Why Bank Of America Just Said To Go Long "Cash & Volatility", In Charts

Tyler Durden's picture




 

JPM, Citi, UBS, and now one of the Wall Street strategists whose perspective we respect the most, BofA's Michael Harnett, who quite clearly disagrees with the official BofA "straight to CNBC" mouthpiece Savita Subramanian, is out with a note in which he is telling reders to get out of stocks, go into cash expecting a short sharp pullbacks in risk assets (e.g. SPX to 1850-1900), and be long volatility.

From his report:

Investors should be long cash & volatility, and be prepared for a short sharp pullback in risk assets (e.g. SPX to 1850-1900), at least until one of the following conditions is met:

  • PMI’s back over 50 in China & US
  • 2-way risk emerges in CNY & oil inducing value buyers of HY & EM debt
  • A spike in volatility and/or an asset price reset induces Fed to pause

Why the unexpectedly bearish stance? According to Hartnett, "cash is king" and defensives are to be bid because of the 3Ps: Positioning, Profits and Policy.

This is what he thinks:

3P’s say Cash is King

Ever since the end of QE3 in late-2014, leadership across asset markets has shifted sharply away from stocks & bonds, to the US dollar, volatility & cash. In 2015, cash outperformed both stocks (down 2%) & fixed income (down 3%), for the first time since 199 (Table 1).

The new leadership is unchanged in the early going in 2016. Cash, gold & government bonds are the sole assets in positive territory thus far. And we believe the three drivers of asset prices, Positioning, Profits, Policy, argue for further outperformance of defensive assets in the near-term.

On Positioning:

The best reason to be bullish right now is there are so few reasons to be bullish: our Bull & Bear Index has sunk back to a very bearish reading of 1.3; high yield bond funds experienced extreme outflows in December ($12bn outflows in just 3 weeks, a contrarian indicator which may help explain HY’s resilience in recent days), and equity markets start the year very oversold - our Global Breadth Rule is once again approaching a contrarian “buy” signal.

Three trends nonetheless point to lower Q1 demand for risk assets:

1. Private client allocations to cash are on the rise. BofAML GWIM cash as a % of AUM jumped to 12% in December, a 2-year high, while equity allocations have dropped to 59% from a Mar’15 peak of 63%.

2. The Sovereign Wealth Fund bid for risk assets is falling. The level of SWF AUM (currently $7.2 trillion) has stagnated in recent quarters. $4.4tn of all SWF AUM originates in commodity-producing countries. Given the new commodity price regime (oil averaged $90/bbl in the 10-years to 2014 but will average closer to $50/bbl in the 2015-2017 period), SWF AUM is likely to come under downward pressure. SWF exposures are notoriously opaque, but publicly available data shows equity allocations of around 50%, concentrated in consumer, financial, industrial & tech sectors. Table 2 shows the top stock holdings of the Norges pension fund, the world’s largest SWF.

3. Buybacks will be less of a tailwind for stock markets & EPS. Rising rates and spreads means lower debt issuance, which in turn means less money for stock buybacks. S&P’s recent downgrade of Yum was driven by its announcement of a stock buyback program to be likely funded by even more debt. If companies cannot now issue debt to fund buybacks, this marks an important turning point for the stock market.

 

On Profits:

1. Global corporate profits are falling. The latest YoY growth of global EPS is -5.8%. Profits are highly correlated with PMIs and in both the US & China PMI’s are weak, i.e. below the boom-bust level of 50 (Chart 2). Upward momentum in these indicators is desperately needed to prevent Q1 being a quarter of EPS downgrades: consensus forecasts 2016 EPS growth of 7.3% in the US & 9.9% for global profits.

2. Recession risk is rising. Classic cyclical signals such as the Dow Jones Transportation Index are in unambiguous bear markets, and are now dragging “new economy” indices lower (e.g. IXK – Chart 3). Thus fresh downside to PMIs would be very worrying: an ISM below the 45 level has coincided with an official US recession 11/13 times since WW2 (see front page chart), is historically associated with (at a minimum) a 5-10% drop in profits, and should it occur in coming months, would be entirely consistent with 1.5% on the 10-year Treasury yield and 1800 on SPX.

