Morgan Stanley Prepares To Be Tri-sappointed; Sees No Policy Boost From US, Europe, Or China

Tyler Durden's picture

Despite high-flying equity indices, there is some underlying concern that all is not rosy in the global economy (and that Fed/ECB/PBoC might not save the day this time). As Morgan Stanley notes, the overcrowded trades are overweight US and within US overweight defensives - implying cyclicals are starting to reflect the current global macro weakness and that there are further downgrades to global growth forecasts to come. Expectations for a repeat of H2 2011's surge in positive surprises are misplaced as several unique factors were at play last year - and are very much lacking this year; moreover global growth indicators are significantly weaker than a year ago. With this background, MS also does not expect imminent QE in the US; the Chinese policy response continues to lag expectations; and there are several hurdles to executing ECB action - all of which leave them expecting further substantial downgrades to 2013 consensus earning forecasts in the US.


Morgan Stanley, Downunder Daily: No Threepeat

The August rally in cyclical equities is, rightly in our view, faltering. We do not expect 2012 to repeat the year-end rallies of 2010 or 2011. This is partly because we think the global growth slowdown continues, and partly because we see a possible triple policy disappointment: in the US, in Europe and in China. The downside risk for cyclical sectors is that earning downgrades spread beyond commodity-related sectors. There seems two crowded trades in global equities: by geography, overweight the US; by sector, overweight defensives. Lopsided positioning means that equity investors are on high alert for signs that cyclical sectors outperform.


Squint at Exhibit 1 and cyclicals did start to outperform through August. But that rally is now faltering. We do not expect it to re-start:

First, global macro remains weak and the risk is that there are further downgrades to global growth forecasts. While macro surprises have inflected – notably in the US (Exhibit 2) – it seems to us unlikely that last year’s pattern of year-end positive surprises (and fleeting upgrades to consensus GDP forecasts) will be repeated.

Several factors contributed to last year’s second-half growth improvement in the US: a fall in petrol (gasoline) prices from May to December 2011; restocking following Japan-related disruption to global supply chains; the draw-forward of investment spending to take advantage of a year-end reduction in investment incentives; and an unseasonably warm northern winter. This year, in contrast, there is no special Japan-type factor; petrol prices have been rising from early July; and concerns about fiscal policy are more likely to delay, rather than bring forward, investment spending.

Moreover, global growth indicators are significantly weaker than a year ago. Global sentiment is deteriorating, with the global purchasing managers’ index below 50. Global trade volumes are on the cusp of contracting, something not seen since 2009 (Exhibit 3).


Industrial commodity prices also signal no imminent growth recovery. Base metals are broadly flat, while iron ore prices are tumbling. The exception is oil, but arguably that is due to supply-side concerns. That makes for an awkward mix: slowing growth lowering industrial commodity prices, with supply-side issues causing growth-dampening energy (and food) price increases (Exhibit 4).


The short story is that our US team does not expect imminent QE in the US; there are several hurdles to executing major ECB action; and the Chinese policy response continues to lag expectations.

However, it may be that cyclical sectors have factored in a lot of bad news. We’re not sure. The downgrades to earning forecasts so far have been concentrated in resource sectors (materials – which includes mining – and energy). Forecast earnings for other cyclical sectors – technology, consumer discretionary, industrials – have held up well through this year. Exhibit 5 shows consensus 2013 EPS forecasts by sector (MSCI All Country index) from the start of this year. Forecasts for technology and consumer discretionary have increased through this year; industrials have seen trivial downgrades. There has not been broad-based cyclical downgrades.

The concentration of sector-level downgrades matches a similar regional concentration: big downgrades have been concentrated in Europe and China (Exhibit 6).


The downside risk for cyclical sectors is that earning downgrades spread beyond Europe, China and China-driven global sectors. Adam Parker, for example, continues to expect further substantial downgrades to 2013 consensus earning forecasts in the US. The global team remains cautious on equities overall. More to the point, it’s very unusual for cyclical sectors to outperform in a weak equity market.

