Financial Professionals

Market Insights

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Charts presented at March due diligence meetings

03/18/2013

Q1 2013 Playbook, It Remains A Bond Friendly World

 

From Page 6 Investment Themes:

            “12. Monetary and fiscal policies from Japan might have the most positive impact on global capital markets during the first quarter. A reversal of the secular strength in the Japanese yen would be the confirming indicator and restore the much needed global carry trade.”

 

 

Japanese Yen, Prior 365 Days

2013 Yen YTD (9.5)

 

Source: Bloomberg

 

 

Japanese Yen, 2007-2013

 

  • Further appreciation is possible
  • Recovered only 42% of the decline from June 2007
  • Prime Minister Shinzo Abe’s war on deflation
  • BOJ Governor Haruhiko Kuroda

 

 

Source: Bloomberg

 

 

Domestic Exporters Expect Further Yen Depreciation

 

Investors view as secular, not cyclical

 

  • Mazda +75%
  • Sony +54%
  • Bridgestone +45%
  • Kirin +44%

 

Toyota Motors, Prior 365 Days

 

Source: Bloomberg

 

 

Daily Focus on U.S. Equity Market Secular Top

 

 

Firm                             13 Strategists                    2013 Close                           2013 EPS

Bank of America            Savita Subramanian           1,600                                    $110.00

Bank of Montreal           Brian Belski                       1,575                                    $106.25

Barclays                       Barry Knapp                      1,525                                    $105.00

Citigroup                       Tobias Levkovich               1,615                                    $110.00

Credit Suisse                Andrew Garthwaite             1,550                                    $104.90

Deutsche Bank              David Bianco                     1,600                                    $108.00

Goldman Sachs            David Kostin                     1,575                                    $107.00

JP Morgan                    Thomas Lee                       1,580                                    $110.00

Morgan Stanley             Adam Parker                      1,434                                    $  98.71

Oppenheimer                John Stoltzfus                   1,585                                    $108.00

Stifel Nicolaus               Barry Bannister                  1,600                                    $113.00

UBS                             Jonathan Golub                 1,425                                    $108.00

Wells Fargo                  Gina Martin Adams            1,390                                    $103.00

________________________________________________________________________

Average                                                                1,543                                    $107.07

High                                                                      1,615                                    $113.00

Low                                                                       1,390                                    $  98.71

 

SPX Technical Formation

 

  • Prevailing bull trend
  • Near-term support 1530; late February “pause in appreciation”
  • September 2012 1474 high, now major support
  • 200-day moving average at 1420

 

 

 SPX Index, 365 days as of March 12, 2013

 

Source: Bloomberg

 

Cheap Volatility

 

VIX Last 10 Years

 

Source: Bloomberg

 

FOMC Policy Shift??

 

  • 6.5% Unemployment outcome-based guidance (currently 7.7%)
  • 2.5% Inflation forecast outcome-based guidance (currently 1.6%)
 

FIFO = Higher U.S. Dollar

 

Composition of the FOMC:

  • Less hawkish (Lacker, Plosser, Fisher)
  • More doves (Rosengren, Evans, Bullard)
  • New hawk (George)

 

  • Labor Force Participation Rate = 63.5%

 

U.S. Dollar Spot Price, Prior 365 Days

 

Source: Bloomberg

 

U.S. Labor Force Participation Rate

 

Source: Bloomberg

 

U.S. Unemployment Rate

 

Source: Bloomberg

 

 

15 Years of SPX Data

 

SPX                 2014        2013        Current    2012        2011        2010        2009          2008       2007

Earnings          $123        $108        $101.25    $100.72    $95.85     $83.90     $61.82       $60.42    $84.63

                        est.          est.

SPX

Year-End          ?             ?             1540        1426.19    1257.60    1257.64    1115.10     903.25    1468.36

 

Fed Funds        ?             0%          0%           0%          0%          0%          0%            4.25%     5.25%

 

Price/

Earnings          12.47       13.91       15.21       14.16       13.12       14.99       18.04         14.95      17.35

 

Gross

Margin             ?             ?             45.11       44.88       44.74       44.37       45.03         45.26      44.19

 

Operating

 

Margin             ?             ?             19.83       19.97       20.27       19.47       17.64         18.18      19.18

                         

Profit

Margin             ?             ?             13.32       13.41       13.73       13.33       11.54         10.65      12.92

 

SPX                 2006        2005        2004        2003        2002        2001        2000          1999       1998

Earnings          $85.38     $74.16     $65.72     $54.37     $46.00     $42.92     $54.82       $49.24    $43.28

 

SPX

Year-End          1418.30    1248.29    1211.92    1111.92    879.82     1148.08    1320.28     1469.25  1229.23

 

Fed Funds        4.25%      2.25%      1.00%      1.25%      1.75%      6.50%      5.50%       4.75%    5.50%

 

Price/

Earnings          16.61       16.83       18.44       20.45       19.13       26.75       24.09         29.84      28.40   

 

Gross               45.30       45.35       46.99       47.69       47.12       46.34       47.77         47.98      46.25

Margin                           

 

Operating         20.18       20.02       20.04       19.09       18.25       16.65       18.71         28.89      18.32

Margin            

                         

Profit

Margin             14.59       13.67       12.88       12.05       10.38       8.74         11.72         12.63      13.49   

 

 

 

EUROPE

 

  • Europe needs a 1.30 euro, not 1.40
  • ECB President Mario Draghi’s verbal intervention
  • Eurozone bond yields at 2-1/2 year lows
  • France weak

 

Euro Currency Prior 365 Days

 

Source: Bloomberg

 

Spanish 10-Year Bond, March 2010 to Present

 

Source: Bloomberg

 

 

Asia

 

  • China muted recovery = materials underperformance
  • Property price measures
  • New leadership

 

ChIna PMI, March 31, 2012 through February 28, 2013

 

Source: Bloomberg

 

Asia

 

Yen weakness = South Korean Won Strength

Tech underperformance; semiconductor

 

South Korean Won, Prior 365 Days

 

Source: Bloomberg

 

TAILWINDS PERSIST

 

  • High grade yield 2.9%
  • $359 billion in speculative grade 2012 offering
  • $77 billion 2013 year to date, tracks above $76 billion last year same time
  • High yield default rate 2.7%, three-decade average is 4.7%
  • Debt first, equity second U.S. financials
  • Bond-like sector outperformance XLV, XLP
  • Emerging market companies focused on consumer wellness
  • Energy MLP, shareholder value unlocked

 

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.