Some very interesting trends/divergences emerging:
1. Staples/Tech or cyclicals/defensives or low vol or correlations all falling completely off a cliff in spectacular fashion.
2. Forward P/Es in Japan vs in China and Korea massively diverging (fx-driven earnings drain, effectively, but only affects fwd PE this much if street is dramatically dramatically underestimating the fx impact on earnings)
3. You all know, Apple, GE, IBM vs S&P, etc.
Meanwhile consider the backdrop:
1. GE was a ‘shoot the messenger’ situation where their own ‘global growth market share’ looks fine but they say global leading indicators are poor so the market takes them down 5% and everyone else untouched
2. Weak USD, Strong commodities, China, and MOST IMPORTANTLY A MASSIVE US DEFICIT were fundamental drivers for US Equity performance for a long time. All are now pushing the opposite way. I am seeing ppl forecasting just 400+b for deficit within 2 yrs. Ppl still had 1T for this year a few months ago. It’s a STAGGERING, stealth development. It’s bad for stocks even if it’s from good growth. People thought the Fed was pumping stocks with ‘liquidity.’ There might have been some weak-USD effects but the FEDERAL BUDGET DEFICIT was the big driver. **Much of the deficit was winding up as corporate earnings the past few years rather than household income** Thus median incomes were flat, overall were up small, overall growth was small, and equity free cash flow and earnings growth has been chugging along at 7,8,9%. Where do you think that came from? Not from the Fed. That was blogoshpere nonsense. IT CAME FROM THE DEFICIT.
The biggest issue of course, is that free cash flow yields still make equities look dramatically cheap to bond-like alternatives… but they also are much more sensitive (over-sensitive) to turning points in things. If only as a punt on reactionary-ism stuff, I don’t like them here. Short for a trade. G’LUCK!
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