Il Primo Ministro greco Lucas Papademos riceve l'approvazione del governo su tagli al bilancio che corrispondono al 7% del Pil nei prossimi tre anni e su una ristrutturazione finalizzata a ridurre di €100 mld gli oltre €200 mld di debito detenuto dai creditori privati, atteso il voto del parlamento • Standard & Poor's declassa il merito creditizio di 34 banche italiane tra cui UniCredit a BBB+ da A, Intesa Sanpaolo a BBB+ da A e Banca Monte dei Paschi di Siena a BBB da BBB+, S&P anticipa "una redditività decisamente debole per le banche italiane nei prossimi anni" • La produzione industriale italiana aumenta a dicembre +1,4% da novembre +0,3%, oltre le stime degli economisti +0,5%, anche se i dati del quarto trimestre -2,1% suggeriscono che la terza economia della zona euro è entrata nella seconda recessione dal 2009 • I Btp decennali salgono per la quinta settimana consecutiva, il periodo di recupero più lungo in oltre cinque anni, la prossima settimana il Tesoro vende €4 mld di buoni al 6% con scadenza 2014 • L'euro cala dal massimo di due mesi contro il dollaro, il mercato azionario europeo cala dal massimo di sei settimane e l'azionario Usa registra la prima settimana di perdite del 2012 dopo che i ministri delle finanze europee non hanno concesso il pacchetto di aiuto necessario a prevenire il collasso economico della Grecia

lunedì 19 marzo 2012

Market Comment - March 19

(Marco Bonelli) How real or unreal is it?

With many participants describing the market as "everything going the right way" and stocks as the most attractive asset class that even decoupled from everything else, with some commentators drooling over 900 points left for the Dow Jones reaching a new all-time-high and analysts being anxious to raise the price target in AAPL every week and not be the last one to put a $1,000 price-tag on the most popular stock in the universe maybe it's worth looking a bit closer and at least try to find out how much of the hype is real and how much not.

Mostly positive economic numbers and the recent asset allocation shift out of bond into stocks on back of a more widely perceived economic recovery in the US but also globally totally makes sense. A 100% performance of housing related stocks in the past six months on signs of a recovery in the housing sectors and a 50% performance of the financial sector in the same time-frame, with about a third of that performance staged in the last week alone after the Fed asserted almost all but four major financial institutions as cured and healthy also makes sense.
In fact the market does really make sense if everything the current rally is based on goes the right way, but does it?

Some market participants might have some problems with the way some economic numbers get calculated and how much the infamous "seasonal adjustments" and changes of the numerator or denominator for computing official data in adjustment to the "real" developments has an effect on efficient comparison of data.

Take last week's Empire State Manufacturing Index and the Fed Philadelphia Index: The first was up on higher prices paid, higher delivery time, less unfilled orders and a higher average workweek. Key components like new orders or shipments, general business conditions in six months were down, which doesn't really make sense in itself, right? Nevertheless, the Empire Index recorded the highest reading since June 2010. In comparison, the Philadelphia Fed Index showed prices paid, unfilled orders and average workweek sharply down (quite a sharp contrast to the same component in New York), also showed new orders and shipments down but the index moved higher quite substantially on higher expectations for inventories and number of employees (!?). Wouldn't you expect the overall index to move lower if 75% of its sub-components, including key elements deteriorate?

Talking the economic recovery in general, as an outside spectator, wouldn't you expect GDP growth in the 3 top 5% area looking at the way each better than expected statistic gets celebrated? Although most economic data in the past three months was reported better than expected, in the last four weeks in particular, quite a few statistics showed mixed to disappointing results. Some underlying data from the trucking and rail sector just show only modest growth and surveys like the NFIB Small Business Economic Trends show muted enthusiasm. Even official GDP estimates for Q1 go below 2% (after 3% in 4Q11). These mixed messages also get reflected in most cyclical industry sector indexes that showed increasing signs of weakness two weeks ago, only to reverse to the upside and catch up all losses last week. The mentioned rally in financials on back of the economic recovery scenario and rising interest rates is great but banks only benefit from higher interest margins if they write more loans. So far overall loan activity and loan demand isn't really boiling and 1.5 to 2% GDP growth may not produce the business as anticipated.

Finally earnings: the last three years produced exceptional earnings growth which is now cooling off dramatically. Q1 already shows as the worst pre-announcement season since Q1 2009 with profit warnings from almost all industry sectors. I total, 407 companies pre-announced their Q1 results, of which 51 provided better and 183 provided worse guidance. The Q1 earnings reporting season gets unofficially kicked off by AA reporting on April 10. With earnings growth stalling (estimates show flat "growth" in the first half of 2012!) the juice behind the rally comes entirely from optimistic expectations.

And maybe that's all the rally needs: as the market is forward-looking, all current "issues" might already be anticipated. How real or unreal some economic numbers are, that's what the market gets and that's what investors have to deal with, it doesn't make sense to question data if the rally moves on and leaves you with even more under-performance. So even if the current environment appears weaker, broad optimism may transform weak growth into healthy growth; however this equation also includes the fact that if the current environment persists longer than expected, optimism may fade quickly.

This week is housing data week which is a main component of the current optimism in regard of the economic recovery in general. Stay tuned but don't be worried about rising interest rates, any discussion and expressed worries in the current environment are kind of ridiculous.

Trade well.

(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)

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