Recap 11-07-11

Main Items:

  • Papandreou will step down and form a unity government after surviving the Confidence vote on Friday. The new PM is expected to be named tomorrow, with former ECB vice president Papademos the front runner according to Greek state TV.
  • Berlusconi said he will not step down. 10y BTP yields widened above 450bps over Bunds, which is expected to trigger increased repo haircuts.


  • EZ Sentix Investor Confidence declined to -21.2 in Nov vs -20 exp and -18.5 prev.
  • EZ Retail Sales declined to -1.5% YoY in Sept vs -0.5% exp and -1.0% prev
  • Australia Construction PMI improved to 34.7 vs 30 prev


Consumer discretionary stocks are starting to look rich. Over the past 20 years, the relative performance of the sector has coincided with relative change of a basket of consumer goods after taking out necessities. This makes sense. However, recently, this trend has turned while consumer discretionary stocks continue to outperform:

Another indicator is the savings rate. Historically, a high savings rate has preceded relative outperformance as savings get built up for discretionary expenditures. The exception to this was of course the previous decade as Mortgage Equity Withdrawal became common. With asset prices stagnant, and with savings rates now at the lowest level since 2007, it is unclear where the capacity for additional discretionary expenditures can come from:

The Cons Discretionary P/E to S&P P/E ratio stands at 74% percentile – not crazy, but probably not cheap enough to sustain a turn in the fundamentals.