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Ed Yardeni
O Ed Yardeni είναι διεθνούς φήμης αναλυτής και σύμβουλος επενδύσεων
2 Νοεμβρίου 2011
MAJOR TOPICS: Catharsis
BULLET POINTS: (1) Papandreou shocks Merkozy and the markets. (2) It’s all
Greek to me: Catharsis, Democracy, Chaos, and Apocalypse. (3) IMF can’t pay next
tranche. (4) Pass the ouzo! (5) “Pain” is derived from a Latin word. (6) Waiting on
Mario and Ben. (7) Fundamental Stock Market Indicator moving sideways. (8)
Bull/Bear Ratio edges up to 1.17. (9) Purchasing managers are depressed in Europe.
(10) US auto sales lack zip. (11) Market weighting auto-related stocks.
BLOG: Our latest post on blog.yardeni.com focuses on PMIs.
I) EURO-MESS: “It’s time to throw the bums out.” I have to believe that was the
initial reaction of German Chancellor Angela Merkel and French President Nicolas
Sarkozy (“Merkozy”) when they discussed how to respond to Greek Prime Minister
George Papandreou’s decision yesterday to call for a referendum on the second Greek
bailout plan put together by Merkozy last Thursday. The first Grand Plan on July 21
was dead on arrival. Now the second Grand Plan may be DOA too. It’s all Greek to
me. How about you? Let’s study the language:
(1) Catharsis. If the Greeks insist on a referendum, Merkozy might have no choice
but to respond to the Euro-Mess with a long-overdue catharsis. That’s a Greek word
meaning “cleansing” or “purging.” The Greek prime minister seems to have
unilaterally concluded that Greece can no longer remain in the euro zone. He must
know that Greek voters will most likely vote against the austerity measures that they
must accept to remain in the monetary union. He also knows that if the referendum
won’t be scheduled until early next year, then the Europeans won’t give Greece any
additional bailout funds that they need to avoid defaulting on their debt. In this
scenario, the Europeans would have to conclude that a much better use of the funds
would be to shore up their banks that might have to absorb 100% haircuts on their
Greek bonds and loans.
Indeed, the IMF may not be able to provide Greece with the sixth tranche of its
bailout. IMF officials, who were completely shocked by Papandreou’s announcement,
reportedly believe that the resulting uncertainty gives them no choice but to hold back
the funds. Given the funding conditions in the IMF charter that require a clear horizon
for the next 12 months, the share of the €8-billion tranche that would come from the
IMF cannot be disbursed.
(2) Democracy. The Greeks invented Democracy. The term is derived from two
Greek words that stand for “people power.” In theory, it’s a wonderful system of
government. However, all too often, it devolves into a tyranny of corrupt populist elite
who purport to represent the best interests of the people. A representative democratic
system with checks and balances can counter some of this tendency, though it tends to
be corrupted by special interest groups. If the Greeks get their referendum, odds are
that the majority will vote to keep their government jobs, their many vacations, and
their early retirements. They’ll vote to default on all of their debts. Then they will
have a big party, drink lots of wine, have a great meal, and throw the plates against
the wall.
(3) Chaos is from the Greek word “Khaos,” meaning “gaping void.” If the Greeks
have their referendum and vote to keep the party going, their central bank will have to
start printing drachmas. Their banks will implode, and their social security funds will
drop to zero along with the value of their Greek bonds. Inflation will soar. Many will
lose their jobs and their pensions. Those who keep their jobs will see their real
incomes plunge.
(4) Apocalypse is the Greek word for “revelation,” but has come to mean the end of
the world. Merkozy are scrambling to avert the collapse of their latest Grand Plan to
save the euro and to avert a financial meltdown by meeting with Papandreou today.
The Greek finance minister reportedly disagrees with the referendum proposal, and a
socialist party leader said the vote was off. A few European authorities are urging
Greece not to hold the vote, or to at least do it quickly.
In this morning’s FT, Richard Milne reports: “George Papandreou, Greece’s prime
minister, has won the backing for a referendum on the second bail-out package for his
heavily indebted country after a grueling cabinet meeting. The Greek cabinet met for
seven hours before giving the Greek prime minister approval to hold the vote on a yet
to be determined date.” Pass the ouzo!
II) STRATEGY: A catharsis, like root canal, is preceded by intense pain. Yesterday
morning, I was at the dentist when the DJIA plunged 288 points, or 2.4%, within the
first five minutes of the open. It ended the day down 573 points from Friday’s close. I
thought I might be a candidate for a root canal. What a relief that it was just a small
cavity requiring a filling. Stock investors enjoyed a relief rally from October 3
through October 28 as European leaders promised to make the Greek pain go away.