Source: Morgan Stanley

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LawsofPhysics's picture

Goodbye Morgan Stanley, we hardly knew thee...

Who is holding shorts right now?

fonzannoon's picture

Is anyone else catching on the the big fuckin joke yet? Build up this Jackson asshole speech for months and then on the morning of the speech have some Weidermeyer guy drop some rumor to resign? The market rallies huge on this and they march Art Cashin out to say this means Europe may be fixed? More importantly it means that this big fuckin speech now means nothing?

Don't worry there is some big freakin ecb/fed thing next month so stay tuned and keep your eyes and ears glued to every word!

SheepDog-One's picture

NOTHING to see here, plebes! Get the fuck back to work and hand us over the money or we're about to get seriously pissed off!!

Jim in MN's picture

Yes.  A superficially boring and irrelevant plan to place European bank license authority with the ECB...otherwise known as a major loss of national sovereignty/security.  All according to the German/US plan to centralize and loot. To be released Sep. 12.


slaughterer's picture

Best way to kill off MS is to rally ES to 1500.  GS/JPM know this.  

bank guy in Brussels's picture

Jim Willie says Morgan Stanley might be about to go down ... and Deutsche Bank and Credit Agricole in Europe might go down with it

Jim Willie is really the ultimate doomer read ... provocative and entertaining

He says the US Treasury 'Bond Tower' is upheld by an increasingly devious balloon of Interest Rate Swaps ...

And that it is possible Saudi Arabia will be falling as an ironic consequence of the US-encouraged 'Arab Spring' revolts, taking the 'Petro-dollar' and US dollar hegemony down with it

And that the Chinese are part way already to accomplishing an alternative world finance system ... which might be based partly on gold

Great fun reading even for those who doubt it - Jim Willie's latest, 'Firestorms and Currency Twisters' covering the 'Morgan Stanley Implosion' and much more

BaBaBouy's picture

They can All Kiss My J-Hole ...


What time does BB spaek?


SheepDog-One's picture

Margin Stanley still even exists? Huh...

P.S. FUCK YOU Margin Stanley! Quit your jawboning and wrap your lips back around that gubment teat!

oogs66's picture

This might be most bullish signal I've seen in awhile!

LoneStarHog's picture

Who cares what Morgan Stanley says. Jim Willie says that MS will IMPLODE>

fonzannoon's picture

Jim Willie has been saying that for a long time now...

LoneStarHog's picture

Time is relative and long is subjective. What is your point?

fonzannoon's picture

my point is be careful if you are using it as actionable trading information. besides that, he seems like he certainly has a good grip on the big picture.

Jim in MN's picture

You mean to say, the financial elites feel that the political elites are insufficiently terrorized this month by the financial elites?  Oh dear, oh dear.


What to's like when the schoolyard bully acts like your best friend, until you have a glimmer of free will in your eye.  Then you get held down and burned with match tips in the back alley. friends again!!!


That is Goldman's relationship with 'heads of state'.

youngman's picture

You can almost hear them crying.....I hope we can get back to basics...a normal more intervention...I can dream.......

Muppet of the Universe's picture

bernank in 7 minutes.  :DTeehee, I feel like a fat kid in a candy store.

orangedrinkandchips's picture






Muppet of the Universe's picture

you sir are a fat bastard, a chunky monkey, and probably correct

chunkylover42's picture

so.... do the opposite, right?

lolmao500's picture

Will Morgan Stanley be around next year? It's not what I'm hearing.

Bartanist's picture

More articles are appearing saying that MS is "toast" and they are being treated as the new Wall Street pariah.

Shelby Moore III's picture

Most of the commentators here seem to be ignoring Exhibit 3.

The Fed will not QE3 until after the crash. My prior comments explain why:

And the extreme faith in the Fed, has kept these markets artificially floated.

I will be on the other side of this trade. This time is not different! (they never are)

In terms of getting the timing correct on shorts/puts, one has to watch the $VIX relative to its turns.