US, Europe, Fixed Income, Equities, 'Where We Are' Really Depends

By Peter Atwater  APR 16, 2012 11:00 AM

Financial Insyghts' Peter Atwater covers banks, Apple, fixed income, Treasuries, and Europe all before lunch.

 


Financial Insyghts' Peter Atwater sat down with Minyanville to address a few of the many questions his clients have been asking recently.

So where are we?

While there are some broad similarities across markets, “Where” really depends.  So let me go through my thoughts by sector.

On the equity front, the tools I use to measure confidence peaked in mid-February.  That is when the transports and the IBEX in Spain peaked, and even the Russell 2000, with its minor overthrow since then, suggests that mid-February was significant.  Since tops are a process much more than bottoms (which tend to be events), I think the early April peak in the S&P was very significant.  

My overarching concern, though, with US equities is that with every risk-on/risk-off trade, “safer” equities -- like dividend stocks -- have been bid up. To me, this is eerily reminiscent of the early 1970s when the market craved the “Nifty Fifty,” the biggest multinational corporations of the time.  As a result, I worry that we could see “safer” underperform more risky stocks on the way down.

And I don’t know what happens to equity investor confidence when supposedly “safe” equities aren’t safe.

What about the banks?

As I’ve offered before, I think the entire move in the bank stocks since early October was a classic decompression trade.  Price to book, especially for names like Bank of America (BAC) got too low.  That said, there is nothing I see that suggests that a real banking recovery is underway. Right now the industry feels like an eight cylinder car with just three or four four cylinders working, but every quarter the working cylinders seem to change.  What I’d love to see is real top line revenue growth -- JPMorgan Chase's (JPM) revenue in Q1 2012, for example, was not much difference from Q1 2010 -- eight quarters of “recovery” ago!

And for banks like Wells Fargo (WFC), I worry about their reliance on mortgages. Don’t get me wrong; they have benefited enormously from the creation of a mortgage oligopoly over the past three years, but it feels to me like many analysts are extrapolating those benefits too far into the future.

What do you make of Apple?

I think Apple (AAPL) is a great company, and I don’t think any company did a better job over the past decade of matching its products to the developing “me, here, now” social mood environment that exists today.  While I am sure that the “i” in iTunes, iPhone, and iPad was first meant to capture “Internet,” today I see it as all about “I” -- my tunes, my phone, my pad -- anywhere and any time.

That said, the company has lots of the social mood indicators of a top.  From its new “space ship” headquarters building to the gapping price targets, complete with analyst profiles like the one of Gene Munster in this week’s Business Week, it feels like déjà vu all over again.

And while the stock can move higher, I think that both the New York Times article from January on Apple’s outsourcing strategies and the latest lawsuits on ebook price fixing are both warning flags.  I think that seeing what is arguably the world’s most popular transnational corporation come under question for its insensitivity to national employment issues has much broader implications than just Apple.  

How about fixed income?

To me, the forced march into risk, which I talked about three years ago, is finally coming to a head.  As I have said so many times, it is not the depth of the recession that matters, but rather its length.  I don’t think people realize how many high yielding CDs have now matured for the average saver and they are desperately looking for something to replace them.  And the message from the asset management industry and many brokerage firms is that a 2%ish Treasury return is simply not enough.

But there is a second aspect that bothers me in fixed income, and that is the availability of supply.  During 2007, you had both staggering demand AND staggering supply of product -- particularly in the consumer space.  Today, there is no consumer debt supply -- and what little supply there is now is either being held by banks, the Fed, the Agencies, or Uncle Sam himself.  Today, the only game in town is in the corporate space.

To me the supply/demand equation feels like a mismatch from hell, especially when you add in petrodollars, which need to be recycled out of the Middle East, due to high oil prices, and the flight capital out of Europe.

How about Treasuries?

I am very bullish on Treasuries and expect that we are also likely to see negative T-Bill rates in the not-too-distant future.

That said, I don’t think people -- investors, money managers, and even “safe” sovereign issuers like the US Treasury/Congress -- have given enough thought to what the end of a bubble in “safe” fixed income means.  Everyone seems to think that once rates turn higher, we’ll just go back to before but with higher yields.  That is not what happens after bubbles burst.

In the investment world, demand is always greatest at the highest price -- not the lowest.  So when bubbles burst, a huge number of investors get burned.  As we are seeing in housing, the other side takes years to play out and it affects the entire food chain.

I worry about the time when bonds don’t behave like bonds.

So what about Europe?

To me the only charts that matter today are the IBEX (the main Spanish equity index) and the DAX (the main German equity index).

I firmly believe that broad market indices are the best real time thermometers of social mood out there and I am deeply bothered by the fact that the IBEX is now trading at levels below the March 2009 low.  With 50% youth unemployment, a dour mood is like dry tinder awaiting a match.  And how European policymakers can believe that Spaniards will impose greater and greater austerity on themselves truly befuddles me.

But I’d also watch the DAX, as I think that is the best real time measure of Germany’s willingness to help.  People forget that generosity is entirely a function of the confidence of the donor, not the need of the recipient.  Therefore the DAX tells us in real time just how confident Germans are.  And a falling DAX is a real problem.

This is not to say that there can’t or won’t be significant swings along the way.  The IBEX is getting oversold, and policymakers are well aware of the capital flight right now out of southern Europe.  But I’d note that the policymaker-driven relief rallies are getting shorter and shorter in both their duration and their effectiveness.

During 2008's banking crisis, it was wild to watch as the lifespan of each subsequent relief rally was cut in half from the prior one.  I am afraid that the same phenomenon is now taking hold in Europe.

Thanks, Peter.
No positions in stocks mentioned.

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