BOB JANJUAH: A 25-50% Bear Market Is Coming

Fed taper, or when the Fed will begin to slow its $85 billion asset purchase program intended to lower long-term interest rates, is all the buzz in markets these days.

In a new note, Bob Janjuah, Nomura's uber-bearish strategist writes that the taper will happen but that it will be "gentle".

He also writes that it won't have anything to do with the strength of the economy or wage inflation.

"The Fed also knows that it was held at least partially responsible for creating and blowing up the bubble that burst spectacularly upon us all in 2007/2008. But very importantly, the Fed now has explicit and pretty much full responsibility for regulation of the banking and financial sector...

"This means first and foremost that while growth, inflation and unemployment all matter a great deal, the Fed cannot now either allow, or be perceived to allow, the creation of any kind of excessive leverage driven speculative (asset) bubbles which, if they collapse, go on to threaten the financial stability of the US. Imagine if this Fed were to allow a major asset bubble to blow up and then burst anytime soon (say within the next two or three years). This time round Congress and the people of the US would be able to place the entire blame on the Fed – probably with some justification – and, if the fallout approached anything like that seen in 2008, then it would mean, in my view, the end of the Fed as we currently know it...

"So for me, ‘tapering’ is going to happen. It will be gentle, it will be well telegraphed, and the key will be to avoid a major shock to the real economy. But the Fed is NOT going to taper because the economy is too strong or because we have sustained core (wage) inflation, or because we have full employment - none of these conditions will be seen for some years to come. Rather, I feel that the Fed is going to taper because it is getting very fearful that it is creating a number of significant and dangerous leverage driven speculative bubbles that could threaten the financial stability of the US. In central bank speak, the Fed has likely come to the point where it feels the costs now outweigh the benefits of more policy."

But he doesn't expect markets to heed the Fed's message. In fact Janjuah thinks a delayed market reaction could  see a few dips before the final market turn that could see a -25% to -50% bear market in late 2013 or early 2014. He also thinks cash will become King again.

"We can certainly see a dip or two between now and the final top/the final turn. But it may take until 2014 (Q1?) before we get the true onset of a major -25% to -50% bear market in stocks. We also need to be cognizant of the Abe/BoJ developments. Along with the Fed, ‘Japan’ is one of the two major global risk reward drivers. The ECB response to (core) deflation and the German elections, and weakening Chinese & EM growth and the indebtedness of China & EM, will also matter a great deal.

"As of today, my best guess is at least one major dip around Q2/Q3 (we may be in the middle of it now) as we seek more clarity around all of these drivers. My initial line in the sand for this dip is around S&P at 1530 and my major line is at S&P at 1450. A weekly close below 1450 S&P, in particular, would be extremely bearish. But I expect at least one more major buying of the dip come (late) Q3/Q4.I would not be surprised if we saw the S&P not just back up in the high 1600s, but perhaps even a 100 points higher (close to 1800!) before the next major bear market begins."

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BILL GROSS: 'It's Important For Investors To Remember Why They Own Bonds In The First Place'

BILL GROSS: 'It's Important For Investors To Remember Why They Own Bonds In The First Place' (PIMCO)

Despite the recent bond fund carnage, PIMCO's Bill Gross think investors need to remember why the own bonds and remember that they should have a flexible fixed income strategy.

"It’s important for investors to remember the reasons they own bonds in the first place – namely for the potential for the preservation of capital, income and growth, relative steadiness and typically low to negative correlations with equities. These needs – which will only become more urgent as millions of baby boomers head to retirement over the next decade and a half – are long term, regardless of what markets are doing today. So fixed income should always have a place in a portfolio. Still, there are ways to navigate challenging markets without feeling stuck. One is to expand your investment universe by going global. Here at PIMCO we like to say that there is no “bond market,” but rather “a market of bonds.” So, you should prize flexibility in your fixed income manager or core bond strategy.

"Finally, be patient. Times are challenging, to be sure, but PIMCO has been successfully investing through more than four decades of market and economic cycles, which gives us some perspective, as well as the confidence that we’re going to be around to fight for the next 40 years. We certainly hope our clients take some comfort in that."

How To Find The Right Fund-Manager Consultant For Your Clients (The Wall Street Journal)

Finding the right fund manager for a client's portfolio is crucial. In a new column for the Wall Street Journal, financial advisor Karen Harding writes that often advisors will use consultants to track down the right managers. 

