Not So Fast
Markets have come out of the gates with a healthy appetite for risk assets. In fact, many of the 2011 laggards – such as financials, industrials, and materials – are leading the S&P 500® Index, attempting to break out above the October 27 high (Figure 1.1). Eurozone bond auctions are going well, and Chinese economic figures released this week continue to suggest there is room for further easing of monetary policy if needed in 2012.
Before I can craft an all-in “risk on” strategy, however, I still need to hear from America’s CEOs & CFOs. I am highly anticipating the upcoming earnings season, and it really gets going on Friday, January 13, with JP Morgan (JPM). This morning’s Initial Jobless Claims and Retail Sales figures may provide short-term players the impetus to shed some risk ahead of tomorrow’s earnings, but overall the market is on firmer footing. I would also like to see some capital flow out of Treasuries. The 10-year seems stuck below 2% (Figure 1.2). A rise in 10-year Treasury yield is a necessary component for further equity appreciation.
In the interim, continue to be allocated to the market but use a defensive approach. Large-cap, big balance sheet dividend-payers with proven earnings growth are favored. Energy and corporate bonds remain overweights. Measure the impact of a rising U.S. Dollar (Figure 1.3) on earnings; I expect it to be a headwind for many corporations this quarter. Finally, I would use the correction in the utilities space as an opportunity for diversified pipeline entities, in particular.
This week’s data . . . .
• Imports posted a modest rise of 11.8% -- the lowest monthly gain since October 2009, with plenty of room to ease monetary policy if needed
• CPI reported at 4.1%, well below the 6.4% print just six months ago
• France successfully sold 4.2bn euros of 91-day paper
• Spain sold $10bn euros of 2015 & 2016 issues, twice the sale target of $5bn euros
• Italy sold $12bn euros of T-Bills at half the yield paid in December and the lowest since June 2011
• Initial Jobless Claims disappoint, rising 24,000 to 399,000, well above the estimate of 375,000
• Retail Sales in December gained 0.1% versus 0.4% estimate, a moderate disappointment as cheaper gasoline and holiday discounts weighed on the advance.
Figure 1.1 S&P 500 Index attempts to break, and sustain, above October 27 1292.66 high
Figure 1.2 10-Year U.S. Treasury unable to advance beyond 2%
Figure 1.3 U.S. Dollar begins to uncomfortably appreciate in the past few months