Sunday, May 9, 2010

Citigroup: Don’t buy this dip

Tobias Levkovich of Citigroup has issued a warning to clients:

In the S&P 500 over time, we cannot find strong evidence of sharp snap backs that reward investors for taking on more risk.

When the S&P has fallen more than 3 per cent or more on a given day, the average or median recovery over a three month period has, according to Levkovich, been acceptable . . .

. . . but not enough to outweigh the risks at the moment. (Remember US markets were sharply lower on sovereign debt fears even before Thursday’s five minutes of mayhem).

Here’s Levkovich:

In view of the recovery in corporate confidence and general investor sentiment from a year ago, it seems improbable that investors will feel emboldened to step up now, particularly when European economic challenges and a stronger dollar could crimp 2H10 earnings. Indeed, selling on rallies could be more pronounced than buying on the dips.

Indeed, the impact of a stronger dollar on US corporate earnings — which has been one of the key drivers of the market in recent months — has been rather overlooked.

But not by Levkovich;

The dollar/euro exchange rate also may add to earnings concerns in 2H10 given that more than 20% of US corporate profits are internationally driven, with Europe by far accounting for the largest exposure of US multinationals. Thus, the loss of confidence in European fiscal health has consequences both in potential future sales trends and currency translation.


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