David Rosenberg: "Despair Begets Hope"

Sunday, May 20th, 2012

Pre­sent­ing the best weekly self-contrarian seg­ment from everyone's favorite Gluskin Sheff–based skep­tic — David Rosenberg:

DESPAIR BEGETS HOPE

... Over half of the 2012 price advance has been reversed in barely over a month as the broad mar­ket drifts down to its low­est level since Feb­ru­ary 2nd. The Finan­cial Times makes the point that the 10-day rel­a­tive strength index at 29.2 is deeply into over­sold ter­ri­tory. The Cana­dian TSX index is offi­cially in bear mar­ket ter­rain, hav­ing declined 21% from its cycle high (posted in April last year) and is back to lev­els pre­vail­ing on Octo­ber 2011.

Fad­ing risk appetite is also under­scored in the credit mar­kets where BB-rated cor­po­rate spreads have widened to 450 basis points from the recent low of 420bps. Until we see some res­o­lu­tion to the lat­est round of euro area angst, one can rea­son­ably expect spreads to widen fur­ther, but we would look at this as a nice buy­ing oppor­tu­nity as the link between the prob­lems there and cor­po­rate default rates here is extremely loose. The fact that gold and other com­modi­ties are slip­ping while core gov­ern­ment bond mar­kets — gilts, bunds and Trea­suries — are ral­ly­ing strongly sug­gests that defla­tion risks are get­ting repriced into var­i­ous asset classes. Greek bonds are trad­ing at pen­nies right now and implicit prob­a­bil­i­ties in periph­eral bond mar­kets are highly dis­count­ing exits from the mon­e­tary union by year-end. Span­ish bond yields have blown through 6% (Italy get­ting closer too) and 10-year spreads off Ger­many have hit a new record high of 485bps.

This is where the LTRO has proven to have actu­ally been a dis­mal fail­ure. Domes­tic banks used the pro­gram as a carry trade to play the yield curve and are now chok­ing on losses on the sov­er­eign gov­ern­ment bonds they were enticed to buy. So thanks a lot, Mr. Draghi — ECB poli­cies are at least partly respon­si­ble for why it is that euro area bank shares have sunk all the way back to March 2009 lows. Non-domestic investors have been dump­ing the periph­eral gov­ern­ment bonds just as the Ital­ian and Span­ish banks have been load­ing up — these for­eign enti­ties, we see in the FT, have been net sell­ers of Ital­ian gov­ern­ment bonds to the tune of 200 bil­lion euros in the past nine months and 80 bil­lion of Span­ish debt over the same time frame. And guess what? They can unleash even more sup­ply dam­age because they still own roughly 800 bil­lion euros worth of com­bined bonds of both basket-case countries.

The most bizarre quote we have seen in quite a while came from a strate­gist in the FT. Get this:

We can take com­fort from the fact that while the Greek elec­torate are against aus­ter­ity, the sup­port for stay­ing within the euro­zone is even stronger".

I can replace that with this real-life comment:

We can take com­fort from the fact that while my three sons are against doing their home­work, the sup­port for get­ting a pass­ing grade is even stronger".

How utterly lame.

If the Greeks want to stay in the euro­zone, it's prob­a­bly because they know they can con­tinue to suck at the teat of the Troika. More bailouts please and on easy terms since "aus­ter­ity" is the new dirty nine-letter word globally.

The best lines actu­ally came from the FT Lex column:

"All balled-out euro­zone coun­tries will ulti­mately have to decide whether they can make the fis­cal adjust­ments and achieve eco­nomic growth more quickly in, or out­side, the euro. That is where Greece now finds itself."

Now that is a thought­ful comment.

There was another really good zinger in the Mar­kets and Invest­ing sec­tion. To wit:

"it's naïve in the extreme to think you can limit the knock-on effect. As soon as Greece leaves or defaults, con­ta­gion will pass like a can­non going off in Spain".

That was from an exec­u­tive at a U.K. bank.

Arvind Sub­ra­man­ian penned a truly bril­liant piece in the FT as well, titled Why Greece's Exit Could Become the Eurozone's Envy. In a nut­shell, Greece's chal­lenge is that it is woe­fully uncom­pet­i­tive and as such needs wages and prices to adjust sharply lower. You either do that organ­i­cally or you devalue the cur­rency — which then sharply boosts exports and fos­ters import sub­sti­tu­tion. Of course, the ini­tial impact is reces­sion­ary and defla­tion­ary, but only for one to two years, if his­tory is a guide, fol­lowed by a boom. This is exactly what hap­pened to Asia a decade ago. As Arvind con­cludes, "the ongo­ing Greek tragedy could yet turn out not too badly for the Greeks. But tragedy it might well be for the euro­zone and per­haps the Euro­pean project".

Indeed, the cost esti­mates I have seen pub­lished for the euro area would be in the neigh­bour­hood of 400 bil­lion euros — in terms of imme­di­ate direct finan­cial losses. Sec­ond round impacts are far more dif­fi­cult to assess, but would be enor­mous. While there are a myr­iad of legal com­plex­i­ties sur­round­ing a Greek depar­ture, it is not an impos­si­ble task. The big­ger issue would be how the ECB would man­age to ring-fence the banks in Por­tu­gal and Spain and pre­vent a contagion.

But let's talk about what we do know with some certainty.

The Greeks voted against the sta­tus quo. It isn't work­ing for them. An elec­tion is likely around mid-June, and the party in the lead is dead-set against the ini­tial bailout terms. The gov­ern­ment, mean­while, runs out of cash by early August when a bond pay­ment comes due and that could well be the trig­ger for default and exit. It is tough to see this process being orderly — con­fu­sion, tur­moil and volatil­ity all come to mind. But if we do get a cathar­tic event, we will be able to buy assets for our client base at excel­lent prices. There always is a sil­ver lin­ing. You just have to find it.

We also know that Angela Merkel this far is not being swayed by her party's recent elec­toral set­backs — at least that is the indi­ca­tion we are get­ting from her lat­est rhetoric.

Tags: Bond Yields, Broad Market, Bunds, Carry Trade, Credit Markets, David Rosenberg, Default Rates, Dismal Failure, Domestic Banks, Domestic Investors, Draghi, Financial Times, Gilts, Government Bond Markets, Government Bonds, Greek Bonds, Relative Strength Index, Risk Appetite, Sovereign Government, Yield Curve
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Gold ‘Will Go To $3,000/oz’ – David Rosenberg

Friday, May 11th, 2012

Gold ‘Will Go To $3,000/oz’ – David Rosenberg

Highly respected econ­o­mist and strate­gist David Rosen­berg has told that Finan­cial Times in a video inter­view (see below) that gold “will go to $3,000 per ounce before this cycle is over.”

Mar­kets are repeat­ing the down­turns of 2010 and 2011 and it is time to search for safety, David Rosen­berg of Gluskin Sheff tells James Mack­in­tosh, the FT Invest­ment Editor.

Rosen­berg sees a “very good oppor­tu­nity in gold” as it has cor­rected and seems to be “off the radar screen right now”.

He sees gold as a cur­rency and says the best way to value gold is in terms of money sup­ply and “cur­rency in circulation.”

As the “vol­ume of dol­lars is going up as we get more quan­ti­ta­tive eas­ing” he sees gold at $3,000 per ounce.

Mack­in­tosh says that Rosenberg’s view is a “pretty bear­ish view”.

To which Rosen­berg responds that it is “bull­ish view on gold and gold min­ing stocks.” Mack­in­tosh says that it is “bear­ish on every­thing else”.

Rosen­berg  says that it is not about being “bull­ish or bear­ish,” it is about “stat­ing how you view the world” and he warns that the major cen­tral banks are all going to print more money and keep real inter­est rates neg­a­tive “as far as the eye can see.”

This is “crit­i­cal” as one of the key deter­mi­nants of the gold price are real short term inter­est rates.

The longer they stay neg­a­tive “the longer the bull mar­ket in gold is going to be.”

Rosen­berg sums up that “this is not about being bull­ish or bear­ish, it is about how do we make money for our clients.”

The inter­est­ing inter­view can be watched here.

Tags: Central Banks, David Rosenberg, Determinants, Economist, Editor Rosenberg, Financial Times, Gold Mining Stocks, Gold Price, gold stocks, Mackintosh, Money Supply, Nbsp, Ounce, Quantitative Easing, Radar Screen, Sheff, Strategist, Sums, Term Interest, Video Interview
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David Rosenberg's Take on Europe

Monday, May 7th, 2012

From David Rosen­berg of Gluskin Sheff

MY TAKE ON EUROPE

Europe is a mess, polit­i­cally, eco­nom­i­cally, and fis­cally. LTRO gave a short life­line and at the same time bound the ties even more tightly between bank bal­ance sheets and gov­ern­ment bond per­for­mance. For all the back­slap­ping, LTRO was a fail­ure, pure and sim­ple. Just as QE — for if QE had been a suc­cess, nobody would be look­ing for a third round (more like the fourth).

I fail to see how any coun­try is going to be able to "grow" their way out of their deficits, bar­ring ECB debt mon­e­ti­za­tion or via Ger­man accep­tance of a com­mon fis­cal pol­icy, which would then allow prof­li­gate sov­er­eigns to ride off of Germany's strong bal­ance sheet. The prob­lem is that the Ger­man econ­omy is start­ing to soften, and along with that I expect polls to start show­ing lesser sup­port for pro­vid­ing back­stops to the periph­ery. And from a geopo­lit­i­cal stand­point, an ever-isolated Ger­many spells even more insta­bil­ity. Gold and the gold min­ing stocks should be a beneficiary.

In less than two years, we are now up to a total of seven Euro­pean lead­ers or rul­ing par­ties that have been forced out of office, cour­tesy of the spread­ing gov­ern­ment debt cri­sis — tack on France now to Ire­land, Por­tu­gal, Greece, Italy, Spain and the Nether­lands. Even Germany's coali­tion is look­ing shaky in the after­math of the fal­ter­ing state elec­tion results for the CDU's (Chris­t­ian Demo­c­ra­tic Union) Free Demo­c­rat coali­tion partner.

This is quite a potent brew — finan­cial insol­vency, eco­nomic fragility and polit­i­cal instability.

Now we have gov­ern­ments, led by Mr. Hol­lande, who want to adopt "growth agen­das" at a time when erod­ing credit qual­ity is increas­ingly imped­ing fis­cal bor­row­ing capac­ity. The French vote comes quickly on the heels of the Dutch gov­ern­ment col­lapse and is joined by a frac­tious elec­tion result in Greece. Ger­many and other pro-austerity/structural reform enti­ties are the big losers. Then again, how cash-strapped sov­er­eigns who need Germany's com­par­a­tively strong finan­cial posi­tion embark on this new anti-fiscal-probity drive is an inter­est­ing ques­tion.
More uncer­tainty, more volatil­ity, more risk-aversion likely lies ahead — and along with it, a fur­ther dete­ri­o­ra­tion in gov­ern­ment finan­cial strength.
As it stands, glob­ally, since the time the Great Reces­sion took hold in 2008, we have seen the total value of gov­ern­ment debt backed with AAA-ratings decline from over a 50% share of total out­stand­ing sov­er­eign credit to less than 10%. Qual­ity is scarce, and as such should be owned.

In sum, this is not the back­drop for sus­tained risk-on invest­ment behav­iour. Both Bob Far­rell and Wal­ter Mur­phy see the cur­rent cor­rec­tive phase in the mar­ket being extended over the near and inter­me­di­ate term. I'm not sure I'd want to bet against them, even if Mike San­toli in Barron's and Paul Lim in the Sun­day NYT are advo­cat­ing a "buy the dips" strategy.

