Ubs Warns Everything Is Overpriced, Prepares For Sell-Off

[zugzwang]

The estimable Wolf Richter essays UBS's latest Weight Watcher.

http://wolfstreet.com/2014/07/20/ubs-warns-everything-is-overpriced-prepares-for-sell-off/

UBS “leapfrogged” – as Bloomberg called it – Bank of America as the world’s largest wealth manager with $1.7 trillion in assets, up 9.7% from a year ago. Global wealth management assets rose 8.7% to $18.5 trillion.

These firms get to manage part of the wealth that central-bank policies have generated at the top. So they have some responsibilities, like helping their clients escape the sinewy arm of the taxman, driving valuations ever higher with their trillions – “doing God’s work,” as Goldman CEO Blankfein had put it so eloquently – and preserving their clients’ wealth when the going gets tough.

And UBS just warned in its latest Weight Watcher that the going will get tough. The report is subtitled chillingly, “We are worried. We reduce risk – for now.”

The warnings are surrounded by terms of flimsy optimism: “The world is slowly recovering and we do not think we are approaching the top of the cycle yet.” Or “the stock market should continue to rally.” These and similarly soothing terms are supposed to make us feel less panicky, apparently, about the harsh reality delineated in the report.

Turns out, “it is now time to scale down risk.” They’re “concerned about valuations.”

They reuse Fed Chair Yellen’s term, but in a much broader sense, pointing out that “equity markets are stretched,” all of it, not just social-media and biotech stocks. The fixed income market and the credit market have become “quite rich.” A tsunami of capital washed into risky assets, and “the market might be ahead of itself.” In fact…

The market is “too complacent and could correct rapidly.”

There was already a first signal last week when the Banco Espírito Santo (BES) in Portugal blew up. It shouldn’t have mattered outside Portugal. Yet it hit hard “a variety of asset classes over the world.” UBS doesn’t think it was the start of another systemic banking crisis.

Soothing words elsewhere to the contrary, UBS is getting cold feet about equities. “The recent momentum in markets is difficult to justify,” it warns.

Rather we think the event tells us a story about market positioning and market pricing: we think the market is stretched. If this is true, the market is already pricing most of the potential good news and is prone to react to bad news.

And UBS thinks one of the catalysts for a market correction could be “the disappointment” from corporate earnings reporting season. It’s particularly worried about the Q3 and Q4 outlook: “estimates seem to be too high, and we are starting to see companies spend less on buybacks (EPS supportive) and more on M&A.”

Our economic surprise index has been very highly correlated with the S&P 500 until the beginning of last year. Since then the market has continued his rally with little fundamental improvement to support it. This divergence is becoming uncomfortably large.

Conclusion? Trimming long equity positions “before the end of the year.”

Beyond equities, it’s even worse: “We don’t like credit,” UBS says categorically. In the US, it expects the default rate to increase “on a 6-12 month horizon,” causing spreads to widen – and losses for those who hold the paper.

Further, the market is “too sanguine on inflation” in the US and is underpricing inflationary pressures, which are “trending up.” The market has “a high conviction on a prolonged period of low inflation,” and is “not positioned for higher inflation.” Instead, fund-flow data indicates that “investors are selling their protection.”

So UBS sees a “correction.” The “re-pricing” will be accompanied not only by higher rates, but also more volatility. It expects 10-year Treasuries to yield 3.4% by the end of the year, up from 2.48% today. Spreads will widen. In addition, “the Fed’s tone is changing,” and it could raise rates sooner and faster than is priced into the curve.

Alas, when the sell-off starts, UBS is “very worried” about “the lack of liquidity” in both the equity and credit markets – the latter being “the best example.” And then the warning: “We have severe doubts about the ability of market makers to provide liquidity in a volatile scenario. This would pave the way for an over-reaction.” In other words, havoc.

Conclusion? Underweight fixed income.

UBS conceded that it might get the timing wrong, “but we believe the risks are asymmetric. On balance we think it is time to be tactically low on risk.” And so: “We decide simply to reduce risk over the full spectrum of assets.”

When the largest player in the wealth management industry warns that all asset classes are overpriced and too risky and that it’s time to reduce exposure across the “full spectrum of assets,” and if in fact it starts selling some of its $1.7 trillion in wealth management assets in a market that is already lacking liquidity – that act in itself can trigger the very sell-off it is warning about. So fasten your seatbelts.

Edited July 20, 2014 by zugzwang

[frederico]

Its 1.7 tr of other people's money though.

[R K]

“The world is slowly recovering and we do not think we are approaching the top of the cycle yet.

