Since I last wrote about the magnificent 7 in February 2011,
a lot has happened and it is rather appropriate to review where do we stand at
the beginning of 2012.
Despite all discussions about recession/double dip in the US
for most of 2011, it did not occur and growth looks to carry on, whilst at a
moderate pace; this is strikingly different from what we have been witnessing
in Europe since the summer and the inability of European policy makers to put
the eurozone (“EZ”) house in order.
In 2011, the DJ increased 5.5% (the S&P 500 was flat) which
is not so bad given what happened in the world, and in Europe
in particular. If one picked up dividend aristocrats it was a reasonable year in
the US.
Friday’s employment numbers were rather positive at +200k
bringing the unemployment rate down to 8.5%.
Things indeed went in the right direction and 2012 starts
under the same auspice bearing that:
- The FED continues with its low interest rate policy along the yield curve, which is most likely during a Presidential election year and in the current economic environment.
- International investors continue to buy the US debt, which they should in my opinion by the lack of other choice, continuing to believe that the US will tackle one for all its deficit and inflation will be kept in check.
Fast growing economies in the rest of the world keeps up
forging ahead whilst inflation continues to be a real issue (food prices remain
very high in China and India, albeit going down recently). However, this is more
a consequence of a growing population and a faster developing middle class: a
strong engine to growth. In addition, some countries like India are going 2 steps forward and
one backwards in terms of liberalization of their markets (for example opening
up the country to foreign supermarket companies).
The graph below is self-explaining…
S&P 500 Banks index: for over two years, the index
has traded range bound and has yet to decisively to breach the 165 level;
there is no sign this happening any time soon and, conversely, there is no sign
of a deterioration either, US banks continuing to recapitalize thanks to an
unabated FED QE. In my opinion, the level comes from a continuing reappraisal
of the future profitability of banks (less leverage + more controls = lower ROE)
versus their ability to pass on additional costs to customers. Neutral. 
Global 1200 financial index: The index broke its 200 MA in May 2011 and several support levels,
reflecting the deepening crisis in the EZ and the need to recapitalize European
banks beyond the official numbers (not talking about OTC derivatives where
nobody knows what the global risk is, even banks on an individual basis
probably do not know their real risk); the solid 800 floor was penetrated without
a whisper and now represents a resistance. The outlook for a number of
Europeans banks is bleak and the introduction of Basle III rules ahead of the
2019 deadline is adding pressure. Negative.
TED spread (LIBOR USD 3 mth - US 3 mth T-bills):
since July, the spread has deteriorated
but in an orderly manner (the OIS displays the same pattern) and is nowhere
near the 2008 crisis levels, with central banks reacting very quickly by opening
USD swap lines and the ECB offering 3 years lines of credit (LTRO) in the tune
of EUR 426 bn. Neutral
USD bank BBB 10 yr - US 10 yr yield: In July the
spread started to widen markedly, whilst well below the extraordinary stress of 2008-2009, to pause for
the past 2 months. Neutral.
OEX volatility: OEX volatility had a spike during the
summer but did not break the high of 2010 and has since come back to the low
20s. Positive.
S&P Case Shiller house price index: The latest
data for US home values (October) published 27th December have continued
to go down for the 5th consecutive month, only two cities showing
positive numbers.
The unadjusted data are negative (-4% since July, the recent
high); adjusted data display the same pattern:
Composite-10: Oct
2011: m/m -1.1%; y/y -3.0%
Composite-20: Oct
2011: m/m -1.2%; y/y -3.4%
As the report comments:
“Some of the other housing
statistics posted relatively healthy figures for November, but it seems that
most of the good news was confined to the multi-family sector. Existing home
sales rose in November, but are still at a low annual rate of about 4.0
million. Single family housing starts also rose, but remain close to record
lows and are still down about 1.5% versus October 2010.”
The recovery did not materialize. Negative.
Conclusion: The
indicators on the banking situation deteriorated, whilst other indicators
are mostly neutral. The macro-economic situation between Europe and the US is diverging
to the advantage of the latter, even if in both cases public finances are in
disarray. The magnificent 7 are telling us that nibbling equity markets will
provide an interesting return.
2011 was bumpy and 2012 will be no less hectic.
Continue investing in high yielding equities / net cash
companies with a strong franchise and look at strong brands in fast growing
economies.
Sources:
http://marketsandbeyond.blogspot.com/2011/02/magnificent-7-and-equity-markets-review.html
US Department of the Treasury: Monitoring the economy
http://www.treasury.gov/resource-center/data-chart-center/monitoring-the-economy/Documents/monthly%20ECONOMIC%20DATA%20TABLES.pdf
S&P/Case-Shiller Home Price Indices
http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldocumentfile&blobtable=SPComSecureDocument&blobheadervalue2=inline%3B+filename%3Ddownload.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1245326665736&blobheadervalue3=abinary%3B+charset%3DUTF-8&blobnocache=true
Markit (via Business Insiders): Manufacturing PMI indices by country
http://www.businessinsider.com/chart-of-the-day-manufacturing-pmis-january-2011-vs-december-2011-2012-1?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Money%20Game%20Chart%20Of%20The%20Day&utm_campaign=Moneygame_COTD_010312
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