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Morgan Stanley Releases 2022 Outlook, Sees S&P Closing 6% Lower At 4,400

Morgan Stanley Releases 2022 Outlook, Sees S&P Closing 6% Lower At 4,400

Back in August, Wall Street’s biggest sellside bear, Morgan Stanley…

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This article was originally published by Zero Hedge

Morgan Stanley Releases 2022 Outlook, Sees S&P Closing 6% Lower At 4,400

Back in August, Wall Street’s biggest sellside bear, Morgan Stanley chief US equity strategist Mike Wilson, reluctantly and grudgingly lifted his year-end S&P price target from 3,800 – tied for lowest at the time to… 3,900 but not before telling his clients how he really felt about the added boost of optimism – “on net, the risk reward skew looks poor to us at the index level.” Well, three months later, and not only was the risk reward skew poor – but to the upside, with the S&P trading just shy of all time highs and some 800 points higher than Wilson’s target (granted there are still 32 trading days left in the year so everything can happen)…

… but it’s time for Morgan Stanley to issue its 2022 full year forecasts. And, as those who have been following his recent weekly notes can already predict, there is no capitulation from Morgan Stanley’s chief equity strategist, who remains just as bearish for 2022 as he was for 2021.

As part of Morgan Stanley’s broader global strategy outlook for 2022, which is titled “The Training Wheels Come Off”, and which we summarized yesterday courtesy of the report’s organizer Andrew Sheets, the bank writes that “Growth improves and inflation moderates, but central bank buying slows and rates rise. Own equities in Europe and Japan, securitized credit, and CAD/CHF, and resist buying Treasuries, US stocks, and EM assets until more is in the price.”

It is the italicized text that matters most, because the coming end of central bank generosity means all major central bank balance sheets peak in the coming 1-2 years (at least until they reverse and resume QE)…

… which coupled with high valuations, that has prompted Morgan Stanley to urge clients to stay away from U.S. stocks and bonds next year even as growth (supposedly) improves and inflation moderates, while seeking better returns in Europe and Japan where central bankers will be more patient and inflationary pressures are lower, according to the strategists in their annual investment outlook.

This is how Morgan Stanley’s Chief Cross-Asset Strategist summarizes where markets now stand:

‘Normal’ is the last word any of us would use to describe the last few years, but our core thesis remains that markets are following many ‘normal’ cycle-based patterns at an accelerated pace. In mid-2019, inflation was above-trend, the yield curve inverted, and our cycle model entered ‘downturn’. In early 2020, activity collapsed and then ‘early cycle’ investment strategies led a blistering recovery. In early 2021, this early-cycle leadership stalled, and gave way to a mid-cycle transition.

For 2022, we think that this ‘hotter and faster’ recovery continues, powered by strength in consumer spending and capital investment. We are above-consensus on 2022 growth in the US, Europe, and China, and see the US unemployment rate falling all the way to 3.6% by the end of 2022.

Good growth and moderating inflation would seem like another version of ‘Goldilocks’, and for some assets we think that the backdrop does look benign. But we think that 2022 is really about ‘mid-to-late cycle’ challenges: better growth squaring off against high valuations, tightening policy, rambunctious investor activity, and inflation being higher than most investors are used to.

Navigating these will be about finding an alignment of risk premiums and fundamentals. We think that this exists in Europe and Japan equities, loans and junior securitized tranches, oil and US equity volatility, and the US and Canadian dollars. At the same time, we see plenty of challenges, including downside to the S&P 500 and US 10-year yields being well above forwards, and think that it is too early to turn bullish on EM assets.

With that big picture in mind, we shift to equities where Mike Wilson picks up the baton to tell clients clients that going into 2022 he is Underweight US stocks due to “slower EPS growth and higher starting valuations versus global peers leave us underweight the S&P.”  And yes, the bank’s year-end 4400 price target (about 500 points higher than its 2021 year-end PT) implies 5% downside potential.

Having predicted downside in the US, Wilson then turns optimistic on Europe and Japan where he sees risk/reward more appealing:

“We are overweight Europe and Japan (8% and 12% upside potential, respectively), where we see the best EPS growth for 2022 and where valuations have already reset to more attractive levels. We remain neutral on EM and China for now.”

His recommendation: since the potential for sector and style dispersion feels more limited than usual, Wilson is “overweight financials across all regions and positive on energy in Europe and EM. Consumer discretionary is a high-conviction underweight in the US.”

