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"Reduce Risk, Boost Cash, Go Underweight Stocks" SocGen Warns

Tyler Durden's picture




 

The writing has been on the wall for a while.

First, in March Ray Dalio who heads the world's biggest hedge fund, said  that "though prices of risky assets are high... these things are not in relation to existing levels of interest rates and liquidity. However, should interest rates rise and liquidity levels decline materially, that picture will change. Further, though cash returns are terrible, few investors in risky assets have given much attention to how quickly losses of capital can be worse. For the reasons explained, we do not want to have any concentrated bets especially at this time."

Then, just last week, Goldman which has repeatedly refused to boost its S&P year end target from 2100, also warned that if indeed the Fed is hiking, that the party is coming to an end:

"by almost any measure, US equity valuations look expensive. The typical stock in the S&P 500 trades at 18.1x forward earnings, ranking at the 98th percentile of historical valuation since 1976. For the overall index, the aggregate forward P/E multiple equals 17.2x, a rise of 63% since September 2011, compared with the median expansion of 48% during 9 previous P/E expansion cycles. Financial metrics such as EV/EBITDA, EV/Sales, and P/B also suggest that US stocks have stretched valuations. With tightening on the horizon, the P/E expansion phase of the current bull market is behind us."

Today it is SocGen's turn, which overnight advised clients that with "US set to unwind QE", now is the time to "increase cash" and "reduce risk." This is how SocGen advises its clients to be positioned ahead of the end of QE:

Correlations have significantly increased between asset classes and it therefore becomes difficult to naturally protect portfolios through asset class diversification: for the first time in a long time we recommend raising the cash allocation (+4 point to 11%) to better manage portfolio risk. We add a position in cash sterling (+4) on top of the existing US dollar one (7%). In parallel, we reduce our equity and bond allocation by 2 points (to respectively 45% and 36%). To enhance risk diversification, we upgrade our weightings in alternative investments (now 8%), including commodities (up 3 points).

 

Note that despite Socgen recommending a 45% allocation to equities it is now underweight the asset class.

As to what SocGen believes is the catalyst for the upcoming risk retrenchment, the answer: the new normal "fundamental" of less liquidity.

Market liquidity is expected to fall due to much tighter regulation and the US central bank policy tightening, announced for the second half of the year, which also creates the risk of policy errors as QE unwinding has never been implemented before. Illiquid assets like small cap equities and corporate bonds may suffer more than average in a de-rating process: in the MAP we recommend reducing weightings in both assets.

 

US Treasuries are facing conflicting forces. If they appear attractive compared with the average bond market valuation (yield spread) of the G9 countries, they will be confronted with monetary policy tightening by 2016. However, given the increased correlation between regional bond markets, diversification benefits have diminished. Overall, we reduce US Treasuries (-2 points to 10%) but, in a context of expected market turbulence, we nevertheless believe they remain one of the few safe havens around, especially when looking at total return in US dollars.

The bolded sentence is key: remember what happens every time QE ends (or S&P downgrades the US)? Equities plunge while Treasurys surge (and yields collapse). Which is why if the selling in the early selling trickle in the S&P seen in the past two weeks accelerates and becomes and all out avalanche, it will mean that the 10Y, currently approaching 2.50% may soon be yet another "generational" bargain.

An infographic summary of SocGen's latest positioning:

 

And, tying it all together, is SocGen's belief that inflation is finally starting to warm up... Again.

Prepare portfolios for inflation to warm up

 

Both our US chief economist and our inflation strategist agree that fears of deflation have receded. In the context where oil prices have risen since their trough in January, this leaves room for the return of inflation fears.  Accordingly,

 

1 – We prefer variable rate bonds (like inflation–linked) to traditional fixed rate bonds.

 

2 - For the first time in many years, we start to re-weight the commodity complex (from 2% to 5%), with a strong preference for base over precious metals.

 

3 - Inflation triggers valuation compression of financial assets, so we recommend a stronger focus on asset valuation: super expensive US equities should continue to be reallocated into cheaper Chinese equity markets that are opening up to global investors, and into euro area equities to benefit from the cyclical upswing.

Yet what SocGen and others appear to have forgotten is that inflation "warmed up" before. So much so that in the summer of 2011 the ECB hiked rates by the smallest possible amount. The result was yet another near collapse of the Eurozone, and only the Fed's intervention in November 2011 with global liquidity swap lines prevented Europe from disintegrating.

