J.P.Morgan: Questions, Questions

Analysts at J.P.Morgan have following market views currently:

• Portfolio strategy: The jury is out on whether investors have abandoned equities as a long-term asset. We stay long stocks over the remainder of the year.
• Economics: Policy makers signal greater focus on asset price inflation.
• Fixed income: Move to neutral duration and focus on carry trades.
• Equities: Pre-announcements point to another positive surprise for the 3Q reporting season.
• Credit: The HY bond default rate is set to collapse to 4% in 2010 vs 9% in 2009. Stay overweight HY credit.
• FX: Our main dollar short remains against JPY.
• Alternatives: Stay short crude oil, tactically.

And here are some summary replies on selected questions:

Is the crisis over? The financial crisis is largely over. The economic crisis, only half so. The recession is over but the recovery has just started. Even the above-trend growth pace that we project for this recovery will require years to get us back to trend levels of activity. This means high unemployment and disinflationary pressures over the next two years.

Is the recovery sustainable? Yes, odds are it is given unprecedented and synchronized global policy stimulus, low funding costs, a repaired financial system, and the massive need for inventory rebuilding into next year.

What are the main risk factors we should monitor? For the recovery in the world economy and in risky assets to be sustained, the private sector will need to take the baton from the public sector. Corporates are in the driver’s seat here. We need to see them move from a precautionary into an expansionary mode. That means capital spending, jobs, and income creation. Watch these.

Is delevering over? No, to the extent that balance sheet repair and maintenance will remain important objectives of households and companies alike, and soon become so for governments. But delevering is not the first priority anymore. Much of the upcoming balance sheet repair will come from asset price appreciation, allowing economic agents to alter savings and funding practices gradually, without jeopardizing the economic recovery.

Do banks have a lot of skeletons left in their closets, keeping them from fulfilling their credit intermediation role? We do not think so. Our Head of ABS Strategy, Chris Flanagan, estimated last week that global banks and insurers are three-quarters of the way through their cycle writedown and credit losses (US$1.6 trillion so far, versus an estimated total of US$2.25 trillion). He projects that the last quarter of these losses will be spread out over a number of years.

Is it too late to buy equities? No. Both our recovery theme—further upgrading of growth prospects—and our asset reflation theme—the pain of earning no return on
cash while the rally passes you by—keep us long equities.

Click on charts to enlarge, courtesy of J.P.Morgan.

Well, our opinions may differ on many issues.

One should ask, what recovery is sustainable if we still need unprecedented and synchronized global policy stimulus? Why these stimuli?

On banks? I rather think along the lines of "...Speaking Japanese Without Knowing It", by John Hussman today.

Given the large output gap I would question also the capital spending by corporates, also colleagues at competing house of Goldman Sachs think of a Slow Train ...

Also buying of equities tactically may be challenging ... the admired Jeff Saut, the strategist at Raymond James, sounded rather cautious in short-term today, but still bullish for longer run.