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Saturday, November 21, 2015 8:40:49 AM
Unhinged
* November 20, 2015
Autumn euphoria has taken over from summer panic, and global equity bourses are making a run at all-time highs. However, markets are becoming unhinged from still deteriorating earnings fundamentals.
The diverging monetary policy backdrop, with the Fed on one side and nearly every other central bank on the other, remains intact. Importantly, the Fed has recently signaled that it is ready to lift interest rates as soon as next month. All of this has caused the U.S. dollar to spike, intensifying the threat of an emerging market (EM) financial accident, as discussed in our September 25 Special Report titled “The U.S. Dollar Debt Hangover: Sectors And Regions To Avoid”.
The risk is that U.S. dollar-induced global deflation will accelerate, causing a relapse in commodity prices at a time when global trade is at a standstill.
Global Alpha Sector Strategy’s global earnings-per-share (EPS) model (an equally weighted composite of all of our sector EPS models) does an excellent job capturing this deteriorating macro backdrop, and is currently signaling more earnings pain heading into 2016 (top panel). Worrisomely, sell-side analysts are penciling in near double-digit EPS growth for the coming year (top panel).
Since the early 1980s, global equity profits and operating earnings margins have been inversely correlated, albeit with a lag (bottom panel). Profit margins are mean reverting, as high margins tend to bring in more competition from start-ups, small- and mid-caps, non-listed, intra- and inter-industry and foreign firms that eat into profitability of incumbents. The opposite is also true. Thus, the current high level of margins should be seen as a harbinger of softer profitability ahead (bottom panel).
Against this backdrop, it is prudent to maintain a defensive over cyclical portfolio bias, a message corroborated by our defensives vs. cyclicals EPS models (not shown).
http://blog.bcaresearch.com/unhinged
• George.
Click on "In reply to", for Authors past commentaries.
* November 20, 2015
Autumn euphoria has taken over from summer panic, and global equity bourses are making a run at all-time highs. However, markets are becoming unhinged from still deteriorating earnings fundamentals.
The diverging monetary policy backdrop, with the Fed on one side and nearly every other central bank on the other, remains intact. Importantly, the Fed has recently signaled that it is ready to lift interest rates as soon as next month. All of this has caused the U.S. dollar to spike, intensifying the threat of an emerging market (EM) financial accident, as discussed in our September 25 Special Report titled “The U.S. Dollar Debt Hangover: Sectors And Regions To Avoid”.
The risk is that U.S. dollar-induced global deflation will accelerate, causing a relapse in commodity prices at a time when global trade is at a standstill.
Global Alpha Sector Strategy’s global earnings-per-share (EPS) model (an equally weighted composite of all of our sector EPS models) does an excellent job capturing this deteriorating macro backdrop, and is currently signaling more earnings pain heading into 2016 (top panel). Worrisomely, sell-side analysts are penciling in near double-digit EPS growth for the coming year (top panel).
Since the early 1980s, global equity profits and operating earnings margins have been inversely correlated, albeit with a lag (bottom panel). Profit margins are mean reverting, as high margins tend to bring in more competition from start-ups, small- and mid-caps, non-listed, intra- and inter-industry and foreign firms that eat into profitability of incumbents. The opposite is also true. Thus, the current high level of margins should be seen as a harbinger of softer profitability ahead (bottom panel).
Against this backdrop, it is prudent to maintain a defensive over cyclical portfolio bias, a message corroborated by our defensives vs. cyclicals EPS models (not shown).
http://blog.bcaresearch.com/unhinged
• George.
Click on "In reply to", for Authors past commentaries.
Information posted to this board is not meant to suggest any specific action, but to point out the technical signs that can help our readers make their own specific decisions. Your Due Dilegence is a must!
• gtsourdinis
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