Developed Countries
In order to make room for this week's upgrade of the consumer discretionary sector, we have downgraded the utilities sector to neutral after a strong run. Overweight positions in this sector were predicated largely on external forces rather than sector-specific factors, largely that the overwhelmingly deflationary global backdrop would turbo-charge the search for yield, culminating in a re-rating in equity fixed income proxies such as utilities. Worries about a slide into recession have ebbed, because domestic consumer spending has stayed resilient, job growth has bounced back after a difficult few months, and the U.S. manufacturing sector is showing signs of life. Even the global economic surprise index has climbed into positive territory, driven mostly by an uptick in the U.S. Consequently, utility stocks may have difficulty generating additional outperformance, especially within the context of the broad market overshoot. We recommended taking profits of 17% and trimming to neutral in Monday's Weekly Report. BLBG: S5UTIL.
This week, we are sending a <i>Special Report</i> written by BCA's Chief Global Strategist Peter Berezin, discussing the end of the 35-year global bond bull market. In addition, we are also sending you a joint <i>U.S. Bond Strategy/Global Fixed Income Strategy Weekly Report</i> which discusses the end of the secular bond bull market and the implications for global bond strategy.
This week, we are sending a <i>Special Report </i>written by BCA's Chief Global Strategist Peter Berezin, discussing the end of the 35-year global bond bull market.
In recent months we have outlined and acted on the bull case for media by upgrading both the S&P cable & satellite and S&P movies & entertainment indexes. This week we added another sub-component to the overweight column. The S&P advertising index has an opportunity to positively surprise in the coming quarters. Expectations are subdued, as measured by both long-term and cyclical relative forward earnings growth estimates, as well as elevated short interest (third panel). On this front, accelerating outlays on media services are a positive omen for marketing budgets, as well as advertising stocks, particularly if consumers begin to loosen their purse strings. Already, advertisers have enjoyed solid revenue growth, in contrast with the contraction in overall S&P 500 sales. As a result, ad rates have gone up, as proxied by the producer price indexes for radio, broadcasting and network TV (second panel). A demand-driven increase in pricing power should be viewed as sustainable, and has higher odds of translating into premium share price valuations given the positive impact on industry productivity (bottom panel). True, the leveling off in auto sales is a risk given the industry’s massive marketing budget, but there are offsets, including the boom in electronics spending, which has positive implications for content demand and potential digital media spending. Netting it out, the reward/risk tradeoff is favorable for an upshift to overweight. The ticker symbols for the stocks in this index are: BLBG: S5COND - OMC and IPG.
In order to harvest a tactical continuation of the high-risk, momentum-driven broad market advance, we have made a few tweaks to our portfolio, while maintaining a core non-cyclical emphasis given that the global growth outlook remains sketchy. This week, we added the cyclical interest rate-sensitive consumer discretionary sector to the fold after recently upgrading the S&P home improvement retail index back to overweight. Relative performance has dropped to a four year low, once heavyweight Amazon is excluded, but a recovery window has opened if the Fed stays lax while wage growth continues to firm and the U.S dollar regains strength. The consumer is the strongest engine in the U.S. economy, and is benefiting from lower oil prices and plunging mortgage rates. Our Consumer Drag Indicator (CDI), comprising mortgage rates and gasoline prices, has climbed significantly, heralding ongoing consumption resilience. Importantly, the CDI has a good track record in leading relative performance (second panel). Money growth is sending a similar message, particularly given a healthy clip in consumer lending growth (top panel). After deleveraging for several years, financial obligations are not onerous, even if interest rates rise modestly. Any upgrade in consumer confidence as a consequence of income growth could unleash pent up dry powder for consumption. As a result, we recommend buying into relative performance weakness and upgrading to overweight, including a boost to the advertising group, please see the next Insight. BLBG: S5COND.
The major banks are more willing to lend to the consumer and less willing to lend to the corporate sector.
Expectations of a prolonged period of abundant liquidity and rising confidence that recession is not imminent have created the conditions for a potential blow-off phase. This week we are fine-tuning our portfolio for peak performance.
BCA’s defense index has been on a tear recently. The unfortunate structural increase in terrorist activity will embolden governments around the world to step up defense spending (top panel), at a time when the pressure to move away from austerity toward expansionary fiscal policy is already intense. Defense industry revenues have already begun to outpace those of the overall S&P 500, and a structural upturn in military expenditures will provide confidence that this is the start of a prolonged uptrend, as occurred throughout most of the last decade. From a cyclical perspective, we have shown that the shipments-to-inventories (SI) ratio at the wholesale, manufacturing and retail levels are collapsing, but the defense capital goods SI ratio is moving in the opposite direction (middle panel), reinforcing the case for ongoing earnings outperformance. Bottom Line: The re-rating phase in BCA’s defense index is still in the early innings. Stay overweight. The ticker symbols for the stocks in this index are: LMT, GD, RTN, NOC, LLL.
Using long-term real rates, Uncovered Interest Rate Parity still works for exchange rate determination. Currencies are also affected by the global risk appetite and commodity prices. Intermediate-term fundamentals for EUR/USD are pointing up, but the timing is not optimal to buy it yet. However, the long-term outlook for the euro remains poor. Currently, USD/JPY has room to rally in the short term. Long-term factors will also continue to weigh on the yen.
The previous Insight showed that the capital markets group required a reversal in currently bearish relative forward earnings momentum in order to break out of its funk. Trading profits are volatile, and markets typically only reward the group with a higher multiple when capital formation is on the upswing. On this front, leading indicators remain grim. New stock issuance is in the dumps, and the global credit impulse is negative (second panel). Corporate balance sheet health has deteriorated, which is a leading signal for future M&A activity (third panel). Businesses are in retrenchment mode, and the corporate sector financing gap, defined as the amount companies are spending in excess of internally generated funds, has rolled over, underscoring that the need for external financing is diminishing. All of this cautions against expecting a sustained upturn in fee generation. Ergo, the relative performance bear market is likely to stay intact, despite the appearance of good value and recent better-than-expected earnings results. The ticker symbols for the stocks in this index are: BLBG: S5CAPM - GS, BLK, BK, MS, SCHW, STT, TROW, AMP, BEN, NTRS, IVZ, AMG, ETFC, LM.