Game on for the stock market this week.
My Tesla Take ...
* Excessive valuations
* MET shares have risen from $50 to over $56 since June 1. The shares of LNC have advanced from $64 to $69 over the same period.
* Life insurance stocks trade with stock prices and interest rates. I believe the former (S&P 500) is overpriced and the later (10-year U.S. note) likely will move somewhat lower over the near term.
* Investors are bullish and valuations in the group are stretched, with price-to-book values now at a generous and unjustified (relative to fundamentals) 1.4 times -- the highest level achieved in nearly nine years and above the historical 1.2 times multiple.
* Though current life insurance multiples are at a discount to banks and other selected financials, the discount is narrower than over the past decade and, given the differential in return on equity (ROE) and the weak business metrics, they likely will continue to trade at a discount.
* Life insurance business trends are uninspiring (organic growth over most business lines is negligible), with returns on equity over the next two years (close to 10%) likely to only match last year's results.
* Earnings estimates are elevated and are likely to be revised lower over the balance of the year.
* As discussed below, the macroeconomic backdrop may be unsuitable for continued strength in the shares of life insurance companies.
* Insurance portfolio yields continue to move lower (by another 10+ basis points in the second quarter) and it would take an increase in yield of at least a 75 basis points for the continued spread compression to abate.
* The recent rise in the 10-year U.S. note yield from 2.12% to 2.35% is likely over.
* Given the drop in both soft and hard economic data, I expect the 10-year U.S. note yield to peak at about current levels.
* The 2s/10s spread, now at 93 basis points, also is likely to be peaking.
* Overall second-half U.S. sales and profit guidance may be disappointing relative to expectations. Domestic credit demand, influenced negatively by peak retail, peak housing, peak autos and peak employment, likely will wane in the months ahead.
* I expect a relatively hawkish Federal Reserve as well as other central bankers around the world to back off over the balance of the year -- a negative for bank stocks.
* Financials, such as life insurance, are considered the beneficiary of tax and regulatory reform, but those initiatives now seem dead on arrival.
* The vulnerabilty of the (T)FAANG complex has been made clear over the last week, but we shouldn't expect that abbreviation to go down without a fight. Should (T)FAANG regain some stability -- which is quite possible, though I remain negative on (T)FAANG -- I suspect the rotation back out of banks/selected financials could commence. (See Jim "El Capitan" Cramer's morning column, "Thumb-Suckers Are Wrong in Their Growth vs. Value Theory.")
* As RevShark remarked Wednesday morning in "Inconsistent, Uncorrelated Market Action Is Reason for Concern," there is an inconsistency and weakness within the market that has been masked by strength in a small group of stocks. From my perch, this likely will be resolved by a broader market correction.
* Financial stocks are currently strategists' and chartists' darlings. Traders are often reluctant to buck charts that move from the lower left to the upper right. Nevertheless, the life insurance group may be stretched and the rotation into the sector could be in an advanced state.
* The projected lower equity market I see could provide another headwind to life insurance earnings.
* For reasons previously mentioned -- better performance in personal lines, runoff of Talcott Resolution, ability to extract capital and merger optionality -- I continue to be long Hartford Financial Services Group (HIG) against shorts in MetLife and Lincoln Financial. Specific business concerns are sizable hedging losses, fee compression in South American business, the general disruption of distribution channels and loss of the Fidelity business at MET and lackluster annuity flows, benefit margins as well as weakness in individual life margins at LNC.