Everyman and his dog have been warning about the increasingly possibility of a correction. They're clearly not seeing the top of the cycle, as they explicitly say.

Years to go yet........

[Wurzel Of Highbridge]

The next downturn is going to be cracking as they can't lower interest rates to stimulate 'bank renter' consumerist lifestyles. There is no room in the UK, US & EU for tax cuts - This time it will be war as were are at the end of the line.

[Mr 0.01%]

The next downturn is going to be cracking as they can't lower interest rates to stimulate 'bank renter' consumerist lifestyles. There is no room in the UK, US & EU for tax cuts - This time it will be war as were are at the end of the line.

Hot war? Would be interesting to see what angle Governments would approach this from - I imagine the appetite for war isn't what it once was amongst most populations in most Western countries (excluding mindless religious zealots).

[Corruption]

The next downturn is going to be cracking as they can't lower interest rates to stimulate 'bank renter' consumerist lifestyles. There is no room in the UK, US & EU for tax cuts - This time it will be war as were are at the end of the line.

The proles in the US and UK no longer want wars, we are the main war monger nations thus i cannot see it.

Maybe the middle east will implode but that'll be without us assisting in a major way.

[wish I could afford one]

Last time (04 July 14) I valued the S&P500 I had it 56% over valued requiring me to be underweight US equities. Of course the market can remain irrational longer than you can remain solvent etc etc.

[200p]

Major Round Numbers

I am waiting for the SP500 to clear 2000pts - that could be a new floor (or at least have a stop under there).

Like gold - I don't think it will ever fall past $1000 a troy ounce.

[The Masked Tulip]

US GDP figures out on Friday - US recession confirmed?

[zugzwang]

US GDP figures out on Friday - US recession confirmed?

Interesting parallels with 2007. An industrial production surge this year skewed wildly upwards by the energy/oil sector. Ex energy, US industrial production growth has been slowing since 2010, and its aggregate output is still below peak 2007. The explanation? QE has driven out real investment in favour of financial speculation. The question is, what happens to the US economy when the shale boom starts to moderate?

[wonderpup]

The proles in the US and UK no longer want wars, we are the main war monger nations thus i cannot see it.

Maybe the middle east will implode but that'll be without us assisting in a major way.

Reading the current crop of 'Putin ate my baby' stories from the allegedly independent british press does make you think though- the fact that an apparently diverse media can so readily fall into the role of propaganda peddling hacks is revealing- all that 21st century post modern world weary ennui seems alarmingly thinly applied- scratch the surface and underneath lurks an unreconstructed 19th century jingoism that is almost charmingly virulent and lacking in self regard.

I almost expect to encounter a ten page pullout featuring Kitchener's face above a 'your country needs you' strapline.

So don't underestimate the power of good old fashioned warmongering- there's life in that old dog yet.

[Mr 0.01%]

No problem fighting for something I believe in but do Cameron and a host of corrupt MPs inspire me to fight? No.

[Venger]

Ubs Warns Everything Is Overpriced, Prepares For Sell-Off

Goldman Sachs is way way more upbeat about the future according to wsj report below.

However we make our own decisions, apart for the excuse givers and apologists who think every buyer needs an excuse for buying, with those excuses lasting into the future, no matter that the value of their 'peak' purchase is currently 30% above what they paid for it. It's not their fault they paid 5 times what you think it's worth... QE and bailouts and save the victims.

Jul 17, 2014
The Markets According to Goldman Sachs
http://blogs.wsj.com/moneybeat/2014/07/17/the-markets-according-to-goldman-sachs/

[porca misèria]

The proles in the US and UK no longer want wars, we are the main war monger nations thus i cannot see it.

Maybe the middle east will implode but that'll be without us assisting in a major way.

We tend to do wars differently now. "Hot" wars since the end of the Cold War have been trade shows for our vast armaments industries (which are our other really big export alongside finance).

Look at Ukraine for the perfect example. They got rid of an elected president twice. First time was miraculously peaceful, but the "orange revolution" government left a complete basketcase. Second time, same again in Kiev, and now it's just a matter of clearing up the east where the population were unhappy about being overridden every time.

The key move wasn't anything military, it was stirring civil unrest in Kiev. Which was very largely pushing on an open door, because the politics of the city were very different to the country as a whole.

[SNACR]

The key move wasn't anything military, it was stirring civil unrest in Kiev. Which was very largely pushing on an open door, because the politics of the city were very different to the country as a whole.

A statement not untrue closer to home.

[gf3]

So they say inflation maybe higher but they want to be in cash?

That's the last place you want to be with high inflation surely. The only reason to see out of equity's is if you can see better opportunities else where. Tell me if you see some.

[Sour Mash]

So they say inflation maybe higher but they want to be in cash?

That's the last place you want to be with high inflation surely. The only reason to see out of equity's is if you can see better opportunities else where. Tell me if you see some.

You want to be in cash if you think asset prices are going to collapse any time soon.

The cost of living (what the average person consiers as inflation) can still go higher even if the stock markets and certain overvalued assets collapse in price. There are genuine 'shortages' possible with food and energy which would push the price of those up, regardless of what happens to property or equities or industrial metals.

[winkie]

So they say inflation maybe higher but they want to be in cash?

That's the last place you want to be with high inflation surely. The only reason to see out of equity's is if you can see better opportunities else where. Tell me if you see some.

Just because there is more money circulating/ things going up in price.....doesn't mean you have to buy at the price they ask......only those that hold the readies can buy, they can only buy so much, no good holding something if the ones that would want to buy can't buy and the ones that can buy refuse to buy.......

[gf3]

You want to be in cash if you think asset prices are going to collapse any time soon.

The cost of living (what the average person consiers as inflation) can still go higher even if the stock markets and certain overvalued assets collapse in price. There are genuine 'shortages' possible with food and energy which would push the price of those up, regardless of what happens to property or equities or industrial metals.

I don't have a crystal ball but historically cash hasn't performed very well. I am planning on buying more equities over the next 4 years.

[Venger]

I don't have a crystal ball but historically cash hasn't performed very well. I am planning on buying more equities over the next 4 years.

We make our own decisions.

[Sour Mash]

I don't have a crystal ball but historically cash hasn't performed very well. I am planning on buying more equities over the next 4 years.

The point is that if you think an asset price crash is imminent, you get into cash (or near-cash instruments) so as to realise capital gains and be ready to snap up bargains.

You don't keep it over the med-long term so inflation and loss of purchasing power isn't relevant here.

[gf3]

The point is that if you think an asset price crash is imminent, you get into cash (or near-cash instruments) so as to realise capital gains and be ready to snap up bargains.

You don't keep it over the med-long term so inflation and loss of purchasing power isn't relevant here.

My plan is to be in the market when people run for cash and still be in the market when they buy back in.

[Take Me Back To London!]

Major Round Numbers

I am waiting for the SP500 to clear 2000pts - that could be a new floor (or at least have a stop under there).

Like gold - I don't think it will ever fall past $1000 a troy ounce.

In the 1970s gold went from double digits to treble digits and never revisited even during the 47% 1974-76 correction or post 1980.

[zugzwang]

Communist China is the last prop holding up the global debt ponzi. When that vast, filthy criminogenic enterprise fails then look out below.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100027691/chinas-terrifying-debt-ratios-poised-to-breeze-past-us-levels/

The China-US sorpasso is looming. I do not mean the much-exaggerated moment when China’s GDP will overtake America's GDP – which may not happen in the lifetime of anybody reading this blog post – as China slows to more pedestrian growth rates (an objective of premier Li Keqiang.)

The sorpasso may instead be the ominous moment when China’s debt ratios overtake the arch-debtor itself.

I had presumed that this inflection point was still a very long way off, but a new report from Stephen Green at Standard Chartered argues that China’s aggregate debt level has reached 251 per cent of GDP, as of June.

This is up 20 percentage points of GDP since late 2013. The total is much higher than normal estimates, though it tallies with what I have heard privately from officials at the IMF and the BIS.

Mr Green – a highly-respected China veteran – includes total social financing (TSF), offshore cross-border bank borrowing (a story that we are going to hear a lot about), bond issuance, shadow banking of various kinds, and government debt.

The ratio has risen by 100 percentage points of GDP over the last five years. As Fitch has argued out in the past, this is more than double the rise seen in Japan over the five years before the Nikkei bubble burst in 1990, or in the US before subprime blew up in 2007, or in Korea before the Asian financial crisis.

It is the speed of the rise that worries credit rating agencies and regulators – including many at the Chinese central bank – as much as the volume itself. Though China is scary on both fronts. It has pushed debt to $26 trillion, more than the entire commercial banking systems of the US and Japan combined. The scale obviously has global ramifications.

[Si1]

Communist China is the last prop holding up the global debt ponzi. When that vast, filthy criminogenic enterprise fails then look out below.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100027691/chinas-terrifying-debt-ratios-poised-to-breeze-past-us-levels/

When it bursts there'll be a rush for the exits, money wise, and western governments will drop rate again to dissuade hot money from entering their markets? Sounds like global debt deflation? Edited July 22, 2014 by Si1