Pages

Equity Strategy: A Mid-Year 2010 Perspective

- "The first half of the year reflected earnings strength and then slowing momentum. Better-than-expected 4Q09 results initially buoyed skeptical investors and the robust trends were further confirmed with 1Q10 earnings. But, typical slowing economic momentum following a reflexive bounce off of the anomalous early 2009 trough has generated a new sense of unease about the future which has been further complicated by government austerity and unanticipated FX swings. To some extent, the pattern was partially predictable, as investors had become trend followers rather than forecasters."
- "Powerful 1Q10 EPS growth was unsustainable, with margin pressures mounting. As noted in mid-April, the rapid acceleration in earnings growth projections reflected both increased executive confidence and a catch-up element. Upward EPS estimate revisions climbing above the 70% threshold was a clear indicator that the data was getting too virtuous and was unsustainable. The impressive margin rebound was due to incredible cost containment and a moderate revenue uptick, but maintaining such elevated profitability needs to be questioned."
- "Sentiment shifted from panic to complacency but now is back in panic mode. In early 2010, there was deep anxiety that the recovery rally from March 2009 had come too far given Greek debt fears, Chinese monetary policy tightening moves and perceived unfavorable policies out of Washington. By early February, the Panic/Euphoria Model had slipped back into panic territory. Yet, after 15%-20% appreciation in equity indices, this proprietary sentiment gauge advanced into complacency in April, leaving markets vulnerable to a pullback. In the past weeks, the model has collapsed back into panic, suggesting a high probability that the S&P 500 climbs in six months, supporting out 1,175 year-end 2010 target."
- "Uncertainty about 2011 trends is likely to cap any major summer rally efforts. While some may look for guidance out of the 2Q10 reporting season, which begins next month, it seems doubtful that issues including tax policies, government spending programs, housing trends, unemployment, trade disputes and currency trends will be settled that quickly. Ambiguity around capex is being resolved, but 2011 clarity is likely to be found later in the year rather than over the summer."
- "A late 3Q10/early 4Q10 market surge seems most likely driven by several catalysts. The start for a renewed rally appears probable in the September/October time period with the midterm elections, the bipartisan commission’s report on US deficit reduction and a better sense of how the Bush tax cuts expire all contributing to some increased clarity for 2011. In addition, there may be greater visibility regarding the impact of the European austerity initiatives relative to stronger economies such as Germany’s. Thus, the slowing economic momentum can be seen as settling in for more normal global growth rather than the traditional initial cyclical bounce."
Citigroup Equity Strategy 20100629

No comments:

Post a Comment