Posted by WARREN MOSLER on 13th February 2013
Assessing some Cracks in the Foundation
Most measures of investor sentiment rest deep within the optimistic domain. This, combined with the recent decline in volatility and performance correlation, suggests that investors have become much less concerned about the macro economy.
A serious correction has so far failed to materialize and shake out some of the optimism. Pull-backs are more evident in many of the larger markets outside of the U.S., including Brazil, France, Italy, Spain, and South Korea.
However, several leadership themes are beginning to give up some performance ground:
I. Machinery. The group is starting to lag following a recent peak in the Mainstreet Farm Equipment Sales Index;
II. Household Durables The stocks are correcting following a sideways move in the HMI;
III. Autos & Components. This group is losing ground as auto sales growth decelerates;
IV. Materials. The stocks have pulled back with the rise in the U.S. dollar and the weaker tone set by some global bourses.
Other important leadership themes at risk of rolling over include:
I. Financials. High-yield credit spreads are beginning to widen and this is usually associated with performance turbulence for the sector.
II. Consumer Discretionary. A softer tone to consumer confidence on the back of DC’s floundering and the rise in payroll taxes sets the stage for a pullback.
Yet, we continue to view these events as opportunity. The global leading data is rallying, while the monetary authorities continue to subsidize business cycle activity by holding interest rates substantially below the level of nominal GDP growth. In our opinion, these very powerful macro forces argue in favor of a bias towards economic leverage, beta, value and foreign exposure.