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US Strategy: Circle of Life
Long Materials, Short Telecom. Close Overweight Health Care, Underweight Energy
Idea.
US Equity Strategy
Thomas J Lee, CFAAC
(1-212) 622-6505
thomas.lee@jpmorgan.com
Bhupinder Singh
(1-212) 622-6406
bhupinder.b.singh@jpmorgan.com
Daniel M McElligott
(1-212) 622-5598
daniel.m.mcelligott@jpmchase.com
J.P. Morgan Securities Inc.
See page 46 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of
this report. Investors should consider this report as only a single factor in making their investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the
company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganmarkets.com or can call 1-800-477-0406
toll free to request a copy of this research.
Circle of Life: Credit
Bottoming?Recovering?
Convertibles High Grade
Munis TIPS
Agency MBS, RMBS
ABX, ABS, CDOs
CMBS
Peaking?Breaking Down?
Treasuries High Yield
Leveraged loans
Circle of Life: Equity Sectors
Bottoming?Recovering ?
Materials Health Care
Telecom Discretionary
Financials
Technology
Utilities
Peaking?Breaking Down?
Staples Industrials
Energy
We still see a 60% chance of our 揢P ZIG?to 1000, but more importantly, we still see a bottom for equities in mid-year (see 揋uide
to Stock Bottoms: Part I?dated 11/21/08) at around 750-800.
?Macro: Can modest Consumer gains in January continue? Current conditions in the US economy are awful, and Europe and EM are
caught in an even deeper downturn. In coming months, the impact of stimulus, TALF should be felt. The bulk of stimulus in ?9 is via HH
income, and the launch of TALF targets restoring consumer credit flows. Thus, odds favor the modest improvements in January consumer
spending to continue. Corporates remain in a deep downturn. Capacity Utilization is now at 50-year lows. As for banks, key is P-PIF.
?Credit: Move High Grade into the Recovery category, given the continued robust issuance. With the Fed in a zero rate environment,
cues for visibility are lacking, and our preferred leading indicator is the performance of Treasury and credit markets. Credit markets have
shown measurable improvements in the past few months, both in pricing and in the levels of issuance but most markets still have
prices/spreads elevated relative to pre-Lehman levels. Exception is High-Grade which has seen healthy issuance. The launch of $1 trillion
TALF should boost issuance of Asset-backed consumer credit, auto-finance, student lending, small biz C&I, and other areas.
?Equities: Pulling a Missouri (the 揝how Me?State). But watch the divergence as credit continues to rally. We were surprised at the
poor reaction of equities to Obama TARP II, fiscal stimulus, expansion of TALF, and housing plans, given the steadier performance of
credit. Thus, we believe equity investors are taking the 搒how me?approach to these initiatives. Still, credit markets have rallied and are
likely to rally further on TALF launch, thus, we believe equities follow, or a further positive divergence is created (credit vs. equities).
?Sectors: Cyclicals improving. Upgrading Materials to Neutral from Underweight. Visibility remains a top priority for investors.
Cyclicals had the most positive improvements in our analysis of sector-specific trends, particularly on earnings revisions and credit spreads.
Materials, in particular, had three positive changes, from relative price performance (see Figure 26), earnings revisions (see Figure 65), and
credit spreads (see Figure 91). We are upgrading Materials to Neutral from Underweight.
New Trade Idea: Long Materials vs. Short Telecom Services. Closing our Overweight Health Care vs. Underweight Energy Idea.
Recommending a new trade: Long Materials vs. Short Telecom Services. Closing our Overweight Health Care, Underweight Energy idea,
which would have outperformed by 730bp in a hypothetical trade. Health Care is still rated Overweight, but could have less near-term upside.
How to use this monthly report: The J.P. Morgan 揅ircle of Life?is based on the premise financial assets follow natural 4-stage cycles of: (i)
Peaking; (ii) Breaking Down; (iii) Bottoming; and (iv) Recovery, and this applies to macro indicators, credit instruments (treasuries to ABS), and
equities. The report has three sections:
i. Circle of Life. Summary Analysis. 揅ircle of Life?graphically situates where, in our judgment, macro, credit instruments, and equity sectors
are moving within their respective individual cycles (see Figure 2).
ii. Sector Comparatives. We analyzed each sector on nine areas: (1) Relative price charts; (2) Monthly sales revision per FC mean; (3) Sales
momentum; (4) EPS revisions; (5) Earnings momentum; (6) Credit spreads; (7) FC mean rating trends; (8) Trends in short interest; and (9)
Valuation. Rather than force rank on the latest data point, we subjectively labeled each sector as Good, Neutral, or Unattractive on these
metrics. We then compiled these into an overall score (see Figure 11).
iii. Sector Analysis: Ranked Industry and Stocks. Based on J.P. Morgan Analyst Target Prices as well as Buzz-o-Meter ratings.
Table of Contents
Circle of Life: Overview...................................................................4
Economics: Consumer to Outperform Corporates ................................................................ 6
Credit Markets ...................................................................................................................... 7
Equities: Closing Health Care vs. Energy. U/G Materials (to N). D/G Telecoms (to N)...... 8
Summary of Circle of Life Trade Recommendations ........................................................... 9
Sector Comparative.......................................................................11
Which Industries Score the Best? Based on Target Prices and Buzz-o-Meter.................... 12
S&P 500: Snapshot of Industry Market Capitalization....................................................... 13
Price Performance – S&P 500 ............................................................................................ 14
Trailing 1-Month Relative Price Performance – Sectors .................................................... 15
Monthly Relative Sales Revision – S&P 500 ..................................................................... 16
Monthly Relative Sales Revision – Sectors ........................................................................ 17
Relative Sales Momentum – S&P 500................................................................................ 18
Relative Sales Growth (vs. S&P 500) – Sectors ................................................................. 19
Monthly Relative Earnings Revision – S&P 500................................................................ 20
Monthly Relative Earnings Revision – Sectors .................................................................. 21
Relative Earnings Momentum – S&P 500.......................................................................... 22
Relative Earnings Momentum – Sectors............................................................................. 23
JULI Spreads – All Industries............................................................................................. 24
JULI Spreads (Relative to All Industries’ Averages) – Sectors.......................................... 25
First Call Mean Rating – S&P 500 ..................................................................................... 26
First Call Mean Rating (Relative to S&P 500) – Sectors.................................................... 27
Short Interest – S&P 500 .................................................................................................... 28
Short Interest (Relative to S&P 500) – Sectors................................................................... 29
Price/10Yr EPS – S&P 500................................................................................................. 30
Price/10Yr EPS (Relative to S&P 500) – Sectors ............................................................... 31
Sector Analysis: Industries and Stocks ......................................32
Energy................................................................................................................................ 33
Materials ............................................................................................................................. 34
Industrials ........................................................................................................................... 35
Technology ......................................................................................................................... 36
Staples................................................................................................................................ 37
Health Care ......................................................................................................................... 38
Telecom .............................................................................................................................. 39
Utilities ............................................................................................................................... 40
Discretionary...................................................................................................................... 41
Financials........................................................................................................................... 43
Buzz-o-Meter Methodology................................................................................................ 44
Composite Score Methodology........................................................................................... 45
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