Recap 8-14-12

Main Items:

  • US Retail Sales Control rose 0.9% in July vs 0.5% exp and -0.1% prev. The Headline figure was also strong, rising 0.8% vs 0.3% exp
  • US Core PPI YoY declined to 2.5% in July vs 2.3% exp and 2.6% prev
  • US NFIB Small Business Optimism index dropped to 91.2 in July vs 91.6 exp and 91.4 prev.

Overseas:

  • German Zew Survey dropped to -25.5 in Aug vs -19.3 exp and -19.6 prev
  • UK CPI increased to 2.6% YoY in July vs 2.3% exp and 2.4% prev. Core CPI increased to 2.3% vs 2.1% exp and prev
  • Australia NAB Business Confidence improved to 4 in July vs -3 prev

Upcoming Data:

  • Tues: UK CPI, EU 2Q GDP, German Zew, US PPI, Retail Sales
  • Wed: MoE Minutes, UK Employment, US CPI, Empire Mfg, NAHB Index
  • Thurs: EU CPI, US Jobless Claims, Housing Starts
  • Fri: Canada CPI, U Michigan Confidence

Commentary & Links:

Building off of yesterday’s note, I want to highlight the cheapness of cyclical vs defensive sectors a bit more today.

Historically, cyclical vs defensive performance tends to be highly correlated to the broader index, as intuition and portfolio theory would suggest. Furthermore, cyclicals tend to trade richer in the early to mid stages of the economic cycle, and cheaper later, which is also not a surprise.

However, this relationship appears to have broken down sharply this time. For example, the Industrials vs Staples price ratio is still at levels from last summer, and before that in 2009. In other words, it is pricing in a recession, even though the S&P index is near its highs.

The obvious culprit is Europe of course, but the underperformance cyclicals would only make sense if the relative share of profits of cyclicals from the EU are much higher than the relative share of profits for staples. And that is not the case. In fact, based on my own tabulations, a larger percentage of revenues of the industrial sector came from North America (61%) than the same metric for the Staples sector. (54%)

This all suggests that going long Industrial vs Staples is a good asymmetric trade here – more upside than down.

Advertisements