3. Long US dollar has morphed into a “risk-off” trade. A stronger US dollar threatens to darken the outlook for US manufacturing, exacerbate the death spiral in commodities, EM & resources, and induce expectations of worsening geopolitics in the Middle East.

 

On Policy:

1. US monetary conditions are tightening. The FOMC is raising rates, credit spreads are rising, and the US dollar is appreciating. The US economy is experiencing a considerable tightening of monetary conditions. Should strong US consumer spending allay fears of Quantitative Failure, all will be well – hence the importance of Friday’s payroll. If not, look for both equity and credit markets to reset lower until such time as the Fed says (even if temporarily) “pause”. Fed tightening is almost always associated with “events” (Chart 4), and markets have a habit of forcing policy reversals (e.g. Fed 1937, BoJ 1995, BoJ 2000).

2. The Great EM Devaluation continues. The Chinese, following all other EM’s, are now devaluing sharply (CNH offshore is down over 6% in less than 10 weeks). As we have said before, until there is 2-way risk in RMB, there is 1-way risk in oil, commodities and EM. BofAML remains long 6-month forward USD/CNH, and long 3-month USD versus a basket of KRW, TWD, MYR. Once Chinese exports react positively to the cheaper currency, a bid is likely to return to Chinese assets. Until then the greatest China threat could be via the Chinese corporate bond market, currently at multi-year highs versus Chinese stocks (Chart 5) despite a credit crunch.

3. The End of the Oil Age. The new oil price regime is likely to continue to create financial stresses in the Middle East (see stock prices in Iran & Saudi Arabia – Chart 6) and fears of regional currency pegs coming under pressure or speculative attack.

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Thu, 01/07/2016 - 10:32 | 7010902 Tom Servo
Tom Servo's picture

The "melt up" has begun early, the 3:30 ramp might push everything green...

 

we shall see...

 

Thu, 01/07/2016 - 10:35 | 7010924 Mark Mywords
Mark Mywords's picture

Another repeat just like yesterday. Drop big prior to open, melt up all day, a small decline again in the afternoon, then your daily surge into the close thanks to our friends at 3:30 Ramp Capital, LLC.

Thu, 01/07/2016 - 10:38 | 7010944 Thought Processor
Thought Processor's picture

 

Yep.  All this new found negativity makes me think that a rally is in order.

Thu, 01/07/2016 - 10:53 | 7011043 OregonGrown
OregonGrown's picture

Long world PPT!

Thu, 01/07/2016 - 11:09 | 7011128 highandwired
highandwired's picture

"Cash, gold & government bonds are the sole assets in positive territory thus far."

Um...did someone forget Bitcoin? 

Thu, 01/07/2016 - 11:21 | 7011206 KnuckleDragger-X
KnuckleDragger-X's picture

We'll see a lot of forced rallies, but the broad market will keep getting worse. Who is going to keep playing the game is the question.....

Thu, 01/07/2016 - 10:46 | 7010990 froze25
froze25's picture

Its just a knee jerk reaction to a rush for "safety" of the US markets, don't worry more blood to come. Since Soros is saying its a crisis my guess is he is positioned short and is just saying things like that to cause more panic selling. The man is a devil but he is right more than wrong and a master manipulator.

Thu, 01/07/2016 - 11:22 | 7011208 dontgoforit
dontgoforit's picture

He's the devil in the blue dress.

Thu, 01/07/2016 - 10:48 | 7011008 Groundhog Day
Groundhog Day's picture

if BOFA is telling retail to sell and buy volatility i should be looking at xiv and spy calls

Thu, 01/07/2016 - 11:14 | 7011161 Crawdaddy
Crawdaddy's picture

Indeed! BOFA is not a part of the cabal trying to bring in the NWO? Hell they are one of the main players. Like they care about who goes cash or doesn't. By the time they are done cash will cease to exist too.