In terms of scour­ing the globe for coun­tries that are cur­rently being rated AAA by all three agen­cies, here they are:

- Aus­tralia
– Canada
– Den­mark
– Fin­land
– Ger­many
– Lux­em­bourg
– Nether­lands
– Nor­way
– Sin­ga­pore
– Swe­den
– Switzer­land
– U.K.

If we did a fur­ther over­lay with respect to the most attrac­tive "real yield" char­ac­ter­is­tics — low infla­tion and attrac­tive coupons along with strong national bal­ance sheets — we would find Nor­way, Aus­tralia and Switzer­land lead­ing the pack.

Tags: Backstops, Big Losers, Borrowing Capacity, Christian Democratic Union, Coalition Partner, David Rosenberg, Debt Crisis, Democrat Coalition, Europe Europe, Financial Insolvency, French Vote, German Economy, Gold Mining Stocks, Government Bond, Government Collapse, Greece Italy, Monetization, Potent Brew, Ruling Parties, State Election Results
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David Rosenberg (Strategic Investment Conference)

Monday, May 7th, 2012

Sub­mit­ted by Lance Roberts of Streettalk Advi­sors

Guest Post: Strate­gic Invest­ment Con­fer­ence: David Rosenberg

STRATEGIC INVESTMENT CONFERENCE – DAY 1

If you haven’t read the notes from the first two speak­ers, Niall Fer­gu­son and Dr. Woody Brock, I encour­age you to do so. The next speaker at the con­fer­ence is a friend of mine and one of the most widely regarded econ­o­mists today. David Rosen­berg was pre­vi­ously the Chief Econ­o­mist at Mer­rill Lynch and is now the Chief Econ­o­mist and Invest­ment Strate­gist at Gluskin-Sheff.   Here are his thoughts.

The 3-D's Defla­tion, Delever­ag­ing and Demographics

“Peo­ple con­tin­u­ally label me a “perma-bear” which is very inac­cu­rate. I have been a perma-bull on fixed income for a very long time. The rea­son that Gluskin-Sheff hired me is that my job is to take the eco­nomic data points and put them together in a struc­ture from which invest­ments can be made.”

"A Fore­cast is noth­ing more than the mid­point of a dis­tri­b­u­tion curve."

When you talk about risk often enough you get clas­si­fied as a “perma-bear”. The cor­ner stone of asset man­age­ment is not cap­i­tal "appre­ci­a­tion" but cap­i­tal "preservation".

In the sec­ond year of this eco­nomic recov­ery (2011) the econ­omy was grow­ing at 1.6%. This is impor­tant to under­stand because in a “nor­mal” recov­ery the econ­omy should be grow­ing at 5–6% at this same point.

Bob Farrell's 10 Mar­ket Rules: The 10 Com­mand­ments To Remember

1. Mar­kets tend to return to the mean over time
2. Excesses in one direc­tion will lead to an oppo­site excess in the other direc­tion
3. There are no new eras — excesses are never per­ma­nent
4. Expo­nen­tial rapidly ris­ing or falling mar­kets usu­ally go fur­ther than you think, but they do not cor­rect by going side­ways
5. The pub­lic buys the most at the top and the least at the bot­tom
6. Fear and greed are stronger than long-term resolve
7. Mar­kets are strongest when they are broad and weak­est when they nar­row to a hand­ful of blue-chip names
8. Bear mar­kets have three stages — sharp down, reflex­ive rebound and a drawn-out fun­da­men­tal down­trend
9. When all the experts and fore­casts agree — some­thing else is going to hap­pen
10. Bull mar­kets are more fun than bear markets.

These are the ten com­mand­ments of invest­ing. Not under­stand­ing this is what leads to indi­vid­u­als los­ing large amounts of money over time.

Rules #1 and #9 are the most impor­tant to con­ver­sa­tion today.

The mar­kets tend to return to the mean over time. Under­stand this. Just this year there have been two very impor­tant cov­ers from Barron’s.

Feb­ru­ary 2012 — Barron's Dow 15000
April 2012 — Barron's — Out­look Mostly Sunny.

Barron’s has an absolutely hor­ri­ble track record of putting on their cov­ers bull­ish sen­ti­ment at just about the peak of the mar­ket. (He showed many exam­ples of Barron’s cov­ers going back over the past decade.)

At the point of peak bull­ish­ness by investors and money man­agers is when the “rever­sion” effect will occur. In other words, what­ever Barron’s puts on their cover you are wise to do the opposite.

The “Fis­cal Cliff”

Under sta­tus quo at the end of 2012 roughly 42 tax ben­e­fits will expire at the end of 2012. At that point there will be record drag (roughly 4%) on GDP from reduc­tion of those tax ben­e­fits to spend­ing. Since the econ­omy is cur­rently barely grow­ing at 2% do the math – a neg­a­tive 2% eco­nomic growth rate is a very large recession.

Ben Bernanke — the Fed has NO abil­ity to off­set the impact of the “fis­cal cliff.” By the way — reces­sions tend to hap­pen in the first year of the Pres­i­den­tial cycle.

The last two times, 1960 and 1969, that there was a fis­cal retrench­ment of the same mag­ni­tude both ended in reces­sions. If there is any one thing to worry about it will be this par­tic­u­lar event more than just about any­thing else.

What about gov­ern­ment spend­ing? US gov­ern­ment spend­ing runs at approx­i­mately $1.50 for every $1.00 brought in. This level of spend­ing is unheard of out­side of WWII and is very unsus­tain­able. Fur­ther­more, the longer that this exces­sive level of debt based spend­ing occurs the more that it becomes a struc­tural prob­lem. Inter­est pay­ments are at a record share of total rev­enue as well as the debt as a share of GDP. The high level of debt to GDP, and the sub­se­quent ser­vic­ing of that debt via inter­est pay­ments, reduces eco­nomic growth. This leads to the real prob­lem fac­ing the U.S. today…Deflation.

Out­side of com­mod­ity based infla­tion there is defla­tion run­ning in every­thing else from incomes to real estate. This defla­tion impacts the base of the con­sumer and the econ­omy. Take a look at the cur­rent out­put gap which is still at some of the largest lev­els on record. The cur­rent eco­nomic growth rate is too weak to off­set the cur­rent slack in the economy.

This is why QE3 is com­ing and is just a mat­ter of timing.

The defla­tion in hous­ing is going to con­tinue. Hous­ing is only about 40% through its rever­sion process. In fact, along with hous­ing, the entire house­hold debt delever­ag­ing process is still in progress and still has a tremen­dous way to go. This delever­ag­ing cycle will remain a dead-weight drag on the econ­omy for quite a long time.

It is impor­tant to under­stand that the debt bub­ble didn't hap­pen in 3 years and it won't be cured in three years either.

Accord­ing to the recent McK­in­sey study the debt delever­ag­ing cycles, in nor­mal his­tor­i­cal reces­sion­ary cycles, lasted on aver­age six to seven years, with total debt as a per­cent­age of GDP declin­ing by roughly 25 per­cent. More impor­tantly, while GDP con­tracted in the ini­tial years of the delever­ag­ing cycle it rebounded in the later years.

A fur­ther pres­sure on the econ­omy remains excess unem­ploy­ment. There are roughly 20 mil­lion still unem­ployed ver­sus the long term aver­age of about 13 mil­lion. The excess capac­ity of labor sup­presses wages and eco­nomic growth. In other words, excess employ­ment leads to defla­tion­ary eco­nomic pressures.

In regards to employ­ment the only real report to watch is the U-6 report, ver­sus U-3, because it is the most inclu­sive mea­sure of unem­ploy­ment. If two full time employ­ees are con­verted to part time they are not included in the U-3 report but will show up in the U-6 report. The U-6 level of unem­ploy­ment is still at a higher level than at any other reces­sion­ary period.

As I stated, high lev­els of unem­ploy­ment, or excess slack in the labor mar­ket, leads to defla­tion in wages. Defla­tion is wages is very prob­lem­atic and has a lot do with defla­tion­ary prices in the economy.

So, defla­tion­ary pres­sures are why I am still bull­ish on bonds ver­sus stocks.

Here is an inter­est­ing side note. What cor­re­lates with bond yields?

88% Fed Pol­icy
75% Core CPI
64% CPI inflation

With the Fed keep­ing yields at zero through 2014 there is NO rate risk in own­ing bonds. When bond yields jump up for any rea­son it is a buy­ing oppor­tu­nity UNTIL the Fed starts tak­ing the punch bowl away.

His­tor­i­cally, the aver­age yield curve spread between the short and long dated matu­ri­ties is about 160 basis points. Cur­rently, that spread is about 330 basis points. That spread will revert to the aver­age over time which means that the long bond yield is going to 2%. Buy Bonds and you will get a bet­ter return than own­ing stocks with dra­mat­i­cally less risk.

What type of bonds? I like cor­po­rate bonds. Cor­po­rate bal­ance sheets are great and have been cleaned up tremen­dously since the reces­sion. The cur­rent cor­po­rate default rate is 2% and com­pa­nies that are BB or BBB rated that have an A rated bal­ance sheet make a lot of sense. There is no debate between stocks and bonds. Bonds are a con­trac­tual agree­ment to pay inter­est and repay prin­ci­pal over a spec­i­fied period of time.

Stocks are cur­rently priced for a 10% growth rate which makes bonds a safer invest­ment in the cur­rent envi­ron­ment which can­not deliver 10% rates of returns. We are no longer in the era of cap­i­tal appre­ci­a­tion and growth. The “baby boomers” are dri­ving the demand for income which will keep pres­sure on find­ing yield which in turn reduces buy­ing pres­sure on stocks. This is why even with the cur­rent stock mar­ket rally since the 2009 lows — equity funds have seen con­tin­ual out­flows. The “Cap­i­tal Preser­va­tion” crowd will con­tinue to grow rel­a­tive to the “Cap­i­tal Appre­ci­a­tion” crowd.

Invest­ment Stat­egy — Safety and Income at a Rea­son­able Price

1. Focus on Safe Yield — Cor­po­rate bonds
2. Equi­ties — Div­i­dend growth and yield, pre­ferred shares
3. Focus on com­pa­nies with low debt/equity ratios and high liq­uid asset ratios. The bal­ance sheet is more impor­tant than usual.
4. Hard assets that pro­vide an income stream — oil and gas roy­al­ties, REITS.
5. Focus on sec­tors or com­pa­nies with low fixed costs, high vari­able cost, high bar­ri­ers to entry, high level of demand inelas­tic­ity.
6. Alter­na­tive assets — that are not reliant on ris­ing equity mar­kets and where volatil­ity can be used to advan­tage.
7. Pre­cious Met­als — hedge against refla­tion­ary poli­cies aimed at defus­ing defla­tion­ary risks.

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Tags: Bob Farrell, Capital Appreciation, Capital Preservation, Chief Economist, Chip Names, David Rosenberg, Deflation, Distribution Curve, Economic Data, Economic Recovery, Eras, Excesses, Fixed Income, Gluskin Sheff, Investment Conference, Investment Strategist, Lance Roberts, Merrill Lynch, Midpoint, Point Bob, Streettalk
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David Rosenberg: The Student Loan Bubble, The 1937–38 Collapse, and The Big Picture

Tuesday, May 1st, 2012

Few have been as stead­fast in their cor­rect call that the US econ­omy sugar high of the first quar­ter was noth­ing but a liquidity-driven, hot weather-facilitated uptick in the econ­omy, which has now ended with a thud, as seen by the recent epic col­lapse in all high-frequency eco­nomic indi­ca­tors, which have not trans­lated into a mar­ket crash sim­ply because the mar­ket is absolutely con­vinced that the worse things get, the more likely the Fed is to come in with another round of nom­i­nal value dilu­tion. Per­haps: it is unclear if the Fed will risk a spike in infla­tion in Q2 espe­cially since as one of the respon­dents in today's Chicago PMI warned very pru­dently that Chi­nese infla­tion is about to hit Amer­ica in the next 60 days. That said, here are some of today's must read obser­va­tions on where we stand cur­rently, on why 1937–38 may be the next immi­nent cal­en­dar period déjà vu, and most impor­tantly, the fact that Rosie now too has real­ized that the next credit bub­ble is stu­dent debt as we have been warn­ing since last summer.

