Big banks are yelling at their clients: SELL EVERYTHING

by Secular Investor

Royal Bank of Scotland warns his clients for a “cataclysmic year”, a deflationary global crisis with oil down to $16 a barrel and a stock market correction with a fifth. J.P. Morgan advises for the first time in 7 years to sell shares on the bounce instead of buy the dip.

RBS credit team sais all alarm bells are ringing. They see the same stress alerts before the Lehman Brothers crisis in 2008. They said in a client note:

“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,”

Both global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings, and uncharted waters given that debt ratios have reached record highs. China is ready for a huge correction and it will snowball the rest of the world.

Brent oil prices will continue to slide after breaking through a key technical level at $34.40, with a “bear flag” and “Fibonacci” signals pointing to a floor of $16. OPEC doesn’t seem to find the answer to the economic slowdown in Asia.
Beside oil prices, bond rates will also fall to new lows. RBS predicts a 0,16% rate on the German Bund in a flight to safety. Negative rates on the 10-year Bund is even possible when deflation persist. And the ECB will lower short-term rate to -0,70% in an attempt to fight deflation.
US Treasuries will fall to rock-bottom levels in sympathy, hammering hedge funds that have shorted US bonds in a very crowded “reflation trade”.

J.P. Morgan: selling shares on the rally

J.P. Morgan also send a note to his clients advising to sell stocks on any bounce. This is the first time in 7 years they advise selling shares:

“Our view is that the risk-reward for equities has worsened materially. In contrast to the past seven years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally,” said Mislav Matejka, an equity strategist at J.P. Morgan.

There are not only technical issues for the stock market, but also fundamental reason to sell. Fourth quarter results will probably be the worst since the financial crisis. They won’t save the stock market this time.
Further adding to the grim outlook is the slowdown in the manufacturing sector, which pushed J.P. Morgan’s profit-margin proxy — the gap between pricing power and the wage costs — into negative territory in the fourth quarter for the first time since 2008.

The positive correlation between oil prices and earnings on top of the sustained gains in the U.S. dollar — which has an inverse correlation to results — will also weigh on the market.