Thu, 01/07/2016 - 10:50 | 7011026 ebworthen
ebworthen's picture

I'd wager there is hot money leaving China for the "safety" of the U.S. markets.

NYSE and NASDAQ circuit-breakers (brownout breakers) still in place, eh?

Thu, 01/07/2016 - 10:43 | 7010980 SlipStitchPass
SlipStitchPass's picture

The Algos have been set. It will touch even today or go green. 

 

Thu, 01/07/2016 - 11:14 | 7011160 RiverRoad
RiverRoad's picture

So Ms. Yellen, will everything be hunky dory again for the November election?

Thu, 01/07/2016 - 11:18 | 7011186 stumbLebum
stumbLebum's picture

Gartman is saying we're now in a bear market, so best to buy with both hands. Gartman has never made money in any market - ever. Even his own mother is at a loss to explain his apparent success.

Thu, 01/07/2016 - 10:32 | 7010903 ebworthen
ebworthen's picture

A target rate of 6% looks about right.

And this time no bailouts and jail the crooks.

I can dream, can't I?

Thu, 01/07/2016 - 11:13 | 7011154 WillyGroper
WillyGroper's picture

wet

;)

Thu, 01/07/2016 - 10:33 | 7010910 Sir SpeaksALot
Sir SpeaksALot's picture

to follow this advice is just enough to cause a total crash :)

Thu, 01/07/2016 - 10:33 | 7010912 Lady Jessica
Lady Jessica's picture

Take away message for the FED: if you gonna go loose, don't do it for too long?

Thu, 01/07/2016 - 10:38 | 7010945 Thisisbullishright
Thisisbullishright's picture

Panic buying is in full bore!!

 

What TOTAL HORSESHIT!!!!

 

Thu, 01/07/2016 - 10:39 | 7010948 Yen Cross
Yen Cross's picture

 I turned on the blowhorn and these fucking clowns are clueless! The propaganda is so blatant!

 I remember last summer when everyone was saying China wasn't a big deal, and now they can't find anything else to blame their bloated balance sheets, and insane P/E's on.

 Fucking retards!

Thu, 01/07/2016 - 11:30 | 7011268 Captain Kink
Captain Kink's picture

China in a world of hurt... How will they raise the cash to "stabilize" their Fiat?

Notice that long dated treasuries are no longer higher on the day... I guess there's no more fear out there...or is a major foreign holder blowing them out to raise cash?

Thu, 01/07/2016 - 11:58 | 7011493 ShorTed
ShorTed's picture

...a major foreign holder blowing them out to raise cash?  Yes, the chinese most particularly.

Thu, 01/07/2016 - 10:40 | 7010956 22winmag
22winmag's picture

Chart #1 LMAO

Thu, 01/07/2016 - 10:41 | 7010963 Dr. Engali
Dr. Engali's picture

"Should strong US consumer spending allay fears of Quantitative Failure, all will be well"

 

"Strong CONsumer" Lol..., These iddjits crack me up. 

Thu, 01/07/2016 - 10:44 | 7010991 Yen Cross
Yen Cross's picture

 I guess they missed the Macys layoffs and shitty car sales numbers Doc.

Thu, 01/07/2016 - 10:48 | 7011006 Dr. Engali
Dr. Engali's picture

It was funny listening to the assholes on CNBS blame Macy's on anything they could besides the CONsumer. Have to keep the propaganda flowing.

Thu, 01/07/2016 - 11:23 | 7011217 dontgoforit
dontgoforit's picture

The problem is so many believe what those pricks are saying....don't even question it.  Post turtles.

Thu, 01/07/2016 - 10:43 | 7010977 Xatos
Xatos's picture

Don't fret, the SHTF by months end.

