Monday, March 01, 2010

But We Know That Bad News Surely Discounted?

10 minutes after worse than expected (by economists) US Manufacturing ISM index, Dow Jones Industrial Average stages nice 30 points rally, German DAX is sent to new intra-day highs.

Well, somehow the note by mining analysts at Citigroup Global Markets from the European morning comes into my mind:

Its March already; no supercycle yet — It’s March already and the way that both metal prices and mining equities began the year (i.e. very bullish) suggests those early-2010 buyers would have hoped for more consistent economic growth signals and at least a small sign of metal inventory declines by now.

Stop-start recovery, no inventory declines — The market seems to have had the recent habit of operating on the dictum “oh, but we know that bad news already”. So it has become passé to talk about stubbornly high inventory levels because “that is surely discounted in metal prices”. It should be remembered that the subprime bubble broke a good nine months before the likes of copper and aluminium peaked in 2008. At that time, sub-prime was also ‘old news’.

Then add some kerosene to the fire by Andrew Lapthorne, the quant at Societe Generale, who writes this morning:
For example globally earnings are expected to grow by 32% in 2010 followed by a further 21% in 2011, leaving the global equity market trading on a 2011 PE multiple of just 11.3 times. The caveat is that historically such growth has typically required US nominal GDP in the 6-8% range – a tough ask given the major growth headwinds most economies are currently facing.

Yeap, and China Manufacturing PMI, the supposed pulling horse of the global economy, surprised to the downside too. Li & Fung Research Centre noted:
The PMI declined from 55.8% in January 2010 to 52.0% in February, the lowest in twelve months. Except stocks of finished goods, all sub-indices were lower than their respective levels in the previous month. Particularly noteworthy is that both output index and new orders index dropped sharply by 6.2 ppt. in February, compared to the previous month. The PMI has stayed in the expansionary zone of higher than 50% for twelve consecutive months.
There is talk about the distortions in February data by the Chinese New Year. Well, the US revisions last Friday to the 4th quarter GDP estimate are not that encouraging either, and reveal much worse picture than the headline suggests. ECRI's US WLI does not suggest improvement too? Probably distorted by Chinese too?

But, of course, there is no correlation of corporate earnings to GDP growth at all? All is discounted?

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