The analysts' downgrades in 2012 aren't leaving any room for error. Errors like if nonresidential construction comes back. Errors like if housing ticks up in price and people get flushed in from the sidelines. Errors like if China cuts rates big. Errors like Europe's can-kicking works and we actually start seeing growth.
I am talking about downgrades like what we saw with 3M (MMM) and Emerson (EMR) Wednesday, or what we saw yesterday with the homebuilders or the real estate investment trusts. These downgrades will come back to haunt analysts, I believe, because you can't thread the needle if we get a pickup. You can't switch directions that fast, and while the idea that a train is leaving the station right now seems unlikely, I do believe that when the turn comes you may not be able to upgrade in time.
The tasks are daunting. We know that many companies are having horrendous quarters as business has just dried up in Europe. We do not have a turn in construction yet in this country. It could be delayed. I read a half-dozen reports in the past 48 hours about the amount of shadow inventory that is about to hit the housing market. We all know that one of these auctions is going to go badly.
But I just think that the skepticism still remains thick out there and you can't keep great stocks like Emerson or MMM down forever. They are too good. You have to believe that the aerospace cycles, auto cycles and residential construction cycles -- all of which have been terrible or are still terrible -- can come back of their own volition.
And, yes, you have to believe that if Santander and Unicredit can get financing, then the others might be able to, too. We now see what the aversion to raising capital in Europe really is: The stocks are crazy high compared to where they could raise money. The U.S. banks on the other hand raised tens of billions of dollars at discounts to the last sale, but the discounts were not of a great magnitude.
Still, all that really means it that Unicredit's stock was actually worth SOMETHING. It wasn't Washington Mutual or Downey Savings or Fannie or Freddie after all. It was just Citigroup (C).
So, I think the focus should be on the margin for error on these downgrades and the possibility that several of the many sparks that are now lit under so many cycles may turn into a real bonfire.
Then the downgraders will look foolish and be doomed to peer from the sidelines as the cycles, as last, turn positive.