Which is why we firmly believe that the only reason the Fed is engaging in a "rate hike" exercise is to lead to precisely the kind of Risk Off event that SocGen is warnings against, which will cripple the US economy even further (whose Q1 GDP is negative contrary to what Wall Street's weathermen will tell you), and serve as the alibi to engage in QE4.

Because for all the posturing, and all the debate among serious people, the Fed has no way out absent one of two things: paradropping money which launches hyperinflation, or wholesale defaults on global debt, which at last check (by McKinsey) was $200 trillion between government, household and corporate.

 

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Tue, 06/09/2015 - 12:49 | 6179096 Mini-Me
Mini-Me's picture

This Ponzi needs to end and soon.  If there is any justice in the world, it will happen on Obama's watch.  It couldn't happen to a nicer guy.

Tue, 06/09/2015 - 12:51 | 6179107 Manthong
Manthong's picture

I want to go underweight government.

Tue, 06/09/2015 - 12:52 | 6179113 NoDebt
NoDebt's picture

Not allowed.

Tue, 06/09/2015 - 13:11 | 6179201 madcows
madcows's picture

Right.  Look at Christy-Kreme, and Hillary Rodham Cankles.  There's a bunch of other fatties on capital hill.  Eating pork and dining out on the corporate gravy train means a lot of calories.

Tue, 06/09/2015 - 12:54 | 6179123 Soul Glow
Soul Glow's picture

Or Hillary or Jeb.  Those families deserve to handle the affair.

Tue, 06/09/2015 - 18:45 | 6180574 Ballin D
Ballin D's picture

Maybe deserve it but Im exhausted from hearing team blue whine about inheriting the great recession.  I dont think my heart could take the hypocracy of their frothing at the mouth from a collapse two weeks into team red's term.

Say what you will about each side's politics - at least under team blue we dont have to hear the dems' constant whining.

Tue, 06/09/2015 - 13:29 | 6179283 European on my ...
European on my shoe Jimmy's picture

Shouldn't this be a call to buy with both hands ,

Tue, 06/09/2015 - 12:50 | 6179099 buzzsaw99
buzzsaw99's picture

they know nothing

Tue, 06/09/2015 - 12:51 | 6179109 JustObserving
JustObserving's picture

SocGen is predicting that Fed will tighten in Q2.  Not a chance.  We have it straight from the horse's mouth:

No tightening in my lifetime Bernanke

US debts are simply too high to withstand tightening.  And the goose that lays the golden eggs, the US stock market, is levitated by stock buybacks with companies borrowing at very low rates.

SocGen, as usual, is wrong.

 

Tue, 06/09/2015 - 12:51 | 6179110 NoDebt
NoDebt's picture

Yeah, I said the same thing in late 2013 and look how that turned out.

Tue, 06/09/2015 - 12:57 | 6179128 Philo Beddoe
Philo Beddoe's picture

Late 2012. Made a killing on my shorts and then I lost a bundle when they went the other way.  Greedy bastard. 

Edit. It was actually 2011. Does not feel that long ago.  

Tue, 06/09/2015 - 13:04 | 6179166 NoDebt
NoDebt's picture

I knew better than to short, at least.  I just went 1/3 cash in late 2013 and I haven't reduced it since then (the gains on the rest of the portfolio have reduced it to a little less than 25% since then).  Drag on returns the last year and a half, but at least I have dry powder for..... well, I'm not really sure what.  Making bullets, perhaps.

Tue, 06/09/2015 - 12:52 | 6179112 knukles
knukles's picture

Not that it's right or wrong, but I always find the Street's recommendations wrought with internal inconsistency.  The theme changes significantly, in fact significant enough to warrant a change in the model portfolio, but the percentage reallocations are usually de minimis   A couple percent here and there.  Just an observation, nothing more.    

Tue, 06/09/2015 - 12:57 | 6179138 KnuckleDragger-X
KnuckleDragger-X's picture

They always make sure they have an advantage if possible and assume they can beat back a collapse....

Tue, 06/09/2015 - 12:52 | 6179115 Raoul_Luke
Raoul_Luke's picture

Been there, done that...

Tue, 06/09/2015 - 12:52 | 6179116 Soul Glow
Soul Glow's picture

Fiat cash ain't shit.

Tue, 06/09/2015 - 14:04 | 6179429 rejected
rejected's picture

Yes it is!

