HOME PRICES CONTINUE TO PLUNGE IN OCTOBER

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Clear Capital released their monthly Home Data Index Report today and it showed continued deterioration in national home prices.? Prices are now off -6.8% from their August peak.? It looks ...

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GOLDMAN SACHS: QE2 WILL NOT DRIVE STOCK PRICES HIGHER

Goldman Sachs is not convinced that QE2 will have a significant impact on the equity markets from current levels.? In a recent strategy note (via Zero Hedge) they cited the primary reason why QE2 was likely already fully priced in and unlikely to impact the real economy heading into 2011:

We believe QE2 is unlikely to change our sales or margin forecasts, so return prospects become a valuation debate. Our targets imply less upside, given 13.5x P/E is consistent with prior 1-2% real rate regimes.

The bullish argument for equities goes as follows: (1) The Fed buys longdated Treasuries to reduce term premium and lower interest rates across the maturity spectrum; (2) The low yields penalize individuals and corporations who hold cash; (3) individuals and institutional investors re-allocate their savings into higher risk instruments such as equities, high yield bonds, emerging market debt and equity, and commodities; (4) firms pursue new capital spending initiatives and boost employment; (5) asset price inflation has a wealth effect and spurs retail spending; (6) a consequence of lower US interest rates is a weaker US Dollar which benefits US exporters and also stimulates some incremental domestic job growth.

Our year-end 2010 price target for the S&P 500 remains 1200 or 1% above the current level of 1183. We expect the S&P 500 will trade sideways during 1Q before rising during the subsequent six months. Our 12-month forecast of 1275 reflects a price return of 8% and a total return including dividends of 10%. For details, see our report US Equity Views: Updating our price targets as investors focus on 2011 (October 15, 2010).

Three topics drive our view of the trajectory of the US equity market. (1) Sales; (2) profit margins; and (3) money flow. Below we briefly outline how each of these items will be affected by the pending QE2.

1. QE2 is unlikely to change our sales forecasts. Goldman Sachs Economics 2011 US GDP growth forecast already incorporates at least $1 trillion of Treasury purchases by the Fed. Despite the hefty forecast of Fed purchases, our 1.8% GDP growth forecast remains below the consensus expectation of 2.5%. The buy-side seems to be in the 2.0%-2 ?% range. Our current index and sector-level sales forecasts incorporate our GDP growth assumptions and therefore already capture QE2. Capacity utilization hovers at 74%, up from the March 2009 low of 68% but below the 81% long-term average, so firms are not compelled to fast-track new projects despite the availability of cheap financing. The US has a demand, not a supply, problem. The US Dollar has weakened in the 12 weeks since QE2 entered public debate and it will benefit revenues of US companies, although by less than many investors believe. S&P 500 generates just 30% of sales outside the US.

2. QE2 is unlikely to change our margin forecasts. Our index and sector level net margin estimates incorporate our US and world GDP, interest rate, inflation, oil and US Dollar forecasts and the firm’s macroeconomic view assumes $1 trillion of QE2. If the Fed successfully spurs higher inflation than we currently assume (1.1% in 2011), it will have a negative impact on profit margins because rising input costs will not be fully-passed through to the? consumer. Passing inflation along to the end customer will be particularly difficult in an environment with nearly 10% unemployment. Our 8.4% net margin forecast stands below bottom-up consensus of 9.0%. The Fed’s desire to re-inflate the economy tilts margin risk lower rather than higher. Firms reporting negative margin surprises in 3Q span the value chain from raw (X, AKS, NUE, MEE) to intermediate (GENZ, LLTC, BMS) to end-demand (AN, AVP, KMB, SLB, EFX, AVY, T) to cite just a few examples.

3. Therefore, QE2’s potential impact on the US equity market reduces to a debate over valuation. Bulls argue stocks are dramatically undervalued relative to bonds. It is true that using Treasuries, BBB corporate bonds, or TIPs in the Fed model leads to a conclusion the S&P 500 is 20% undervalued. Bulls similarly argue that QE2 will drive both yields and risk lower,? reduce the cost of equity, and support a DDM valuation above our 12-month target. Bulls implicitly argue stocks should trade at a higher P/E multiple. Our more modest return projection incorporates a current starting point valuation that shows stocks trade at a 13.5x NTM P/E multiple consistent with past real interest rate regimes of 1-2%. However, the current P/E multiple is calculated when margins stand at all-time highs. A P/E assuming normalized margins would be 14.6x closer to the long-term average. We believe the forward path of stocks will be determined by potential asset allocation shifts by owners of 70% of the US equity market. Individuals own in aggregate 53% and pension funds own 17%. Shares will trade sustainably higher if these investor groups decide to re-risk from bonds to stocks. Any shifts most likely will be gradual.

A lot of that probably sounds familiar to regular readers.

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REAL COMMERCIAL PROPERTY PRICES CONTINUE TO FALL

20 October 2010 by PTC 0 Comments

Moody's via:

"The Moody s REAL any property Type Aggregate Index measured decreased by 3.3% in August, bring 105.37 b.c index ' is the lowest recorded since the beginning of the recession, surpassing old recession low-level 107.98, which took place in October 2009.". Domestic prices are 7.6% less than the value recorded last year. Since the peak in October 2007, prices declined 45.1%.

Data suggest that the commercial real estate market has become trifurquée, with prizes for the most active trophy amounting distressed asset prices decreased sharply, prices for the smaller, but healthy properties remains essentially plat.Une how to display the index returns is by looking at the interaction of these three components of the whole of market.Index again to negative this month part because large negative returns on distressed properties created a drag outweighs positive and flat performance properties. ?

Source: Moodys

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The content of this site is provided as general information only and should not be considered advice investment .all the content of the site should not be interpreted as a recommendation to buy or sell any security or financial product, or participate in any particular trading strategy or investment.The ideas expressed on this site are solely the opinions of the authors and do not necessarily represent the views of the companies affiliated to the author (s).The opinions of all the guest authors or contributors and will differ from those of m. Roche.These opinions do not necessarily represent the opinions or Mr. Roche investment decisions.The authors are, or may not have a position in any security referenced herein and can or cannot seek to do business with one another or companies referred to by this site Web.Toute action you take information and analysis on this site is your responsabilité.Consultez ultimately your investment advisor before taking an investment decision.

A short note on the comments-the increase in users of recent months has led to increased improductifs.Tout user who engages in the use of racial epithets or uses the comment section as a place to insult other users is prohibited on the comments section site.La feedback is welcome to all readers interested in relevant questions and engage in a thoughtful, intelligent discussion and brief productive.En, just be agréable.Merci.

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