No Image

“Are You Ready For Greed?” Morgan Stanley Asks

“And some things that should not have been forgotten, were lost” – The Lord of the Rings

 

“Are you ready for greed?” asks Morgan Stanley’s Andrew Sheets in his Sunday Start note, in which he compares the current market situation to the early days of 2007, when the first harbingers of the financial crisis emerged (recall “10 Years Ago Today, The Financial Crisis Started With An Announcement By HSBC“) and when early warnings that it would all end in tears were roundly ignored for almost a year, all because of – you guessed it – a resurgence of greed.

“It’s happened before. As TABX cratered and credit markets wavered in early 2007, the S&P 500 went on to make new highs, not peaking until October. Greed is a powerful force. We are trying not to forget that.”

Morgan Stanley notes that after the crisis, greed became an anachronism as animal spirits died along with a wholesale shift in investor mentality:

Caution became unusually acceptable, whether due to real concern or survivorship bias. Corporates slowed investment, pushing capex well below trend. Investors pulled money out of stocks, despite a rising market. Banks cut balance sheets and reduced staff. Implied volatility remained unusually elevated over realised. Conferences became filled with speakers talking about just how bad the financial future might be.

 

There was almost an ‘end of history’ feel to it: That banking and the economy have fundamentally changed. That we’ve learned from our errors. That animal spirits won’t be allowed to return. This mindset has had pros and cons: It’s starved investment under the auspices of ‘financial prudence’, a somewhat self-fulfilling prophecy which meant low growth encouraged low growth. But it also led to a more stable financial sector, the seventh-longest US expansion in history, and global equities flirting with all-time highs. That’s a debate for another Sunday.

According to the bank, however, this may be changing. At least it hopes it is:

What matters now is if this mindset changes. The passage of time, coupled with the signals of the new US administration, is raising the odds of increased aggressiveness. The return of fully fledged ‘greed’ is not our base case. But it is a serious enough possibility to weigh on our thinking and our recommendations. Further steps towards it are one of several factors that we think support a 1Q ‘sparkle’.

Here’s why MS is hopeful:

Consumer confidence is the highest since 2001. Business confidence is the highest since 2004. US unemployment is 4.8%. G4 central banks continue to run exceptionally easy policy. Fiscal policy is already loosening in Japan and Europe, and is expected to loosen (significantly) in the US. It is quite a cocktail – easy credit, easy fiscal and monetary policy, high confidence and a self-professed ‘business-friendly’ US administration. Asset valuations certainly aren’t cheap. But then again, how often do greedy markets care about valuations?

So is the message here to throw caution to the wind, and just buy everything with both hands hoping others will be even greedier and allowing an easy way to offload exposure, or that with the VIX at levels that were last encountered in early 2007, and complacency pervasive, what comes next will be unpleasant?

Here is the full note from Sheets, so readers can decide for themselves (highlights ours).

Are You Ready for Greed?

 

10 years ago, almost to the day, trading launched something called TABX. A close relative of the ABX subprime indices, it aimed to provide a transparent way to both buy and sell risk on subprime-backed CDOs. But what was meant to be a tool to provide market liquidity and better risk management had the opposite effect. Prices on TABX collapsed, as investors finally had a way to express what they thought bonds were worth. Parts of the index meant to mimic AAA-rated bonds paying 0.50% per year lost 20% within hours. Now confined to financial infamy, TABX did provide transparency for subprime: An AAA-rated bond, in theory, should lose about 3bp/year. TABX suggested the losses on ‘AAA’ ABS CDOs could be 1000x that.

 

Such severe miscalculations shaped the crisis and the decade to come. 2008-09 didn’t just batter the economy, or the markets, or faith in institutions. It changed mindsets.

 

Caution became unusually acceptable, whether due to real concern or survivorship bias. Corporates slowed investment, pushing capex well below trend. Investors pulled money out of stocks, despite a rising market. Banks cut balance sheets and reduced staff. Implied volatility remained unusually elevated over realised. Conferences became filled with speakers talking about just how bad the financial future might be.

 

There was almost an ‘end of history’ feel to it: That banking and the economy have fundamentally changed. That we’ve learned from our errors. That animal spirits won’t be allowed to return. This mindset has had pros and cons: It’s starved investment under the auspices of ‘financial prudence’, a somewhat self-fulfilling prophecy which meant low growth encouraged low growth. But it also led to a more stable financial sector, the seventh-longest US expansion in history, and global equities flirting with all-time highs. That’s a debate for another Sunday.