On Monday and Tuesday, stock investors were in agony again. The question now is
whether the European catharsis will be a long and painful experience, or a quick root
canal procedure numbed with novocaine.
The word “pain” comes from the Latin “poena” meaning a fine, a penalty. That’s
appropriate since the Italians are starting to feel more of the pain of the European
sovereign debt crisis. The Italian 10-year government bond yield remains around its
euro-era high of 6.15% this morning despite the ECB yesterday purchasing its second
biggest amount of these bonds since it started buying the country’s debt in early
August. The Italian 10-year bond yield spread over Germany is at 434bps this
morning. According to yesterday’s FT, a spread of 450bps is a key trigger point that
could require bond investors to come up with more cash when using them as
collateral.
The bad news out of Europe increases the chances that the ECB will lower its official
interest rate on Thursday, or strongly indicate that that will be done early next month.
The problem for Mario Draghi, the new president of the ECB, is that in a first reading
of inflation for October, the Eurostat said inflation was 3.0% during the month. In
addition, embracing a more aggressive policy of buying Italian and Spanish bonds
may be difficult. However, the ECB is likely to be much less hawkish, and more
responsive to the financial crisis under Draghi than under his predecessor. Of course,
we can count on the FOMC under the leadership of Ben Bernanke to issue a very
dovish statement after this afternoon’s meeting of the Fed’s policy committee.
Meanwhile, our Fundamental Stock Market Indicator continues to muddle along,
suggesting that the stock market may continue to move sideways, though with lots of
volatility. It was down 2.6% during the week of October 22, but has been fluctuating
in a tight range since the spring. The good news is that the Bull/Bear Ratio remained
extremely low at 1.17 this week. Bearish sentiment is bullish. Finally, for the 360
S&P 500 companies that have reported so far, earnings are up 24.3% y/y on a 12.3%
increase in revenues. That’s impressive.
* S&P 500 Q3 Earnings Season Monitor: With 72% of the S&P 500 companies
finished reporting Q3-2011 results, the earnings surprise is turning out to be slightly
higher than in Q2. We still expect Q3 will mark the S&P 500’s eleventh straight
positive earnings surprise, but y/y growth and the degree of the surprise for both
earnings and revenues are likely to be lower than in prior quarters. The tallies at this
point: With results in for 360 of the 500 companies, earnings and revenues are 7.8%
and 1.9% above the analysts’ forecasts, little changed from 7.9% and 1.8% after
Monday’s close. Earnings for the 360 companies are 24.3% higher than a year ago,
and revenues are up 12.3% y/y. About 71% of the companies have a positive earnings
surprise, and 61% have a positive revenue surprise, but only 78% have higher
earnings y/y versus 83% with higher revenues. With over 81% of the Financials sector
finished reporting, it appears that revenue growth will be nearly 6% y/y versus
analysts’ forecasts of no growth. Ex-Financials, the S&P 500’s revenue surprise drops
to 1.5% from 1.9%, and the earnings surprise falls to 4.4% from 7.8%.
* S&P 500 Cyclical vs. Stable Sectors (weekly): How are the S&P 500’s Cyclical
and Stable sectors performing? Cyclical sectors took a bigger hit than Stable sectors
on Tuesday, but have continued to outperform Stable since the 2011 low on October
3. Cyclical down 3.2% yesterday, and Stable fell 1.8%, but Cyclical is up 13.6% since
October 3, while Stable has risen just 4.9% since then. Cyclical down 5.1% ytd, but
has improved 11.3 percentage points from its 2011 low of -16.4%. Stable sectors have
risen 2.7% ytd, and is up 7.5 percentage points from its 2011 low of -4.8%. Cyclical
market cap is down 13.9 percentage points from its 2011 peak of 8.8% ytd on April
29, while Stable is down 8.7 percentage points from its peak ytd gain of 11.4% on
May 19. Both have fallen sharply since the market melted down in August, but Stable
sectors are down less than Cyclical sectors. Forward P/E for Cyclical up to 10.9 in
October from a 34-month low of 10.5 in September, and P/E for Stable sectors edged
up to 12.6 from 12.4.
* S&P 500 Technicals (weekly): How’s the technical picture looking for the S&P
500 and its 10 sectors since its yearly low on October 3? The S&P 500 has improved
significantly and moved back above its now rising 50-dma on October 10, but has
failed to stay above its still falling 200-dma. The S&P 500 is down 10.7% from a
three-year high on April 29 and is down 3.1% ytd. The S&P 500 is trading 2.3%
above its 50-dma, and 4.3% below its 200-dma (compared to 4.1% and -3.5% a week
ago). The S&P 500’s 50-dma has been rising again since October 13 after being flat
or falling since June 3. Its 200-dma turned flat at the end of last week, but is falling
again now, as it has done since August 8. The good news: The S&P 500’s 50-dma has
risen to 6.4% below the 200-dma from a 30-month low of -8.3% on October 12.
Here’s how much the 50-dmas trade relative to the 200-dmas for the S&P 500’s 10
sectors: Financials (-15.2%), Industrials (-10.9), Materials (-10.6), Energy (-9.8),
Telecom (-3.9), Consumer Discretionary (-3.7), Tech (-3.2), Health Care (-2.8),
Consumer Staples (-0.2), and Utilities (2.6). Nine of the 10 sectors are trading above
their 50-dmas, and nine have a rising 50-dma. Just one sector trades above its 200dma, but three have a rising 200-dma.
* Fundamental Stock Market Indicator (weekly): Is the S&P 500 still closely
tracking our Fundamental Stock Market Indicator (FSMI)? It appears to be once
again. The FSMI plunged 2.6% during the week of October 22 to its lowest level
since the week of November 20, 2010. It’s down 16.4% since its cyclical high posted
back in February. Our FSMI is the average of the Weekly Consumer Comfort Index
(WCCI) and our Boom-Bust Barometer (BBB). Here’s how they performed the week
of October 22: 1) The BBB declined for the ninth time in 11 weeks, down 1.6% w/w
and 9.4% over the 11-week period. It’s 16.8% below its record high (posted in
March). Jobless claims--a component of our BBB--rose to 405,500, based on 4-wa,
after falling steadily from 422,250 to 403,750 the previous four weeks. The CRB raw
industrials spot price index, another component, has currently stabilized around recent
lows. 2) The WCCI fell to its lowest level in a month.
* Stock Market Sentiment Indicators: Investors Intelligence Bull/Bear Ratio rose
for the third straight week to 1.17 this week from a 2½-year low of 0.74 three weeks
ago. Bullish sentiment increased steadily over the three-week period to 43.2% from
34.4%, which had been the fewest bulls in more than a year. Bearish sentiment fell to
36.8% from 46.3% three weeks ago, which was the most bears since March 2009.
Those calling for a correction fell from 23.2% to 20.0% over the past two weeks, just
above the early October low of 19.3% (which was the first reading below 20% since
September 2008). The AAII Bull Ratio rose to 63.2% during the final week of
October after falling from 52.2% to 51.0% the previous week. Bullish sentiment
increased from 36.0% to 43.0% during the week, while bearish sentiment fell for the
fifth straight week from 48.0% to 25.0% over the five-week span. In the futures pits,
large speculators have turned bullish on the S&P 500 and are more neutral on the
Nasdaq. S&P 500 Put-Call Ratio slipped for the second straight week to 1.81, based
on 4-wa, after climbing from 1.73 to 1.95 the prior four weeks. VIX charts are
showing less market volatility.
III) GLOBAL ECONOMY: The global economy was able to grow and prosper
during the previous two decades even though they were described as “lost decades”
for Japan, the world’s second largest economy back then. The question is whether the
global economy can do the same if Europe’s economy is now facing a lost decade? I
think so, but right now Europe’s economy may be already in a recession that will
certainly depress global economic growth. For now, most of the pain in the global
economy is showing up in Europe’s economic indicators:
(1) OECD predicts a growth recession for Europe next year. On Monday, the OECD
slashed its 2012 growth forecast for the euro zone to 0.3% from 2.0% in May.
(2) Unemployment rising in Europe. During September, 23.3 million people were
unemployed in the 27 countries of the European Union. That includes 16.2 million
unemployed in the euro zone. Compared with August 2011, the number of persons
unemployed increased by 174,000 in the EU27 and by 188,000 in the euro area. As a
result, the jobless rate in the euro zone rose slightly to 10.2% in September from a
revised 10.1% in August.
(3) European manufacturing purchasing managers are depressed. Manufacturing
purchasing managers indexes (M-PMI) were weak in all of the major European
countries during October. The UK index dropped to 47.4 from 50.8. The EU index
fell to 47.1, the lowest since July 2009. Germany decreased to 49.1, the first reading
below 50 since September 2009. France edged up from 48.2 to 48.5, but remained
under 50. Italy plunged to 43.3 (see our blog).
(4) US manufacturing growing, but at a slower pace. The M-PMI in the US edged
down during October, but remained above 50 (see our blog). It was 50.8 during the
month. The weakest component was the inventories index, which dropped to 46.7
from 52.0. Still on the upside were production (50.1), orders (52.4), and employment
(53.5).
* China Manufacturing PMI: Is tight monetary policy depressing China’s
economy? Latest PMI data say yes. The China Federation of Logistics and Purchasing
composite index (PMI)--the official index--fell for the first time in three months to
50.4, the lowest since February 2009. Here’s a snapshot of October’s report: 1) The
new orders index (which makes up 30% of the composite index) was just above 50,
dropping from 51.3 in September to a 32-month low of 50.5 last month. 2) The
production index (which accounts for 25% of the index) slipped from 52.7 to 52.3, not
far from July’s 29-month low of 51.2. 3) PMI sub-indexes for employment (49.7),
new export orders (48.6), and imports (47.0) all slipped below 50 last month. 4) Tight
monetary policy appears to have eased inflationary pressures. The input price index
dipped below 50 for the first time since April 2009, tanking 10.4 points in October to
45.2. It was as high as 70.1 in February.
* US vs. Europe Manufacturing PMI: How’s business for European manufacturers?
Not good. The EU’s PMI dropped to a 27-month low of 47.1 in October, the third
straight reading below 50.0 (with only Ireland above the break-even point). Of the Big
Three economies, Germany’s PMI dropped to 49.1, the first reading below 50 since
September 2009. Italy saw its PMI plummet from 48.3 to 43.3 last month, the lowest
since June 2009. France’s PMI ticked up from 48.2 to 48.5, remaining below 50 for
the third straight month. The UK tumbled to a 28-month low of 47.4 in October from
a revised 50.8 (vs. 51.1) in September, below 50 three of the past four months. Both
the EU and UK had PMI readings that were above 60.0 in the early months of this
year. While manufacturing is contracting in Europe, it’s still growing in the US
(50.8), though at a slower pace.
* US Manufacturing PMI: What’s the latest in the US manufacturing sector? The
M-PMI fell for the sixth time in seven months, dropping from 51.6 to 50.8 in October,
reversing nearly all of September’s 1-point gain. The index was at a cyclical high of
61.4 in February and a 25-month low of 50.6 in August. The five components that
make up the composite index were mixed in October: 1) The inventories index
accounted for the bulk of the decline in the M-PMI, dropping 5.2 points to 46.7, the
largest m/m decline since November 2009, though the index has been very volatile the
past several months. 2) The new orders index unexpectedly climbed 2.8 points last
month to a six-month high of 52.4, the first reading above 50 since June. 3) The
production index slipped to 50.1 after climbing to 51.2 in September from 48.6 in
August, which was the first reading below 50 since May 2009. 4) Both the
employment (53.5 vs. 53.8) and supplier deliveries’ (51.3 vs. 51.4) indexes were little
changed in October after climbing in September. On the inflation front, price
pressures have eased dramatically, with the prices-paid index tumbling 15 points in
October alone to 41.0, dropping below 50 for the first time since May 2009. The
index was as high as 85.5 in April.
* Construction Spending: Is the construction recession over yet? The industry is still
struggling to recover, remaining in a holding pattern around recession lows. 1) Total
construction spending edged up 0.2% in September. Revisions showed August’s
increase slightly larger (1.6% vs. 1.4%) and July’s decline considerably steeper (3.3% vs. -1.4%). Spending was 1.3% below a year ago. 2) Private construction
accounted for September’s advance, rising 0.6%, the fifth gain in six months.
Residential and nonresidential investment climbed 0.9% and 0.3%, respectively, with
the former up 0.1% y/y and the latter 7.4% above a year ago. Nonresidential
construction remains weak for many segments (recreation, lodging, commercial,
manufacturing, health care, and communications building), though most have
bottomed or turned up. Construction of power- and transportation-related building are
at cycle highs. 3) September public construction spending was down 0.6% m/m and
9.2% y/y. While most building remains depressed, construction of highways &
streets, along with schools, have turned up recently, with health care building holding
around record highs.
IV) FOCUS ON AUTO-RELATED INDUSTRIES: The soft patch is over for the
auto industry. Motor vehicle sales have rebounded from this year’s low of 11.5
million units (saar) during June to 13.2mu during October, close to the recent high of
13.3mu during February. The plunge during the spring was attributable to a shortage
of cars caused by the disruption of parts and vehicles produced in Japan following the
earthquake over there. In addition, demand was depressed by rapidly rising gasoline
prices, which have settled down recently. Nevertheless, the pace of US auto demand
remains relatively low as a result of high unemployment and stagnating real incomes.
