have abated, for the only difference is the actual price of Oil, Renminbi, US Treasury yields, while no fundamental change has occurred. To us, no game changer between now and then, just a narrative shift.

 

The narrative of reflation is today dominant and can continue to propel markets for a while longer. But as we know the narrative changes fast, and when it does we can expect a quick re-pricing. As we re-assess the validity of the underlying risks, we expect a shift in narrative in the few months ahead and a sizeable sell-off.

According to Fasanara there are four key risks ahead:

1. China Risk. China remains entangled in the messy rebalancing of its economy. While managing to sedate panic in equity and currency markets for now, China failed to address its structural issues. The size of NPLs is staggering at 30% of GDP. Short term rates are spiking in recognition of defaults happening on the ground at accelerating speed, and involving not just small enterprises, not just private enterprises, but large and state-owned enterprises too. In Q1, it only managed to keep GDP in shape by means of graciously expanding credit by a monumental 1trn$. Unsurprisingly, you cannot borrow 10% of GDP per quarter for long without a currency adjustment, whether desired or not. And generally, what is the point in selling reserves to defend the peg, thus doing monetary tightening, when you seek so desperately monetary expansion.
2. Oil Price Risk. The price of Oil moved from 27$ earlier this year to approx. 47$ today. The Doha meeting failed to freeze production, but the market could count on a declining production out of US frackers. While the bullish camp sees further reduction in production in the US, Venezuela, and an agreement on freezing production at the next OPEC/non OPEC meeting, we believe Oil will follow a volatile path around a declining trend-line, which will take it one day to sub-$10.
3. Strong US Dollar Risk. The weak Dollar is the major factor propelling the reflation sentiment in the market – EMs and Commodities greeted it with enthusiasm. However, it seems to us more a story of appreciating Yen and Eur out of the failed attempts of the Boj and the ECB to reflate their economies, as markets doubt their capacity at negative rates. It is not the typical weak Dollar out of increasing US current account deficit and increasing spending / imports, positive for the world and inflation. We expect the USD to have another leg up in the months ahead. A stronger Dollar alone has the potential to revive January-type fears over Oil, CNH, Emerging Markets, leading to a risk off of global assets, including the S&P, which is priced to perfection, with a P/E close to record highs.
4. European Banking Sector Risk. While the micro picture / relative performance of each bank is under the control of its management team (legacy issues and disposal of NPLs, overcapacity and layoffs/cost cutting, restructurings, industry consolidation, monetization of subsidies from Central Banks), macro structural headwinds for banks these days are too heavy a burden (negative sloped interest rate curves, deeply negative interest rates, deflationary economy, depressed GDP growth, over-regulation, Fintech), and will likely push valuations to new lows in the months/years ahead.

Fasanara caveats that “none of this is to claim that all of these outcomes are just about to materialize, imminently. It is, however, to say that the risk of one of them derailing complacent markets is material. While the probability of each of those events happening may seem low at present, the probability of any of them happening is hard to ignore. They bear across the same overall hypothesis of a steep market sell-off, January-style.”

That said it adds that “we stand next to a sleepy volcano. To be bullish risk assets today is to be blindfold to the underlying risks, dismissing them all too quickly while their core drivers are left playing out, mistaking optimism for wishful thinking. We live through transformational times, where we are fast reaching the limits of monetary printing, and markets are still to price that in. GDP growth, inflation, productivity are all missing in action despite various rounds of monetary doping and financial engineering the world over. The un-anchoring of inflation expectations from Europe to Japan, previously believed to be stationary variable, i.e. mean reverting, may best testify to the falling credibility of Central Bankers, as they ran out of policy space. Falling credibility is typical precursor to financial imbalances compounding (including bubbles) and then tipping off into financial crisis.”

It wouldn’t be the first time markets have gone though such a violent phase:

It is not the first time in history that we go through an existential crisis of global capitalism. In the 20’s structural deflation led to Keynes revolution in economics. In the 70’s chronic inflation led to Milton Friedman counter-revolution, and governments like Thatcher or Reagan. Market-based economies survived both. Today, a new form of global capitalism might have to be worked out, to decipher how could we still be entangled in deflation despite what we learned from past experiences. We thought we knew it all and we do not. The disruption from technology, working wonders at accelerating returns, is happening so fast that it is tough to come to terms with it and fully grasp its many implications. For what is worth, the industrial revolution too took time to equate to growing productivity and wealth, while it went past its implementation phase.

