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JP Morgan - Buy The Dips... Unless Things Turn South, In Which Case Don't

Tyler Durden's picture


In a titanic call that the puking Charles Schwab E-Trade baby could probably make with its eyes closed, JP Morgan comes out this morning with the conclusion that investors should buy the market unless things turn bad. Isn't that kinda analogous to an analyst saying if the Dow is at 36,000 on December 31, you should have bought. And vice versa. At least JPM analysts Mislav Matejka and Emmanuel Cau admit that investor confidence is slipping. So in an attempt to prop it up, they present the following puff piece with content which everybody who has the pleasure of watching CNBC now and then, is all too aware of.

Here are the key calls proposed by JPM:

  • The last week's trading is showing how rapidly the sentiment is changing and how fragile the investor confidence was to begin with. In Q4 the general desire was to add further to market exposure, but majority didn't want to chase into the year end, deciding to wait for a pullback, for better entry levels. It is interesting that now that correction is unfolding, instead of looking at this as the long awaited opportunity to add into, the overall sentiment today is that it is better to wait, that there is too much uncertainty and too many moving parts to consider. However,if it weren't for this poor news flow in the first place, the stocks wouldn't be trading at levels of last October again.
  • The question is whether what we are witnessing over the past fewdays is a game changer?Is "buying the dips" going to fail as a winning strategy this time?Acknowledging the potential for markets to create their own future outcomes, we point out the following:
  • In the background, the reporting season is so far delivering good results. Out of 197 S&P500 companies that reported to date, 77% have beaten on EPS line, with average beat of 16%.Perhaps more interestingly, while in Q2 ‘09 45% of non-financial companies beat on revenues, and in Q3 58%, in Q4 so far the proportion stands at 71%. For the majority of corporates that have reported, the analysts are having to raise their ‘10 estimates, which ultimately means that every percent the market falls, it becomes a percent cheaper.
  • Second, credit cycle is showing further signs of turning, as evidenced in the results of most banks. This is one of the key conditions for the sustainability of recovery.
  • Third,despite the latest few prints which were higher than expected, the 4-week run-rate of jobless claims is consistent with outright positive payrolls right now.
  • Fourth, while Greek debt situation remains precarious, and the market is starting to entertain contagion risk, we note that in the case of Romania, Latvia and Hungary the announcement of a financial assistance program managed to stabilise markets relatively swiftly. The worst outcome for all parties concerned is the default, but JPM believes solvency is not the issue, rather the lack of credibility which can/will lead to liquidity risk, ultimately calling for outside assistance.
  • Fifth, The start of the Chinese policy tightening, while detrimental to the market sentiment and raising the potential for policy mistake, could ultimately be seen as a positive, as a sign that growth recovery appears robust enough to allow policymakers to refocus on asset bubble concerns.
  • Sixth, the recent turn in the currency trends, with some Euro weakness, should remove one of the headwinds for European exporters.
  • Lastly, while we are cognisant that the market can drive valuations to much lower levels than would be at first deemed reasonable, it is perhaps worth mentioning that stocks trade on 11.5x this year’s earnings, in addition to the EPS integer moving up.
  • We advise adding to positions on weakness and would revisit this view if jobless claims were to move back towards 500k, if Greek default becomes a reality or if manufacturing leading indicators roll over.

Stocks trading at 11.5x P/E? Sure, if you assume 5.7% GDP growth in perpetuity, a trillion dollar stimulus package every year in perpetuity, based entirely on increasingly worthless paper "money", and every firm following suit in Goldman's example of making compensation expense a positive P&L item (with all corporations soon to share about 10 people between them, this is not just a modest proposal). As for the last paragraph, no commentary is needed.

As part of its musings, JPM's proposal are as follows:

  • Asset reflationtrade based on excess liquidity is to give way to recovery trade, characterised by rising bond yields and toplinegrowth. We see the market is in the process of changing the correlation between USD and equity direction, with new regime=> +vepayrolls, stable USD, rising bond yields and rising equities, to emerge. The catalysts are:
  • 1. Strong earnings delivery in Q4 and Q1. Margins are troughingat a high level, creating significant operational leverage to any toplinepickup. Base effects are very favorable.
  • 2. Turn in labour to confirm recovery on track, and produce revenue growth, answering investor skepticism regarding the sustainability of recovery. In addition, credit stabilisation, house prices troughing, delinquencies peaking and steep yield curves in place.
  • 3. Central banks to remain on hold. Inflation risk minimal beyond WTI base effects. Valuations in 2010 could re-rate beyond historical averages. 4. Leading indicators rebounding again (PMI new orders to inventories)
  • Key risks:“Double dip”-final demand falters post withdrawal of incentives. DM sovereign debt crisis and the start of EM tightening could hurt the investor sentiment.
  • Key trades:
    • Add to exposure on dips, Cyclicalsand Banks in particular. Avoid consensus EM trades (i.e. Materials). In 2010 DM exposure to be rewarded.
    • Stock selection based on EPS momentum, Value, operating leverage and “Quality”.
    • OW Europe vsUS, OW Germany, OW USD exposure
      • Key longs: Industrials, Financials, Energy, Discretionary, Utilities
      • Key shorts:Staples, Pharma

Yet among this gobbledygookery of phnatasmagoric prognostications, is this quite useful chart indicating the very odd recent correlation between european equities and the USD. If indeed the primary catalyst for European stock market appreciation has been an osmotic relationship between the continent's markets and those of the US (which do in fact benefit from a weaker dollar), then we would go out on a much longer limb than JPM, and would say that should the euro appreciation trade finally revert, then look out below in euro stock land.

