Wednesday, December 20, 2006

Case Studies in Bull Market; C and GE

The considerable number of “cautious” analysts covering GE and C will struggle through the New Year’s celebration trying to cope with the fact that these behemoth stocks got away from them. In fact, with virtually no change in earnings estimates or forward looking ROE's as a consequence of the last analyst meetings, the barely 3.5% yield today ( C ) , now looks less much interesting than the 4.4%-plus yield on offer a mere few weeks/months ago. (Both GE and C charts look rather similar as well; coincidence??). What does the “unexpected” move say about value added research which doesn’t provide context for price action? At least one thoughtful analyst (AG Edwards) did raise the “conviction level” of his buy, a reasonable attitude that contrasts with the intellectually inadequate revisionist research being spewed out of the brokerage house printing presses focusing on next quarters margins, NII, and revenue growth, as well as cost takeouts, with virtually no mention of market related valuation pickup. While that detailed discussion is good and well, the regular posturing for elbow room in the “bull” camp by analysts awakening from their slumber, whom now suggest that infinitesimal moves in margins are sufficient to kick start the largest financial service firm in the world is nothing short of comical. Any highly paid value-added research shouldn't rely unnecessarily on internal projections and tiny model adjustments to make a case for a stock (stocks) that are so representative of the economy. In fact, one can sympathize with the associates slamming away at their laptops, having to revise earlier model assumptions (input with apparently the greatest eagerness and conviction) every time old research pieces are cast aside because a bad trade in Greenwich sends ripples through the bond market. Readers will likely continue scratching their heads looking for explanations to the surprising stock price action, or be content with the fallacious arguments offered in the published research
We recently noted that the outperformance of C was coming courtesy of a switch from other big names in the sector (BAC, WFC; previous outperformers), in a rotational strategy that firmly underpins a still near-term bullish view of the sector as well as broader market. That said, I would be rather cautious on the FIG sectors with historically high margins and returns (p/c insurance and broker dealers) though somewhat more constructive on the secondary "mortgage sector". As far as C is concerned "the late buyers" of C at year end are bound to be disappointed (over twelve to eighteen months) given unusual near term outperformance.

No comments: