Archive for May, 2011

Lunacy of the highest order…Osama Bin Laden’s death means that the “war on terror is over”

Monday, May 2nd, 2011

This morning J.P. Morgan published a piece from its chief investment strategist on the death of Osama Bin Laden.  The title of it was, “US Equity FLASH:  3 Reasons Death of Bin Laden Should Have Lasting Positive Effects on Equity Markets.” There were three basic points, which I list below. The summary lines are verbatim.

This strikes me as ridiculous, and it reminds me of why sell-side research is always one sided (buy stocks; they always go up).  I think this a real stretch.  Perhaps, at the margin, this is a positive, but I don’t buy it.

1.  Equity inflows should increase

According to JPM, this is one less reason that investors have to see risk in equities.  They argue that diminished flows to equity funds relative to the past two decades prior to 2008 will reverse.

2.  Contracting size of tail [risk] thus raising importance of relative value

Again, according to JPM, this also reduces the risk of a black swan event, which should lead to higher valuations placed on equities. In other words, the risk premium for stocks should diminish.  Stocks have become relatively less risky and investors will pile back into them.  The author claims that commodities have done well because they are “catastrophe” assets. 

Frankly, Wall Street hasn’t liked the whole commodity thing since the get-go, since the best way to play it (i.e. buy commodities) doesn’t help their business as well as traditional investing (i.e. buy stocks and bonds) does.  Prior to 2000–or 2005, for that matter–you would have been hard pressed to find a large mining company with more than a handful of research analysts covering it.

3.  Consumer confidence goes up:  US Govt scores major victory in war on terror, strengthening credibility of US Govt and US in general

The author says that one result of this event is that consumer confidence will increase, and that a result of that will be increased borrowing (“Honey, I think we can buy that car now, Osama’s dead.”) Okay, I admit that that’s probably the transmission mechanism:  consumers more confident, they tend to borrow more; but I have a hard time with tying the two together.

At the end of the summary, JPM muses about the possibility that this could be one of the signposts that a new secular bull market in stocks is underway, something with which we heartily disagree.

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