 

A new evolutionary phase of ‘helicopter money’ and the nuclear fusion of monetary and fiscal policies might well be the next stop, as policymakers move from price setting to direct resource allocation, in certain markets more than others, in certain places sooner than in others, but the road to that next stage is certain to be bumpy. Policy mistakes and market accidents are legitimate along the way.

The conclusion is troubling:

A drastic 50%+ cash allocation and a defensive/net short approach seems to us as the only antidote against expensive, random, violent markets, moving from one storm to the next. While warranted, such approach is no easy task. It entails suffering from lack of carry, while showing up as underperformers against exuberant markets for certain periods. It might, however, prove right in the longer term, which is what matters. Picking up carry has been the mantra of the asset management industry for as long as the industry existed. Today however, as 7trn$ bonds are trading negatively, as equities expanded multiples on rising prices and contracting earnings, picking up what is left of carry today is like willfully trading what used to be good yield for illiquidity premium and bad credit risk: a value trap, if not a financial guillotine. Picking up carry in end-of-cycle fractured markets like these ones, as VAR shocks are ever more frequent and liquidity evaporates fast on downfalls, extracting it out of expensive fixed income and equity assets, feels to us like picking up dimes in front of a steamroller. It may just be the financial equivalent of the unaware ant of the Aesop fables, dancing while winter is coming. The financial grasshopper looks boring, impractical, uninspiring, for lack of carry and as it refused to follow the trend higher, until the winter comes.

* * *

How will Fasanara trade its conviction? Four trades.

• Short Chinese Renminbi Thesis. In Q1, China only managed to keep GDP in shape by means of graciously expanding credit by a monumental 1 trn $. Unsurprisingly, at 250% total debt on GDP, you cannot borrow 10% of GDP per quarter for long, without a currency adjustment, whether desired or not.
• Short Oil Thesis. Long-term, we believe Oil will follow a volatile path around a declining trend-line, which will take it one day to sub-10$. Within 2016, we expect global aggregate demand to stay anemic and supply to surprise on the upside, inventories to grow, primarily due to the accelerating speed of technological progress.
   
• Short S&P Thesis. To us, the S&P is priced to perfection, despite a most cloudy environment for growth and risk assets, thus representing a good value short, for limited upside is combined with the risk of a sizeable sell-off in the months ahead.
   
• Short European Banks Thesis. We believe that micro policies at the local level, while valid, are impotent against heavy structural macro headwinds, and only the macro environment can save the banking sector in its current form in the longer-term. Macro structural headwinds for banks these days are too heavy a burden (negative sloped interest rate curves, deeply negative interest rates, deflationary economy, depressed GDP growth, over-regulation, Fintech), and will likely push valuations to new lows in the months/years ahead.

Full letter below:

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Authored by Kenneth Rogoff, originally posted at Project Syndicate,

Are emerging-market central banks overweight in dollars and underweight in gold? Given a slowing global economy, in which emerging markets are probably very grateful for any reserves they retain, this might seem an ill-timed question. But there is a good case to be made that a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.

Just to be clear, I am not siding with those – usually American far-right crackpots – who favor a return to the gold standard, in which countries fix the value of their currencies in terms of gold. After all, the gold standard’s last reign ended disastrously in the 1930s, and there is no reason to believe that a return to it would turn out any differently.

No, I am just proposing that emerging markets shift a significant share of the trillions of dollars in foreign-currency reserves that they now hold (China alone has official reserves of $3.3 trillion) into gold. Even shifting, say, up to 10% of their reserves into gold would not bring them anywhere near the many rich countries that hold 60-70% of their (admittedly smaller) official reserves in gold.

For some time, the rich countries have argued that it is in everyone’s collective interest to demonetize gold. Sure, we hold a lot of gold, these countries say, but that is a vestige of the pre-World War II gold standard, when central banks needed a stockpile.

Indeed, back in 1999, European central banks, seeing no reason to keep holding so much gold, entered a pact to start reducing their stocks in an orderly fashion. The sales made sense at the time for most of the participating countries: The real backing for their debt was the tax reach of their governments, their high levels of institutional development, and their relative political stability. The 1999 pact has been revisited periodically, though since the most recent edition in 2014, most rich countries have taken a long pause, still leaving them with extremely high gold reserves.

Emerging markets have remained buyers of gold, but at a snail’s pace compared to their voracious appetite for US Treasury bonds and other rich-country debt. As of March 2016, China held just over 2% of its reserves in gold, and the share for India was 5%. Russia is really the only major emerging market to increase its gold purchases significantly, in no small part due to Western sanctions, with holdings now amounting to almost 15% of reserves.