Taking a closer look at equities, it will not be a surprise to anyone who has followed Wilson’s thoughts in recent weeks why he has been especially bearish on stocks. He carried that pessimism into his year-ahead forecast, writing that he expects more volatile equity markets in 2022:

At face value our global macro forecasts suggest a continued benign backdrop for equities in 2022 with strong nominal (and real) GDP growth, moderating inflation through the year and no rate hikes from any of the G3 central banks. However, underneath the surface we think there are a number of reasons to suggest that global equities’ serene progress over the last 18 months will become somewhat more volatile going forward as earnings growth slows, bond yields rise, and corporates continue to juggle the challenges of disrupted supply chains and elevated input costs. We think that these issues weigh most heavily on the US equity market but are more optimistic elsewhere, especially in Europe and Japan, where our risk/reward frameworks still look quite appealing.

Wilson next details why he is cautious on US equities versus global peers. There are three main reasons:

  1. 1) Greater EPS uncertainty in the US… The persistent price outperformance of MSCI USA versus MSCI ACWI for much of the last decade has been driven by superior and more durable EPS trends. While our US equity strategists see solid EPS growth in 2022, uncertainty around that expectation goes up materially given cost pressures, supply issues, and tax/policy uncertainty that is unique to the US. The recovery in rest of world EPS has lagged the US so far and hence offers (1) more ‘catch-up’ potential and (2) less earnings volatility over the next 12 months.

  2. 2) …against a backdrop of a record US P/E premium… It is natural for P/E ratios to de-rate as we progress through the initial phase of the earnings recovery and towards a more mid-cycle environment. While this has happened to a reasonable degree for non-US equities, Exhibit 18 shows that the S&P de-rating remains modest so far, with the current N12M P/E of 21 still close to a 20-year high. Consequently, US equities currently trade at a record valuation premium to global peers.

  3. 3) …and the prospect of higher bond yields that tend to favor Europe and Japan: This record valuation premium also exists at a time when bond yields look set to rise further, a situation that has typically favored the likes of Europe and Japan more than the US or EM. In particular, the US’s high exposure to growth stocks means that its relative performance has been inversely correlated to real bond yields in recent years – our bond strategists expect the latter to increase materially through 2022

While US equity underperformance has indeed been rare post-GFC, the secular backdrop may be shifting: Wilson predicts that while a decade of strong and steady outperformance from US stocks may have made the potential for sizeable underperformance versus global peers unlikely, the strategist warns that “it is worth noting that such occurrences were not so uncommon before the GFC, as shown in Exhibit 23 .

In effect, US equities have been large relative beneficiaries of the secular stagnation environment of the last cycle, “but a shift towards  stronger nominal growth in this new cycle (which would be consistent with higher real yields) makes a return to pre-GFC performance patterns more plausible.”

Curiously, Morgan Stanley’s equity strategist is bearish on stocks even as the bank’s rates strategists are surprisingly dovish, and don’t see the Fed hiking until 2023, well beyond when the market is pricing in the first two rate hikes in (2022), an outlook that coincides with that of Morgan Stanley CEO, James Gorman, himself who is far more hawkish. it is these rate hike delays that will eventually lead to dollar weakness after a period of strength at the beginning of next year, according to the note.

Outside of developed markets, Sheets’ team urged patience, suggesting investors wait until the greenback weakens before considering emerging market stocks and bonds. In currencies, they favor the Canadian dollar and Norwegian krone and expect a largely stable yuan.
On the commodity front, the bank prefers oil to gold and suggested metal prices face a challenging outlook. Here is a bigger picture snapshot of what the bank expects across various asset classes:

We will cover the bank’s outlook on other key assets – and its top preferred trades – in a subsequent note. However, those who wish to read the full 64 page report, it is available to professional subs in the usual place.

Tyler Durden
Mon, 11/15/2021 – 12:50









Author: Tyler Durden

Economics

The Fed Says the U.S. Is Now Officially In A Real Estate Bubble

For the first time since 2007 the Fed’s Exuberance Index is warning that U.S. real estate prices are in a bubble. Did the Fed even notice? 
The post The…

…For the first time since 2007 the Fed’s Exuberance Index is warning that U.S. real estate prices are in a bubble. Did the Fed even notice? 

This post by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]) and abridged (…) excerpt from an article from Stephen Punwasi of betterdwelling.com for the sake of clarity and brevity to provide you with a fast and easy read. Please note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

…If asset buyers are said to be exuberant, they’re excitedly paying emotional premiums, premiums that are above fundamentals, paid because people think prices will always rise. If buyers are exuberant for an extended period, the whole market can become exuberant…[and the Fed’s] exuberance indicator was designed to help identify [such] bubbles.

…American real estate buyers are displaying obvious signs of exuberance. The exuberance index read 2.8 in Q2 2021, more than double the 1.37 threshold needed to seem bubbly. The most recent quarter was the fifth above the threshold, making it officially a bubble…

Declaring a bubble after just five quarters might seem early, but that’s the point. The indicators help central banks and policymakers identify them early. By alerting policy makers early, they can act and contain the issue before it gets out of control.

The current bubble will be the first time in history that the U.S. has a system in place for an early warning but the question is, will they ignore the warning sign? Central banks have become increasingly political, dismissing even their own research. It wouldn’t be surprising to see them gloss over existing warning systems as they did with inflation…

Related Articles From the munKNEE Vault:

1. Fed’s Exuberance Index Shows Canada’s Real Estate To Be A “Bubble On A Bubble”

The U.S. Federal Reserve’s latest Exuberance Index (Q2), considered a “smoking gun” for bubbles, shows Canada is well into a real estate bubble – a bubble on a bubble.

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The post The Fed Says the U.S. Is Now Officially In A Real Estate Bubble appeared first on munKNEE.com.








Author: Lorimer Wilson

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Economics

A Fake Story Tanks Eric Fry’s Stock

There’s been major drama going on with one of Eric Fry’s recommendations in recent weeks.
In short, a vicious attack by a short-seller resulted in…

There’s been major drama going on with one of Eric Fry’s recommendations in recent weeks.

In short, a vicious attack by a short-seller resulted in a massive selloff. Eric’s pick was down 35% seemingly overnight.

But that’s not the whole story…

In today’s Digest, Eric pulls back the curtain on what actually happened, how the situation has played out since, and what we can learn from it.

It’s a cautionary tale that illustrates two things…

One, it’s incredibly important to do your due diligence before investing your hard-earned money into a stock. And two, you have to be careful whom you trust for accurate information.

I’ll let Eric take it from here.

Have a good weekend,

Jeff Remsburg

Beware Fake News

By Eric Fry

Soren Kierkegaard, the Danish existentialist philosopher once remarked, “Geniuses are like thunderstorms. They go against the wind, terrify people, clean the air.”

Short-sellers often perform a similar function. Although they certainly are not all geniuses, their incisive analyses can swirl through the financial markets and terrify investors for a spell, while cleansing the air of misinformation and/or fraudulent behavior.

Because these financial thunderstorms can strike an individual stock like a thunderbolt, they usually singe every investor who happens to be in the vicinity.

Not surprisingly, therefore, short-sellers are about as welcome on Wall Street as a thunderstorm at a garden wedding. To put it bluntly, most folks hate short-sellers.

I don’t. I hate the misinformation and/or deception that causes investors to make ill-informed decisions…

Steel Yourself Against the Misinformation

Generally speaking, short-sellers are a fringy community of forensic analysts and truth-seekers. As a group, they expose the sort of misinformation that deceives investors. That’s a public service to all of us investors.

But sometimes, short-sellers themselves, are a source of misinformation — fonts of fake news.

In other words, not all short-sellers are created equal… neither are any other sources of investment information and “analysis” equally reliable.

This fact has never been timelier and more relevant than it is today, when social media sites funnel most of the minute-by-minute investment narrative that we consume.

Because of social media’s scope and dominance, deceptions can magnify quickly and “go viral,” often with mind-numbing speed and destructive power.

In such circumstances, getting to the truth can be challenging.

But a couple of simple steps can facilitate the process of fact-finding. Both of these steps are so ancient (and timeless) that they predate the internet itself:

  • Consider the source. Whenever you encounter a story that seems implausible or that conflicts with widespread opinion, check the source. Find the source of that story from the original source documents, if possible. Once you locate that source, check its history for honesty and accuracy. For example, a scientific observation from a Johns Hopkins University study is probably more reliable than one from National Enquirer.
  • Look for signs of intellectual honesty. Does the source of the story thoughtfully consider the “other side”? For example, does the source solicit information from third parties to corroborate its findings? Does the source present its findings matter-of-factly, while acknowledging portions that may be inconclusive or incomplete?
  • These two simple steps, by themselves, can usually help investors navigate deception and/or discover truth… like they did during the last two weeks when a short-selling firm attacked Standard Lithium (NYSEAMERICAN:SLI), a stock I have recommended in my investment services.