* Auto Sales: What’s down the road for car manufacturers? A smoother ride than
early this summer, but not without some bumps. Total sales added to September’s 1.0
million jump, climbing from 13.1mu to 13.2mu (saar) in October, just shy of this
year’s high of 13.3mu in February. Sales have recovered completely from the Japanrelated supply chain disruptions. Domestic car sales increased to 4.3mu (saar) last
month, after hovering around 4.0mu since May. Sales of domestic light-trucks edged
down to 5.8mu (saar) after accelerating to a 3½-year high of 6.0mu in September.
Sales of imported cars remained at 3.1mu (saar), up from 2.7mu from May through
August. Domestic production was considerably below domestic sales in September (at
8.5mu vs. 10.1mu). In September, there were 2.1 cars in inventory for every car sold,
with the days’ supply stuck around 40 for several months.
* Automobile Manufacturers (market weight): The stock price index for the market
weight rated Automobile Manufacturers industry is down 30.4% ytd and trades 37.8%
below its 52-week high, for the worst performance among the auto-related industries.
Earnings had been pressured during the spring and summer by parts shortages and
higher material costs, and now the possibility of slower economic growth threatens
this cyclical industry. The price index is up 504% from a 26-year low in March 2009,
but remains 78% below its record high in 1999. Forward earnings fell 2.8% m/m in
October, have fallen in eight of the past nine months, and is down 18.2% from a sixyear high in January. Analysts expect annual earnings to edge up 1.2% in 2011, and
fall 9.3% in 2012, but that’s more favorable than the five years of losses reported
from 2006-2010. NERI down to -14.3% in October from -13.2% in September. P/E
up to 6.5 from a 16-year low of 5.6 in September, but at a relatively normal 43%
discount to the market. Profit margin up to a record high of 5.5% in Q2-2011 after
turning positive in Q4-2009 for the first time in 10 quarters.
* Auto Parts & Equipment (market weight): The stock price index for the market
weight rated Auto Parts & Equipment industry is down 13.8% ytd, trades 22.9%
below its 52-week high, and is 10% below its falling 200-dma. The industry is down
to one company now from three firms in 2005 and is benefiting from greater
outsourcing by the auto industry. Forward earnings and the profit margin remained
positive during the recession, and have risen steadily to new cyclical highs since
bottoming in mid-2009. Forward earnings down 3.1% m/m in October from a cyclical
high, but has risen in 29 of the past 31 months. Analysts expect earnings growth of
21.1% in 2011 and 23.7% in 2012, but have been reducing their forecasts recently.
P/E up to 10.4 from a three-year low of 9.2 in September, and at a lower 9% discount
to the market. NERI tumbled to a cyclical low of -30.1% in October from -6.9% in
September. The profit margin was steady at 4.2% in Q2, but is down from a 14-year
high of 4.3% in Q4. The biggest threats to this industry are global competition in the
long term and a slowing economy in the near term.
* Automotive Retail (market weight): The stock price index for the market weight
rated Automotive Retail industry is the best performer among the auto-related
industries, with a gain of 15.2% ytd, and is only 1.9% below its record high in
October. This industry is trading above both its 50-dma and 200-dma. Analysts expect
earnings to rise 20.1% in 2011 and 12.5% in 2012, and left their forecasts relatively
unchanged in October. Forward earnings is up 1.0% m/m in October to another record
high, and has risen in 29 of the past 30 months. Valuation edged down to 15.5 in
October from 15.7 in September, and fell to a 36% premium to the market from a
record high of 42% in September. NERI dropped to 12.0% in October from 13.5% in
September, but has been positive for 32 straight months--one of the best positive
streaks in the S&P 500. Profit margin has been rising since Q3-2008, and was up to a
record high of 5.9% in Q2 from 5.7% in Q1.
* Tires & Rubber (market weight): The stock price index for the market weight rated
Tires & Rubber industry has risen 21.2% ytd for the best performance among the
auto-related industries, and is trading at its 200-dma. Forward earnings rose 4.9%
m/m in October to a cyclical high, and has risen in 25 of the past 31 months. Analysts
expect earnings growth of 224.8% in 2011 and 36.7% in 2012, and raised their annual
forecasts in October. NERI down from a five-year high of 30.3% in July to 16.7% in
October, but is at its twelfth highest reading since 1995 and was positive for a sixth
straight month. The profit margin rose to a 11-quarter high of 1.4% in Q2, but this is
still an intensively competitive global industry and earnings remain vulnerable to auto
sales.
V) UPDATES & LINKS: We have updated Valuation, Stock Market Sentiment
Indicators and US Business Surveys on our website. Questions, comments,
downloading problems: [email protected] or call 480-664-1333.