Emerging markets hold reserves because they do not have the luxury of being able to inflate their way out of a financial crunch or a government debt crisis. Simply put, they live in a world where a large fraction of international debt – and an even larger share of global trade – is still denominated in hard currency. So they hold reserves of such currencies as a backstop against fiscal and financial catastrophe. Yes, in principle, it would be a much better world if emerging markets could somehow pool their resources, perhaps through an International Monetary Fund facility; but the trust required to make such an arrangement work simply is not yet there.

Why would the system work better with a larger share of gold reserves? The problem with the status quo is that emerging markets as a group are competing for rich-country bonds, which is helping to drive down the interest rates they receive. With interest rates stuck near zero, rich-country bond prices cannot drop much more than they already have, while the supply of advanced-country debt is limited by tax capacity and risk tolerance.

Gold, despite being in nearly fixed supply, does not have this problem, because there is no limit on its price. Moreover, there is a case to be made that gold is an extremely low-risk asset with average real returns comparable to very short-term debt. And, because gold is a highly liquid asset – a key criterion for a reserve asset – central banks can afford to look past its short-term volatility to longer-run average returns.

True, gold does not pay interest, and there are costs associated with storage. But these costs can be managed relatively efficiently by holding gold offshore if necessary (many countries hold gold at the New York Federal Reserve); and, over time, the price can go up. It is for this reason that the system as a whole can never run out of monetary gold.

I don’t want to create the impression that by shifting into gold, emerging markets would somehow benefit at the expense of advanced economies. After all, the status quo is that advanced-economy central banks and treasuries hold vastly more gold than emerging markets do, and a systematic shift by emerging markets will bid up its price. But this is not a systemic problem; and, in fact, a rise in gold prices would close part of the gap between demand and supply for safe assets that has emerged due to the zero lower bound on interest rates.

There has never been a compelling reason for emerging markets to buy into the rich-country case for completely demonetizing gold. And there isn’t one now.

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Following this weekend’s leak by Greenpeace demonstrating not only that the TTIP is driven entirely by narrow corporate interests, but that Obama is openly willing to reneg on his pro-environment agenda just to pass the Transatlantic Treaty at any cost, the blowback arrived earlier today when France became the first major European nation which threatened to reject the huge free trade deal between the U.S. and the European Union, because according to AP “it’s too friendly to U.S. business and probably doomed.“

Signs of trouble have been dogging the Trans-Atlantic Trade and Investment Partnership, a U.S.-EU free trade zone encompassing half the world economy, for months but only today have we seen the accumulated tension bubble up to the surface.

French president Francois Hollande said Tuesday that France “will never accept” challenges to its farming and culture in exchange for better access to U.S. markets. “That’s why at this stage, France says no,” the Socialist leader said at a conference on left-wing politics.

Earlier Tuesday, French Trade Minister Matthias Fekl told Europe-1 radio that negotiations “are totally blocked” and that a halt to talks “is the most probable option.” He insisted on better farming and environmental protections, adding that “in its current state, France cannot sign it.”

“Europe is giving a lot … but receiving very little in return,” he said.

In an unexpected twist to what was supposed to be a smoothly implemented treaty, European officials appear to be toughening their rhetoric after Greenpeace leaked large amounts of confidential negotiating documents that suggest the EU is coming under U.S. pressure to weaken consumer protections in key sectors.

Protesters wear masks of Barack Obama and Angela Merkel
as they demonstrate against TTIP free trade agreement

The EU chief negotiator said several Greenpeace conclusions were “false” while U.S. Trade representative spokesman Trevor Kincaid said the interpretations were misleading and sometimes wrong.

Still, EU negotiator Ignacio Garcia Bercero said Monday that major disagreements remain between the two sides following the 13th round of talks last week. The U.S. election campaign is complicating negotiations, making it increasingly unlikely that President Barack Obama can achieve a deal before leaving office.

France and some other European countries with rich culinary and farming traditions are particularly concerned about U.S. policies that give greater freedom to trade in genetically modified food, chlorine-rinsed poultry and hormone-treated beef.

France is also protective of subsidies to its film industry, fearing eventual domination by deep-pocketed Hollywood.

Meanwhile, as reported previously, support for the TTIP has tumbled on both sides of the Atlantic, with just 15% of Americans and 17% of Germans now responding that the trade deal would be beneficial, down from more than half as of two years ago.

