Here are a couple of research notes that caught Market Blog's attention on Tuesday. Why? Both happen to turn conventional wisdom on its head, which is always entertaining and often just plain smart.
Tobias Levkovich, strategist at Citigroup, argued in a note to clients that equity investors should look at the bond market for a reason to get bullish. Mr. Levkovich, a raving contrarian, looks at it this way: The spread between safe government bonds and risky high-yield bonds has widened remarkably since last year and are now closing in on those other two eras of tremendous risk aversion, the 1990 recession and the 2002 bear market that followed the tech implosion. This suggests that risk aversion should snap back soon, which is good news for equity markets.
"It is often most difficult to find the internal fortitude to buy assets when the situation is challenging, but such chances are rare," he said in his note. "Conversely, investors always seem willing to become slaves to the latest fashionable stories that generate their own momentum even when the risks begin to outweigh the rewards.
Richard Bernstein, chief investment strategist at Merrill Lynch and another high profile contrarian, took a peak at energy stocks in a note to clients and didn't like what he saw. One of his prime reasons for recoiling from the sector? Sentiment is far too bullish, at a time when fundamentals are eroding.
According to a fund manager survey he cites, energy is an overweighted sector in four out of five regions of the world, suggesting that most of the buying in the sector has already been done. Yet, negative earnings surprises are popping up far too frequently. In the third quarter of 2007, energy ranked third (after financials and materials) in terms of the number of negative earnings surprises. In the fourth quarter, the sector moved into second place (again, after financials).
"These results suggest that fundamentals are actually deteriorating. Higher energy prices might now be forcing demand to fall off," Mr. Bernstein said. "Refining margins, often considered a good indicator of demand, are now being squeezed in every region of the world."
Merrill Lynch's estimates crude oil will average $82 (U.S.) a barrel in 2008, well below its current price of $98.88 in mid-afternoon trading.