First, Rosie on the big picture:

An Account­ing Of The Macro Risks

We have been on the receiv­ing end of end­less analy­sis sug­gest­ing that dou­ble– dip reces­sion risks in the U.S. are either zero or com­pletely triv­ial. The pri­mary rea­sons given for this view are: the pos­i­tively sloped yield curve, neg­a­tive real short-term rates, no sign of inven­tory excess and no sign of a flat­ten­ing in the trend in the lead­ing indi­ca­tors (aside from the Eco­nomic Cycle Research Institute's weekly lead­ing index).

Not too long ago, we were sent one par­tic­u­lar Street report that began with a com­ment on how the analy­sis incor­po­rated data from the last eight reces­sions in the United States. But why are these eight reces­sions in the post-WWII era rel­e­vant? This past reces­sion was not just a blip or cor­rec­tion in GDP due to a man­u­fac­tur­ing inventory-led reces­sion, it was a trau­matic asset price defla­tion and credit con­trac­tion of his­toric proportions.

Take us at our word, if Ben Bernanke is wor­ried, it is not about what dri­ves a post-WWII cycle. He has the 1937–38 bru­tal down­turn in mind and this is actu­ally a much more appro­pri­ate tem­plate, notwith­stand­ing the changed struc­ture of the economy.

Head­ing into both the 1937–38 and the recent down­turn, there was no sign of inven­tory excess (prior to the '37-'38 reces­sion, inven­to­ries con­tributed 20% to the eco­nomic expan­sion; in 2009, it was over 60%). And, going into the 1937–38 melt­down in the econ­omy and the stock mar­ket, the U.S. yield curve was pos­i­tively sloped to the tune of 240bps. But why do so many cling to the "yield curve" in a credit cycle in any event?

Just as the flat­ten­ing yield curve and tight­en­ing Fed (the funds rate did rise 425bps) were no match for the par­a­bolic credit expan­sion from 2003 to 2007, it would seem fool­hardy to revert to the yield curve's steep­ness today as some bell­wether lead­ing indi­ca­tor when we are on the other (darker) side of the credit cycle. At best it gives the banks another way to gen­er­ate low-multiple trad­ing prof­its, and that's about it.

More­over, where were "real" short-term inter­est rates head­ing into the unex­pected 1937–38 col­lapse? How about minus 200bps? What was at play in that reces­sion was not inven­to­ries, the curve or real rates — it was the sud­den with­drawal of fis­cal sup­port after years of mas­sive New Deal stimulus.

Let's look at the sit­u­a­tion from a top-down view. Dur­ing this sta­tis­ti­cal recov­ery from the 2009 bot­tom, real U.S. GDP growth aver­aged 2.4% at an annual rate, and of that, 0.7 per­cent­age points came from inven­to­ries. Exclud­ing inven­to­ries, oth­er­wise known as "real final sales" aver­age annual real GDP growth was 1.7%, on aver­age — is the weak­est post-recession recov­ery on record. This despite a 10% deficit-to-GDP ratio, a gov­ern­ment debt-to-GDP ratio rapidly head­ing to 100%, a near zero Fed funds rate, record low mort­gage rates, an unprece­dented tripling in the size of the Fed bal­ance sheet, shift­ing account­ing rules to help reju­ve­nate profit growth in the finan­cial sec­tor, cheap and easy FHA financ­ing to vir­tu­ally any­one who wants to buy a home, relent­less gov­ern­ment pres­sure on banks to mod­ify defaulted loans and bailout stim­u­lus galore.

Well, what's past is past. Where are we going? It's pretty clear from the man­u­fac­tur­ing com­po­nents of the last pay­roll report and the lat­est ISM index that the inven­tory cycle is either reach­ing its peak or it already has.

We can see from the lat­est auto sales report and auto buy­ing plans in the con­fi­dence sur­veys that the bol­ster­ing eco­nomic impact from the revival in the motor vehi­cle sec­tor has run its course.

As for hous­ing, sales and mort­gage pur­chase appli­ca­tions are still lan­guish­ing despite mort­gage rates at record low lev­els and this also attests to the degree of exces­sive demand from the prior bub­ble that is still being worked off. More­over, com­mer­cial con­struc­tion is beset by high and still-rising vacancy rates in the office and shop­ping cen­tre space.

It would be nice to see an export boom but the over­seas economies, to vary­ing extents, are feel­ing the effects of last year's tight­en­ing in mon­e­tary pol­icy (emerg­ing Asia) or the cur­rent tight­en­ing in fis­cal pol­icy (sub­merg­ing Europe). And, although the U.S. con­sumer is not exactly rolling over, spend­ing fatigue seems to be set­ting in, along with a nat­ural rise in the per­sonal sav­ings rate.

Per­haps U.S. cap­i­tal spend­ing will be a lynch­pin, but at only 7% of GDP, it will con­tribute a hand­ful of basis points to head­line growth.

Then we come to the near-20% chunk of the U.S. econ­omy, the gov­ern­ment sec­tor. Two-thirds of that comes from the belea­guered state and local gov­ern­ment sec­tors, which are in a full-fledged retrench­ment mode as it cuts ser­vices, raises taxes, and lays off civil ser­vants to the tune of 10,000 month in and month out, to reverse the flow of red bud­getary ink.

After con­tribut­ing about one per­cent­age point annu­ally to OECD growth over the past three years, fis­cal pol­icy in the indus­tri­al­ized world is set to sub­tract the same amount in the com­ing year. In a world of small num­bers, that's pretty big.

In the U.S., the fis­cal with­drawal will be closer to four per­cent­age points of GDP next year, unless more cans are kicked down the road after the Novem­ber elec­tion. So, if the peak of inven­tory con­tri­bu­tion is behind us, and all we have left is a base­line growth trend in real final sales of less than 2%, then eco­nomic con­trac­tion next year becomes a very dis­tinct pos­si­bil­ity. Besides, for any pres­i­dent, new or incum­bent, it makes per­fect sense to get the bad news out of the way in year-one of the elec­tion cycle than year four.

How the Gluskin Sheff strate­gist makes sense of it all:

What we have on our hands right now is a recov­ery built of straw instead of bricks. An eco­nomic expan­sion and bull mar­ket built on ram­pant expan­sion of the Fed and Fed­eral gov­ern­ments' bal­ance sheet is nei­ther sus­tain­able nor desir­able. I am con­vinced that we will, before long, be replay­ing some­thing along the lines of the rever­sal of the tech mania and the rever­sal of the hous­ing mania, which were equally unsus­tain­able.

Most impor­tantly, Rosie's take on the stu­dent debt bubble.

The Next Credit Bubble

Could well be in stu­dent debt, where out­stand­ing loans surged $117 bil­lion last year to over $1 tril­lion. More than 80% of 18–24 year olds that have taken out col­lege loans still have a bal­ance and 30% have more than 20% owing. This over­hang has far-reaching impli­ca­tions beyond Sal­lie Mae's bal­ance sheet — it is also a rea­son why the young first-time home­buyer is notably absent from the real estate mar­ket and why this may well remain the case for some time to come as this key demand group works off the moun­tain of stu­dent debt before apply­ing for a mort­gage loan. For a sense of how this stu­dent loan saga is unfold­ing, also have a look at Try­ing to Shed Stu­dent Debt on page A3 of the week­end WSJ — as the delever­ag­ing cycle is about to take on an entirely new defla­tion­ary dimension.

The lack of demand from the tra­di­tional first-time home­buyer group (the U.S. real estate mar­ket is really get­ting most of its under­pin­nings from investors buy­ing up dis­tressed units to then rent out) is com­pound­ing the inven­tory over­hang that is, in turn, main­tain­ing down­ward pres­sure on home prices in the vast major­ity of markets.

Take a look at page A2 of today's WSJ (Hous­ing Ends Slide but Faces a Long Bot­tom): banks still own 450,000 fore­closed prop­er­ties, there are another 2 mil­lion units right now in the fore­clo­sure process and there are an addi­tional 1.7 mil­lion homes in some form of delin­quency. This means total sup­ply (actual and poten­tial) of over 4 mil­lion units and that does not include the near-record 3.6 mil­lion vacant units being held off the mar­ket for "unspec­i­fied rea­sons". This means a total vacancy rate in the owner-occupied sec­tor of between 5% and 10% which is huge excess sup­ply and likely a dead-weight drag on hous­ing val­ues for some to come, even if demand does man­age to soon out­strip depleted rates of new construction.

Source: Gluskin Sheff

Tags: Asset Price, Blip, Calendar Period, Chicago Pmi, Credit Bubble, David Rosenberg, Deflation, Double Dip Recession, Economic Cycle Research Institute, Economic Indicators, Endless Analysis, Hot Weather, Leading Indicators, Market Crash, Nominal Value, Recessions, Student Debt, Thud, Uptick, Yield Curve
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Rosenberg Roasts Roundtable of Groupthink

Monday, April 23rd, 2012

It appears that when it comes to mock­ing con­sen­sus group­think ema­nat­ing from lazy career 'financiers' who seek pro­tec­tion from their lack of imag­i­na­tion and orig­i­nal thought, 'cre­ation' of neg­a­tive alpha and gen­eral under­per­for­mance (not to men­tion reliance on rat­ing agen­cies, only to jump at the first oppor­tu­nity to demo­nize the clue­less raters), in the sheer herds of other D-grade asset "man­agers" (for much more read Jeremy Grantham explain­ing this and much more here), David Rosen­berg enjoys even more lin­guis­tic flex­i­bil­ity than even us. Case in point, his just released trash­ing of the lat­est Barron's per­mab­ull group­think effort titled "Out­look: Mostly Sunny." And just as it so often hap­pens, no sooner did those words hit the cover of that par­tic­u­lar rag, that it started rain­ing, gen­er­ously pro­vid­ing mate­r­ial for the lat­est "Roast­ing with Rosie."

From Gluskin Sheff:

Con­sen­sus Cre­ates A Con­trary Call

When the experts and fore­casts agree, some­thing else is going to hap­pen."
~ Bob Farrell's invest­ment rule #9.

Did the folks at Barron's inten­tion­ally lob a ball right into my wheel­house? The front cover says it all — Out­look: Mostly Sunny. Check it out. Any perma-bull out there right now should be trem­bling by the front cover effect. This is no dif­fer­ent than the fabled Death of Equi­ties in the 1979 Busi­ness­week, the Econ­o­mist front cover call­ing for oil prices to basi­cally head towards zero circa 1998, and the front cover of Barron's a decade ago say­ing That's All, Folks when it came to inter­est rates sup­pos­edly bot­tom­ing out. Come to think of it, Barron's ran with Dow 15,000 on its front cover back on Feb­ru­ary 13, 2012, and last we saw, at the nearby peak in early April, the blue-chip index closed 1,700 points below that thresh­old (and has been roughly flat since the date of that article).

