onsdag 14 september 2011

Positiva tankar från Citibank

1 - where is that recession again?  Don't get me wrong.  De-leveraging consumers AND governments are NOT a prescription for growth.  Many European governments are technically bankrupt.  It is tough to see how Italy can refinance, but only last month the same was said of Spain, whose CDS now trades almost 100bps below Italy........  It is tough to see why the West should see recovery when swathes of consumers have been de-franchised by tighter credit.  However, this has been true since the depths of 2009.  Hopeless though the outlook may seem, it is not so much the economy that changes, as investor sentiment towards it.  Many "economists", but also investors were happy to invest on a basis of 3.5%-4% US GDP growth as late as this January or February.  All-time highs in many cyclicals were being dismissed as the "different this time" this time.  Now sentiment is 200% consensual recession.  Before we have any evidence other than some consumer and business surveys....


Not only have the airlines reported strong trading.  US railroads report little change in railcar traffic.  The ATA reports little change in US truck tonnage being moved.  The SOX index of early cyclical semi stocks is showing signs of life??? (see chart below)   Where are the profit warnings at the Frankfurt Motor Show?  Did you read the Cummins statement and long-term outlook?  Steel Dynamics goes UP on a profit warning.....What happens if US ISM jumps to 52 or 53 next month???? CIti's US economic surprise index has been improving for weeks now......If volumes of traffic / freight are unchanged, has the whole business world missed the coming recession, again?  Am i just too early to question the consensus?  Or are we forecasting the recession we have just been through?    This in many ways is NOT 2008.  Absolute credit levels remain too high, but credit standards are not tightening as in late 2008 (in fact US commercial loans are GROWING - at least for now).  Western consumer end-markets have hardly recovered from their 2009 lows - with US car sales still at less than replacement 12m levels for the 2nd year in 100, and housing activity at 100-year per capita lows.   Many European economies have already collapsed.  In contrast, EM consumers and capex investment are at record levels, supporting global demand, and offsetting lack of growth in the West.  Inventories in most businesses are not extended as they were in 2008.  Corporate debt and liquidity is still fully prepared for a closed credit market, even at July all-time low costs of credit.  Many corporates have improved pricing power, as higher 2010 raw materials costs, and tight capacity post 2009 cuts leave utilisation in many industries above 100% (of a much smaller capacity base).   Western labour has zero pricing power,supporting margins further.  Western currencies continue to devalue, further driving local currency profit margins, and interest rates remain (as they will) at record lows.


Thus, consumer continue to de-lever very slowly, as they were.

Governments will de-lever only when they are forced to (hitting the same construction, defence, low-end consumer markets they were already hitting).  But none of this has changed.  GDP growth is already slow - and it will stay that way.  However, unless we assume a collapse in EM demand, as well as that in the West, it is tough to see where the consensual global earnings depression comes from just now.


2 - how can earnings be so divorced from GDP?  Investors continue to associate their GDP views with the S&P. However, the S&P trades on earnings, the multiple driven by risk appetite but also by rates and bond yields, both close to zero. If earnings hold up, markets are actually very cheap relative to bonds.  How is a sub 2% yield on US/German government bonds (both blighted by liabilities not even accounted for yet) a safer investment than a 4-5% dividend yield from a global cyclical / industrial / consumer leader benefiting from EM growth and low developed market costs and interest rates?  Are S&P earnings really still driven by US GDP? For banks, construction, retail maybe yes.  But for the other 80% of the S&P constituents, growing EM markets, high commodity prices, falling labour costs, rising rents, low int rates, and a low USD all drive high earnings, almost completely divorced from US GDP, and in the case of int rates and USD, actually helped by it.  On this basis, the winners of 2010 should continue to be the winners.  Exporters and global leaders with strong balance sheets and pricing power will continue to benefit.  Japanese investors saw the same in the 1990s,as exporters to the US boomed, whilst Japan-dependent companies languished.  As in 2010, this points to industrials, materials, and China / EM consumer plays.  Where would you rather be? Earning 1.9% in USTs?



Global extreme recession consensus is providing some buying opportunities in global leaders in industrial and consumer markets.

Of course forecasts will come down, especially from overly extrapolated 2012 margin expectations.  But that is priced in.  Autos have given up 80-90% of their 18-month outperformance versus defensive pharmas in just a month.  Are they at trough in a full-blown recession, of course not, but the relative risk reward has shifted sharply.

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