Strong Consumer Confidence Not Helping European Retailers

Preliminary results indicate that European consumer confidence rose more than anticipated, with the measure closing in on levels not seen since prior to the global financial crisis:

As we would expect, this bodes well for a continued recovery in household consumption in the Euro area and confirms stronger than expected retail sales data that was released earlier this month:

In contrast, stock performance of all of the Apparel, Accessories, & Luxury Goods companies in MSCI Europe has not been positive so far this year...

Since foreign sales accounts for more than 60% of total sales in all but two of this sub-industry's members, we are not surprised to see a disconnect between these stocks and sentiment in Europe. The underperformance is more likely the result of consistently negative revisions to sales and earnings estimates over the last 1-, 3-, and 6-month time periods:

World Industrial Production Finished 2013 At An All-Time High

The CPB Netherlands Bureau for Economic Policy Analysis publishes a monthly report called "World Trade Monitor". This report tries to quantify the seemingly unquantifiable; world industrial production and world trade volume and prices. Either later today or early next week the CPB should come out with the first statistics for 2014. Today, however, we are going to take a look at world industrial production for 2013.

According to the CPB, world industrial production rose 3.5% year-over-year to an all-time high at the end of last year.



Industrial production growth was led by the emerging economies which grew by 4.4% year-over-year and reach an all-time high. Developed economies, however, only grew by 2.7% and are still about 7% lower than the all-time high in early 2008.

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Asia increased industrial production the most of any region. While, Africa and the Middle East and  Latin America actually saw a year-over-year decline in 2013.

MSCI World Sector Momentum Fades

Stocks are making new highs, yet internal momentum is somewhat sluggish.  The following is a tour of some momentum stats measuring the sectors within the MSCI World index.  We focus on the 20 day timeframe for our analysis.

Forty-four percent of stocks have advanced over the last 20 days, while fifty-five percent have declined, resulting in a net -11% advancing.  Telecom stocks have the best net advancing percentage.

Net Advances



Only 3.5% of all stocks in the MSCI World index are making new 20-day highs, while almost 35% are making new 20-day lows.

20-day Highs


20-day Lows


Forty-seven percent of the last 20 days have been up days on average, which is down from 57% eight days ago.

Percent Up Days

Foreign Investors Dump Japanese Stocks by Largest Amount on Record

For the week ending March 14th, foreign investors in Japanese stocks were net sellers by the largest single-week amount since weekly records began in 2001. This is concerning not only because of what it implies for the Nikkei (2nd chart), but also because of what it implies for the yen (i.e. a strengthening relative to the USD) (3rd chart). In a somewhat roundabout way, the yen usually strengthens as foreign investors sell Japanese stocks because they are doing so to express a more cautious sentiment. The flight to safety bid in the yen therefore outweighs the weakness one would expect if investors were to sell their Japanese equity holdings and then convert the proceeds back to US dollars.

US Existing Home Sales Decline For The 6th Time In 7 Months

Existing home sales fell to 4.6 million homes in February which is the lowest level since July 2012. Existing home sales are now down over 7% year-over-year. The weakness this month was centered in the Midwest and Northeast. The South and West regions both saw month-over-month increases in February. Weaker sales has also increased supply to a 10-month high. This, however, may drag down house prices over the next quarter or two. And unfortunately, the pending home sales index is not forecasting a jump over the next few months for existing home sales.

Deflationary Storm Clouds

We've enough items to start to make a list of the economic indicators catching our attention because they seem to be stalling out or peaking similar to what we saw in 2007.

The first group of charts touches on production, employment, consumption, employment, confidence and inflation.













The second group is a few important commodity prices, that speak to housing, growth in China and perhaps global inflation (or lack thereof).







This may explain why the shorter-term correlation between stocks and bonds has shot back up recently, indicating a growing fear of a deflationary shock.



This may also explain why counter-cyclical stocks have retaken market leadership so far this year.  This tends to be consistent with bonds outperforming stocks.

Utilities And Health Care: This Year's Odd Couple

Quick name the two best performing sectors YTD in the MSCI World...

