David Rosenberg: What a Difference a Year Makes

Friday, February 5th, 2010

One year makes a quite a difference:

• A year ago, China was embarking on a massive fiscal and credit stimulus plan that would send commodity prices and global exports surging. Today, the People’s Bank of China (PBoC), along with other Asian central banks, is now withdrawing the stimulus (India as well). Is the near 10% correction in the Chinese stock market telling us something about the Chinese economic outlook? Something tells us the Reserve Bank of Australia was on to something when it didn’t hike rates yesterday when the market was fully priced for another move - after all, China is Australia’s most important customer.
• A year ago, it was all about saving the insolvent banking sector. Now it is popular to bash the banks and de-risk them. Notice how the financials haven’t done a thing in five months?
• A year ago, it was all about fiscal reflation. While there is now tepid support for job creation and small business incentives, the emphasis is also on ending the Bush goodies and taxing the rich (defined as anyone making more than $250k).
• A year ago, it was all about quantitative easing and the need for the Fed to add more than $1 trillion of mortgages to its balance sheet. Today, it is all about the exit strategy.
• A year ago, the U.S. dollar’s bear market rally was about to give way to a 6%-plus decline in support of global carry trades. Today, the dollar has broken out on a trade-weighted basis and has broken above the 50, 100 and 200-day moving averages.
• A year ago, the VIX index was at 40. Today, it is barely above 20.
• A year ago, Baa corporate bond spreads were in excess of 550 basis points. Today, they are 260 basis points.
• A year ago, the S&P 500 was undervalued by 18%, on a Shiller normalized P/E basis. Now, it is overvalued by 25%.
• A year ago, we were coming off a -6.4% real GDP print in the U.S. and a 35 ISM reading and only ‘green shoots’ lay in our path. Today, we are coming off a +5.7% GDP headline and a 58.4 ISM index and the days of “sequential improvement” are clearly over.
• A year ago, 10-year Treasury note yields were 2.7% and rising. Today, they are 3.7% and falling.

Source: Breakfast with Dave, February 3, 2010

It is surprising that the majority of pundits still believe that we are in a bull market. We’ve got news for you…
When you go back to a year ago, we had:

• Oil at $40/bbl (not around $80)
• Copper at $1.50/pound
• The U.S. dollar was about to embark on a 7% trade-weighted decline (it is breaking out currently)
• The VIX index was above 40x (not 20+)
• The S&P 500 was undervalued by 15% (not overvalued by 25%)
• 10-year bond yields were 2.7% (not 3.7%)
• Baa corporate spreads were 550bps (not 260bps)
• The Fed had no mortgages on its balance sheet (now it holds $1 trillion)
• The U.S. federal deficit was $700 billion (not $1.5 trillion)
• Market Vane Sentiment was 30 (not near 60)
• ISM was 35 (not 58), and real GDP was sliding at a 6.4% annual rate.

Source: Breakfast with Dave, February 4, 2010

Tags: Asian Central Banks, Bank Of Australia, Bank Of China, China, Chinese Economic Outlook, Chinese Stock Market, Commodities, Commodity Prices, Corporate Bond Spreads, David Rosenberg, Emerging Markets, Global Exports, Hike Rates, India, Ism Index, Market Rally, Moving Averages, oil, Pboc, Real Gdp, Reflation, Reserve Bank Of Australia, Shiller, Small Business Incentives, Vix Index
Posted in Emerging Markets, India, Markets | No Comments »

Setting the Bull Trap

Wednesday, January 7th, 2009

This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management.

Long time students of the market will tell you that “the crowd is usually wrong at the extremes”. Judging by what I see, hear and read in the media, the current consensus is that stocks bottomed on November 20th-21st, an economic recovery will begin in the second half of 2009, corporate bonds are a buy, stocks are cheap and the stock market is now discounting all the bad news. This is surely a sign that the worst is likely behind us.

Even though I was looking for a low in the S&P 500 around 750 (it bottomed around 740 on November 21st only to close at 800 the same day), I continue to believe that was a low point, but not THE low point for this bear market. We were large buyers of Mortgage Backed Securities during the Wall Street de-leveraging and have been rewarded with handsome gains, although we began to take some profits on Friday where appropriate.

Corporate bond spreads have tightened during a slow holiday season as well as spreads in CMBS (Commercial Mortgage Backed Securities). Corporate spreads may or may not tighten further as I believe there will be a wave of issuance at every level - Government, Emerging Markets, Corporations, Municipalities, etc. Treasury yields have crashed as the Fed has taken the Federal Funds Target Rate to a range of 0-0.25%.

Stocks have rallied even more to S&P 931 and could possibly make a run at 1,000-1,100 if “performance anxiety” sets in among those portfolio managers that are afraid to miss the rally. We are not afraid of missing the rally because we are absolute return investors and have the luxury of having missed the big down move from nearly 1,600. The managers that are subject to performance anxiety are the same group that managed to a market benchmark only to get tattooed during the downturn.

The Fed is punishing savers and the Prudent Man by manipulating interest rates to zero. You can sit in cash and earn zero or you can be forced out on the risk spectrum just so you can keep up with inflation or your benchmark. Forcing money into risky assets is perhaps the most dangerous experiment ever done, and is so large in scale and so unprecedented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation. The funneling of assets into risk is masking the deteriorating fundamentals and giving the appearance of a market that has bottomed. But this is sleight of hand, an illusion.

The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card - and with our money no less. They are also setting up the ULTIMATE BULL TRAP - a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left.

Click here for Bennet’s full report.

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.

Bennet graduated from Rutgers University in 1982 with a degree in Economics.

Tags: Absolute Return, Bear Market, Buy Stocks, Commercial Mortgage Backed Securities, Corporate Bond Spreads, Corporate Bonds, Downturn, Economic Recovery, Emerging Markets, Holiday Season, Issuance, Level Government, Mortgage Backed Securities, Performance Anxiety, Portfolio Managers, Prudent Man, Stock Market, Target Rate, Time Students, Treasury Yields
Posted in Bonds, Emerging Markets, Markets | 2 Comments »