Tuesday, May 18, 2010

Merrill Sees Buy Signal Close

Bank of America Merrill Lynch is out with monthly Global Fund Manager Survey today. Last month there were concerns about Goldilocks Running Out Of Cash, today the key conclusions are as follows:

Goldilocks emigrates to US but fears it’s all been a dream
The May FMS saw the impact of a straightforward growth shock. Eurozone fiscal
concerns plus worries on China tightening has led to a rapid cooling in global growth expectations to +72 from +82 (back to levels of May 2009). This was headlined by a 17-point fall in EU growth outlook to +67; the second biggest 1-
month fall on record. A net 3% of regional PMs now expects a weaker Chinese
economy over the next 12 months (the first negative reading since March 2009).

Liquidity silver lining?
Interest rate expectations continue to be pushed back with almost 60% of investors seeing no Fed move before 2011 at the earliest. Even more conclusive is that 89% of investors see no ECB move before next year.

Cash levels restored; US is region of choice
Average cash levels moved sharply higher to 4.3% (from 3.5%) ending the sell signal triggered last month but falling short of a buy signal at 4.5%. After the extreme optimism of April, asset allocators cut equity overweight to a net 30%from 52%); bonds benefited, climbing 19 points to a net 29% UW. US is now the region of choice (+22% OW) as GEM conviction has waned (19% OW vs 31% in April). Despite risk aversion commodities retained support at 17% OW (from 20%)helped by a net 13% viewing oil as undervalued (from 2% overvalued in April).

Relative pessimism on Europe starts to look stretched
The differential in 12-month relative corporate profit outlook between EU and US is now at the highest level since July 2003. As much as the US (and US$) is, understandably, viewed as a safe haven, the relative optimism looks close to contrarian trigger levels. While falling back from the multi-year high seen last month, investors remain OW Japan in regional allocations (net 5% vs. 12%).

Growth concerns but pro-cyclical sector tilt retained
Concerns over global growth saw broad rotation into defensive sectors out of banks and basic materials. However, the top-3 sectors remain technology, energy and industrial suggesting the cyclical trade retains some attractions. Three big GEM-demand related sectors (industrials, staples and materials) are now seen as overvalued but remain overweight in portfolios.

Contrarian pain
US underperforms vs. Europe. $ falls vs. Yen and Euro. Buy utilities & banks; sell technology & industrials. Back testing indicators say buy EU, sell US in terms of relative regional preferences.

Click on chart to enlarge, courtesy of BofA Merrill Lynch.
Mid-cycle crisis ongoing? Is Goldilocks (that has moved to US now) a normal precursor of a Minsky moment?

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