Lastly, JPM joins the Jim Cramer chorus in claiming that the events in Greece are blown way out of proportion. Upcoming riots in Athens should austerity measures be adopted and 20%+ unemployment comes, would surely beg to differ.



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Mon, 02/01/2010 - 10:18 | 213177 Bylinka (not verified)
Bylinka's picture

Thanks Tyler, I couldn't stop laughing. Regards, Alex

Mon, 02/01/2010 - 10:21 | 213180 Cognitive Dissonance
Cognitive Dissonance's picture

".......JP Morgan comes out this morning with the conclusion that investors should buy the market unless things turn bad."

That line alone is priceless. Talk about hedging your bet. Any reply I might have beyond that line would be like shooting fish in a barrel and only make me look bad, almost like I'd be picking on poor old JPM.

Mon, 02/01/2010 - 10:25 | 213184 Number 156
Number 156's picture

So when did Dennis Kneale start working for JPM?

Mon, 02/01/2010 - 10:26 | 213186 Anonymous
Anonymous's picture

TD - think the puking baby you're referring to is the eTrade baby.

Looking forward to the day when I can contribute more to this site than firming up pop culture references...

Mon, 02/01/2010 - 10:36 | 213191 Anonymous
Anonymous's picture


Mon, 02/01/2010 - 10:43 | 213199 Carl Marks
Carl Marks's picture

It will rain tomorrow. Unless it doesn't.

Mon, 02/01/2010 - 10:43 | 213201 Daedal
Daedal's picture

Someone got paid to compile this nonsense.

Mon, 02/01/2010 - 10:46 | 213205 Anonymous
Anonymous's picture

of course - the big banking "talent".

Mon, 02/01/2010 - 10:44 | 213203 Anonymous
Anonymous's picture

Given that GS (on behalf of JPM?) may find itself either prop chopped or cut off from 0% feed to their schemes – things sure look unstable to J(6pack)PM.

However dumb&dumber both firms have become...

So as long as GS blocks reform - feel free to buy this market. Should they fail, things might turn bad. One never knows what these bully kids might contemplate when all their lollipops pop out. Gee, we could even see a big sucking sound.

Mon, 02/01/2010 - 10:47 | 213207 Handle with care
Handle with care's picture

This is like the Tom Mix quote, "To make money in the stock market buy stocks and then sell them after they go up.  If they don't go up, don't buy them."


Also love that in JPM land Euro weakness is a good thing as it, "remove one of the headwinds for European exporters." without apparantly creating a headwind for US exporters.  Maybe they're modelling the best of all worlds in which both the Euro and Dollar fall against each other simultaneously 

Mon, 02/01/2010 - 10:56 | 213213 Cognitive Dissonance
Cognitive Dissonance's picture

LP Morgan and company is simply tailoring their pronouncements for the specific audience. Sort of along the lines of a President tailoring his foreign country (bashing) rhetoric for "domestic consumption" and not because he really means it.

They treat us as fools because we are fools for going along, regardless of whether it's JPM or our so-called national leaders.

Mon, 02/01/2010 - 11:04 | 213215 CONners
CONners's picture

"...stocks trade on 11.5x this year’s earnings, in addition to the EPS integer moving up."

Is 11.5 their current integer? Jethro Bodine with a sixth grade education could do better than this.

Mon, 02/01/2010 - 11:12 | 213219 Trifecta Man
Trifecta Man's picture

Just chart the QQQQ against its 20-week or 100-day moving average.  Go back to the year 2000 to see what it would have done for you.  It predicted the rally in 2009, and it now predicts the trend is down.  Ignore this at your own peril.  Don't listen to JPM.

Mon, 02/01/2010 - 11:25 | 213227 Anonymous
Anonymous's picture

I am absolutely right, unless I am wrong!

Mon, 02/01/2010 - 11:44 | 213236 Miles Kendig
Miles Kendig's picture

And Wall Street still wonders why Main Street has lost confidence in the ability of bankers to think critically... 

Mon, 02/01/2010 - 11:47 | 213248 Ripped Chunk
Ripped Chunk's picture

Forever in debt to your priceless advice

Mon, 02/01/2010 - 11:54 | 213256 Anonymous
Anonymous's picture

China: tightening or (stealth) soft landing?

Mon, 02/01/2010 - 14:09 | 213427 wackyquacker
wackyquacker's picture

no brainer. Buy low and sell high

Mon, 02/01/2010 - 18:34 | 213901 dnarby
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Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.

- Will Rogers

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