Mensajepor pedro » Jue Ago 05, 2010 5:04 pm
By Roubini
Equities – Just Say No.
By Gina Sanchez
CORE OBSERVATIONS
Earnings have markets cheering. As of August 4, 2010, 357 companies have reported earnings with 74% reporting positive earnings growth and an average 10.33% better than expected earnings. However, sales on average have reported flat to slightly negative on expectations (-0.76%). Margins expansion explains the rise in earnings growth. Factors such as labor shedding and bottoming out in capacity utilization have supported the expansion. These contributors are unlikely to reoccur in the near term and will likely drag on earnings going into 2011. Without solid sales growth, we could see the S&P wander into overvalued territory pretty quickly. Our expectations for GDP growth and consumption are weak given the downward wage pressure and slow labor markets.
Eurozone concerns have faded. The stress tests managed to gloss over the most important test, a sovereign default, and to avoid testing the held-to-maturity book where sovereign debt is held. Combined with that, the trillion dollar bailout package has effectively kicked the can down the road for European sovereigns. Finally, macro data out of Europe is coming in better than expected. In our estimation, the cyclical recovery in Europe is temporary and the potential for stress in the bank books are still there, just ignored.
We see the possibility of an overshoot. Psychologically, the markets have been looking for a reason to be cheerful, similar to the need to laugh during a heavy dramatic movie scene. And, laugh, they will. But, only for a short moment. We will soon be reminded that this is indeed more of a drama and less of a comedy.
RGE S&P 500 Risk Aversion Indicator
Risk seeking behavior in the markets will likely support a short-term rally. However, the fundamentals do not support such a rally. We expect that it will be short-term in nature and that the market will return to fundamentals as economic data comes out to force the issue of weak GDP growth, weak consumption and weak sales.
Risk Aversion/Seeking is measured by looking at the correlation between the rank of returns and volatility in the market.
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