MorningWord 9/6/13: Yesterday in the Chart of the Day, I highlighted the under-performance of homebuilding stocks for the better part of this year, and the very recent lack of participation of home improvement retailer HD. The logical conclusion is that an impending fall Taper of bond purchases from the Fed, which has caused a fairly historic rise in rates has dramatically slowed down activity related to the housing market. But there is also another factor at work, for the better part of the last couple years, while Europe has been marred in economic turmoil, and emerging markets have been in deep recessions, U.S. companies with overwhelming revenue exposure to the U.S. have been a favorable place to park cash relative to U.S. multi-nationals. Consider this comparison, HD which gets nearly 90% of their sales from the U.S. is up 130% since Sept of 2011, vs IBM which gets a little more than 40% of its sales, and is likely to rely on emerging markets and Europe for much of its future growth is only up ~14% in that same time period.
While the U.S. Fed has signaled that our economy is getting closer to stand on its own two feet, it is obvious that this will be a slow process, thus the term “Taper.” But as we have seen in bond yields since May, the market will start to anticipate the “next trade”.
I think it is safe to say that valuations in housing related names such as TOL and HD got a tad stretched this year, with multiple expansion assuming the recovery would go on for years. On the flip-side, U.S. multi-nationals like IBM, (which is expected to grow earnings 10% a year for the next few years, trading at 10x that expected growth) which have severely lagged (down ~4% ytd) could offer a great deal more value on a relative basis as opposed to those sectors that have already benefited from the U.S.’s recovery and are not likely to see a material impact from the rest of the world coming off the mat.
We are always looking for that “next trade”, which often tends to be a tad contrarian. We are compiling a list of U.S. multinationals that have missed the “fortress America” trade, but could take center-stage if we do see reflation of global growth in the months/quarters to come.
But The Technical Set Up Looks Dicey.
The 5 year chart (below) shows what is a fairly important inflection point, earlier this year breaking the uptrend that has been in place since the bottom in 2008, and now sitting on one and half year support. On a long term basis there is no real meaningful technical support for another 10% lower.