For someone who hasn’t got much to add about the current state of the market, Bob Janjuah still manages to crank out 1,500 words in his latest piece for Nomura.
Bob firmly believes we are in a third stage of a secular bear market, which is about to get nasty.
Basic problems
The key basic problems remain weak trend growth in the DM world, which we think will continue for another three to five years, the policy errors (in our view) of the current set of policymakers, and the existing set of inadequate ‘old world’ policy institutions.
Still bearish
In or within a year from now I expect global equities to be 25% to 30% lower. My S&P500 target for the low in 2012 remains 800/900, and I think an ‘undershoot’ into the 700s is entirely possible. For the valuation-focused, assume S&P 500 EPS in 2012 of $90/$100, and P/Es in the 8 to 9 area – I see this kind of P/E as the new norm in the kind of world we are in. In this bearish outcome I would expect 10-year bund yields at 1% to 1.25%, 10 year UST yields at 1.25% to 1.5%, and 10-year gilts below 2%. The USD should do well, credit and commodities should not.Here I have to insert an important caveat regarding Germany and bunds. My core assumption remains that in the euro zone policymakers do not attempt to fix an excess leverage and low growth problem with more leverage. This type of plan obviously appeals to Tim Geithner, but the core euro zone should be extremely concerned by the suggestion that leveraging the EFSF is a supposed “solution‟
Echoes of Albert Edwards in there. He too thinks the S&P should trade on a single digit PE and expects the yield on US treasuries to fall further.
In the short-term, Bob expects the S&P 500 to bottom in the low 1,000′s later this month, by which time he expects to see 10-year bund yields below 1.5 per cent and US Treasuries under1.75 per cent.
Beyond October 2011, on a two- to three-month basis into year-end/early 2012, I still see a possibility of a decent counter-trend risk rally. Should this materialise, the S&P500 could move from a low in October of around 1000, up to/towards 1200 by end-December 2011/January 2012. I see many possible drivers of this risk squeeze: Greece could be bailed out through to early 2012, which is when I would expect it to default and the restructuring of the euro zone to begin in earnest; Kevin expects a two- to three-month patch of „better‟ data in Q4 2011; QE2 in the UK; ECB rate cuts; positive EFSF headlines or progress; positive PSI headlines or progress. At least part of President Obama’s fiscal ‘boost’ should happen, and something is better than nothing. Additionally, should the S&P 500 hit the low 1000s (over the next month or so, as I expect) and the unemployment rate exceeds 10%, I believe the Fed will be unable to resist another dose of QE, whereby QE3 will be a rehash of QE2. Finally, I think positioning and sentiment by late October 2011 will be such that markets are ripe for a decent squeeze.
Bob reckons QE3 would be an even bigger policy mistake and won’t hold his breath waiting for a solution to the Eurozone debt crisis.
I expect the next year to be about capital and job preservation. Any counter-trend rally should be tradable but short lived – it should be viewed opportunistically. My core message is bearish. Over the past month Kevin and I have looked closely for anything that could change our view and have come up with nothing. Even the hope that EM or China can go on a multi-trillion USD investment binge to re-ignite global growth seems pretty forlorn, as China’s last fiscal and credit binge in 2008 is proving very costly to clean up. The euro zone may positively surprise us with a clear and credible plan for the region, involving major debt and economic restructuring for Greece, Portugal and Ireland, a major recapitalisation of the euro zone financial system, and the formation of a „neue-eurozone” with a hard-money ECB at the core. We can but hope. The only alternatives are immediate full fiscal union, or full on unlimited unsterilised monetisation by the ECB. Both “options” are I think extremely unlikely.
And he’s not alone.
Related links:
Stylised facts from Bob and Kevin – FT Alphaville