G3 Recap 5-3-11

Main Items:

  • RBA kept rates unchanged as expected.
  • King: “The economic consequences of high-level indebtedness now would become more severe if rates were to rise. It is the main reason why interest rates are so low”
  • In Canada, the country’s Conservative party won a majority (from 143 to 167; 155 required to form a majority government) in parliamentary elections Monday, securing PM Harper another term and elevating the New Democratic Party to the #2 position for the first time, ahead of the more established Liberal party. JPM: This ends seven years of minority government and allows the Conservatives to move ahead in several areas. First, planned corporate tax cuts will proceed. Legislation passed by Harper in 2007 resulted in a reduced rate from 18.0% to 16.5% on January 1, falling further to 15.0% in 2012. Second, PM Harper has pledged to balance the federal budget by 2014. More generally, the Conservatives are a strong advocate for the oil industry, endeavoring to make Canada an "energy superpower."


  • UK Manufacturing PMI declined to 54.6 in April vs 57.0 expected and 57.1 previously
  • EU PPI rose 6.7% YoY in March vs 6.6% expected and previously
  • China Non-Manufacturing PMI improved to 62.5 in April vs 60.2 previously.


  • There were several bearish S&P reports yesterday after the bearish shooting star on the candle stick charts. In particular, Gavekal parroted a Bill Miller comment that only 2 S&P sectors outperformed the S&P in 1Q, showing weak breadth and hence risk to the downside. What was clearly missing from that is the fact that one earnings cycle is too short of a period for drawing meaningful conclusions from sector breadth. A longer look of 6m suggests that breadth remains normal, and even when it is at extremes, the conclusion is not clear:

    An interesting segue of looking at price breadth is cheapness breadth, or percent of sectors that are cheaper than the index. Note that the relationship between cheapness breadth and subsequent index return appears visually more robust, but the relationship appears completely nonlinear. I leave the reader to delve further, but suffice to say here that even though a plurality of sectors are richer than the index, historically such readings have proceeded a continuation of the broader bull market:

  • On another note, it is time to look at Japanese equities again. After March and the massive sell off, it is safe to assume that the speculative positioning is clean. Nikkei relative valuation vs the S&P is at the cheapest level since Lehman, (which was followed by a 20% outperformance) and price action is finally starting to look decent. Those worried about correlation can sell S&P futures against the Nikkei.


4 thoughts on “G3 Recap 5-3-11

    1. Hi Sid – Nikkei’s not too expensive. Roughly 17.5 on a trailing basis and 15.7 on a forward basis. Still richer than the S&P, but relatively speaking the near the cheapest levels we’ve seen over the past 5 years.

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