• Knave Dave
    05/23/2016 - 18:16
    This past Thursday marked the one-year anniversary of the US stock market’s death when stocks saw their last high. Market bulls have spent a year looking like the walking dead. They’ve...

JPMorgan Crushes The BTFDers: "Sell Any Rallies"

Tyler Durden's picture


It didn't take long for the momentum-chasing fundamental strategists to readjust their immediate stock price targets on the heels of the i) failure of the Santa Rally and ii) the worst start to the year in Chinese stock market history.  Case in point, moments ago JPM's equity strategy team released its first note for the year in which it says that "we take the view that equities are unlikely to perform well on a 12-24 month horizon" adding that "the regime of buying the dips might be over and selling any rallies might be the new one."

According to JPM, the following are the headwinds faced by stocks:

1) Equities are not attractively priced any more. On most metrics, P/S, P/E and P/B, they are trading at a premium to their historical averages. Sales per share are at highs, as well. True, relative to fixed income, stocks still look interesting, but credit spreads are widening, and the key central bank has started to hike. Asset reflation regime might start to reverse.


2) Balance sheets are deteriorating, with increased debt issuance used to finance record levels of buybacks. US corporate financing gap has turned negative. This is typically not a good starting point.


3) US profit margins are showing increasing evidence of peaking. Profitability improvement was one of the key drivers of the 7-year long equity rally. This might be finished, as the profit margin proxy – the difference between corporate pricing and the wage growth – has turned outright negative 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 already at ‘07 highs, and credit spreads are widening.


4) Fed tightening is happening very late in the cycle. Typically, the first hike takes place within 12 months of the end of last recession. This time around, we are close to 7 years. Could the Fed appear to be behind the curve, especially if inflation and wage growth picks up? More fundamentally, asset reflation worked during ZIRP to help equities. This could start to unwind.


5) Medium-term Chinese and EM backdrop remains challenging. CNY is back to highs vs EM FX. This could lead to another round of devaluations, possibly in Q1. This would be especially the case if the Fed were to be seen to be falling behind the curve. EM do not typically perform well against a backdrop of a strengthening USD. In addition, EM credit overhang is significant, and NPL upcycle could be just starting.


Importantly, the sector allocation in the event of a down market might not be typical, given that, during the up markets, the leadership was also not orthodox. The bull market was characterised by the leadership of Growth, Defensives and yield. The bear market could see some of the high P/E winners rolling over, not just the weakness in the traditional cycle sensitive names.

In putting the above concerns together, JPM says that "selling any rallies" may be the new "BTFD", adding that "envisages 3 distinct scenarios for stocks, 2 of which are negative."

1) US growth is robust, starting the year strongly, especially as the El Nino effect flatters the seasonal data delivery. Wage growth continues picking up and inflation turns decisively higher as oil price base effects drop out. Fed could start to look as if it is behind the curve, in particular if the projected productivity improvement in the US doesn’t materialise. Markets start to worry about a ’94 type of scenario. The P/E multiples derate, especially in the Growth sectors, those that enjoyed sharp multiple expansion during the past 6 years. EM suffers on the back of a strong USD and potential further CNY devaluation, with rising credit concerns. Equities overall perform poorly.


2) Global growth remains mixed, with no clear rebound in China. NPL upcycle in EM starts in earnest. US profit margins are peaking, with corporate sector consequently turning more cautious. End-cycle dynamics take hold. China undertakes further currency devaluations in an attempt to stabilize its growth, hurting sentiment. In this scenario, global equities are likely to perform poorly, as well.


3) This scenario could be branded a Goldilocks one, not too hot and not too cold. US growth remains robust, Fed is hiking, but can maintain a gradual pace of hikes as productivity growth rebounds. Market leadership broadens to encompass Value sectors, which start outperforming. The Chinese are successful in stabilizing their economy and in averting credit dislocation. Eurozone recovery continues, and more importantly, it is not overshadowed by increasing global uncertainty, as it was last summer. In this scenario, equities perform well, making new cycle highs.


One could argue that over the past 7 years, while most were worrying about deflationary risks, most assets – including credit, fixed income and equities, enjoyed Asset Reflation, with a notable exception of commodities. Asset reflation regime might be giving way to Asset Deflation, where most assets either lose money, at the same time, or are already maxed out in terms of their potential returns.

In short: "Longer term, over the next 12-18 months, we think the risk-reward is turning less favourable; We cut our equity OW to minimal 5% on 30th November."

Good luck to all 17-year-old hedge fund managers and their pet algos.

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Mon, 01/04/2016 - 08:59 | 6994519 Omega_Man
Omega_Man's picture

JP Morgan are assholes. Hope the militia storm their building and steal their loot

Mon, 01/04/2016 - 09:02 | 6994530 Haus-Targaryen
Haus-Targaryen's picture

Solid "meh" at the moment.  Mr. Yellen can now drop overnight back to 0 and its back to business for a while longer. 

Mon, 01/04/2016 - 11:17 | 6995052 HopefulCynical
HopefulCynical's picture

Yep. It's true that everything's in the shitter, in real economic terms. The fact that JPM is saying so, however, means that the game is afoot.