Is it surprising that the top of leader boards reads in bright green Utilities (5.24%) and Health Care (5.07%)? Third place goes to Materials which is trailing by a significant margin (1.49%).  These two sectors have something in commmon other than being generally more defensive in nature. They currently have the two best 3-month change in estimates of any sector. Health Care has the highest 4-year average sales growth estimate change over the past three months (0.4). 7 of the 10 sectors have had negative sales growth revisions over this span. For Utilities, they are the best of the worst when it comes to change in EPS growth estimates. They have seen their four-year average growth estimates fall by -0.3% over the the past three months while the average sector is at -1.6%.

US Consumer Discretionary Stocks Looking Rich And Then Some

There are 609 companies in the MSCI North America. Of which, 104 (17.1%) are in the consumer discretionary sector. Only the financial sector (109 stocks or 17.9%) account for a larger share in the MSCI North America. Understanding the valuation characteristics of such a large proportion of the MSCI US is important for understanding the valuation situation of the market as a whole.  US consumer discretionary stocks have far outpaced the MSCI World Index over the past four years (78% outperformance) and thus, not surprisingly valuations are looking pretty stretched for this sector. 

78% of consumer discretionary stocks are trading above their 5-year P/CF average and 54% of stocks are within 20% of their 5-year high P/CF valuation while only 1% of of stocks are within  20% of their 5-year P/CF low. To put that in perspective, 67% of stocks in the entire MSCI US are trading above their 5-year P/CF average and 45% of stocks are within 20% of their 5-year high P/CF valuation and 6% are within 20% of their 5-year P/CF low.





Only 4% of stocks are trading at a P/CF multiple of  5x or less, while over 13% of stocks are trading at P/CF multiple of 25x or more. Overall, 41% of stocks are trading at P/CF multiple of 15 or greater.

More on Lumber And What It Means For Stocks

Copper is probably the best commodity indicator to track in order understand global economic strength or weakness because of its widespread use in infrastructure, houses, cars, electrical equipment, etc. In turn, lumber is probably the best commodity indicator to track in order to understand domestic conditions in the US.

In the last week, lumber has traded limit down ($10) several times and has decisively broken out on the downside.  There are at least two important things to consider as lumber prices fall:

1) A drop in lumber prices opens the door to lower inflation expectations and, in turn, lower bond yields.  Lumber is indicating that there was more than just weather negatively impacting the economy this winter.



2) Stimulating and restoring the housing market has been a huge focus for the Fed.  Policies like QE were directly aimed at improving housing activity, the wealth effect and confidence.  To the extent lumber prices suggest weakening housing activity, and by extension faltering success of extraordinary monetary policy, this could negatively impact the perception that QE is helping the economy.  The stock market seems to reflect a confidence reflationary central bank policies have put the economy on the road to recovery.  Should that confidence get shaken, stocks are at risk.  This likely explains the near 80% correlation between lumber prices and stock prices over the last four years.  Should that relationship continue, it bodes ill for stocks.

Last Week Copper Stole the Show, This Week it's Lumber's Turn

Copper made headlines last week as it plowed through multiple support areas to levels not seen since mid-2010. That move gave market watchers, including ourselves, pause since copper prices are an important leading economic indicator. Not to be outdone by copper, lumber prices are currently in free fall and are breaking important support levels as they head toward a 10% YTD decline. Lumber, like copper, is an important leading economic indicator since one of the primary uses of lumber is home construction.

Few Bright Spots in the German ZEW Survey

The economic outlook in Germany weakened for the third month in a row, according to the latest ZEW survey:



Anticipation of stock market gains has fallen steadily since last September:



The expectation for improvement in profits (red line) fell in a number of industries in March:

Autos


Banks


Information Technology


Services


Telecommunications


On the bright side, there has been a continued rise in profit expectations for the chemical and pharmaceutical industry...



And there seem to be few complaints about the current economic situation:



Compared to its neighbors, we find similar declines in sentiment for the U.K. (and Europe as a whole) while sentiment actually rose in France and Italy: