Posts filed under “Analysts”
Two reports from different wirehouses caught my eye yesterday due to their amazing Yin and Yang nature.
First up, the always excellent Equity & Quant Strategist at BAML, Savita Subramanian (the Yin), issued a report titled Wall St. Proclaims the Death of Equities. The report discusses the firm’s proprietary sell-side indicator, which has reached near record levels of bearishness, which is of course bullish for stocks. So much so that its current level implies a 12-month S&P500 target of 1665. (It should be noted that the indicator’s focus is equity allocation: It “is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month. We have found that Wall Street’s consensus equity allocation has historically been a reliable contrary indicator.”) Although it’s about equity allocation, bear with me here.
Here’s a look at the chart. (Note that 1665 is not BAML’s official S&P target – it is the implied target based on this one indicator, not the firm’s official position.)
No sooner had I read that report when, lo and behold, I come across a piece of research from UBS’ estimable Chief Strategist Jonathan Golub (the Yang) who, as if on cue, sliced his S&P500 forecast by 100 down to 1375 and shaved $1.50 off his S&P earnings, down to $103.50. (I am, perhaps a bit unfairly, construing Mr. Golub’s call as effectively the equivalent of a reduction in equity allocation. As he’s cut his target by 6.7% and called for the remainder of the year to be flat, I don’t think that’s too much of a stretch.)
Said Mr. Golub:
We are lowering our S&P 500 year-end target to 1,375 from 1,475 on three main catalysts: (1) deterioration in incoming U.S. economic data; (2) the Supreme Court’s healthcare ruling, which we believe will contribute to greater partisanship ahead of year-end fiscal discussions; and (3) a more contentious tone among European policymakers, despite some success at the most recent Euro summit.
We are lowering our S&P 500 earnings estimates for 2012 to $103.50 from $105, and for 2013 to $110 from $113. Our lowered estimates reflect moderate U.S. GDP, weaker non-U.S. growth, additional dollar strength, and a more difficult operating environment for Financials.
And an interesting chart from Mr. Golub:
As the exhibit below highlights, the vast majority of market’s rebound was achieved in the early days of the recovery as a result of earnings strength and a re-rating of multiples from depressed levels. By contrast, the market’s 12% rise over the past two years has been characterized by flatter returns with greater volatility.
If there’s been a better example of research Yin and Yang, I can’t remember what it was. Fascinating stuff from two great strategists.
Finally, I’ll note that I’m starting to see a real divergence of opinion opening up on where markets are headed, this being the most recent – and obviously glaring – example. It will be interesting to watch it all play out.
Equity prices & bond yields since 1900 I don’t often give props to big Sell Side firms, but today I must make an exception. Merrill Lynch’s Equity Strategy group put out The Longest Pictures: Picture Guide to Financial Markets Since 1800 this week. Its a 102 page doozy looking at every asset class and country going back…Read More
6 Buys, 3 Neutrals Average Price Target = $39 BofA/Merrill – Neutral – $38 PT Goldman Sachs – Buy – $42 PT Oppenheimer – Outperform – $41 PT JPMorgan – Overweight – $45 PT Piper Jaffray – Overweight – $41 PT Wells Fargo – Outperform – $37-$40 Range Credit Suisse – Neutral – $34 PT…Read More
Rosenberg, exactly 5 years ago today in May 2007: > click for full report > Invictus here. In my Barron’s Big Money post, I mentioned attending a small dinner in October 2007 at which David Rosenberg was the speaker. In comments, Hamann asked if I could provide any additional insight into what he had shared…Read More
Click to enlarge: The Wall Street Journal – Stock Funds Shunned Despite Broad Inflows Long-term mutual funds had estimated net inflows of $6.48 billion in the latest week as investors added money to hybrid, bond and foreign equities, while domestic equity funds saw the sharpest outflow so far this year, according to the Investment Company…Read More
Société Générale’s Andrew Lapthorne lays out the danger of relying on P/E ratios. “The essential message is that although one is of course simply the inverse of the other, using P/E ratio instead of earnings yields can give dramatically different results when making historical valuation comparisons. This disparity between average P/E and average E/P is…Read More
S&P, the notoriously incompetent rating agency that was a prime enabler of the credit crisis, has declared that Greece is in “selective default.” This is, of course, an act of belated cowardice on the part of S&P. When a borrower informs their lenders that they will a) Not be repaying the full loan amount; and…Read More
Bruce Krasting: I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.
When you stick your neck out and make prognostications about the future, sometimes you’re going to be wrong. I’m certainly no exception. But when it comes to really big misses, I think Meredith Whitney’s call for a monster blow-out of the Municipal Bond market is on top of the list.
Meredith is a smart lady. That being the case, it’s worth looking into why she was so wrong. A report this weekend from the Bond Buyer provides a partial answer:
A 32% ($138B) YoY decline is a very big relative change. The drop in long-term financing was not offset by increases in short-term debt; that category fell by 7.4% ($5B).
The drop in total borrowings is almost exclusively a result of the 46% ($129B) in the “New Money” category. The drop in New Money debt issuance is a consequence of hundreds of cities and states collectively saying:
We’re in a pinch on revenues. Let’s not spend any money we don’t have to for the time being. We’re going to have put off the construction of the new (Sewer plant, overpass, water treatment facility, school, whatever). The last thing we want to do is go to the Muni market and borrow any more.
As a result of many individual decisions to defer infrastructure projects, the Munis have kicked the can down road. They have eliminated the current and future expenses related to these projects. With that, they have stabilized the trajectory of their debt growth and improved short-term cash liquidity (by having less ST debt). In the process, they have created a shortage of muni bonds (relative to expectations) in the market.
Thus, all may appear well in muni land. A successful re-balancing has taken place, for the time being. If the munis can continue to push off infrastructure projects, they will not suffer the fate that Ms. Whitney feared they might.
I said that the munis had “kicked the can down the road”. In this case, it’s quite a different form of can kicking. When the Federal government raises the debt ceiling, we all say, “They kicked the can”. But the munis are doing (pretty much) the exact opposite, so Can Kicking would appear to be an improper/unfair description of what is happening with Munis. I think it’s still valid, deferring infrastructure investments is another form of kicking.
Like most Kicking efforts, it will end badly sooner or later. I’m looking at a potential example as I write. One of NYC’s reservoirs is about a half mile away. A $60mm NYC/NYS funded construction plan was shelved a month ago. Could this become one of those examples where Kicking goes badly? Consider this daisy-chain.
The Croton Reservoir is part of a chain of reservoirs that provide water for NYC. It’s large (22 miles), but it’s small in comparisons to the big man-made lakes further upstate. Croton is important because it connects directly to those upstate reservoirs via an underground tunnel. That tunnel goes north, and then west. It is 1,000 feet deep where it meets the Hudson River.
A bit of physics. The upstate reservoirs are 1,000 feet above the sea and the tunnel is 1,000 below. The tunnel is (was) large enough to drive a truck through so the water pressure at the lowest part of the tunnel is enormous. What might you expect from a 75 year old tunnel under that much pressure? A leak? Sure.
This is one hell of a leak. As much as 35 million gallons a day was the estimate seven years ago. There is evidence that rate has since accelerated. That comes to 13 billion gallons a year, which is sufficient for 250,000 average Americans. Think Orlando, Madison, Winston-Salem or Reno. Each of these cities uses about as much water as NYC is leaking. In China, this much water would meet the needs of 1.7mm people, In Bangladesh it would be sufficient for 3mm. It’s enough to fill 650,000 in-ground swimming pools. That’s a leak.
It gets worse. The leak was first detected in 1988. Therefore something like 15 million swimming pools worth of drinkable water have been pissed into the ocean. It’s so bad that areas on either side of the tunnel have sinkholes. People have been forced to move. Properties have been condemned. And the sinkholes keep getting bigger.
There are already dozens of lawsuits on this. They are after the State and the City who own and maintain the reservoirs. The judges have all sided against the City and State, and there have been promises to fix the damn leak for years. A few years ago, a formal plan was put together.
This is no small engineering matter. A new tunnel will be built that connects the old tunnel before and after the break. Once completed, the old tunnel will be cemented closed. The diversion tunnel will be ½ mile long. Recall that this is 1,000 below sea level, any construction/mining this deep is both difficult and dangerous (the bends). Those normal risks are, however, trumped by risks that the nearby existing tunnel breaches during construction of the diversion tunnel. The water pressure in the tunnel is sufficient to crush a submarine. Read More