Thu, 01/07/2016 - 10:44 | 7010985 Chris P
Chris P's picture

I think they need an IPO of the FED so we can all get in on the action. When they can print and buy it makes it so much easier to make money. I needs me one of those printing presses!!!

Thu, 01/07/2016 - 11:19 | 7011197 RiverRoad
RiverRoad's picture

Just for laughs....check out how the Fed is leveraged.

Thu, 01/07/2016 - 11:24 | 7011220 dontgoforit
dontgoforit's picture

For more laughs:

What do you call a deaf gynocologist?

 

A lip reader.

Thu, 01/07/2016 - 10:45 | 7010989 buzzsaw99
buzzsaw99's picture

i wonder if they have any vol to sell? /s

maybe some ir swaps too? /s

Thu, 01/07/2016 - 10:46 | 7010998 I AM SULLY
I AM SULLY's picture

Prepare to have your shorts soiled.

Thu, 01/07/2016 - 10:48 | 7011011 LawsofPhysics
LawsofPhysics's picture

Just like GM, AIG, and all the other useless fucks, we should have let BofA go BANKRUPT a long time ago.

Reap what has been sown dumbasses!

Thu, 01/07/2016 - 10:49 | 7011016 Yen Cross
Yen Cross's picture

 How can this guy say equity markets are oversold? Look at the monthly charts dipshit. Equities are 6+ years overbought!

Thu, 01/07/2016 - 10:49 | 7011018 madbraz
madbraz's picture

when directors of Virtu and Citadel are on the advisory borrowing committee of the US Treasury you know that the game is utterly corrupt and rigged.

Thu, 01/07/2016 - 10:50 | 7011023 FreeShitter
FreeShitter's picture

Days like these (1-2% neg) plus soros coming out saying this is 2008 just reinforces the thought that we are NOT close to the big one yet.....the big one comes with a thunderous flash crash, just sheer panic. These are ripples right now..keep stacking my friends.

Thu, 01/07/2016 - 10:55 | 7011024 FreeNewEnergy
FreeNewEnergy's picture

Here's my takeaway, if we actually use the signals given:

From his report:

Investors should be long cash & volatility, and be prepared for a short sharp pullback in risk assets (e.g. SPX to 1850-1900), at least until one of the following conditions is met:

  • PMI’s back over 50 in China & US
  • 2-way risk emerges in CNY & oil inducing value buyers of HY & EM debt
  • A spike in volatility and/or an asset price reset induces Fed to pause

PMIs over 50 in US and China: Next year

2-way risk in blah, blah, blah: I dunno

Spike in vol/asset price reset inducing Fed to pause: underway.

So, what Mr. Submariner (isn't he a Marvel Superhero?) is telling us is exactly squat. He says, "Oh, shit, stocks are going down. Get Out! Get back in when they're lower."

WTF? No wonder nobody trusts anybody anymore. Experts tell you things you can figure out on your own. Better off being a moron, I suppose.

How about this, Mr. Subhuman, or Namor, as you were known back in the 60s, I'll hold onto my silver, except for the bars that went to the bottom of the ocean, which you are obviously holding for me (hint: I will be buried at sea, along with Osama bin Laden).

Thanks for the heads up. The Dow is only down 1000 points since the rate hike. Get a real fucking job.

Disclaimer: This does not violate my non-disparagement agreement, since my comments are opinion only and not those of our station, advertisers or creditors.

Thu, 01/07/2016 - 11:28 | 7011247 Zero-risk bias
Zero-risk bias's picture

Giving you an uptick just for the consistently cynical tone.

Thu, 01/07/2016 - 10:55 | 7011033 buzzsaw99
buzzsaw99's picture

SWF owners don't sell, they borrow. Someday they will sell but not today. As for clients holding more cash that is a bullish indicator. Big oil profits are down but profits don't matter.

