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Talley Leger
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Talley Léger is an independent thematic macro strategist, and former VP & analyst on the U.S. portfolio strategy team in the equity research department of Barclays Capital. Mr. Léger joined Barclays Capital in September 2008 from Lehman Brothers where he held a similar position. Prior to... More
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  • Talley Leger On Stock Market Volatility, Outlook: Video

    Aug. 17 (Bloomberg) -- Talley Leger, founder of Macro Vision Research, talks about stock market volatility and investor sentiment. Leger speaks with Deirdre Bolton, Dominic Chu and Adam Johnson on Bloomberg Television's "In the Loop." (Source: Bloomberg)

    bloom.bg/PiXznN

    Aug 25 11:32 AM | Link | Comment!
  • A Temporary Reprieve For U.S. Equities?

    Last week, we admitted it's possible that U.S. equities could get a temporary reprieve if the AAII bull-bear spread hit negative extremes. As a reminder, the American Association of Individual Investors' Investor Sentiment Survey measures the percentage of members who are bullish, bearish, and neutral on the stock market for the next six months. At the extremes, it has generally been a decent contrarian indicator for equities, meaning the bears tend to maul the survey around market bottoms (and the bulls typically stampede near tops).

    Figure 1: On May 17, 2012, the bull-bear spread fell to -22.4ppts; on June 9, 2011, the bull-bear spread fell to -23ppts and bounced along that low a couple more times before the S&P 500 finally bottomed on October 3, 2011

    (click to enlarge)AAII

    On May 17, the bull-bear spread (i.e., the difference between the bullish and bearish percentage) fell to -22.4 percentage points (figure 1). Historically, the stock market tends to put in some kind of a bottom when the bears are looting and the bulls have completely pulled in their horns. The question is: Will it be a temporary reprieve, or something more durable? Last spring, the bull-bear spread fell to a negative extreme of -23 percentage points on June 9 and bounced along that low a couple more times before the S&P 500 finally bottomed on October 3. If past is prologue, we may have just embarked on a bumpy ride that could last all summer long. Buckle up.

    Talley D. Léger
    Investment Strategist
    (203) 940-0878

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 22 6:27 AM | Link | Comment!
  • S&P 500 Earnings Surprises Revert To Their Mean

    We've seen significant positive surprises so far this earnings season. Among the 60% (300) of S&P 500 companies that have reported with full comparable operating earnings per share (EPS) for 1Q12, 70% (210) beat, 19% (56) missed, and 11% (34) met their estimates (figure 1). Despite these considerable upside surprises, the S&P 500 is down -0.4% on a month-to-date basis. With the exception of Utilities (25%), at least 52% of firms have reported in each of the nine remaining sectors. 87% of Materials issues have beaten estimates, yet the sector is down -0.3% month to date. Curiously, 75% and 74% of Industrials and Technology companies, respectively, have come in better than expected but the segments are down -0.3% and -1.1%, each, in the same timeframe (figure 6). Why is there such a disconnect between the surprise to consensus sell-side earnings estimates and share price performance?

    Figure 1: Among the 60% of S&P 500 companies that have reported operating EPS for 1Q12, 70% beat, 19% missed, and 11% met their estimates

    (click to enlarge)EPS Beats Misses Meets

    Figure 2: Mean reversion - the beat rate has moderated to 70% (as of April 26)

    (click to enlarge)Mean Reversion

    Last week, we noted that this quarter's beat rate of 80% (as of April 19) was unusually high compared to the five-year average of 67%, just as last quarter's beat rate of 49% (as of January 19) was unusually low at the same point in the reporting period (figure 2). The major difference is that 1Q12 earnings estimates declined enough over the last several months for the actuals to be able to beat the estimates. However, Q1 estimates stopped decreasing on March 18 and have started increasing, meaning further significant positive surprises may be harder to come by (read: mean reversion). Indeed, the beat rate has moderated from 80% to 70% (as of April 26).

    We've always questioned the efficacy of earnings surprise models. To us, it seems the surprise says more about the instability of the estimates than it does about the underlying trend in earnings. In our view, it's the trend in earnings growth that matters most for equity returns. Figure 3 shows the year-over-year percent change on S&P 500 trailing 12-month operating EPS alongside the year-over-year percent change on the S&P 500 index since 1990. On a trend basis, equity returns usually benefit from accelerating earnings growth, and generally suffer from slowing earnings growth. S&P 500 quarterly operating EPS grew 16.4% y/y in 1Q11. So far, EPS are growing 7.8% y/y in 1Q12 according to Capital IQ's bottom-up consensus estimate (figure 4). The point we're trying to make is earnings support is waning for stocks on a trend basis.

    Figure 3: On a trend basis, equity returns usually benefit from accelerating earnings growth, and generally suffer from slowing earnings growth

    (click to enlarge)SPX EPS Long

    Figure 4: So far, EPS are growing 7.8% y/y in 1Q12, meaning earnings support is waning for stocks on a trend basis

    (click to enlarge)SPX EPS Short

    Last spring, we had a "minor" Greek tragedy while Euro Area real GDP grew 0.8% q/q in 1Q11. This spring, we have a major Spanish and Italian Inquisition while Euro Area real GDP entered recession for the second time since the start of the financial crisis, falling -0.3% q/q in 4Q11 and the momentum isn't looking good for 1Q12 (figure 5). Last week, we learned that the Markit Flash Eurozone PMI Composite Output Index (a weighted average of the Manufacturing PMI Output Index and the Services PMI Activity Index) dropped from 49.1 in March to 47.4 in April. This week, we learned that Spain (the fifth largest economy in Europe) real GDP shrank -0.3% q/q in 1Q12. Meanwhile, Standard & Poor's has downgraded 11 banks, including Santander (STD) and BBVA (BBVA), adding to its two-notch downgrade of Spanish sovereign debt last week.

    As we noted last week, these trends bode ill for S&P 500 companies' global sales. Based on the 50% of S&P 500 companies with full reporting information, foreign or non-U.S. sales represented 46% of global sales in 2010. Importantly, Europe represented 29% of foreign sales, which means the region accounted for 13% of global sales, the second-largest category after that nebulous "Foreign Countries" bucket. Of those U.S. firms that do report foreign sales, few are required to specify where they're derived. When a U.S. company reports foreign sales but doesn't provide a breakdown, it gets thrown into the "Foreign Countries" category. The bottom line is there could be more European exposure in that general bucket than U.S. firms specify. Caveat emptor.

    Figure 5: Euro Area real GDP fell -0.3% q/q in 4Q11 and Spain (the fifth largest economy in Europe) real GDP shrank -0.3% q/q in 1Q12

    (click to enlarge)Euro Area & Spain GDP

    Figure 6: S&P 500 Sector Performance (April 27, 2012)

    (click to enlarge)Sector Performance

    Talley D. Léger

    Investment Strategist

    (203) 940-0878

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 06 7:42 PM | Link | 5 Comments
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