But before hiring a consultant advisors need to go over a few key things.
1. Is the consultant "objective and unbiased." 2. How much experience does the advisor have? 3. Do they understand your client base.

Investors Stage An Exodus From Emerging Markets As Equities Suffer Collateral Damage (Bank of America)

Bond funds saw $14.5 billion in outflows in the week ending June 12. BofA Merrill Lynch Chief Investment Strategist Michael Hartnett also highlighted the bond redemption in emerging market assets. He called it an "exodus from [emerging markets] assets" with $9 billion in redemptions from EM debt and equity funds.

BofA Merrill Lynch Global Investment Strategy, EPFR Global

BOB JANJUAH: A 25-50% Bear Market Is Coming (Nomura)

Nomura's Bob Janjuah thinks there will be a Fed tapering and that it will be gentle. He also thinks the taper won't depend on the strength of the economy. Instead he thinks it will be because the Fed will want to avoid creating an "excessive leverage driven asset bubble."

Janjuah also doesn't expect markets to heed the Fed's message in time and stands by his call for a -25% to -50% bear market in late 2013 or early 2014. 

"We can certainly see a dip or two between now and the final top/the final turn. But it may take until 2014 (Q1?) before we get the true onset of a major -25% to -50% bear market in stocks. We also need to be cognizant of the Abe/BoJ developments. Along with the Fed, ‘Japan’ is one of the two major global risk reward drivers. The ECB response to (core) deflation and the German elections, and weakening Chinese & EM growth and the indebtedness of China & EM, will also matter a great deal."

JIM O'NEILL: The Love Affair With Bonds Could Soon End (Bloomberg)

Jim O'Neill thinks a Fed taper will cause turbulence in financial markets. He also doesn't think it would be "a stretch" to see 10-year Treasury yields at 5%. 

In a Bloomberg View column, he wrote: "A return to normality eventually implies a benchmark 10-year Treasury yield of 4 percent or more. It won’t happen all at once, but that’s where we’re heading. With yields at roughly 2.2 percent, there’s a long way to go. This transition will mark a recovery of the equity culture and the cooling of investors’ protracted love affair with bonds."

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A Quick Reminder That The US Economy Is The Envy Of The World

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There Are Three Big Events Today, Including A Big US Debt Auction That Everyone Will Be Watching

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3 Dividend Stocks for Wannabe Landlords

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A Bit Of A Global Bloodbath Is Happening In Markets, And Here's What Traders Are Talking About

Dave Lutz of Stifel, Nicolaus passes along the top topics about which he is chatting with clients this morning.

As he puts it, there is a "bit of a bloodbath" in global markets today.

Morning, a bit of a bloodbath in Global markets, but US futures have recovered from their lows thus far – Like yesterday, the SPX Futures are outperforming Japan and Europe – Losing only 30bp, but trading under the 50dma – a first since April.  DAX is off 1.5% (Was off 2.5%), while EU fins are outperforming (off 70bp) – despite Greek and other Yields widening quickly.   In Asia, Focus on the Nikkei smacked for over 6%, taking the index to levels not seen before the BOJ launched its stimulus program on April 3 – China lost “only” 3% after a 3 day holiday closure – The Kospi was hit for another 1.5% (Samsung hit again, now off 13% this month) – and flows continued from EM Asia, with Indonesia, Philippines off sharply again. 

Many yields globally are lower, with Japan’s 10YY off 2bp, and US 10YY under 2.2% after testing week lows earlier this AM.  Yields in the PIIGS, however, still leaking wider to Bunds – With Greece out 15bp further on Political unrest – Greek yields have leapt almost 2% against Bunds in the last month..   The USDJPY got under 94 overnight, a massive move that sparked the de-leveraging in Japan – With that, the DXY remains quite weak, lost 5% in 2 weeks, and resting on 4M lows (overdone?) – We had FX Intervention last night from Indonesia, Brazil, India to stem the EM outflows.   Despite the DXY Tailwind – Most commodities are under pressure, especially Industrial – as World Bank cuts it’s growth forecasts, and Carry Deleveraging impacting asset classes globally.    

Not least of the restraints on Abe in outlining his plans for widespread deregulation to stimulate investment and business growth is the July 21 elections for the upper house of parliament - The LDP is expected to overturn the majority in the House of Councillors now held by the opposition Democratic Party of Japan - But Abe needs a convincing win to give him the political clout to push through some of the more contentious and divisive elements in his structural reform program.

For more on today's market action, see here -->

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