Recap 10-19-12: Thoughts

Commentary:

  • Obviously, yesterday’s post got the timing wrong. Better half wrong than all wrong, I suppose. Historical precedents still suggest a mid single digit correction.
  • Implied vol remains very cheap. The 6th rolling VIX contract just bounced off of mid 2008 lows. Not necessarily a buying opportunity, but perhaps positioning is not as bearish as you’d think.

  • The homebuilding boom is quite welcome for the US, but the impact on corporate earnings will be muted. The housing mess means that home building related sectors are now a much smaller part of the economy. Almost all homebuilders are mid-cap stocks and aren’t even in the S&P index. Impact on US GDP is likely to be less than 50bps. Keep that in mind as the positive housing data continues to come in.
  • European stocks are expensive. Earnings expectations have stopped falling, but don’t show any signs of picking up. While austerity continues, earnings will continue to be under pressure. OMT removes tail risk, but that doesn’t mean growth is coming back. Might need to wait until Spain officially asks for help before playing this view though.
  • Technical signals suggest Gold is at a short term bottom. My estimate of fair value is around 1,800. FOMC next week should be a positive.
  • Is the better Chinese data a mirage? The leadership transition is not over until early November, so this is batch of September data is likely NOT a result of new policy initiatives. But the negative momentum has undoubtedly eased. So the stabilization in China-related assets is probably real, but substantial gains are unlikely unless the new leadership announces another stimulus package.
  • The increase in MBS current coupon rates suggests that a sudden jump in prepayments is less likely. As a result, mortgage REITs may be cheap here. Earnings are in 2 weeks.
  • The US polls reflect the popular vote, which does not correlate well with the electoral vote. Worst outcome is a Republican congress and an Obama win, because fiscal cliff risk is the highest. The fact that there are no national elections for 2 more years after November will make all players more willing to play chicken.

Notable:

  • European Council President José Manuel Durão Barroso said the EC has confirmed the key principles of the Single Supervisory Mechanism (SSM) and they will now work to finalize the framework before the end of the year

Upcoming Data:

  • Mon: Japan Trade Bal
  • Tues: BoC, Canada Retail Sales, AU CPI
  • Wed: EU PMI, German IFO, USMarkit PMI, US New Home Sales, FOMC
  • Thu: US DGO, Jobless Claims, Pending Home Sales,
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3 thoughts on “Recap 10-19-12: Thoughts

  1. Earnings have been a disaster. What is the catalyst for further gains in a declining earnings cycle? I don’t buy the housing recovery because there is a pipeline that is clogged with inventory that banks simply won’t let go because it unmasks the true mark on their books. Its funny how the CME lowered margin requirements yesterday just when the market showed signs of rolling over.

  2. Not buying the ‘housing recovery’ either. I see the parade of housing ‘experts’ on cnbc trying to scare up a buying frenzy. My guess is the uptick in housing, if there really is one, is the result of investor’s who’ve taken the bait. I firmly believe housing will be the very last thng to truly recover. Too much inventory, too much unemployment…

  3. It’s been an odd quarter. Almost all PE expansion, although estimates seem to be picking up a bit.
    The number of earnings misses this quarter suggests much of the weakness is recent – my guess is that if it happened earlier in the quarter, the companies would’ve ‘guided’ down.

    I also think the housing recovery story will continue to be weak for a few years as well. The buildup of both inventory as well as pent up demand is probably very bifurcated. Many MSA’s have either one or the other, IMO. So the result is that some places do ok and make headlines, but most markets will stay stagnant. Interesting that CAT’s CEO said today that housing starts need to DOUBLE to make a difference on their bottom line. So that seems to support the view that the housing industry remains unusually small.

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