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Cynics, skeptics, and fiction-peddlers are frowned upon by the Obama administration (and the mainstream media) when it comes to our glorious leader's economic miracle. So we thought a simple litmus test might be useful to judge just how 'doomed' the nation really is…

"When you see that in order to produce, you need to obtain permission from men who produce nothing;

 

when you see that money is flowing to those who deal not in goods, but in favors;

 

when you see that men get rich more easily by graft than by work;

 

and your laws no longer protect you against them, but protect them against you;

 

…you may know that your society is doomed."

 

Atlas Shrugged – Ayn Rand

You decide.

h/t ArmstrongEconomics.com

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The full article with additional charts can be accessed here

Something’s got to give in the oil market

Oil prices have rallied sharply from their January lows. At the time of writing, ICE Brent and NYMEX WTI front month prices are up 64% and 71%, respectively. While the media and commodity analysts have focused mainly on the recent rally in the spot price, in our view the more interesting development was in the curve structure. The entire move up happened in the front end of the curve. Longer-dated oil prices have remain almost unchanged. This has led to a sharp rally in crude oil time-spreads; 1-60 month ICE Brent time-spreads moved from -USD20.64/bbl in January to -USD8.82/bbl at the time of writing. In commodity markets, the shape of the forward curve is primarily a function of inventories. In our view, the inventory time-spread mechanism is the strongest and most robust relationship in commodities. Any divergence presents a physical storage arbitrage opportunity which will inevitably be exploited quickly by the market. Hence any deviation between spreads and inventories is typically very short lived. And this is where the oil market is now completely out of balance in our view.  The rally in front month prices combined with the lack of any price action in the back has pushed time-spreads roughly 20-30% above the levels they should normally be. This is the largest discrepancy between time-spreads and inventories we have witnessed over the entire time-horizon in which 5-year forward prices are available. In our view, either near-dated crude oil prices will sell off again or longer dated prices appreciate.

Clearly the market is expecting a tighter crude oil market in the near future given all the production outages. However, this alone does not warrant the move in spreads. It seems that the move up in oil prices was exacerbated by a general move up in commodity prices overall. Since the lows in mid-February, prices of copper, aluminum, zinc, nickel have all been moving up in a similar fashion to oil. 

It thus appears that investors have been pouring money indiscriminately into commodities of late. This is visible also in positioning. Open interest in WTI has reached an all-time high. Net speculative positions and open interest in WTI and Brent are near all-time highs. In our view, it is investor flows that have pushed time-spreads up, hence time-spreads will ultimately revert back to fundamentals (inventories).

We can speculate about the rationale of the buyers. Some would argue that ever-more dovish central bank policies in Europe and Japan, as well as the clear shift away from the promised hawkish path in the US have heightened inflation concerns again. Arguably this should have the exact opposite effect on commodity forward curves though, as this should drive up longer-dated prices while spot prices should remain unaffected by inflation expectations. However, while correct in theory, one has to look at how the market can express an inflation view in practice. Trading longer-dated futures is something typically reserved to hedge funds. The bulk of asset managers such as pension funds are only allowed to invest in securities, and thus if a pension fund or an insurance company seeks exposure to commodities they typically have to buy a commodity index product.

So what gives?

We are confident that this discrepancy between inventories and time-spreads will self-correct in the near future as well. However, the question is how. There are two ways how stocks and time-spreads could realign, either inventories drop sharply or spreads will weaken dramatically again. 

We strongly doubt that inventories can be the correcting factor in the short run. While there are multiple short term production outages around the world, there has yet to be a real impact on inventories. We ran dozens of models using different type of inventories as input variables (total petroleum, excluding NGLs, just crude etc.) and they all come roughly to the same result. Total industrial petroleum inventories would have to be more than 250 million barrels below current levels to justify current spreads. Crude oil inventories (without NGLs) alone would have to be about 100 million barrels lower. Even should current production outages as well as the declines in US output persist, inventories are unlikely to fall to these kind of levels until well into 2017.

