U.S. Discretionary Almost Outliers

Submitted by: Colin Lokey
       You may recall that the success or failure of QE3 ultimately rests with the U.S. consumer. This is because the whole plan is predicated upon the so-called 'wealth effect'. The idea is that when households see the value of their home and their stocks go up, they will start spending. This will boost demand which in turn will cajole corporations to start hiring. The market is depending so much on this ridiculous scheme that consumer discretionary names are expected to post huge revenue gains relative the broad market going forward as the market is already pricing in the theoretical spending spree (see here). Just how far overvalued are consumer discretionary names now that everyone is betting on them to be the savior of the economy? According to BofA/Merrill Lynch the z-score for the group's book value has hovered around or above 2 this year. Recall from statistics class that a z-score of 3 means the data point is an outlier (i.e. not consistent with the reality of the data set). A z-score above 2 probably spells trouble, or, as BofA/ML puts it,
"Potential short positions for value-investors: US discretionary"

Source: BofAMerrillLynch, MSCI, DataStream


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