What Barron's is refer­ring to here is the lat­est Big Money poll that it con­ducts semi-annually. The actual title of the arti­cle (on page 25) is Rea­son to Cheer. Rea­son to cheer? About what? Mar­gins being squeezed? Profit growth prac­ti­cally evap­o­rat­ing? Earn­ings down­grades still sig­nif­i­cantly out­pac­ing upgrades? The recov­ery so excru­ci­at­ingly slow that senior mem­bers of the Fed are con­tem­plat­ing QE3? Insol­vency of Span­ish banks? Hard land­ing risks in China? The 2013 fis­cal cliff? The fact that over 60% of the data in the past two months have sur­prised to the downside?

The results of the Big Money Poll were startling:

- 55% of the port­fo­lio man­agers are either bull­ish or very bull­ish. Only 14% are bear­ish or very bear­ish.
– Finan­cials and tech­nol­ogy are the favourites, with 31% cit­ing both as being the top per­form­ers in the next six to 12 months.
– Favourite stock ... Apple (sur­prised?).
– Util­i­ties are seen as the worst per­former — by 30% of those polled.
– With respect to Trea­suries, 81% are bears, just 2% are bulls. How can yields rise in such a lop­sided envi­ron­ment? I mean, who is there left to sell? This is a clas­sic bull­ish con­trary sign­post.
– Bonds of all types are detested — 33% bear­ish on cor­po­rates while 14% are bull­ish; 35% are bear­ish on munis while only 12% are bull­ish.
– But ... 41% are bulls on real estate; only 10% bears are left.
– For gold, 39% bears and 30% are bulls. That is great— the one asset class that has been in a sec­u­lar bear mar­ket for 12 years is adored (equi­ties), and the two that have actu­ally made you money over this time span (the bond– bul­lion bar­bell) is to be avoided. Go figure!

The lat­est mar­ket posi­tion­ing by non-commercial accounts (proxy for what the hedge funds are doing) from the weekly Com­mit­ment of Traders report is also rather instruc­tive (futures and options con­tracts combined):

- 10-year T-note: Net spec­u­la­tive short posi­tion of 130,045 con­tracts on the CBOT. As I said above, who is left to sell?
– DJIA index: Net long 13,285 con­tracts on the CBOT.
– EAFE stocks: Net short 440 con­tracts on the CME but this num­ber has been com­ing down.
– EM stocks: Net short 4,787 con­tracts on the CME, also com­ing down of late as the shorts cover.
– Nikkei index: Net short 4,894 con­tracts and also on the descent.
– Cop­per: Net long 1,229 con­tracts.
– Energy: Net short 124,941 nat­ural gas con­tracts on the NYMEX: net long 288,393 WTI oil con­tracts. Patient investors know what to do.

- Gold: Net long posi­tion has been cut in half since last sum­mer to 146,833 con­tracts. The lat­est cor­rec­tive action has been healthy as the ear­lier froth is gone.
– Sil­ver: Ditto — the net spec­u­la­tive long posi­tion has been sliced 40% to 21,309 con­tracts.
– Euro: Net short 117,062 con­tracts on the CME (likely why the cur­rency won't go down ... the bears are already all in that trade!).
– Ster­ling: Net short 13,456 con­tracts (and is enjoy­ing a humdinger of a short– cov­er­ing rally of late).
– Yen: Net short 57,984 con­tracts (if the Japan­ese gov­ern­ment is telling you they want the cur­rency to depre­ci­ate, we should prob­a­bly take heed).
– Cana­dian dol­lar: Still has a net spec­u­la­tive long posi­tion of 37,873 con­tracts on the CME, which could hold back the gains.

It is viewed as a global dar­ling. But the Aussie dol­lar still com­mands a net spec­u­la­tive long posi­tion of 48,902 con­tracts and the Reserve Bank of Aus­tralia is about to cut rates while the Bank of Canada seems itchy to raise them as they did in 2010 — so there could be an oppor­tu­nity on the 'cross rate' here.

Tags: Asset Managers, Barron, Blue Chip Index, Bob Farrell, Businessweek, Case In Point, Consensus, David Rosenberg, Dow, Economist, Financiers, Gluskin Sheff, Groupthink, Herds, Money Poll, Oil Prices, Raters, Roasts, Rosie, Threshold, Wheelhouse
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Rosenberg: Déja 2011 All Over Again

Monday, April 16th, 2012

From the first day of 2012 we pre­dicted, and have done so until we were blue in the face, that 2012 would be a car­bon copy of 2011... and thus 2010. Unfor­tu­nately when set­ting the screen­play, the cen­tral plan­ners of the world really don't have that much imag­i­na­tion and recy­cling scripts is the best they can do. And while this fore­cast will not be glar­ingly obvi­ous until the debt ceil­ing fiasco is repeated at almost the same time in 2012 as it was in 2011, we are happy that more and more peo­ple are start­ing to, as quite often hap­pens, see things our way. We present David Rosen­berg who sum­ma­rizes why 2012 is Deja 2011 all over again.

From Gluskin Sheff

DÉJA VU

It is incred­i­ble how things are play­ing out so sim­i­larly to this time last year. We closed the books on 2010 at 1,257 on the S&P 500, then hit an interim high of 1,343 on Feb­ru­ary 18th of 2011 and then cor­rected to 1,256 on March 16th. We later had a nice bounce off that low to 1,363 on April 29th (a higher high). Who knew then that by Octo­ber 3rd, the index would roll all the way back to 1,099 and was in dire need yet again for more cen­tral bank intervention?

This time around, the S&P 500 kicked off the year at 1,257 to hit an interim high of 1,374 on March 1st. We then cor­rected down to 1,343 as of March 6th and then ral­lied our way back to 1,419 on April 2nd (again, a higher high). Only time will tell if the 1,419 close on April 2nd proves to be the peak for the year as the 1,363 high as back on April 29th of last year.

In fact, the exact same pat­tern occurred in 2010. Out of the gates, the S&P 500 shot up from 1,115 to a brief peak of 1,150 by Jan­u­ary 19th. After a brief cor­rec­tion (as we had in early March of this year) to 1,056 by Feb­ru­ary 8th, the mar­ket soared to 1,217 by April 23rd — lit­er­ally, a straight line up —just as we saw hap­pen­ing two weeks ago. Again, who knew then that we would be at 1,047 by August 26th? Once again, it took aggres­sive action by the Fed to revive the bull. This is an incred­i­ble sea­sonal pat­tern. It works for bonds too. Has any­one rec­og­nized how the yield on the 10-year T-note surged in the winter-spring of 2008, 2009, 2010 and 2011? In each of the past three years, 4% was either pierced, tested or approached. These were the peaks of the year each time. This time, the sea­sonal high was 2.4%. Are you kid­ding me? Our pal Gary Shilling may well be onto some­thing when he says the ulti­mate low may be some­where close to 1.5%.

To some extent, the bounce we are see­ing reflects how deeply over­sold the mar­ket was with the Dow los­ing 550 points over a five-day span. The AAII sen­ti­ment poll showed the bull camp shrink­ing 10 points in the past week to 28.1% and the bear share expand­ing 13.8 points to 41.6% so quite the shift here. It does not take much at all in these nerve-racking times to get investors to switch their views on a dime. So much of the move has been tech­ni­cal. Sen­ti­ment per­haps in some cases washed out — very quickly. It is still too early in the earn­ings report­ing sea­son to make a call here on the fun­da­men­tals — Alcoa is not the canary in the coalmine for the over­all econ­omy. And the eco­nomic data are still broadly mixed. Much of this rally actu­ally is based on quite a bit of fluff like renewed expec­ta­tions that the Fed is actu­ally going to embark on more stim­u­lus after all, fol­low­ing com­ments yes­ter­day from two senior Fed officials:

Based on such analy­sis, I con­sider a highly accom­moda­tive pol­icy stance to be appro­pri­ate in present cir­cum­stances. But con­sid­er­able uncer­tainty sur­rounds the out­look, and I remain pre­pared to adjust my pol­icy views in response to incom­ing infor­ma­tion. In par­tic­u­lar, fur­ther eas­ing actions could be war­ranted if the recov­ery pro­ceeds at a slower-than-expected pace, while a sig­nif­i­cant accel­er­a­tion in the pace of recov­ery could call for an ear­lier begin­ning to the process of pol­icy firm­ing than the FOMC cur­rently anticipates.

Vice Chair Janet L. Yellen, The Eco­nomic Out­look and Mon­e­tary Policy

Remarks at the Money Mar­ke­teers of New York University

Also, we can­not lose sight of the fact that the econ­omy still faces sig­nif­i­cant head­winds and that there are some mean­ing­ful down­side risks. In the head­winds depart­ment, I would include the run-up in gaso­line prices men­tioned ear­lier because that will sap pur­chas­ing power, the con­tin­ued Imped­i­ments to a strong recov­ery from ongo­ing weak­ness in the hous­ing sec­tor, and fis­cal drag at the fed­eral and state and local lev­els. In terms of down­side risks, these include the risk that growth abroad dis­ap­points and the risk of fur­ther dis­rup­tions to the sup­ply of oil and higher oil prices.

On the infla­tion front, the over­all rate of increase of con­sumer prices, as mea­sured by the 12-month change of the price index for per­sonal con­sump­tion expen­di­tures slowed to 2.3 per­cent in Feb­ru­ary from a recent peak of 2.9 per­cent last Sep­tem­ber. Even though the recent rise of gaso­line prices men­tioned above could inter­rupt this pat­tern, we expect this mod­er­a­tion of over­all infla­tion to resume later this year.

William C. Dud­ley, Pres­i­dent of the New York Fed­eral Reserve Bank

Remarks at the Cen­ter for Eco­nomic Devel­op­ment, Syra­cuse, New York

Beyond a brief jolt to investor risk appetite, it is debat­able as to what these rounds of Fed bal­ance sheet expan­sion really accom­plished in terms of help­ing the econ­omy out. Three years of near-0% pol­icy rates and a tripling in the size of the Fed's bal­ance sheet hasn't changed the fact that this goes down as the weak­est recov­ery ever — we've never gone this long with­out see­ing a quar­ter of 4% GDP growth or bet­ter — or that the econ­omy remains extremely fragile.

One thing seems sure. If the stock mar­ket were truly telling us any­thing mean­ing­ful about the eco­nomic out­look, then we wouldn't be hav­ing the yield on the 10-year T-note at 2.05% and barely budg­ing as the S&P 500 nudged even higher to close at the highs of the ses­sion in yesterday's impres­sive pos­i­tive price action.

Tags: Aggressive Action, Amp, Blue In The Face, Bounce, Carbon Copy, Central Bank Intervention, Central Planners, David Rosenberg, Debt Ceiling, Deja, Deja Vu, Dire Need, Fiasco, Gates, Imagination, Recycling, Screenplay, Scripts, Sheff, Straight Line
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David Rosenberg: Six Roadblocks For Stocks

Tuesday, April 10th, 2012

There is no free-lunch — espe­cially if that lunch is liquidity-fueled — is how Gluskin-Sheff's David Rosen­berg reminds us of the real­ity fac­ing US mar­kets this year and next. As (for­mer Fed gov­er­nor) Kevin Warsh noted in the WSJ "The 'fis­cal cliff' in early 2013 — when gov­ern­ment stim­u­lus spend­ing and tax relief are set to fall — is not mis­for­tune. It is the inevitable result of poli­cies that kick the can down the road." Between the jobs data and three months in a row of declin­ing ISM orders/inventories it seems the key man­u­fac­tur­ing sec­tor of sup­port for the econ­omy may be quak­ing and add to that the delever­ag­ing that is now recur­ring (con­sumer credit) and Rosen­berg sees six rather siz­able stumbling-blocks fac­ing mar­kets as we move for­ward.