Tue, 06/09/2015 - 12:54 | 6179124 KnuckleDragger-X
KnuckleDragger-X's picture

The HFT's are shaving pennies on manipulated trades, but that can't go on much longer and once the music stops the rush for the exits will start. I really do feel sorry for the sheep......

Tue, 06/09/2015 - 13:02 | 6179159 Bell's 2 hearted
Bell's 2 hearted's picture

the sheep will do what they always do ... ride it down ... all the way

 

for the usual reasons

 

don't want to pay capital gains tax

incessant 'bottom is in' at every step by "experts"

fear/paralysis

Tue, 06/09/2015 - 12:56 | 6179134 q99x2
q99x2's picture

Look for money falling from the sky unless you believe Greece is going to default.

Tue, 06/09/2015 - 12:58 | 6179140 Dr. Engali
Dr. Engali's picture

Underweight equities and overweight full metal jackets.

Tue, 06/09/2015 - 12:58 | 6179144 Bell's 2 hearted
Bell's 2 hearted's picture

"The bolded sentence is key: remember what happens every time QE ends (or S&P downgrades the US)? Equities plunge while Treasurys surge (and yields collapse). Which is why if the selling in the early selling trickle in the S&P seen in the past two weeks accelerates and becomes and all out avalanche, it will mean that the 10Y, currently approaching 2.50% may soon be yet another "generational" bargain."

 

Bond bull for years ... not letting go till i see the whites of the "10yr yield  @1%" eyes

Tue, 06/09/2015 - 13:00 | 6179153 Dr. Engali
Dr. Engali's picture

Exactly. I refuse to sell until I see sub 1% on the ten year.

Tue, 06/09/2015 - 13:06 | 6179173 NoDebt
NoDebt's picture

I can't find a lot of reason to disagree with that.  Hopefully you're buying actual bonds, not using a bond fund.

Tue, 06/09/2015 - 13:09 | 6179183 Bell's 2 hearted
Bell's 2 hearted's picture

US government treasuries only

 

last man, er, bond standing

Tue, 06/09/2015 - 13:12 | 6179209 NoDebt
NoDebt's picture

Deeply understood.

Tue, 06/09/2015 - 14:58 | 6179708 CPL
CPL's picture

Say you need to heat up some soup and the power goes out.  Assuming that the microwave is the answer over the stove doesn't make much of a difference when there's no power flowing.  Both the microwave and the stove in that case might as well be boat anchors.  The problem with that plan given is the fact the cash denomination that powers it is worthless.  Offering bonds, cash or whatever is pointless.  Something is obviously mentally wrong with the soc-gen if they are giving options that don't amount to anything to anybody and doesn't help going forward.

Someone go hand the bunch of them pink slips.  They are overdue to be fired, the bunch of them are useless cunts.

Tue, 06/09/2015 - 13:02 | 6179160 RiverRoad
RiverRoad's picture

Of course QE4..........just in time for the next presidential election of HRH Hillary.

Tue, 06/09/2015 - 13:20 | 6179250 Comte d'herblay
Comte d'herblay's picture

"Election"??

This is an appointment by the Jews,--- who manage the media very carefully to make it appear that there is an election going on.  

George Stepinalotashit is the most recent example of a hilary admenstruation wannabe, who is let alone about his extremely biased interview:  http://en.wikipedia.org/wiki/Bob_Iger---  

 

 ABC News later told the On Media blog that it would not take any punitive action against Stephanopoulos:

 

"We accept his apology," a spokesperson said. "It was an honest mistake."

 

On the April 26 edition of "This Week," Stephanopoulos interviewed Schweizer and challenged the author's assertions that Hillary Clinton may have committed a crime because there was a "troubling pattern" between donations to the foundation and Clinton's actions as secretary of state.

"We've done investigative work here at ABC News, found no proof of any kind of direct action," the host told Schweizer. "An independent government ethics expert, Bill Allison, of the Sunlight Foundation, wrote this. He said, 'There's no smoking gun, no evidence that she changed the policy based on donations to the foundation.'  No smoking gun."

Later in the interview, Stephanopoulos said, "I still haven't heard any direct evidence, and you just said you had no evidence that she intervened here." He also noted that other news organizations that used Schweizer's research "haven't confirmed any evidence of any crime."

Among the more notable revelations to come out of Schweizer's research is the relationship between the Clinton Foundation and Uranium One, a former Canadian mining company that was taken over by Russia in 2013 with U.S. government approval. From 2009 through 2013, Uranium One’s chairman donated $2.35 million to the Clinton Foundation.

Hillary Clinton has said that there is "not an inherent conflict of interest" between the foundation donations and her decisions at the State Department. 

It's all a setup. 

 

Tue, 06/09/2015 - 13:03 | 6179165 Ness.
Ness.'s picture

Stocks on the highs.  Thanks for playing.

Tue, 06/09/2015 - 13:12 | 6179199 Serfs Up
Serfs Up's picture

fk this shit, I am so fkn tired of this same-ness, the never ending groundhog day bullshit that infests every single fkn day.

I am tired.  I want this charade to end.  Fk you bankers and all your greedy ways.  

/My time.  It is coming.

 

Tue, 06/09/2015 - 13:15 | 6179218 Niall Of The Ni...
Niall Of The Nine Hostages's picture

If inflation is heating up, stocks are where you want to be, not the cash that's going to be inflated away.

As far as hyping assets you're cashing out of, SocGen could learn a thing or two from Goldman. Goldman would at least have their story straighter than this.

Tue, 06/09/2015 - 13:16 | 6179225 Mike Honcho
Mike Honcho's picture

When .25% is the strongest consideration for a rate hike and continuously gets delayed, the writing is on the wall.  The WH told us the recession ended June 2009, boy its been a good 6 years!

Tue, 06/09/2015 - 13:21 | 6179252 gwar5
gwar5's picture

Dear SOCGEN,

Thanks so much for the late call.

In your case it's better to be retarded than lucky.

Buh-bye,

Gwar5

 

 

 

 

 

Tue, 06/09/2015 - 13:50 | 6179376 HopefulCynical
HopefulCynical's picture

This is the last big sucker play, right before the final rocketship ramp job. They tell everyone a 'correction' is coming, and a lot of folks sell outright, or go "underweiaght stocks."

Then the market will drift sideways for a while, and then drop 7 - 10% percent, sharply for good scare effect. Then it will head for the sky again. All the folks who sold will watch in a panic, finally buying the blow off top, which Goldman & Pals will be all too happy to not only sell them, but short-sell them as well.

Remember, the banksters' true goal is to screw the global economy up so badly, in terms of zeros on computer screens theoretically owed to banksters, that the world truly believes it has no choice but to stand aside and let the banksters foreclose on the whole planet.

The American economy can still recover, if the Big Kersplat happens now. But if they blow the stawk bubble another 25 - 35%, it will give the parasites enough time to finish hollowing us completely and utterly out. Yeah, we're mostly hollowed out now. But "mostly dead is still a little bit alive," or however that line goes. They want utterly dead.

When the big crash actually comes, Goldman & Pals aren't going to tell anyone that will ever let that info bee seen by the public in any way. If you & I are seeing it - it ain't true.

Tue, 06/09/2015 - 13:56 | 6179405 RexZeedog
RexZeedog's picture

But sometimes a zit gets so big and ugly, you can't hide it anymore...

Tue, 06/09/2015 - 13:56 | 6179402 Goldbugger
Goldbugger's picture

Prepare for the crash, and the next one is going to be a big one. But unlike what we have seen in the past. I personally think it will take the next 5 years to bottom. IMO

Tue, 06/09/2015 - 13:58 | 6179410 TheRideNeverEnds
TheRideNeverEnds's picture

Yea sure thing, I will take your advise and sell my stocks out to you or Goldman here at the bottom of this most recent dip.

After all selling off 2% from all time highs to a strong floor of frantic hot money bids clearly signals the top of this historic bull market and is in no way classic price action of a continuing bull market.

Thanks SocGen! What would I do without you?

Tue, 06/09/2015 - 14:57 | 6179709 HopefulCynical
HopefulCynical's picture

I see someone else also understands the flim flam being played here.

Tue, 06/09/2015 - 14:51 | 6179674 fremannx
fremannx's picture
"Reduce Risk, Boost Cash, Go Underweight Stocks" SocGen Warns

Actually pretty good advice. The dollar will pull back a little in the coming months but it will continue its juggernaut climb this fall...

 

http://www.globaldeflationnews.com/u-s-dollar-indexelliott-wave-update-f...

Do NOT follow this link or you will be banned from the site!