Steelmakers to move countertrend in a falling equity market on Obama plan [HEAT]

The continued rumour on another package from Obama & Co. has especially made steelmakers in Asia move against the trend of falling equity markets overnight. Despite that most are well aware of the fact that another round of stimulus will spur risk sentiment short term, but long term it is not going to help much. Earnings will still be under pressure due to weak sales and the prospect of further significant margin gains is remote.

Obama is most likely going to launch another stimulus package/infrastructure investment that for sure will spur short term risk appetite and lead to equities travelling higher. This would most likely lead to the test of the 1130-level in S&P500 as we have had as our short term target for a while now. That said we still believe that the long term fundamental issues in the western economies is far from solved and this simply acts like a structural barrier for further sustainable growth in companies. Consumers needs to deleverage (as does the government) and will be reflected in a weak demand. Currently the weak sales are masked by margin improvements and higher capacity utilization, but soon or later this will spill over into earnings disappointments. We still see, contrary to consensus, at EPS of 84-85 USD in S&P500 for 2011 leading to a fair value of 1174. Overnight Asian equity markets have retraced a bit after several strong days which was expected. However it is interesting to note that steelmakers are trading countertrend and going higher fueled by the hope of renewed strong demand coming from Obama infrastructure project. We expect this to continue until the details of the plan are put forward and the plan has actually been transformed into law. There is no such thing as hope.