The magnificent 7 and equity markets - Review 6
After a 10% decline between 20th January and 5th February, the S&P 500 is recovering and
is still above its 200 days moving average, itself in a positive slope. We are now 10 month
up after the trough reached on 9th March 2009. The magnificent 7 are telling us that
there is no reason to become negative on equity (I recommend the reader to go to
the GTI web site for their monthly newsletter, one of the best available – don’t forget to tell
them that you are coming from Markets & Beyond).
S&P 500 Banks index: For 6-7 months the index has traded in a narrow 120-140 band.
The index and the 200 days moving average continue to. The index is still 70% below the
nadir reached in February 2007. The 120 support is holding very well. Positive.
Global 1200 financial index: The world financial sector did not hold the 1000 mark
reflecting woes with sovereign risk in Europe, Greece in particular, and European banks
exposure to this risk. The index went through the 200 days moving average but is not
extended its losses. Positive.
TED spread (LIBOR USD 3 mth - US 3 mth T-bills): The spread is holding well its
normal levels and is below 20 basis points (0.20%). The interbank market shows no stress.
USD bank BBB 10 yr - US 10 yr yield: Whilst still high and above historical average,
the spread has steadily decreased since July and is nearly 3% below the highest point
reached in March standing at 4.5%. Positive.
OEX volatility: OEX volatility had a spike corresponding to the Greek problem, but
quickly came back to previous levels. We need this indicator to stay at or below 20%.
S&P Case Shiller house price index: The latest data (November) published 26th
January marked approximately 10 months of improved readings in the annual statistics,
beginning in early 2009, and is the third consecutive month these statistics have
registered single digit declines, after 20 consecutive months of double digit declines.
Adjusted numbers show the 6th m/m consecutive increase in both indices; the unadjusted
data are however showing for the 2nd consecutive month a slight decrease. Prices for both
indices are back to late 2003 level.
Composite-10: November 2009: m/m +0.24%, y/y -4.5%
Composite-20: November 2009: m/m +0.24%, y/y -5,3%
The signals are still unclear concerning the health of the recovery despite prices falling less
Signs are becoming more positive but still ambivalent. Slightly positive.
Oil price: The oil prices continue to be capped at +/- $80/b. Not much happening on the
energy front. In the US gas prices have recovered to +/- $6/btu from +/- $2.5/btu. One
interesting development is the announcement of a new nuclear plant being commissioned
in the US for the first time in 30 years: Positive.
Conclusion: All these indicators but OEX volatility (neutral) are positive. I was
expecting a 20-25% correction and only 10% did materialized.
I am again ambivalent: in the US, news are getting better if not great on the economic
front and the earning season was good with 70% of companies reporting better than
expected numbers, but are deteriorating in Europe. They look OK in emerging markets,
China slowing down what was becoming an overheating economy, particularly in the real
estate sector, and India expecting to grow above 7%. Nevertheless, there are strong
headwinds ahead: wages are in a deflationary mood in the Western world, unemployment
remains high, budget deficits are not really improving with a GDP growth which is muted,
public debt is growing faster than ever. I do not expect any tightening by the FED
and the ECB any time soon despite the rhetoric: we still are in a deflationary
environment, and bank’s balance sheets are not strong enough to weather any large
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