Strategists at Barclays Capital have been hinting for weeks that they were growing wary of the house’s hardline bullish view on equities.
While BarCap’s strategists have yet to issue an outright “sell,” a note published on Monday provided evidence that such advice cannot be far behind.
From Barry Knapp, on US portfolio strategy:
How long will the current earnings yield of 3.6% remain in place? If our economists’ forecasts are correct, and the historical relationship holds, our simple model suggests that earnings yields could witness a sharp reversal from their current lows of 3.6% to something north of 5% heading into next year. In our view, equities have moved too far, too fast since March, and risk levels are rising. If you’re long, we recommend staying long for now, but we would think twice before putting new money to work in this market.
Indeed, Knapp points out that BarCap’s earnings forecasts are now below consensus for this year and next; stock prices, therefore, are only being supported by the flood of liquidity. And he is not overly impressed by the current reporting season in the US:
While it’s too early in the reporting season to draw any hard conclusions on the entire consumer discretionary sector (only 21% of the sector has reported), results continue to beat bottom-line estimates, although we believe that this is primarily due to inventory management, as revenues continue to fall sharply y/y. Our analysis of when revenues typically bottom relative to earnings (U.S. Portfolio Strategy; It’s all about the Fed, but let’s discuss earnings; 10/11/09) implies that we should be seeing better top-line results at this point. The absence of top-line growth is consistent with the rebalancing of U.S. and global growth, in our view.
He also has some dark words to say on the numbers coming out of the financial sector:
Certainly, with a little over four weeks of history, it’s a stretch to draw any strong conclusions; however, the fall of reserves in the weeks prior to the end of 3Q09, followed by a spike in reserves in early October, struck us as curious and rather consistent with our observation that high-quality, well-reserved banks are continuing to build reserves aggressively, while the majority of banks are under-reserved. We wonder if banks are using reserves to flatter current results.
And he’s downright negative on housing:
We are concerned that many of those pending home sales are speculative purchases, similar to the 2006 vintage of subprime and Alt-A mortgages that are dependent on tax credits and FHA loans. Evidence to support this thesis comes from the existing home sales increase in the West where sales volumes for houses less than $100,000 increased by 116% y/y, while other price tier volumes changed only -14% to 9% y/y. Certainly, it is possible that California home prices have reached a market-clearing price; however, given the leverage implicit in financing that clearing price, we are concerned about the sustainability of the stabilization.
We can’t help but wonder what Tim “upside surprise” Bond makes of all this.
Related links:
The great wall of cash – FT Alphaville
BarSlap! – FT Alphaville
Gross v Bond, or Pimco v BarCap: The debate flares – FT Alphaville