CHALLENGES FOR THE MARKET

First, there is liq­uid­ity — this major cat­a­lyst for equi­ties since last Octo­ber looks set to sub­side with the Fed seem­ingly back­ing off from a QE expan­sion, at least over the near-term. And the ECB is back talk­ing about infla­tion so it doesn't even look like a rate cut is com­ing despite esca­lat­ing reces­sion pres­sures in Europe. It is now also highly doubt­ful that China will re-open the mon­e­tary taps fol­low­ing the dis­ap­point­ing March infla­tion data. The liq­uid lunch looks less likely.

Sec­ond, there is the U.S. econ­omy — not just the dis­ap­point­ing jobs data on Fri­day but the real­ity that 70% of the releases in the past month have come in below expec­ta­tions. While the chain stores did report what seemed on the sur­face to be a solid +3.9% YoY sales gain in March, keep in mind that yet again we had very mild weather and we also had an early Easter effect.

Third, there is the rapid slow­ing in cor­po­rate earn­ings (Alcoa kicks off the report­ing sea­son tomor­row). In Q4, we had the YoY trend in S&P 500 oper­at­ing earn­ings slip into single-digits (+9.2%) for the first time in two years, and absent Apple, the pace would have been 6.2% (see the front page of the Investor's Busi­ness Daily). Only 62% of com­pa­nies beat their esti­mates, which is far below aver­age. As for Q1, the con­sen­sus is all the way down to +3.2% on a YoY basis — well off the +5.5% expec­ta­tion at the turn of the year and the +12.8% fore­cast in the mid-part of 2011. Strip Apple out of the num­bers, and you are talk­ing about earn­ings growth of prac­ti­cally noth­ing— +1.8%.

Not only has earn­ings growth basi­cally evap­o­rated, but the ratio of neg­a­tive to pos­i­tive guid­ance has risen to lev­els we last saw two years ago, mar­gins are poised to shrink to a two-year low as well, and only three S&P 500 sec­tors are actu­ally seen rais­ing their earn­ings from year-ago lev­els. Now the ques­tion is whether or not the mar­ket can move up with earn­ings con­tract­ing and the answer is — of course! We have seen that in the past, as rare as it may be. Just go back to 1998, when the Asian melt­down and strong U.S. dol­lar severely pinched U.S. cor­po­rate earn­ings, yet the S&P 500 ral­lied more than 20% that year. But what else hap­pened? Well, we had the Fed cut rates three times as a super-strong anti­dote, and did so at a time when there was no evi­dent slack in the labor mar­ket. Plus, we were in the early stages of an internet-led pro­duc­tiv­ity spree, which under­pinned profit mar­gins. In addi­tion, we had a Demo­c­ra­tic pres­i­dent work­ing with Con­gress to pass leg­is­la­tion that reduced red tape, labour rigidi­ties and tax­a­tion — with no bud­get deficit! Please, tell me if we cur­rently have these as anti­dotes for a weak­en­ing trend in cor­po­rate profits.

Fourth, there is Europe mak­ing the head­lines again, and not in a pos­i­tive way. Spain is back on the radar screen with a very bad bond auc­tion last week serv­ing up as a ref­er­en­dum on the government's fis­cal plan — send­ing the 10– year yield back up close to 6%.

We have the two rounds of French elec­tions loom­ing (April 22nd and May 6th) and the new gov­ern­ment is going to have pre­cious lit­tle time or mar­gin of error with regard to deliv­er­ing a fis­cal pack­age that will pass the 'sniff test' for Mr. Mar­ket. It is very clear that, in Italy, Mario Monti's hon­ey­moon period is over as he vac­il­lates over parts of his eco­nomic reform pack­age. Finan­cial stress is high­lighted by the poor per­for­mance of the euro area banks (the group that got the cycli­cal bounce going last Novem­ber) as the group sagged 4.3% last week and is now trad­ing near three-month lows.

On the macro front, Ger­many had been an eco­nomic lynch­pin but no longer with indus­trial pro­duc­tion slid­ing 1.3% in Feb­ru­ary and a down­ward revi­sion to Jan­u­ary. U.K. fac­tory out­put also fell 1% — a big shock to a con­sen­sus look­ing for a 0.1% gain. Not just Europe, but the global econ­omy in gen­eral is cool­ing off. The HSBC dif­fu­sion sur­vey of China's ser­vice sec­tor slipped to 53.3 in March from 53.9 in Feb­ru­ary. Russia's econ­omy min­istry just shaved its 2012 growth fore­cast to 3.4% from 3.7%.

Fifth, there is the poor tech­ni­cal pic­ture. The large num­ber of dis­tri­b­u­tion days of late. The num­ber of stocks mak­ing fresh 52-week highs is on the decline. At last week's highs in the major aver­ages, diver­gences were pop­ping up every­where. One par­tic­u­lar glar­ing anom­aly was the surge in global equi­ties in Q1 and the sharp rise in gov­ern­ment bond yields at a time when the CRB index fal­tered — if the first two asset classes were actu­ally pre­scient in the view of global refla­tion, wouldn't it have shown up in basic mate­r­ial prices given their inher­ent cycli­cal sensitivities?

Sixth, val­u­a­tion sup­port is less of a pos­i­tive than it was six months ago. The cyclically-adjusted P/E at 22x for the S&P 500 is nearly 40% higher than the long-run aver­age of 16x. The for­ward P/E ratio at over 13x now is about in line with the his­tor­i­cal norm. Some nifty analy­sis cited on page B6 of the week­end WSJ (Why Stocks Look Too Pricey) found that when real rates are neg­a­tive, as they are today, they tend to rep­re­sent peri­ods of eco­nomic tur­moil and as such, the typ­i­cal P/E mul­ti­ple dur­ing these times is 11x — ver­sus today's trail­ing mul­ti­ple of 14x. On this basis, the mar­ket as a whole (keep­ing in mind that we don't buy the mar­ket, just the slices of it that we strongly believe are under­val­ued) is over­priced by more than 20%.

Tags: Alcoa, Corporate Earnings, David Rosenberg, ECB, Fed Governor, Gluskin Sheff, Inevitable Result, Inflation Data, Kevin Warsh, Liquid Lunch, Manufacturing Sector, Mild Weather, Qe, Reporting Season, Roadblocks, S David, Season Tomorrow, Solid 3, There Is No Free Lunch, Wsj
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AdvisorAnalyst.com's Top 20 Stories for March-April 2012

Friday, April 6th, 2012

Here are this month's Top 20 Sto­ries accord­ing to you:

1. Inter­est Rates: The Mar­ket Has it All Wrong (Jakobsen)

2. James Paulsen: Does Gold Still Glitter

3. Sprott: Invest­ment Out­look (April 2012)

4. Jef­frey Saut: How to Posi­tion Port­fo­lios for 2012

5. Twelve Steps to Mak­ing Your Busi­ness Fun Again

6. "This Time its Dif­fer­ent?" — David Rosen­berg Explains the Melt Up and the Latent Risks

7. Ray Dalio: Ugly = Beau­ti­ful / Beau­ti­ful = Ugly

8. Defin­ing Risk: War­ren Buffett's Three Kind of Investments

9. Why War­ren Buf­fett is Wrong About Gold (Koesterich)

10. Bill Gross: Invest­ment Out­look (April 2012)

11. A Sim­ple Method to Improve Your Client's Invest­ment Performance

12. A False Sense of Secu­rity (Hussman)

13. David Rosen­berg: The Record Quarter

14. John Huss­man: Invest­ment Out­look (March 19, 2012)

15. A Warn­ing From War­ren Buffett's Top Eco­nomic Indicator

16. Doug Kass Says The Mar­ket is Now Overvalued

17. ECRI: Why Our Reces­sion Call Stands

18. Are Record ECB Mar­gin Calls Impair­ing Gold

19. Fig­ur­ing Out ECRI's Reces­sion Call

20. Shift­ing Winds, Tur­bu­lence Ahead (Sonders)

Tags: David Rosenberg, Doug Kass, Economic Indicator, Ecri, False Sense Of Security, Glitter, Gold, Gross Investment, Investment Outlook, Investment Performance, Jakobsen, John Hussman, Latent Risks, March 19, Ray Dalio, Recession, Record Quarter, Sense Of Security, Sprott, Twelve Steps, Warren Buffett
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David Rosenberg: The Record Quarter

Tuesday, April 3rd, 2012

from David Rosen­berg, Gluskin Sheff

What a quar­ter! The Dow up 8% and enjoy­ing a record quar­ter in terms of points — 994 of them to be exact and in per­cent terms, now just 7% off attain­ing a new all-time high. The S&P 500 surged 12% (and 3.1% for March; 28% from the Octo­ber 2011 lows), which was the best per­for­mance since 1998. It seems so strange to draw com­par­isons to 1998, which was the infancy of the Inter­net rev­o­lu­tion; a period of fis­cal sta­bil­ity, 5% risk-free rates, sus­tained 4% real growth in the econ­omy, strong hous­ing mar­kets, polit­i­cal sta­bil­ity, sub-5% unem­ploy­ment, a sta­ble and pre­dictable cen­tral bank.

And look at the com­po­si­tion of the rally. Apple soared 48% and accounted for nearly 20% of the appre­ci­a­tion in the S&P 500 (it now makes up 3% of the 200 largest hedge fund port­fo­lios — three times as much as any other name; 4% of the S&P 500 mar­ket cap; and 11% of the Nas­daq). Not since Microsoft in 1999 was one stock this dom­i­nant, though the val­u­a­tions are not com­pa­ra­ble (MSFT then was trad­ing with a 70x P/E multiple).

But out­side of Apple, what led the rally were the low-quality names that got so beat up last year, such as Bank of Amer­ica bounc­ing 72% (it was the Dow's worst per­former in 2011; finan­cials in aggre­gate rose 22%). Sears Hold­ings have sky­rock­eted 108% this year even though the com­pany doesn't expect to make money this year or next.

What does that tell you? What it says is that this bull run was really more about pric­ing out a pos­si­ble finan­cial dis­as­ter com­ing out of Europe than any­thing that could really be described as pos­i­tive on the global macro­eco­nomic front. Low– qual­ity stocks in the S&P 500 out­per­formed high-quality stocks in Q1 by 500 basis points and high-beta stocks within the Rus­sell 1000 out­per­formed low– beta by 900bps. On a global scale, what has been a poorer place to put cap­i­tal to work than Japan? And yet the Nikkei posted a rip­ping 19% advance in Q1, the best start to any year since the pre-bubble-burst times of 1988. Emerg­ing mar­kets are up 13% year-to-date. Greece ral­lied 7% in Q1 — that also tells you some­thing about this rally. It's called a dead-cat bounce. Mean­while, the stodgy sec­tors that worked so well last year are bid­ing their time — util­i­ties so far in 2012 are down 3%, tele­com is flat, and sta­ples are up a mere 5%.

Most investors can dig back to 2000 if they really try. It was not uncom­mon for typ­i­cally risk-averse investors such as retirees to be insis­tent that at least half of their port­fo­lios con­sisted of Microsoft, Intel, Cisco and Dell. Each of these stocks had gone par­a­bolic and none of them paid div­i­dends, which was a good thing because that left them with all those earn­ings to plow back into the busi­ness. If you needed to buy gro­ceries, you could just sell a few shares for cash flow.

My how things have changed. Today, "div­i­dend pay­ing stocks" are all the focus of atten­tion — not to men­tion fund flows. Indeed, what is still so fas­ci­nat­ing is how the pri­vate client sec­tor sim­ply refuses to drink from the Fed liq­uid­ity spiked punch bowl, hav­ing been burnt by two cen­tral bank-induced bub­bles sep­a­rated less than a decade apart. Investors con­tinue to use stock price appre­ci­a­tion as an oppor­tu­nity to rebal­ance and diver­sify rather than chase per­for­mance — pulling $15.6 bil­lion from U.S. equity mutual funds so far this year while tax­able bond funds have seen net inflows amount­ing to $59 billion.