    On November 18, a short-selling outfit called Blue Orca Capital issued a negative report about the company.

    The report’s most damaging assertion was that Standard Lithium’s direct extraction technology could recover only 13% of the lithium that is contained in the brines it is processing — not the 90% recovery rate the company had been reporting.

    The stock plummeted 35% after Blue Orca’s report crossed the wires.

    But I issued an alert to my subscribers that stated the following:

    “If that assertion is true, it would be a truly damaging data point, perhaps even fatal to Standard Lithium. However, as recently as November 12, Standard Lithium submitted a detailed filing with the SEC that stated the following:

    “The final product lithium recovery is about 90%.

    “In other words, six days ago, the company informed a federal agency that its lithium extraction process recovers 90% of the lithium contained in the Arkansas brine it is processing.

    “Not 13%.

    “If the actual number is 13%, as Blue Orca Capital asserts, then the entire management team of Standard Lithium and its Board of Directors has committed a large-scale fraud…

    “A conspiracy and fraud of this scale and complexity seems unlikely…

    “More likely is that an ill-intentioned, or ill-informed, short seller has conspired to hammer the share price of a stock its firm has sold short.”

    In other words, I considered the source of the surprising story and deemed it to be untrustworthy. Furthermore, previous reports by Blue Orca about other companies revealed a consistent pattern of unreliable, one-sided analysis.

    Hours later, Standard Lithium issued a rebuttal to Blue Orca that confirmed my assumptions. You can view the entire release here: Standard Lithium Response.

    But the most important detail from the company’s response was that its direct extraction technology does, in fact, recover about 90% of the lithium that’s contained in the brine it is processing.

    The company stated flatly:

    “Blue Orca Capital’s interpretation of lithium recovery rates is incorrect and underestimates lithium extraction efficiencies.”

    Despite this comprehensive rebuttal, Blue Orca did not issue a mea culpa or concede defeat in any way. Instead, it simply doubled down on the identical claims Standard Lithium had debunked.

    The new attack from Blue Orca triggered another wave of selling that pushed the stock lower again on Nov. 22. But the selling pressure abruptly reversed on the day before Thanksgiving.

    That’s when the company announced a $100 million investment by Koch Strategic Platforms (KSP), a subsidiary of Koch Investments Group.

    Importantly, the press release that announced this investment included the following line:

    “[KSP’s] Direct Investment follows extensive due diligence into Standard Lithium’s LiSTR DLE technology, Demonstration Plant and project objectives…”

    Presumably, therefore, KSP possesses a more intimate and sophisticated understanding of Standard Lithium’s extraction technology than do the short-sellers at Blue Orca.

    The stock has been rallying ever since.

    An Early Warning

    To be sure, the short-seller’s attack on Standard Lithium was a frightening event. But ultimately, misinformation lost this battle.

    Furthermore, the company has emerged from that attack with its credibility intact and its investment potential greatly enhanced by a major new investment from what could become a major strategic partner.

    The stock remains what it was when I first recommended it to my subscribers: a speculative, unproven play on a “home-grown” battery-metals supply chain. But the stock has become somewhat less speculative in the wake of KSP’s $100 million buy-in.

    Now, before I let you go…

    2022 is on our heels, and we’re perhaps facing more apprehension than ever.

    With the new Omicron variant of the Covid-19 virus potentially bringing about city-, state- and country-wide restrictions, economic uncertainty, inflation and more, the end of 2021 is starting to feel quite a bit like the end of 2020.

    As such, it is critical that you hear what my colleagues, Louis Navellier and Luke Lango, and I see for the next year.

    And on Tuesday, December 7, at 7:00 p.m. EST, the three of us will give you our investing game plan for 2022.

    Click here now to reserve your spot — I’ll tell you more about it this week.

    Regards,

    Eric Fry

    The post A Fake Story Tanks Eric Fry’s Stock appeared first on InvestorPlace.




    Author: Jeff Remsburg

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    Economics

    Formulating some thoughts about 2022

    Light yellow line is the 10-year Government of Canada bond yield, orange line is the 2-year bond yield: Over the past week, Omicron fears have triggered…

    Light yellow line is the 10-year Government of Canada bond yield, orange line is the 2-year bond yield:

    Over the past week, Omicron fears have triggered a huge demand for long-dated government debt, while central bank talks of tapering have pushed the front end of the yield up.

    Indeed, when looking at the BAX futures, we have the following curve (for those that are unfamiliar, these are 3-month bankers’ acceptance futures, of which you derive the rate by going 100 minus the anticipated yield percentage, so a 98 would be equal to 2.00%):

    BAX – Three-Month Canadian Bankers’ Acceptance Futures

    Last update: December 5, 2021

    Month Bid price Ask price Settl. price Net change Open int. Vol.
    Open interest: 1,173,941
    Volume: 145,981
    December 2021 99.455 99.460 99.460 -0.005 136,604 34,223
    January 2022 0 0 99.380 0 0 0
    February 2022 0 0 99.220 0 0 0
    March 2022 99.080 99.095 99.105 -0.015 242,041 25,545
    June 2022 98.660 98.665 98.690 -0.030 185,438 16,971
    September 2022 98.335 98.340 98.360 -0.025 167,920 15,778
    December 2022 98.125 98.140 98.150 -0.015 144,759 17,816
    March 2023 97.985 97.995 98.010 -0.020 107,855 13,145
    June 2023 97.865 0 97.890 -0.020 62,554 10,228
    September 2023 97.795 97.840 97.820 -0.025 69,061 6,586
    December 2023 97.510 97.820 97.805 -0.020 38,357 4,960
    March 2024 0 0 97.780 -0.005 12,729 386
    June 2024 0 0 97.775 -0.010 4,613 181
    September 2024 0 0 97.790 -0.005 2,010 162

    The spot price is at 0.54%, while the December 2022 future is at 1.85%, which implies that in the next 12 months we will have a rate increase of about 125bps the way things are going.

    The 2-year government bond is yielding 0.95% as of last Friday.  Using expectations theory, this is roughly in-line, but functionally speaking, the inversion of the yield curve is going to signal some ominous signs going forward.

    Central banks are engaging in the tightening direction because of fairly obvious circumstances – there are leading indicator signs of inflation everywhere (labour market tightness AND the inability to find quality labour both count; the first is easily quantified, while the second one is not, and is a very relevant factor for many businesses), input costs rising or even being completely unavailable, energy costs spiking, etc.  With governments flooding the economy with deficit-financed stimulus, it is creating an environment where no realistic amount of money thrown at a problem can stimulate productive output.

    My guess at present is that tapering and rate increases will go until the economy blows up once again – the evaporation of demand will be mammoth – when these supply chain issues are resolved, the drop-off in demand will commence very quickly.  It will likely happen far sooner than what happened in the 4th quarter of 2018 (the US Federal Reserve started shrinking its balance sheet of treasuries at the end of 2017 and the vomit started occurring around October 2018).  Indeed, you even saw hints of this economic dislocation occur in late 2019 – there was likely going to be an economic recession in 2020 even if Covid-19 did not occur.  Covid instead just masked the underlying conditions, and stimulative monetary policy coupled with shutdowns of global logistics and labour disruptions was the subsequent excuse when fundamentally things were already in awful shape to begin with.

    This means that portfolio concentration (other than not being leveraged up the hilt) should be focused on non-discretionary elements of demand.

    These are not serious suggestions, but Beer (TAP), Smokes (MO) and Popcorn (AMC…  just kidding!) will probably be the last industries standing among the carnage.  Even McDonalds (MCD) will not be spared as less and less will be able to afford the $10 “extra value” meals as central banks continue to drain the excess, but Dollarama (TSE: DOL) will thrive.

    The conventional playbook would suggest that commodities would fare poorly with a precipitous decline in demand, but this is one of those strange interactions between the financial economy and real economy where hard assets will initially lose value in the face of interest rate increases (this has already happened), but the moment the central banks have stretched the rubber band too hard and it snaps, commodities likewise will be receiving a huge tailwind.

    2022 is surely to be a worse year for most broad market investors and the public in general.  Returns are going to be very constrained and P/E expansion will be non-existent (other than by reduced earnings expectations!).  Watch out, and hold onto your wallets.  There will be few that will be spared.







    Author: Sacha Peter

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