Saturday, May 14, 2011

Prominent strategists at Goldman Sachs and Credit Suisse foresee better results for stocks

Prominent strategists at Goldman Sachs and Credit Suisse foresee better results for stocks less tied to the economic cycle. Doug Cliggott, head of equity strategy at Credit Suisse, wrote: “Gone is the US equity performance profile that suggested bold optimism on growth.”

Commodities have been at the forefront of the selling so far. Big rallies in hard assets such as gold, silver and oil ended in an ugly slump last week. Silver crashed 30 per cent in its worst fall since 1980. Oil, which was until recently worrying investors with its sharp ascent, fell around 15 per cent.

There are two schools of thought as to why commodities are slumping. One is that the Federal Reserve’s $600 billion program to buy Treasury debt has helped investors divert funds to commodities and equities, creating a bubble in those assets, which is now starting to burst.

Investors and market observers are divided over whether this is a big deal or not,” wrote Cliggott, who wrote CS is ‘in the 'it's a big deal' camp.’

The other is that it is a sign of impending weakness in the economy. Copper, known as the ‘metal with a PhD’ for its ability to act as a predictor for the economy given its wide-scale industrial applications, has hit a five-month low.

The reduced appetite for speculative investments has shown in the outperformance of defensive stocks, whose fortunes are less tied to the rise and fall of the economy.

The S&P 500's healthcare and utilities sectors were the performance leaders over the last month, rising 2.9 per cent and 2.6 per cent, respectively. That's despite a 1.5 per cent fall in year-over-year earnings growth in utilities in the first quarter, worst of the S&P's 10 sectors.

Healthcare, long a go-nowhere sector, has had a whopping rally. The sector has gained for seven straight weeks, and is up 14.9 per cent this year, best of the 10 S&P sectors.

Energy, down 7.8 per cent in the last seven weeks, is the worst performer in that time.

Goldman Sachs says it has become "much less confident in the near-term equity picture," exiting what it called its "top trade" in US banks, and doing the same with a trade that was long industrial shares relative to consumer staples.

Cliggott sees a 10 per cent decline at the end of the Fed's so-called QE2 stimulus program - which is what happened at the end of the first round of Fed buying - as the "base case" scenario. The firm continues to recommend a short financial-long health care trade, as well as a long consumer staples-short consumer discretionary trade.

EPFR Global, which tracks fund flows, said Friday that global equity funds experienced their first outflow since mid-March. Source www.business-standard.com..
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