 

What matters now is if this mindset changes. The passage of time, coupled with the signals of the new US administration, is raising the odds of increased aggressiveness. The return of fully fledged ‘greed’ is not our base case. But it is a serious enough possibility to weigh on our thinking and our recommendations. Further steps towards it are one of several factors that we think support a 1Q ‘sparkle’.

 

The path to greed seems surprisingly straightforward. Economic data, for the first time in years, are strong in the US, UK, Europe and China, and improving in Japan and broader EM. Inflation is rising (eurozone HICP is 1.8%Y), but not yet concerning (core HICP is 0.9%Y). Global earnings growth has turned positive again after 10 quarters of declines and credit is widely and cheaply available, with US credit markets seeing the most issuance ever in 2016 and European corporate bonds yielding 0.9%. Consumer confidence is the highest since 2001. Business confidence is the highest since 2004. US unemployment is 4.8%. G4 central banks continue to run exceptionally easy policy. Fiscal policy is already loosening in Japan and Europe, and is expected to loosen (significantly) in the US.

 

It is quite a cocktail – easy credit, easy fiscal and monetary policy, high confidence and a self-professed ‘business-friendly’ US administration. Asset valuations certainly aren’t cheap. But then again, how often do greedy markets care about valuations?

 

In short, we think a scenario where retail investors, corporates and financials all get much more optimistic at the same time needs to be respected, even if it’s not our base case outcome. Our preferred way to express that view is to own upside optionality on US and Japanese equities, where we think low volatility levels are underpricing a ‘greedy’ tail, and the possibility that such a scenario could see higher markets and higher volatility. It’s happened before. As TABX cratered and credit markets wavered in early 2007, the S&P 500 went on to make new highs, not peaking until October. Greed is a powerful force. We are trying not to forget that.

The post “Are You Ready For Greed?” Morgan Stanley Asks appeared first on crude-oil.news.


No Image

Coalition air strikes killed 18 Afghan civilians, UN says

Author: 
Reuters
Sun, 2017-02-12
ID: 
1486922806267065400

KABUL: At least 18 civilians were killed last week in air strikes by international forces in Afghanistan’s Helmand province, an initial United Nations inquiry has concluded.
American military officials say their aircraft have conducted around 30 air strikes in Helmand in the past week. A spokesman said they were looking into the inquiry.
“We are investigating the allegations and working diligently to determine whether civilians were killed or injured as a result of US air strikes,” said Brig. Gen. Charles Cleveland.
The NATO-led military mission has deployed hundreds of troops to Helmand in a bid to help Afghan security forces in their war against Taliban insurgents.
American aircraft and special forces have also provided combat support, with at least one US soldier wounded in recent fighting.
On Thursday and Friday air strikes in Helmand’s Sangin district killed as many as 18 civilians, mostly women and children, according to a UN statement released on Sunday.
The UN said the strikes had been conducted by “international military forces,” but only US aircraft have been involved in recent coalition strikes, according to military officials.
Family members of victims at the regional hospital in Helmand’s capital, Lashkar Gah, demanded explanations.
“How could women and children be Taliban?” Majnoon, a resident of Sangin, who said 11 people were killed in his brother’s house in a strike on Thursday, told Reuters.
Mullah Qasem, a local leader in Sangin, said the government wanted justice for the families of the victims.
The UN said a Taliban suicide bomber also killed at least seven civilians in an attack in Lashkar Gah on Saturday.
“(The UN) reiterates the need for all parties to the conflict to strictly adhere to their obligations under international humanitarian law to take all feasible measures to protect civilians from harm,” the statement said.
Civilian casualties from both American and Afghan air strikes increased dramatically last year, according to the UN’s most recent report on threats to civilians.

Main category: 

No Image

Yemen shelling kills Pakistani in southern Saudi

Author: 
Agence France Presse
Sun, 2017-02-12
ID: 
1486921918136967700

RIYADH: A Pakistani national was killed Sunday in Saudi Arabia when Yemeni rebels shelled the kingdom’s southern border region, the civil defense department said.
A rocket hit Arda, which is part of the southwestern region of Jazan, Civil Defense spokesman Yahya Al-Qahtani said in a report by the official Saudi Press Agency.
“As result, a Pakistani national was killed,” he said without naming the victim.
At least 115 civilians and soldiers have been killed in southern Saudi Arabia since a Saudi-led coalition launched air strikes in Yemen against Houthi rebels in March 2015 to support Yemen’s government.
Most of the casualties were Saudi who were killed in cross-border shelling or skirmishes.

Main category: