I consider myself a “situational” investor/trader. I try to have some sort of top down framework on the macro environment. Specifically, I look at micro situations and work my way back up to the middle and arrive at my most convicted ideas. Like most, I struggle with making sense of the broad macro moves in currencies, commodities and bonds, specifically relating them back to how I am investing in the stock market and arriving at intelligent takeaways for the economy. I don’t get why rates are not higher given the perceived improvement in the U.S. economy (Bonds – From Russia With Love), but I also get the sources and causes for demand for U.S. Treasuries, so it’s confusing enough that I’m not trading it.
Another oddity to me in macro-land is the price of crude oil. Over the past couple months, as geo-political tensions have been rising in almost every corner of the globe, oil prices have declined more than 10% from 52 week highs. Again, I am not an expert on such issues, but I keep hearing it’s a supply/demand thing. Ok, so more aggressive sellers than buyers, I know that from my stock trading. But is it that there is just so much more supply than normal seasonal patterns? Could this quickly change at the slightest bit of supply disruption, or is depressed oil demand telling us that the global economy is weak?
This morning in Business Insider’s 10 Things Before the Opening Bell the first few were:
China Is Slowing. China’s flash manufacturing PMI fell to a three-month low of 50.3 in August, signaling decelerating growth in the world’s second-largest economy.
Europe Is Slowing. The eurozone’s flash manufacturing PMI was also disappointing, falling to 52.8 in August. This was down from 53.8 in July and worse than the 53.4 expected by economists.
Could Europe Possibly Be Worse Than We Think? Growth in the eurozone screeched to a halt in Q2.
But fear not, here was the fourth:
Markets Are Up. U.S. futures are rallying, with Dow futures up 34 points and S&P 500 futures up 3 points.
This has been par for the course in 2014, as the S&P 500 index is outperforming the Euro Stoxx 50 index by nearly 10%. One of the surprising aspects of the outperformance of U.S. stocks vs. European stocks in 2014 is that the valuation differential between the largest U.S. multinationals and the largest European multinationals was already significant before the start of the new year. That valuation spread has widened even more. It’d be one thing if the mega caps in the U.S. were mostly domestically focused, but both U.S. and European multinationals generally do business in the same markets.
Here are a few comparisons:
- Siemens is priced at 16.5x P/E with 20% EPS growth expected over the next 2 years, while GE is priced at 16.5x P/E with 7% EPS growth expected
- Total is priced at 11x P/E with 6% EPS growth expected, while XOM is priced at 12.75x P/E with 15 growth expected.
- Volkswagen is priced at 8.75x P/E with 12% growth expected, while F is priced at 12.5x with 15% growth expected.
- SAP is priced at 17x P/E with 10% growth expected, and ORCL is priced at 15.75x P/E with 10% growth expected
ORCL is the only stock that looks like a (slightly) better value than SAP, if both stocks meet the projections.
In other words, given the valuation spread, the fact that European stocks remain under pressure while U.S. stocks continue to rally is bizarre truth in 2014. So while the strains in Europe from a macro perspective are obvious, the bottoms up analysis still suggests that U.S. stocks are the anomaly in the market. But momentum is a force in and of itself, and at the moment, it’s oblivious to any and all arguments against owning U.S. stocks.