ROUBINI IS NOW CALLING FOR A USA RECESSION IN 1ST QUARTER OF 2012...WITH GLOBAL RAMIFICATIONS...STORE UP ON CASH...

RGE Market Strategy By Gina Sanchez, Ibrahim Gassambe and Dayna Goodwin Sep 1, 2011 4:00:00 PM | Last Updated Read this analysis on Roubini.com Since downgrading our equity outlook on August 1, we’ve advised investors to reduce their exposure on strength, as we expect the environment to further deteriorate despite the sharp revision in expectations. We are taking the current strength as an opportunity to close our equity versus cash overweight, bringing it to neutral, and close our emerging markets (EM) versus developed markets (DM) overweight. The RGE Economic Research Team now expects a recession in Q1 2012 and has sharply revised its growth forecast for the U.S. to 1.5% for 2011 and the 0.6-1.0% range for 2012, well below consensus expectations. While these revisions leave our 2011 EPS estimate unchanged at $94, we are now lowering our 2012 EPS estimate to $85. We expect significant headwinds for equities from continued GDP and earnings revisions. The bond market also continues to suggest further downside for equities at least 9%. Thus we are closing our equity versus cash overweight, as we are entering a recession with a significantly negative S&P risk/reward profile for the next 6-18 months. We are also closing our EM equity versus DM equity overweight. We expect an increase in risk aversion and flight to quality on the back of a global slowdown to drive EM underperformance, despite pockets of decoupling in the real economy. We had previously expected a period of slow growth in DMs and potential growth in EMs, coupled with an improved inflation picture and favorable policy in EMs, to lead to an EM outperformance. However our economic team is now anticipating a recession and therefore we expect heightened risk aversion to trump any support from relatively stronger fundamentals. Recommendations: We continue to reiterate our defensive stance across sectors: Overweight consumer staples and health care; underweight financials and consumer discretionary. We continue to prefer the U.S. relative to the eurozone, where much of the periphery is already double dipping and fundamentals as well as sentiment are at greater risk. We are now neutral equity versus cash. We are now neutral emerging markets versus developed markets.