Weak economic data out of the US, Europe and China have equity investors very worried.
S&P 500 earning estimates are coming down and the cyclically sensitive sectors such as financials, tech and energy have dropped in response. The US 10 year treasury interest rate has dropped to the lowest level in decades. All of this worry seems very well discounted.
However, the analysts as still worried about further deterioration. Goldman Sachs came out with a widely publicized "short the market" call - which they have since been stopped out of. All of the big banks are issuing bearish calls on tech stocks. In particular, I can cite stories about JPM cutting estimates of 18 different hardware vendors including AAPL. Goldman Sachs is advocating buying September $22 puts on INTC.
What is going on here?
- Europe looks weak due to the numerous issues that they have there with sovereign debt.
- China looks weak. This has a cascade effect on all of the beneficiaries of Chinese growth such as the energy and materials sector.
- Manufacturing looks weak across the board.
- Inventories are low.
- Investors are removing REO supply since the cashflows from rent far exceed the carrying cost of buying the homes. Thank you Ben Bernanke for ZIRP.
- Population continues to grow and housing starts are at generational lows
As Bill points out, housing is a leading indicator of economic growth. The housing data has just been great recently for all metrics including inventory, pricing and builder confidence. This could provide a reasonably good offset to the loss of overseas growth drivers in Europe and China.
On this 4th of July, it seems like the the domestic US economy is poised to be the engine of growth for the world.
This provides plenty of opportunity to invest in names that have large US earnings exposure but have been sold off on these ancillary concerns.