The lack of any real sig­nif­i­cant back-up in bond yields sug­gests that the asset allo­ca­tors have been idle as well.

It would then seem as though this is a mar­ket being dri­ven by traders. Then again, it has been a very trad­able rally, just as the post-QE1 and post-QE2 jumps were. Ditto for the cur­rent post-LTRO rally. But liq­uid­ity is not an anti­dote for fun­da­men­tals. And a mar­ket that lacks breadth, par­tic­i­pa­tion and vol­ume is not gen­er­ally one you can rely on for sus­tained strength, notwith­stand­ing the ter­rific first quar­ter that risky assets deliv­ered. We lived through this exactly a year ago.

Mean­while, we have real estate defla­tion rear­ing its ugly head in China, a spread­ing Euro­pean reces­sion (for all the talk of Ger­man resilience, retail sales vol­umes sank 1.1% in Feb­ru­ary and have con­tracted now in four of the past five months), acute debt prob­lems in Por­tu­gal and Spain (there is already talk in Greece about the need for a third bailout), and the U.S. data have been com­ing out rather mixed (it should have enjoyed a much big­ger bounce than it did in recent months from the extremely warm weather — it was the fourth warmest win­ter since 1896; 15% warmer than usual.

In Chicago, it was the warmest March ever and sec­ond balmi­est March on record in New York City. For the lat­ter, it was 9 degrees above nor­mal and would have lined up in the top 10 for any April!). That the employ­ment, hous­ing and spend­ing data weren't even stronger than what they showed — likely lit­tle bet­ter than a 2% pace for Q1 real GDP — is the real story beneath the story. The fact that the 10-year note yield stopped at 2.4% and has since ral­lied 20 basis points instead of mak­ing the expected tech­ni­cal chal­lenge of 2.65% sug­gests that the bond mar­ket crowd may be fig­ur­ing out what this means for the Q2 land­scape as the weather skew to the data subsides.

U.S. DATA ON SHAKY GROUND
Yes, yes, U.S. per­sonal spend­ing jumped an above-expected 0.8% in Feb­ru­ary, above the 0.6% increase that was gen­er­ally expected and the largest monthly gain since August 2009 when the shoots were green. But if truth be told, this as we would say in mar­ket par­lance, was a "low mul­ti­ple" increase. The rea­son? Per­sonal incomes were soft and that is what counts most — income fun­da­men­tals remain dis­mal. Not only did income come in soft at +0.2% (half what was expected) but not even enough to cover the cost of liv­ing, but Jan­u­ary and Feb­ru­ary were both revised lower. Real dis­pos­able income also declined 0.1% — the third decrease in the past four months and on a per capita basis is down 0.4% YoY, a far cry from the +2% trend of a year ago. The econ­omy is build­ing momen­tum. Right.

Let's just say that had the sav­ings rate stayed the same in Feb­ru­ary, nom­i­nal con­sumer spend­ing growth would have come in at a puny +0.2% and guess what? Real PCE would have been –0.1%. Thanks for com­ing out. As we said, a "low qual­ity" spend­ing per­for­mance, absent the income fun­da­men­tals, there is no sustainability.

Then we got yet another spotty regional man­u­fac­tur­ing index in the form of the Chicago PMI (the national fig­ure comes out today). It came in below expec­ta­tions at 62.2 for March (con­sen­sus was 63.0) — a 1.8 point drop from the pre­vi­ous month, and the third decline in the past four months. New orders slid from 69.2 to 63.3 — the largest one month drop since last May and the low­est level since Octo­ber (this is now the fifth man­u­fac­tur­ing sur­vey to show a drop in new orders). If not for the inven­to­ries, which jumped from 49.6 to 57.4 — the sharpest run-up since Decem­ber 2010 and the high­est lev­els since last Sep­tem­ber — the head­line decline would have been much worse. And in a sign­post of how cor­po­rate exec­u­tives (or the Human Resource depart­ments in any event) are respond­ing to neg­a­tive pro­duc­tiv­ity growth, the employ­ment index dropped from 64.2 to 56.3— largest drop since April 2008 and it has fallen in two of the past three months.

Then we got the Uni­ver­sity of Michi­gan con­sumer sen­ti­ment index which was revised higher for March to 76.2 from 74.3 in the pre­lim­i­nary read­ing — this the high­est level since Feb­ru­ary 2011. What was inter­est­ing were the details beneath the sur­face, such as auto buy­ing plans being revised down from 123 to 122 — first decline in three months; and buy­ing con­di­tions for large house­hold items being revised lower from 127 to 125— a four-month low.

Finally, the best Canada could muster up was a 0.1% gain in real GDP for Jan­u­ary. At least it was pos­i­tive — but barely. It reveals an econ­omy that right now is uneven and sput­ter­ing. It's a good thing there was a solid hand­off from the tail-end of Q4, as that is what is keep­ing Q1 GDP esti­mates close to a 2% annual rate. If there is a piece of infor­ma­tion that Cana­dian dol­lar bulls can put in their back pocket it is that man­u­fac­tur­ing out­put, even with the loonie at par, man­aged to post a solid 0.7% advance — fac­tory out­put up now for five months run­ning. Now that is impressive.

Copy­right © Gluskin Sheff

Tags: Bank Of America, Basis Points, Bull Run, Canadian, Canadian Market, China, David Rosenberg, Financial Disaster, Fiscal Stability, Fund Portfolios, Global Scale, Gluskin Sheff, Hedge Fund, Internet Revolution, Low Quality, Lows, Msft, Nasdaq, Political Stability, Quality Names, Quality Stocks, Record Quarter, Sears Holdings
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Rosenberg, Lee Debate Outlook for U.S. Stocks

Monday, March 26th, 2012

Thomas Lee, chief U.S. equity strate­gist of JPMor­gan Chase, and David Rosen­berg, chief econ­o­mist and strate­gist of Gluskin Sheff & Asso­ciates, talk about the out­look for U.S. stocks and their invest­ment strategies. 

Source: Bloomberg, March 23, 2012

Tags: Chief Economist, David Rosenberg, Debate, Gluskin Sheff, Investment Strategies, Jpmorgan Chase, Outlook, Stocks, Strategist, Thomas Lee
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David Rosenberg: The Truth On Sideline Cash

Wednesday, March 21st, 2012

The money-on-the-sidelines argu­ment has reached deaf­en­ing and self-confirming as anchor­ing bias among any and every swollen long-only man­ager seems to have made them ignore the real­i­ties of the sit­u­a­tion. David Rosen­berg, of Gluskin Sheff to the res­cue with good old fash­ioned facts — as much as they might dis­ap­point the audi­ence. Bar­ton Biggs quote in the USA Today arti­cle points out how bull­ish he is and how cash lev­els are very high and "idled money is ready to be put to work". How­ever, as Rosie points out equity fund cash ratios are at a de min­imus 3.6%, the same level as in the fall of 2007 and near its low­est level ever. The time when cash was heavy and 'ample' was at the mar­ket lows in 2009 when the ratio was very close to 6%. Bond fund man­agers, it should be noted this includes the exu­ber­ant HY funds, are now sit­ting on less than 2% cash so if retail inflows con­tinue to sub­side as they did this week, buy­ing power could weaken over the near-term. What David points out that is more inter­est­ing per­haps is the con­verse of most people's con­trar­ian dumb money per­spec­tive — the house­hold sec­tor appears to have used the rally of the past three years, for the most part, to diver­sify out of the equity mar­ket (get­ting out at price lev­els they could only dream of see­ing again). As we have pointed out again and again, the retail investor has been a net redeemer in equity funds for nine-months run­ning and has been rebal­anc­ing since the March 2009 lows in a clearly demo­graphic shift towards income strate­gies as the mem­ory of two burst­ing bub­bles within seven years is seared into most pri­vate investors' minds.

Tags: Article Points, Bond Fund, Bursting Bubbles, David Rosenberg, Demographic Shift, Dumb Money, Equity Fund, Equity Funds, Fund Managers, Household Sector, Hy, Income Strategies, Lows, Private Investors, Redeemer, Retail Investor, Sheff, Sideline, Sidelines, Usa Today
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"This Time It's Different?" — David Rosenberg Explains The Melt Up And The Latent Risks

Monday, March 19th, 2012

The mar­ket is rip­ping. That much is obvi­ous. What some may have for­got­ten how­ever, is that it ripped in the begin­ning of 2011... and in the begin­ning of 2010: in other words, what we are get­ting is not just déjà vu (all on the back of mas­sive cen­tral bank inter­ven­tion time after time), but dou­ble déjà vu. The end results, how­ever, by year end in both those cases was less than spec­tac­u­lar. In fact, in an attempt to con­vince read­ers that this time it is dif­fer­ent, Reuters came out yes­ter­day with an arti­cle titled, you guessed it, "This Time It's Dif­fer­ent" which con­tains the fol­low­ing ver­biage: "bursts of opti­mism have sown false hope before... Today there is a cau­tious hope that per­haps this time it's dif­fer­ent." (this arti­cle was penned by the inhouse spin mas­ter, Stella Daw­son, who had a rather promi­nent appear­ance here.) So the tril­lions in excess elec­tronic liq­uid­ity pro­vided by every­one but the Fed (con­strained in an elec­tion year) is dif­fer­ent than the liq­uid­ity pro­vided by the Fed? Got it. Of course, there are those who will bite, and buy the pro­pa­ganda, and stocks. For every­one else, here is a run­down from David Rosen­berg explain­ing why stocks con­tinue to move near-vertically higher, and what the latent risks con­tinue to be.

UP, UP AND AWAY!

It has been quite a move up in the U.S. equity mar­kets. The S&P 500 just com­pleted its fifth straight week of gains, the longest streak of the year. From the clos­ing low of last Octo­ber 3rd, the index has ral­lied a breath­tak­ing 28%. So far in 2012, the Dow is up 8%, the S&P 500 is up 12% and the Nas­daq is up 17%. Breath­tak­ing to say the least.

What accounts for all this optimism:

• The Euro­pean LTRO pro­gram has oblit­er­ated finan­cial tail risks in the region.
• The suc­cess­ful sec­ond bailout of Greece.
• Chi­nese infla­tion down to 3.2% has fuelled hopes of mon­e­tary ease.
• Per­cep­tions that that the U.S. econ­omy is reac­cel­er­at­ing — all the Fed had to do was change "mod­est" to "mod­er­ate" (plus the ECRI lead­ing index has improved to a seven-month high).
• Ten­ta­tive signs that the sec­u­lar head­winds are sub­sid­ing — hous­ing, credit, employ­ment, local gov­ern­ment fis­cal restraint.
• Oil prices sta­bi­liz­ing with a calm emerg­ing with respect to Iran.
• Tech­ni­cally, the mar­ket is mak­ing higher highs and higher lows — a con­firmed uptrend.
• Global earn­ings esti­mates are no longer going down.
• Finan­cial con­di­tions are eas­ing with cor­po­rate bond spreads nar­row­ing sharply.
• The suc­cess evi­dent in the Fed's lat­est bank­ing sec­tor stress tests — bank
• stocks advanced 9% last week.
• The snap­back after the early-March triple-digit decline in the Dow — the first of the year has embold­ened the 'buy the dip' psychology.

What are the risks?

That we wake up some time in the sec­ond quar­ter and dis­cover that the econ­omy may well have con­tracted if not for the extremely warm weather we had in the open­ing months of the year, which pro­vided a huge, if not unprece­dented, skew to the data (see Weather Alert: Why the Sun Could Be Bad for Risky Assets on page 14 of the week­end FT).

