Barron's published a negative column on the private mortgage insurers over the weekend that seemed hyperbolic, inconsistent and wrong-footed in areas of (fundamental) substance.
Specifically, the Barron's column suggested that reserves are understated based on the analysis that defaults will rise and cures will come down in the period ahead.This simply is inconsistent with the recent and current data trends that are incorporated in industry reserve policy.
The article failed to identify some positives (e.g., the runoff value of the industry's portfolio) and failed to recognize that the housing markets (pricing, turnover and new orders) are, in general, stabilizing and, in areas not exposed to large shadow inventory for sale, certain regions are actually improving.
Finally, the article didn't incorporate some positive news that came from RDN late last week.
Run, don't walk, to read Jeff Matthews' blog on Sears Holdings today.
SHLD shares are trading much higher this morning after Lampert added to his personal holdings in the shares.
The January New York Manufacturing Survey surprised to the upside, rising to 13.5 (consensus was 11.0) and comparing to 8.2 in December.
This is the best number in seven months.
New orders rose to 13.7 from 6.0, and backlogs were less negative. Employment improved markedly from 2.3 to 12.1.
Domestic and non-U.S. concerns are known, will not likely be discounted again and, importantly, will likely diminish in consequence. Markets typically fall or rise (sharply) on the unexpected. Our fiscal imbalances and those of our counterparts are more appreciated than they were a year ago, when there was almost universal agreement (by the Fed, Wall Street strategists, etc.) of a normal duration (to history) and self-sustaining economic cycle. That optimism was incorporated in a consensus 15%-20% gain for the U.S. stock market and proved incorrect. Good times (late 2010) morphed into worsening times last year, as economic growth expectations failed to be realized and were marked down. With the benefit of hindsight this provided a strong headwind to stock prices in 2011.
Monday's European equity markets closed near their highs; our futures are substantively higher; French, Spanish and Italian bond yields dropped; and the euro has advanced smartly against many currencies (up by nearly 1% against the U.S. dollar at the time of this writing) -- it is not out of the question that the reaction will not be dissimilar to the reaction to the U.S. downgrade during the summer. On the positive side, S&P's (those wonderful folks who brought us AAA subslime ratings back five years ago) European ratings change could serve as a catalyst to hard but coordinated fiscal and political decisions -- the heavy lifting is still ahead -- that will ultimately produce more positive outcomes and stability.
As I have previously written, European "tame and timid" will, in the fullness of time, become "shock and awe," as Europe's leaders and central bankers eventually do what has to be done. February's liquidity add through the long-term refinancing operation facility will likely stabilize the debt crisis in Europe. And the ECB is already thinking more "shock and awe" based on a report in The Wall Street Journal this morning. In the fullness of time, Greece (which all now know is already bankrupt) and its lenders will agree to deeper writedowns of debt, as that country remains in the EU. More is to come.
Negatives have been sufficiently discounted. The S&P 500 now trades at only 12.2x estimated 2012 earnings consensus, 3 multiple points below the last 50 years' average (when the yield on the 10-year U.S. note approached 6.70%) and nearly 7 multiple points below times in history when interest rates and inflationary expectations were similar. The consensus, upbeat 12 months ago, is now downbeat, as vividly illustrated by the interview with Pimco's Bill Gross who, along with many others, ask now whether there will be another economic/debt apocalypse. But how will the apocalypse occur?
With "the new normal" of de-leveraging, re-regulation, de-globalization and slowing economic growth now embraced by consensus, investors' expectations are lowly ebbing, as individuals and institutions have materially de-risked in response to growth assumptions. Economic growth expectations, which surprised to the downside in 2011, have been recast to lower expectations as a baseline view and, as such, have been materially discounted. Surprises could come from the upside in 2012 to that baseline and lowered view. (Last night already saw two surprises, as the German confidence index exhibited the largest one-month rise in history and China's GDP rose better than expectations. The later report resulted in the largest upside move in the Chinese stock market since late 2009.)
A market crescendo will build throughout 2012. I expect that U.S. share prices will slowly climb the wall of worry in the first half of the year as the European crisis stabilizes, owing to a growing commitment by European leaders and central bankers to do whatever is necessary to avoid the unimaginable. At the same time, high-frequency domestic economic statistics will likely continue to gradually improve, led by surprising strength in housing and automobile industry sales.
Prospects for a U.S. political regime change will embolden investors as the year unfolds. A business- and market-friendly Republican leadership will look increasingly likely to replace the current administration as the year progresses. A crescendo-like buildup in consumer and business confidence will likely unfold.
Interest rates remain low, and inflation stays quiescent. A market-friendly Fed (and a worldwide global loosening of the monetary reins), a still-large manufacturing output gap and a "not too hot, not too cold" jobs picture (which will contain wage inflation and protect corporate profit margins) could contribute to a crescendo-like buildup in stock valuations. It is not inconceivable that the contraction (around 15% in valuations in 2011) will be entirely reversed in 2012. This expansion in multiples, coupled with near-10% earnings growth, could produce an outsized and totally unexpected 20%-25% gain the S&P 500 this year.