Mon, 01/04/2016 - 09:05 | 6994534 stocktivity
stocktivity's picture

The Chinese PPT will be out in force tonight to close it green. Janet and the Fed will be involved all night to do whatever it takes. Must close China green tonight!  Maybe Janet can talk Obama into getting Saudi and Iran to duke it out and spike oil.

Mon, 01/04/2016 - 10:59 | 6994977 TheDanimal
TheDanimal's picture

The loot is a lie.

Mon, 01/04/2016 - 09:02 | 6994520 VinceFostersGhost
VinceFostersGhost's picture



Throw the women and children in the water.....and let's paddle the hell out of here.


So Paul Ryan came up with money for everything.......except us........that sucks!

Mon, 01/04/2016 - 08:59 | 6994522 StackShinyStuff
StackShinyStuff's picture

What about the STFRers?

Mon, 01/04/2016 - 08:59 | 6994523 spanish inquisition
spanish inquisition's picture

Pfft. What do they know? I will wait to see what Gartman says.

Mon, 01/04/2016 - 09:00 | 6994525 max2205
max2205's picture

Janet didn't get a Hainakua card from JPM?

Mon, 01/04/2016 - 09:01 | 6994526 conscious being
conscious being's picture

This is a retreat to the inner citadel, the T-bond complex. The stock market will be sacrificed to prop up bonds - parsphrasing Jim Willie from a few years back.

Mon, 01/04/2016 - 09:02 | 6994529 I AM SULLY
I AM SULLY's picture

This whole shit-show is going down the tubes.

The only question is whether they trigger a nuclear war on the way down - who knows.

Mon, 01/04/2016 - 09:02 | 6994535 Never One Roach
Never One Roach's picture

Would you like cup of "Hope and Change" with that market crash?

Mon, 01/04/2016 - 09:23 | 6994585 VinceFostersGhost
VinceFostersGhost's picture



If it's free.....why the hell not?

Mon, 01/04/2016 - 09:55 | 6994713 kralizec
kralizec's picture

Awesome, a double "heh!" morning.  Thanks, I needed that.

Mon, 01/04/2016 - 09:07 | 6994545 ebworthen
ebworthen's picture

Time to clear more of Mom and Pop's chips off the green felt?

Mon, 01/04/2016 - 09:08 | 6994547 BandGap
BandGap's picture

Sooooooooooooooo, overnight and all of a sudden equities are no longer valued correctly.

How much does JPM (and the other shill houses) pay for the ability to tell you the ship is sinking as the waves are touching their toes?

Lemmings forward!

Mon, 01/04/2016 - 09:19 | 6994571 Boris Badenov
Boris Badenov's picture

No, not overnight. Since the Screaming Vee bottom in the Yen 12/18/2015 (have a look at a chart).

Mon, 01/04/2016 - 09:10 | 6994549 Omega_Man
Omega_Man's picture

these fukkkers gotta burn

Mon, 01/04/2016 - 09:17 | 6994564 firstdivision
firstdivision's picture

Points 1-3 have been over a year and a half-old.  Metrics have been flashing 'Danger' since 2014.  This is setting up more and more like 2006-2008, and we're in the 2008 part of the timeline.

Mon, 01/04/2016 - 09:18 | 6994566 homiegot
homiegot's picture

Sell the rally.

Mon, 01/04/2016 - 09:25 | 6994592 yogibear
yogibear's picture

Many people looking for the "January effect" soon.

Mon, 01/04/2016 - 09:25 | 6994593 Omega_Man
Omega_Man's picture

the fed and big banks needs to be stormed and taken over and looted... get the civil war going...

Mon, 01/04/2016 - 09:25 | 6994594 yellensNIRPles
yellensNIRPles's picture

You have been warned. Officially, this time.

Mon, 01/04/2016 - 09:46 | 6994680 Bopper09
Bopper09's picture

Want to know how bankers are lying?  They're talking.

Mon, 01/04/2016 - 09:58 | 6994720 Quinvarius
Quinvarius's picture

I remember when the bankers said Ukraine was contained.  Then Ukraine had a full blown civil war, which turned into a pre-game of WW3 in Europe, which then spllied over into the Middle Eastern Theater as a hot war.  And now we are hours away from a nuke fest, depending on what Obama's next mistake is.  And there is alway a next mistake when that clown is involved.  So what choice is there but to push the DOW green?

Mon, 01/04/2016 - 10:35 | 6994868 NIETSNEREM
NIETSNEREM's picture

Whatever happened to the "summer of recovery"?

Mon, 01/04/2016 - 11:01 | 6994986 bamawatson
bamawatson's picture

no, no, --- they said re-covered; as in glossed over again

Mon, 01/04/2016 - 11:10 | 6995025 Wahooo
Wahooo's picture

Fine, but what does Gartman say?

Mon, 01/04/2016 - 11:28 | 6995096 No Quarter
No Quarter's picture

So if the conventional wisdom is to do the oposite of what JPM says, how do you play this one? 

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