Remem­ber —Jan­u­ary and Feb­ru­ary were both 5 degrees warmer than usual. For months usu­ally beset by win­ter weather, the sea­sonal fac­tors attempt to cor­rect for this by boost­ing the raw data, which at that time of year are about the low­est given that many folks are snow­bound. If not for the sea­sonal adjust­ment process, we would only be able to com­pare the data on a year-to-year basis because there is no apples-to-apples com­par­i­son between eco­nomic activ­ity in Jan­u­ary and what you would typ­i­cally see in May. So in Jan­u­ary and Feb­ru­ary in par­tic­u­lar, the raw non­sea­son­ally adjusted basis get a "bell curve" like we would in school in a tough mid-term exam. The prob­lem this time is that Jan­u­ary and Feb­ru­ary were down­right balmy. This wreaked havoc on all the data, espe­cially hous­ing, employ­ment and spending.

We esti­mate that over 40% of the job gains were weather-related, tak­ing both months into account. We also know that pro­duc­tiv­ity is con­tract­ing and 100% of the time in the past decade, com­pa­nies responded by curb­ing their hir­ing. So tak­ing the weather effect into account and the rever­sal this will have in com­ing months with respect to the data impact, com­bined with the likely cooling-off in hir­ing plans already evi­dent in many sur­veys, and we could well see the non­farm pay­roll num­bers get cut in half and come in closer to 100k than 200k as we move into the spring and sum­mer months.

This is not a dis­as­ter story at all, but recall that it was this sort of slug­gish back­drop that brought at least a tem­po­rary end to the equity mar­ket rally last year and forced the Fed into more inter­ven­tion in sup­port of the bond mar­ket. Don't write off QE3 just yet. On top of all that, we do expect to see the trade deficit con­tinue to widen as the Euro­pean reces­sion and Asian slow­down hit the U.S. shores, and con­trac­tion in net exports is going to very likely emerge as a big head­wind for the GDP data in the next few quar­ters. In fact, it is only now starting.

And by the time it sub­sides later this year, house­holds and busi­nesses will be prepar­ing for next year's mas­sive tax grab. If logic pre­vails, this prepa­ra­tion is prob­a­bly going to include a move to boost sav­ings and raise liq­uid­ity (osten­si­bly at the expense of spend­ing growth — expect the retail­ers to head into the 2012 hol­i­day sea­son lean and mean).

The weather also had a direct impact on spend­ing by releas­ing more than $30 bil­lion in recent months in terms of house­hold cash flow from a rad­i­cally lower util­ity bill. Absent that de facto tax cut', and retail sales would have stag­nated over the past three months as opposed to ris­ing at what appears to be a healthy 8% annual rate. This will sub­side now and we have not yet seen the full brunt of $4 gaso­line either — many a com­men­ta­tor has stated that the con­sumer sec­tor is less vul­ner­a­ble now and there is less of a "shock fac­tor" this time around. We shall see about that.

As it stands, nom­i­nal spend­ing at the pumps is at its low­est level since last June — we have not seen the drain­ing impact on house­hold cash flows yet. But we did see the impact on Uni­ver­sity of Michi­gan con­sumer sen­ti­ment, which sur­prised to the down­side in a month that saw the Nas­daq head to 12-year highs and employ­ment rip by more than 200k — going from 75.3 on sen­ti­ment to 74.3 is largely explained from the rise in gaso­line prices.

The IBD/TIPP eco­nomic opti­mism index also slumped to 47.5 in March from the one-year high of 49.4 in Feb­ru­ary. The com­po­nents of the recently released March sur­vey data from NY Fed Empire and Philly Fed looked on the soft side, espe­cially order books and pro­duc­tion plans. This has also shown up in a recent rever­sal in Pres­i­dent Obama's approval rat­ings — so the gaso­line impact, with a lag, is only now start­ing to rear its ugly head.

Keep in mind that even with WTI con­sol­i­dat­ing, the prices that con­sumers pay at the pump are on a steady march higher — up 31 cents in the past month to an aver­age of $3.82 a gal­lon (nation­wide) — but already nearly one-third of Amer­i­cans are pay­ing $4 or higher. What does this then do to the GDP price defla­tor and hence to real growth — well, just have a look and see what hap­pened in the first quar­ter of 2011. It's called stall speed, not escape velocity.

It is unclear just how sta­ble things are in Europe. The ECB has papered over the prob­lems for now but has jeop­ar­dized the sanc­tity of its bal­ance sheet at the same time. The U.K. is seem­ingly on the precipice of los­ing its AAA rat­ing sta­tus. Then we have Asia. India in a full-blown eco­nomic down­turn and its bank­ing sys­tem is in dis­ar­ray. And the Chi­nese econ­omy is now slow­ing down at a pace we have not seen since the 2009 hard land­ing. As the U.S. mar­ket has been surg­ing, the MSCI China index sagged 2.7% in March —not a con­struc­tive sign­post for the com­mod­ity com­plex. While this has caused the TSX index to lag the S&P 500, the Cana­dian dol­lar has man­aged to stay above par, in part because the rate-hike that is now being priced into the local bond mar­ket (Cana­dian 2-year note yields now offer a hefty 90 basis point pre­mium to the U.S. comparable).

Back to China for a minute — the country's A shares are down 3.3% in the past month while the H shares have gained 18%. The Chi­nese stock mar­ket now trades at a 9.9x for­ward mul­ti­ple, ver­sus a 15-year aver­age of 12x. So the mar­ket there is well val­ued and the A shares (those listed in China; the H shares trade in Hong Kong) may well be poised to play some catch-up here. Some­thing we have noticed and are def­i­nitely key­ing on.

As for the over­all mar­ket, our CIO, Bill Webb, likes what he sees in the form of the lin­ger­ing wide gap between the pre­vail­ing return on cap­i­tal and the cost of cap­i­tal. Screen­ing for GARP (Growth at a Rea­son­able Price) and yield remains in vogue. While we are involved in those slices of the mar­ket, the major aver­ages have man­aged to rally to lev­els above the year-end tar­gets the con­sen­sus estab­lished at the start of 2012 (of 1,355 on the S&P 500), as was the case this time last year. The S&P 500 has actu­ally risen as much in 2012 so far as it did at this stage in 1998 and when you con­sider how benev­o­lent 1998 was in terms of fis­cal, mon­e­tary and eco­nomic sta­bil­ity just three years after the advent of the Inter­net, how can any­one really com­pare the two years?

What we are see­ing unfold really is a liquidity-induced rally that is built on a lot of hope. Nei­ther were required in 1998 — the Fed kept a neu­tral pol­icy in place for most of that year and there was no need for hope; the growth in the econ­omy was organic and self-sustaining with­out unprece­dented gov­ern­ment assis­tance. Even then, we had a near-20% cor­rec­tion that sum­mer. Noth­ing moves in a straight line indef­i­nitely and while Bill and the invest­ment team have been tac­ti­cally bull­ish for most of this year, we are feel­ing the need to dial back the risk some­what near-term given the high lev­els of com­pla­cency and the fact that val­u­a­tion is less com­pelling than it was four-six months ago.

For exam­ple, the FT cites research show­ing that the S&P 500 is now two stan­dard devi­a­tions above its 50-day mov­ing aver­age, which is far beyond the norm of even an over­bought mar­ket and in the past this has proven to be a pretty good 'chill for now indi­ca­tor. Breadth has also dete­ri­o­rated of late as the mar­ket has scaled new highs, which is often a tech­ni­cal sign that an inter­me­di­ate top is at hand.

In the name of being 'tac­ti­cal' and 'nim­ble', which is crit­i­cal in today's rapid-fire volatile back­drop, get­ting a lit­tle more defen­sive here is not a bad idea at all. We also remain long-term bulls on gold and com­modi­ties, but with the U.S. dol­lar break­ing out and the Chi­nese data com­ing in softer than expected for the most part, we have taken on a less ebul­lient pos­ture for the time being and plan to get more involved at bet­ter pric­ing lev­els once this cor­rec­tive phase runs its course. The min­ing stocks have bro­ken below key sup­port lev­els here and over the near-term, the chart points are to be respected.

Also keep an eye on the bond mar­ket, which has become a bit unglued in recent weeks. Of course, this hap­pens at least four times a year so hic­cups like this are really par for the course. And as usual, we are hear­ing once again how we should all be pre­pared for the end of the sec­u­lar bull mar­ket in Trea­suries. These Wall Street reports come out at least once per year, the lat­est com­ing from UBS strate­gists. When will these peo­ple ever learn? In any event, it has been a rocky road as the 10-year note yield spiked 27 basis points last week to a five-month high of 2.3%. This is all part of the global risk-on trade because Ger­man bunds sold off just as much, and other assets that tend to do bet­ter in risk-off envi­ron­ments, such as gold, also suf­fered set­backs (the yel­low metal lost S50/oz over the week).

Bond yields are not yet at a level to upset the equity mar­ket apple cart, espe­cially with the yield on the banks improv­ing so much in one fell swoop. But if we approach 3% on the 10-year note then we could start to see the stock mar­ket pay some atten­tion — it's not so much the level, as the change, and at a time when gaso­line prices start to really pinch the con­sumer (dri­ving sea­son is right around the cor­ner), ris­ing bor­row­ing costs are not going to pro­vide a very con­struc­tive backdrop.

Tags: Bailout, Canadian, Canadian Market, Cautious Hope, Central Bank Intervention, David Rosenberg, Dawson, Deja Vu, Election Year, False Hope, Latent Risks, liquidity, Nasdaq, Optimism, Perceptions, Reuters, Rundown, Spin Master, Time After Time, Trillions, Verbiage, Year End
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Top Fifteen Stories of February/March According to You

Saturday, March 17th, 2012

AdvisorAnalyst.com's Top Fif­teen Sto­ries (Feb­ru­ary — March 2012) Accord­ing to You

David Rosen­berg: Let's Get Real — Risks are Loom­ing Big Time

A Warn­ing From War­ren Buffett's Top Eco­nomic Indicator

David Rosen­bert Presents the Six Pins That Can Pop the Com­pla­cency Bubble

David Rosen­berg: The Best Cur­rency May Be Phys­i­cal Gold

Jeremy Grantham: We're Eat­ing Our Grandchildren

Jef­frey Saut: How To Posi­tion Port­fo­lios in 2012

Jeremy Grantham's 10 Invest­ment Lessons

Thir­teen Qual­i­ties of North America's Top Advisors

GMO's Jeremy Grantham Q4 2011 Let­ter — The Longest Quar­terly Let­ter Ever

Twelve Steps to Mak­ing Your Busi­ness Fun Again

Bill Gross: Invest­ment Out­look (Feb­ru­ary 28, 2012)

Europe's Cash for Trash LTRO Scam and the Inden­tured Servi­tude of the Citizenry

Eric Sprott: Invest­ment Out­look (Feb­ru­ary 24, 2012)

Jeremy Siegel: 66% Chance of Dow 15,000 — 50% Chance of Dow 17,000 in the Next 2 years

Tags: Big Time, Bill Gross, Citizenry, Complacency, David Rosenberg, Economic Indicator, Eric Sprott, Grandchildren, Gross Investment, Indentured Servitude, Investment Lessons, Investment Outlook, Jeremy Grantham, Jeremy Siegel, physical gold, Portfolios, Quarterly Letter, Thirteen Qualities, Twelve Steps, Warren Buffett
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David Rosenberg: "The Best Currency May Be Physical Gold"

Sunday, March 4th, 2012

Stop us when this sounds familiar:

From David Rosen­berg of Gluskin Sheff

What a no-brainer to suck at the teat and go long some very trans­par­ent and liq­uid debt that matures in less than three years (how can there not be a rally in global risk assets when Europe's cen­tral bank pumps a com­bined $1.3 tril­lion into the finan­cial sys­tem? Not to men­tion a sec­ond bailout for Greece we were told a year ago there wouldn't be any!). This must be the safest carry trade ever, or at least that is the per­cep­tion (1% LTRO loan for a 5% Ital­ian bond or a 2% short-term note even ... back up the truck!). Put up a tiny bit of cap­i­tal and lever it up. It is incred­i­ble that we live in a world where the dif­fer­ence between going out of busi­ness as a bank and pros­per­ity lies with cheap money being accessed from the cen­tral bank bal­ance sheet.

