US STRATEGY – For Your Eyes Only

Continuing with Keith’s theme from the Early Look, we’ve titled the U.S. Sector Strategy piece this morning after the 12th film in the James Bond Series.  In total, there were 22 films in the James Bond Series, with the 22nd having been released in the U.K. on Halloween of this year.  

 

On an inflation adjusted basis, the James Bond film series brought in $11.7BN in revenue versus costs of production of $1.1BN. Now that is a margin you can take to the bank. (Maybe even a government subsidized bank!)  Although, as we have seen recently in the U.S., government subsidized financial institutions actually do quite well.   This morning AIG continued that trend with it second quarter of positive earnings, though with the stock up 6x since March, it is trading down in the pre-market on earnings.

 

The S&P 500 has been up for four days in a row, rising 1.9% yesterday.  Yesterday’s rally was on the back of upbeat earnings and guidance in the Technology sector and favorable MACRO data points.  In addition, retailers saw the biggest increase in same-store sales since July 2008, but the rate of growth is still anemic.  Also helping was the passage of stimulus legislation, including and extension (and expansion) of homebuyer tax credit and unemployment benefits.  The homebuyer tax credit as extended to April 30th for signed contracts.

 

In addition, the VIX fell 8.3% yesterday, now falling for the fourth straight session after spiking nearly 38% last week.

 

On the MACRO calendar productivity was the mantra of the day, as Q3 nonfarm productivity jumped 9.5%, well ahead of the 6.5% consensus and the biggest quarterly increase in six years. With output up and unit labor costs declining the numbers highlight the attractive corporate profitability trends.  In addition, initial jobless claims fell to 512,000 (from 532,000) in the week-ended October 31st.  The four-week-moving average fell to 524,000 from 527,000, the ninth consecutive weekly decline. Continuing claims fell for a sixth straight week.  This morning the focus is the government’s monthly employment report.

 

All the sectors with leverage to the global RECOVERY theme outperformed the S&P 500 across the board yesterday. The move came despite some strength in the dollar and pullback in the CRB; the CRB declined 1% yesterday.  The three best performing sectors were Consumer Discretionary (XLY), Industrials (XLI) and Financials (XLF), while the safety trade – Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) - were relative underperformers.  All nine sectors were positive on the day. 

 

The two stocks causing the underperformance of the Consumer Staples (XLP) yesterday were CVS down 20% and WFMI down 15%.  CVS announced the loss of $3.7B in PBM contracts and disclosed that antitrust regulators were probing some business practices.  Also, the margin guidance for the PBM business in 2010 appeared to be disappointing.  WFMI was taken out behind the wood shed issuing below-consensus 2010 EPS guidance. 

 

Today, the set up for the S&P 500 is: TRADE (1,064) and TREND is positive (1,029).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 6 of 9 sectors are positive from the TRADE duration.  Consumer Staples is the only sector positive on both durations and the Financials broke TREND. 

 

The Research Edge Quant models have 1% upside and 3% downside in the S&P 500.  At the time of writing the major market futures are poised to open down. 

 

The Research Edge MACRO Team.

 

US STRATEGY – For Your Eyes Only - S P500

US STRATEGY – For Your Eyes Only - s pperf

 

 


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