18 June 2008

Look out! Uber Bears!

First off, RBS issued an uber-bearish call this morning. Here's some coverage of it via Ambrose Evans-Pritchard in the Telegraph:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.


RBS expects Wall Street to rally a little further into early July before
short-lived momentum from America's fiscal boost begins to fizzle out
, and the delayed effects of the oil spike inflict their damage.

The bolded portion corresponds nicely with my near-term take on the markets.

Here's a key excerpt of a discussion of the RBS note between Neil Hume and Helen Thomas from FT's Alphaville:

NH: yep we have this very bearish RBS note
NH: actually, we have the email that Bob Janjuah sent to clients
NH: OK, we can't copy and paste all of it
NH: but we do have some highlights
NH: I am pleased with the call from last Thursday, to significantly reduceshrt stk/shrt credit bets. At that point iTraxx XO was above 500, andS&P was in the low 1330s. We are now just above 450 XO and 1360 S&P.
NH: Looking forward, nothing has changed for me. Tactically, and asmentioned above, whilst it was prudent to go from '10 out 10′ SHORTstks/credit to '2 or 3 out of 10′ SHORT at the back end of last week, Istill want to retain at least some small short interest in credit andstks, because over the course of end June and early July, we will betransitioning from the zone of my tactical call INTO the zone of myVERY BEARISH strategic call for Aug/Sept/Oct.
NH: This calls looks for S&P down at 1050 +/- 50 points during this 3 mthwindow, and whilst credit will relatively outperform stks, I still seeXO at 650/700 during this period, HiVol up at 275/300, Main up in the130s, and IG10 at/close to 200. Whilst I think August and September arethe key risky months, the reason I'd be small shrt (now) over late Juneand July, when I suspect risk assets will try to rally (1405/1420intra-day S&P, low 70s Main, mid-130s HiVol, 425ish XO, PERHAPS!) is that the risk is that the coming big sell off actually starts EARLIERrather than later.
HT: I'd add that it looks like there must be two of these uber-bearish notes flying around
HT: from RBS
NH: all of which is actually a very confusing way of saying that whilstmrkts will likely rally for the next 2/4 wks, we won't see S&P above1405 closing/1420 intra-day, and that the risks are that the Aug/Sept20/25% sell off actually begins earlier, in July. So for me, I want tobe positioned to capture the very big bear move coming over the next 3months, and am prepared to see mrkts rally a bit in my face over thenext few weeks, as a fair trade off against being positioned for a selloff that surprises by coming earlier than I expect.

And there you have it. I'm going to set up a long position to try and pick up some upside from the oversold markets. Catch some upside from a wee bear market rally. And then get back on the short side in July.

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