Monday, May 2, 2011

JPM: Bin Laden's death +ive for stocks

US Equity FLASH: 3 Reasons Death of Bin Laden Should Have Lasting Positive Effects on Equity Markets

Click here for the full Note and disclaimers. 
The death of Osama Bin Laden, in our view, will have durable positive effects on equity markets, persuading investors to diminish fears on global security (a strong case to be made that the war on terror is over), leading to lower equity risk premiums (read P/E of stocks go up). Why?
  • *  #1: Equity Inflows Should Increase….Those investors have one less excuse to see "risks" in equity, thus, inflows into equity should improve. Already, YTD US equity funds have seen inflows of $30b, the largest share of any asset class YTD. Yet the pace is below what existed for most of the past two decades—in any year prior to 2008, this figure would be $58-$60 by May.
  • *  #2: Contracting Size Of Tail, Thus Raising Importance Of Relative Value. A second important reason we see equity valuations increase (via lower risk premia) is that terrorism is a tail event, and the framework of asset allocators/macro funds/individual investors was to build “fat tails”—that is, build greater likelihood of terrorism in their models. With smaller tails, "catastrophe" assets like commodities have somewhat diminished value in a portfolio compared to "relative value" assets like equities (which remain historically cheap versus bonds). In other words, this argues for inflows to increase for stocks.
  • *  #3. Consumer Confidence Goes Up: US Govt Scores Major Victory In War On Terror, Strengthening Credibility Of US Govt And US In General. Consumer confidence (CONCCONF Index <>) at 65 remains at levels seen during recessions and well below the 102 average of 1998-2008. We acknowledge unemployment, high oil, and weak housing are major factors behind this low reading. However, the lack of success of capturing Bin Laden since 9/11 has frustrated US citizens about the ability of US government to bring enemies to justice, despite our enormous resources. Thus, a major win in the “war on terror” could be seen as analogous to the boost seen after defeat of major enemies. How do consumers express confidence? They borrow money…thus; this is a boost to Financials, which have suffered from lack of loan demand…
Market Strategy: We Don’t Think The 1-Day Reaction Is Right Gauge--Another Argument In Camp Of "Secular Bull". Is it possible that several years from now, this will be seen as one of reasons behind a strengthened secular bull market –others, we argue are: (i) record corporate profit share; (ii) record high equity risk premia and by Fall (iii) recovery in US housing market. On Friday (4/29, we raised our 2011 YE Target to 1475) (see” Raising '12E EPS to $105 (from $102), YE11 Target to 1475 (from 1425). 16 Ideas”) and believe this solidifies our thesis. We believe Financials, Industrials and Technologywill prove to be sectors driving this move to 1475. We increasingly see significant value inHealth Care.

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