Perhaps Morgan Stanley have been listening to FT Alphaville’s Paul Murphy, because the bank has moved “underweight” of European equities. (Their new asset allocation is +5 per cent cash, neutral bonds and -5 per cent equities).
Strategist Teun Draaisma is telling clients to take advantage of the recent rally to SELL.
Draasima says none of the signposts which will call an end to this downturn – US housing, banks’ balance sheets and corporate earnings – are flashing green. In fact the fundamentals are not turning at all, says the Morgan Stanley man.
On US housing:
We expect further weakness, as does the futures market for the Case-Shiller index, which, like us, expects US house prices to trough by the middle of 2010, 50% lower from its peak on that index. The three main worries we have are the following. First, US house prices have never bottomed while unemployment is still rising: our US economists expect the unemployment rate to peak at 9.9% in 1Q10.
Banks:
Our European Banks analyst, Huw van Steenis, believes suspending mark-to-market could have made a big difference last year in relation to securities on banks’ balance sheets, but is not a game changer now. European accounting rules (IAS 39) already allowed for this under some circumstances, and suspending mark-to-market does not extend to loan portfolios, which make up ~60% of banks’ balance sheets and will deteriorate along with the nascent NPL cycle.
Draaisma also notes that credit markets have lagged behind in this rally in spite of the various policy initiatives announced in the past month or so – the “legacy” asset plan, quantitative easing etc etc etc.
Credit markets have been lagging in this rally, which has been very much equity-led. The futures market of house prices in the US, the RPX index, has continued to fall in recent weeks, indicating a lower trough despite the policy initiatives. Our US economists point out that what had been only a meager rebound in the subprime ABX market following the Treasury’s legacy asset purchase plan announcement has now reversed all the way to new lows. They also point out that the AAA index in the commercial mortgage CMBX market has now widened to 637 bp from the recent lowest spread of 525 bp hit last Thursday, moving about halfway back to the 747 bp close on March 20.
So where does all that leave us? The answer is in the middle of a normal, run of mill bear market rally.
We are currently in one of those classical 20%+ bear market rallies on the hopes of successful policy action. For instance, in the US between 1930 and 1932, there were five 20%+ such rallies (up to 35%) lasting 35 days on average. We hear people use adjectives such as biggest, strongest, fastest and other superlatives to describe this rally. We believe this is quite a normal bear market rally. What would be more painful is a 6 or even 12 month move of over 50% as happened a few times in Japan. The current one has so far been 25 calendar days, and 25% in the US, 17% in Europe. Anyway, with the S&P at 843 closing in on its 150-day moving average of 900 (200-day moving average of 992) we feel the risk-reward of further upside is not compelling.
Related links:
Japan until further notice - FT Alphaville
Bear market rallies – FT Alphaville