Hence, in order for time-spreads and oil inventories to realign, we believe time-spreads will have to weaken again. But there are two ways how this can happen as well. Either via a renewed sell-off in front month prices or a move higher in the back end of the curve.  In our view, both can happen:

The back end of the curve is too low in our view in order to encourage enough investment in replacement production. At roughly USd50-55/bbl, there aren’t enough oil project sanctioned to ensure that future demand can be met. According to Wood MacKenzie, an energy consultant, oil companies put on hold or scrapped oil projects worth USD380 by January 2016. This accounts for 27 billion barrels in oil reserves. To put this into perspective, the US Energy Information administration (EIA) states that US crude oil reserves increased by only 15.7 billion barrels from 2009 to 2014 (17.7 including lease condensates) thanks to shale oil. And given the price collapse, a large junk of these reserves are likely no longer economical viable. The oil from these abandoned projects will be missing at some point in the future. Hence ultimately we expect longer-dated oil prices to move higher so that some of the global projects become economical again. However, what speaks against a sudden appreciation in the back end is the need of producers to hedge their forward production. Thus, any immediate rally in the back end will likely be sold. So that would suggest that the reversal in spreads will be driven by a renewed collapse in prices in the front-end. 

Hence either outcome is possible in our view: either near-dated crude oil prices will sell off again or longer dated prices appreciate. What does that mean for our readers?  The most obvious way to trade this is by selling crude oil time-spreads. But not many people have the ability or feel comfortable trading crude oil time-spreads. But the two possible outcomes described above open an interesting opportunity in gold. As we outlined in our framework report: Gold Price Framework Vol. 1: Price Model, gold prices are driven by longer-dated energy prices. Importantly, we found that changes in oil spot prices have little to no effect on gold. Hence a renewed sell-off in the front end of the curve would in our view have little impact on the gold price. A move higher in the back end however would be hugely positive for gold prices, all else equal. Hence, the expected reversal in the crude-oil time-spreads creates an optionality for gold prices. If oil spot prices sell off – all else equal – , nothing happens with gold, if longer-dated oil prices go up, gold most likely goes up.

We estimate that in order for time-spreads to move back in line with inventories, either front end prices have to sell off by USD10-15/bbl or the back end has to appreciate USD15-20/bbl. Given the parameters of our gold pricing model, the latter would add roughly USD100-150/oz to the gold price. In the end, we think something has got to give in the oil market and a clever way to take advantage of this move is to build a long position in gold.

via http://ift.tt/1rirHWy Gold Money

There has been a surprising mood change at JPM over the past 4 months: after initially changing the company’s long-held view on equities, which for the first time since 2007 it is no longer holds at overweight, JPM’s head equity strategist Mislav Matejka has been quite vocal on urging clients to take advantage of the current rally and sell into it. To be sure, this was surprising because whether JPM is talking its book or not, the bank stands to generate more client fees if the prevailing sentiment is one of bullish optimism rather than the opposite. And yet it is precisely the latter that JPM has been urging.

Today following the frantic S&P rally from the February lows, Matejka is out with his latest Equity Strategy note in which, unlike so many of his peers, the JPM strategist has refused to flip-flop on his conviction but to the contrary sees him reiterate the same warning he has delivered for the past three months, namely that “the turn higher in activity, needed for the next leg of the rally, is failing to get confirmed” and urges clients to “resist the calls to chase.“

Here is his full take:

Equities had a meaningful rebound from the February lows, and we now find many who didn’t want to add at the time, are looking to enter the market at these levels. Indeed, pundits are urging investors to “chase performance”. We believe that this would be a mistake; complacency has crept into the market again, technicals appear overbought and the upturn in activity appears to be stalling.

 

Specifically:

1. SPX RSI has recently hit high 60-ies. Proportion of bullish investors has shot up, proportion of bears has come down to 6-month lows. Vix is not far from the year lows. Skew and put/call ratios have normalised. Investors are not short anymore – HF beta has moved from -18% at lows in February to +22% currently.
   
2. There are signs that the nascent stabilisation in activity, which started in February and helped equities bounce is already losing momentum. A gap has opened up between US CESI and SPX. Philly Fed has come down, as did US flash April PMI. Eurozone PMIs are not reaccelerating and credit impulse is weakening. Chinese Q1 data improvement was to some extent base effects driven, and policy support is now being scaled back. Real steel demand in China is significantly down again. We do not expect the restocking phase to last for long.

   

3. EPS revisions remain in negative territory. Consequently, P/E multiples have re-rated substantially, with the 2016E P/E for S&P500 up 8% ytd, from 16.4x to 17.7x now.

   

4. The positive market impact from the policy actions is likely behind us. This was driven by the change in Fed’s reaction function, doubling down by ECB and the turn in many EM central bank outlooks. In fact, expectations have shot up so much now that central banks are able to disappoint again – case in point is last week’s reaction to BOJ inaction. The turn in the USD is an important positive for EM, where we are OW EM vs DM this year, but it pressures Japan and Eurozone. Inflation forwards are remaining subdued.
5. Strong April seasonals were a big help, where April was the best-performing month of the year historically. However, we are now entering typically poor seasonals, May and the summer.