Thu, 01/07/2016 - 10:51 | 7011037 two hoots
two hoots's picture

Who knows where all this is heading?  For some markets are just a day at the tracks, others where they invest (?) their money for the future, still others just something they know exist but will never be involved in, just affected by it (and not knowing it).  There are as many worlds as there are people each seeing, hearing, tasting it differently.  It is what it is and ain't what it ain't.  One must find their best sweet spot and call it good.

Thu, 01/07/2016 - 11:07 | 7011113 savedeposit
savedeposit's picture

Yeah go cash

Bills, paper with dead presidents

NOT!

Thu, 01/07/2016 - 11:35 | 7011297 ihatediscus
ihatediscus's picture

BOFA SAYS ........CASH

.......................................AHHHH..........thats a sure  sign ..........time to buy more Pmetal

Thu, 01/07/2016 - 11:07 | 7011114 polo007
polo007's picture

http://realmoney.thestreet.com/articles/01/07/2016/ah-ha-moment-might-fi...

The "Ah-Ha Moment" Might Finally Be at Hand

By Doug Kass

Jan 07, 2016 | 8:31 AM EST
  
It looks like we're finally witnessing the return of so-called "natural price discovery" to Wall Street.

Years of the Federal Reserve Zero's Interest Rate Policy and massive liquidity infusions have yielded a central-bank "put" on the markets, replacing natural price discovery with asset-price inflation.

But now, it looks like that movie is being run in reverse. That's because players are beginning to lose faith in the Fed and other central banks, or what I call the "Ah-Ha Moment."

We appear to now be at a place that I've been warning about for the past year. By inflating asset prices, central bankers have compressed risk like a coiled spring -- and money managers have all crowded into the same trade of being long on overvalued equities and other asset classes. But the past few days have shown what happens when many of these players want to exit the same trade at the same time.

How Do You Say 'Tora! Tora! Tora!' in Chinese?

Many of business TV's "talking heads" have been saying this week that investors should ignore China's woes, citing things like the fact that trade with the Asian nation represents just a small part of U.S. gross domestic product.

They're clueless!

I remain short on the iShares China Large-Cap ETF (FXI), and I issued another warning about China just two days ago in my column Don't Say We Didn't Warn You About China.

The Chinese markets are overleveraged, and after losing real estate/construction as an engine of growth, the government is devaluing China's currency in an attempt to resuscitate domestic economic growth.

Meanwhile, I've consistently argued that China's stock markets are much more broken than America's. Perhaps that's why the Chinese markets' circuit breakers -- which shut off trading early today for the second time this week -- are having the opposite effect of what the authorities intended.

Unfortunately, China's potential to "export" risk through capital flight and a devalued Chinese currency (one of the "surprises" I predicted for 2015) and could cause problems for Western markets as investors lose faith and unwind long positions.

In a world of tepid growth, the system's fragility and overvalued nature -- coupled with a loss of confidence in central bankers -- represents an outsized risk to our markets. So does the notion of America as an "oasis of prosperity" in a flat, interconnected and networked world.

Thu, 01/07/2016 - 11:09 | 7011115 earleflorida
earleflorida's picture

all the shit talk`noise would be irrelevant had Clinton left the 'Glass-Steagall Act' stand...

is the ussa moar competitive today globally, or our the ussa'S 99% moar secure financially...[?]

Thu, 01/07/2016 - 11:21 | 7011202 James TraffiCan't
James TraffiCan't's picture

Can we learn from History? Fuck ya!

Sit on Cash, hedge it with PM and just Fucking relax and watch the Sheep get slaughtered!

Beam me up!

Thu, 01/07/2016 - 11:32 | 7011280 Zero-risk bias
Zero-risk bias's picture

Long wheelbarrows and speed bumps?.. Yawn/

Thu, 01/07/2016 - 13:55 | 7012400 TheDanimal
TheDanimal's picture

The consumer is fucking broke.  Idiots are deferring or skimping on essentials so they can spend more on discretionary.  It seems logical to me that this trend will continue and even magnify as people become poorer and poorer. 

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