Tuesday, April 13, 2010

Merrill Sees Goldilocks Running Out Of Cash?

As an add-on to the Citi's survey I mentioned yesterday, Bank of America Merrill Lynch is out with monthly Global Fund Manager Survey today, and the conclusions are as follows:

The Full Goldilocks

The April FMS shows investor expectations are for robust growth (just 11% think growth slows), big profits and contained inflation…the full Goldilocks. In a super sign for structural bulls, investor belief in “above-trend” growth leaped. But short-term markets now vulnerable to growth disappointment and/or a jump in rates (consensus predicts 4.15% year-end for 10-year US Treasury yield).

No More Deleveraging Please

For the first time since December 2007 investors rank higher dividends and capital spending as higher priorities than balance sheet deleveraging, a sign the balance sheet recession has ended and a view consistent with equities outperforming corporate bonds.

No Cash = Correction Signal

Cash balances dropped to 3.5%. In 4 out of the past 5 occasions cash fell to 3.5% or below, equities corrected 7.1% in the following 4 weeks. As in January, asset allocators are once again very overweight equities (+52%), underweight bonds (-48%) and, in a rare admission, underweight cash too (-4%).

Banks Ain’t So Bad After All

The big underweight of global banks narrowed dramatically to -10%. April saw a pro-cyclical shift to materials (18%) and industrials (27%, highest since May '06) and away from utilities (-35%, lowest since May '06). Tech is still the big favourite.

Europe a No-Go Zone but the Yen Better Decline

Eurozone and UK remain no-go regions for asset allocators. More investors expect the yen to weaken than at any time since March 2002. So no surprise the Japan equity OW (+12%) reached its highest level since July 2007. Investors are overweight the US and Emerging Markets.

Pain Trades

Treasuries outperform Equities; Eurozone outperforms; Yen appreciates; defensives outperform cyclicals.

Click on chart to enlarge, courtesy of Bank of America Merrill Lynch.

Of course, there are fund managers that have alternative views, but note bears are in short supply these days, like John Hussman notes this week:
In short, my impression is that investors are deluding themselves about the solvency of the banking system. People learned in the 1930's that when you don't require the reported value of assets to have a clear and tangible link to the value that the assets would have in liquidation, bad things happen. Yet this is what regulatory and accounting rules are allowing for the banking system at present. While I do believe that bank depositors are safe to the extent of FDIC guarantees, my impression is that the banking system is still quietly insolvent.

Add this bullish sentiment in options markets, and wait not long till the roof of your house crashes? Guys, please send those Priests of Goldilocks some real stuff, otherwise the dopamine may be not sufficient to maintain the placebo effect of self-fulfilling prophecy, errr, expectations! Or prepare yourself ... :)

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