Rather than chasing the recent rally, we believe that investors should look to fade it. In terms of equity allocation, we are UW equities in balanced portfolios for ’16, our first UW equity allocation since 2007. We cut our multi-year, structural OW stance on 30th Nov and are this year OW credit vs equities.

Matejka then explains why the upside potential from here is now limited:

There is a reason why equities didn’t go anywhere for a while now. MSCI World has not performed over a trailing 12-month and even 24-month timeframe, even though monetary policy was getting ever more supportive during this period. It appears that easy policy is not enough, we believe a sustained pickup in activity is needed to push stocks higher. This will remain elusive in our view, and we advise to keep using rallies as opportunities to reduce. Medium term:

1. Equity valuations are not offering much room for error. Global P/E multiples have moved to outright expensive territory. The P/S metric is higher today than it was at any time in the ‘07-’08 period, also outright expensive. Peak P/S on peak sales? Bond yields are staying low, but at some point the market will have to look for a convergence between nominal bond yields and nominal growth rates.
2. The gap between credit spreads and equities remains significant. In addition, supply of credit is getting worse – US bank lending standards have tightened for three quarters in a row. Demand for credit is falling, as well. This is the case for consumer too, where US consumer credit growth is the weakest since ‘11. US net debt-to-equity ratio is at the top of the historical range, much higher than it was in ’07.
3. US profit margins are deteriorating. Profitability improvement was one of the key drivers of the seven-year equity rally. This might be finished, as the profit margin proxy – the difference between corporate pricing and the wage growth – turned outright negative in Q4 for the first time since 2008. Buybacks have flattered earnings for a while now, but we would be surprised if these stay a potent support. Buybacks as a share of EBIT are at historical highs, similar to the levels seen in 2007.
4. Growth – Policy trade-off is poor. Global economic activity remains subdued, and at the same time, the Fed is not injecting liquidity into the system anymore. The best of policy support is behind us. In fact, if we are going to start the next downturn from a point where Fed was not able to unwind more than one or two of the past interest rate cuts, the hit to investor confidence would be significant, in our view.
5. Structural Chinese backdrop remains challenging, in particular in terms of credit excess. Sentiment on the space had a U-turn recently. Only 3 months ago it was an unanimous view that CNY had to depreciate again. Right now there is an almost unanimous view that downside risks are successfully pushed out. Complacency coming back?

Finally, Matejka focuses on the one risk factor he believes is the most relevant one: sliding US profits, and the threat of stagflation.

• Consensus view is that the US backdrop remains the key area of support, with most seeing US consumer as resilient.
• Our concern is over the reversal of the following three powerful forces that led to the tripling of S&P500 over the past seven years: 1) profit margins moving from record lows since World War II to record highs; 2) HY and HG credit spreads tightening dramatically; and 3) the Fed expanding its balance sheet.
• All three of those drivers are finished from a medium-term perspective. US HY credit spreads have widened since June ‘14, and this move is not only due to the Energy sector. Ex-Energy, spreads are 270bp wider, in effect they doubled. US corporate balance sheets have deteriorated, in contrast to Europe. Profit margins are coming under pressure, given signs of increasing wage growth and weaker top lines than expected. Productivity is staying low, driving ULCs higher. The NIPA profits data for Q4 has shown significant weakening in all the divisions: domestic, foreign, financial and non-financial earnings.
• Profits and credit conditions have tended to drive both capex and the labour market. This is the conduit through which the weakness could spread to the rest of the economy, in our view. We note that the lead-lag was typically substantial, of the order of 2-4 quarters. Still, we believe one should be cutting equity weight before the weakness becomes obvious. The equity market is clearly far from pricing in much of the risk of broader economic slowdown, in our view. The US consumer cyclicals sector remains the strongest performer in this bull market. In fact, Consumer Discretionary sector is still holding up well this year and car sales are near record highs. If the economy does weaken toward the year-end, this would likely have a very material impact. This is especially as the Fed might be out of the picture given the timing of the US presidential cycle.

So first it was Deutsche Bank (by way of Joe LaVorgna) that became one of Wall Street’s biggest bears; now it is JPM’s turn. Perhaps Matejka’s appeal is genuine – we don’t know. However one thing is certain: when Goldman also joins the chorus of ever louder sellside bears, that will be the time to load up the truck with 3x leverage.

via http://ift.tt/1Z7V1de Tyler Durden