At least LTRO1 was deal­ing with a pos­si­ble break­down of the sys­tem since the banks weren't lend­ing to each other. LTRO2 is clearly an overt pol­icy move from the tra­di­tional cen­tral bank role of being the lender of last resort (which even LTRO1 was to a point) to being the lender of first call, as Peter Tchir aptly puts it. There is no such thing as a free lunch, but there is such a thing as the law of unin­tended con­se­quences. I can't say I know for sure what they will be or when they will show up, but there are going to be reper­cus­sions from a cen­tral bank mor­ph­ing from a bona fide lender of last resort to a gift-giving institution.

Some­how a long gold, short euro bar­bell looks really good here. Bernanke, after all, now seems reluc­tant to embark on QE3 bar­ring a renewed eco­nomic turn­down while the ECB is mov­ing fur­ther away from the role of a tra­di­tional cen­tral bank to take on the role of quasi fis­cal pol­i­cy­mak­ing, The Ger­man cen­tral bank, after all, is respon­si­ble for 25% of any losses that would ever be incurred by the mas­sive Draghi bal­ance sheet expan­sion. Why would any­one want to be long a cur­rency rep­re­sent­ing a region with a 10.7% unem­ploy­ment rate, ris­ing infla­tion rates and free money? Mind you — the same can be said for the US (where U-6 job­less rate is even higher), which is why the best cur­rency may be phys­i­cal gold (or the pro­duc­ers that trade very inex­pen­sively here and you pickup some leverage).

Short and sweet.

Tags: Bailout, Bank Balance, Barbell, Brainer, Carry Trade, Cheap Money, David Rosenberg, Draghi, Free Lunch, German Central Bank, Gluskin Sheff, Going Out Of Business, Law Of Unintended Consequences, Lender Of Last Resort, Less Than Three Years, Morphing, physical gold, Policymaking, S Central, Teat, Turndown
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David Rosenberg: "It's a Gas, Gas, Gas!"

Monday, February 27th, 2012

Once again, if one wants to get noth­ing but schiz­o­phrenic noise from sev­eral momen­tum chas­ing vac­uum tubes which very way may take the mar­ket to all time highs on 1 ES con­tract churned back and forth, by all means focus on the "mar­ket" which for the past three years is merely a pol­icy vehi­cle of the monetary-fiscal fusion régime (thank you Plosser for con­firm­ing what we have been say­ing for years). For every­one else, here is the tra­di­tion­ally solid eco­nomic com­men­tary from David Rosen­berg. Con­sid­er­ing that the cen­tral plan­ners have pumped $7 tril­lion, or 50% of their bal­ance sheet, in the stock mar­ket in the past 4 years, to off­set pre­cisely the warn­ings that Rosen­berg issues on a daily basis, we are far beyond debat­ing whether or not those who observe the econ­omy real­is­ti­cally are right or wrong. The only ques­tion is whether the cen­tral banks can con­tinue to expand their bal­ance sheet at an expo­nen­tial phase to off­set the inevitable. Answer: they can't.

From Gluskin Sheff's David Rosenberg

IT'S A GAS, GAS, GAS!

"There are fluc­tu­a­tions in the mar­ket that don't mean anything."

Ira Gluskin, Feb­ru­ary 14, 2012

If there was a Rule #11 added to Bob Farrell's list of gems, this would be it. We have added this ditty before from Ira, and will con­tinue to do so as a reminder. A reminder of what you ask? A reminder of how the stock mar­ket can be divorced from eco­nomic real­i­ties for a period of time. The stock mar­ket ignored the per­ils of the busted tech bub­ble for a good eight months back in 2000, ulti­mately to its own cha­grin. It ignored the melt­down in the hous­ing and mort­gage mar­ket for at least 10 months back in 2007. The exam­ples can go on, but hope­fully the point is taken.

At any given moment of time, the mar­ket is dri­ven by a vari­ety of fac­tors. Some are more impor­tant than oth­ers, and they include tech­ni­cals, sea­son­als, sen­ti­ment. fund flows, val­u­a­tions and, Of course, the fun­da­men­tals. The key dri­ving force this year has been the expanded P/E mul­ti­ple, in line with a 16 read­ing on the VIX index, as the mar­kets seem to believe that the mas­sive expan­sions of global cen­tral bal­ance sheets will end up sav­ing the day for dilap­i­dated sov­er­eign gov­ern­ment bal­ance sheets and woe­fully under­cap­i­tal­ized Euro­pean banks. Too bad the Gra­ham and Dodd clas­sic text on value invest­ing didn't include a chap­ter on cen­tral bank money-printing.

From our lens, liquidity-based ral­lies are fun to trade, but tend to have a rel­a­tively short shelf life. Imag­ine what is on everyone's minds for the com­ing week is not the eco­nomic data or earn­ings results but instead the sec­ond LTRO round on Wednes­day — this is what investors are bit­ing their nails over: will it be 1 tril­lion euros or 'just' 300 bil­lion? Page M10 of Barron's dubs this the 'LTRO put', which "sparked a mas­sive risk-on rally in global mar­kets". Incred­i­ble how easy it is to avert a bear mar­ket why didn't the Fed do this in 2007 and 2008, sim­ply print money — and help us avoid the Great Recession?

What about the fun­da­men­tals? Well, let's have a look at earn­ings. It is com­pletely ironic that we would be expe­ri­enc­ing one of the most pow­er­ful cycli­cal upswings in the stock mar­ket since the reces­sion ended (the S&P 500 is now up 25% from the Octo­ber 3rd nearby low) at a time when we are clearly com­ing off the poor­est quar­ter for earn­ings, in every respect. The YoY trend in oper­at­ing [PS is now below 6%, and with­out Apple, growth has basi­cally van­ished alto­gether (down to a mere +2.8%). Cor­po­rate guid­ance over the past three months is at the low­est point since August 2009 — before the term 'green shoots' was invented! Only 44% of com­pa­nies beat their rev­enue tar­gets, the weak­est since the first quar­ter of 2010: and 64% sur­passed their profit esti­mates and this too is the low­est since the third quar­ter of 2008.

If mem­ory serves me cor­rectly, you did not want to go long the mar­ket head­ing into either the sec­ond quar­ter of 2010 or the fourth quar­ter of 2008 with these fac­toids in hand. I have to admit that I find it per­plex­ing as to why so many folks dub this a tech-led rally when we came off a week that saw both Hewlett– Packard and Dell dis­ap­point in their Q4 earn­ings results — the for­mer with a 7% YoY rev­enue dive.

All that said, the S&P 500 did man­age to close out the week at 1,365.74 and estab­lish a level not seen since June 5, 2008 (only 200 points shy of set­ting a new all-time high —Jeremy Siegel must be lick­ing his chops). If you are won­der­ing why it is that con­sumer sen­ti­ment jumped to 75.3 in Feb­ru­ary (bet­ter than the read­ing that was widely expected), this is the rea­son. The Uni­ver­sity of Michi­gan index does a much bet­ter job track­ing the equity mar­ket than it does the labour mar­ket or con­sumer spend­ing for that matter.

Page 13 of the week­end FT quotes a strate­gist as saying

"... we also had a com­bi­na­tion of a cou­ple of good earn­ings reports and lit­tle bright signs com­ing from the hous­ing and labour mar­kets. Some peo­ple are even talk­ing about the S&P 500 hit­ting the 1,400 mark."

Actu­ally, earn­ings growth and earn­ings esti­mates are going down on net. As is cor­po­rate guid­ance, what lit­tle of it there is. The bright signs from hous­ing are really a com­men­tary on the balmy weather skew­ing the sea­son­ally adjusted data and there is cer­tainly no sign of any recov­ery in prices (it's incred­i­ble how so many peo­ple get excited over a 321,000 new home sales tally — never mind that they are still near record lows in per capita terms). To be sure, the new hous­ing inven­tory is down to a six-year low of 5.6 months sup­ply, but tak­ing into account the sup­ply com­ing down the pike from fore­clo­sures, the entire back­log in the pipeline is at least dou­ble that posted number.

...

The pre­cious met­als mar­ket is hardly sig­nalling good times ahead — rather more tur­bu­lent times ahead — as gold fin­ished last week near a three-month high (sil­ver has been behav­ing even bet­ter and plat­inum has hit its best level in five months).

Mean­while, what is largely being ignored is the rapid move up in oil prices as Iran-based ten­sions esca­late fur­ther. The WTI crude price rose to nearly $110/bbl and more impor­tantly. Brent has soared over $125/bbl (high­est level since August 2008), and for­ward con­tracts are point­ing to gaso­line break­ing back above $4 a gal­lon in the next two to three months (already there in Cal­i­for­nia and within 10 cents in New York state). The nation­wide aver­age has already risen 37 cents in just the past month and 7 cents last week alone — it hasn't been long enough to show through in the con­fi­dence sur­veys, though let's face it, we are see­ing early signs already of some fray­ing at the edges in the retail sec­tor — despite the appar­ent improve­ment in the labour mar­ket (indeed, it is income that peo­ple spend, and growth on this front, let's be hon­est, has been less than stellar).

Mean­while, as if to rep­re­sent the con­sen­sus of opin­ion out there. page A2 of the week­end WSJ quotes a pun­dit as say­ing "$4 prob­a­bly isn't going to be the thresh­old that changes peo­ples' behav­ior this time. I think peo­ple have got­ten used to $4".

What clap­trap. Its not that peo­ple have got­ten used to $4 — it's only there in the Golden State, Hawaii and Alaska ... wait until it grips the whole coun­try. And con­sumers have yet to fully process this rapid move up in gas prices, but recall what hap­pened a year ago. To be sure, there was no reces­sion, but eco­nomic growth came to a vir­tual halt in the first half of the year because of the impact that energy costs exerted on the GDP price defla­tor. Sec­ond, it is not the level but the change in prices at the pump that influ­ences the growth rate of the econ­omy — every penny at the pumps siphons away around $1.5 bil­lion from con­sumer wal­lets into the gas tank. More­over, a lit­tle his­tory les­son for the pun­dit quoted above. Accord­ing to work con­ducted by the Uni­ver­sity of Cal­i­for­nia at San Diego and cited on page 14 of the week­end FT. all but one of the 11 post-WWII reces­sions fol­lowed an oil shock (the lone excep­tion was the 1960 down­turn). Recall what hap­pened the last two times Brent hit cur­rent lev­els — in 2008 (reces­sion) and 2011 (stall speed). Nei­ther out­come was very good.

The key is how long this ele­vated energy price envi­ron­ment sticks around in terms of over­all eco­nomic impact. Brent had already been hov­er­ing near $110/bbl for 12 months but this most recent price run-up has actu­ally taken the 200-day mov­ing aver­age higher now than it was in the 2008 reces­sion year. Let's keep in mind that the jump in crude prices has occurred even with the Saudis pro­duc­ing at its fastest clip in 30 years — under­scor­ing how tight the back­drop is. Even with slow­ing demand in the weak economies of the 'devel­oped world', con­tin­ued rapid growth in emerg­ing mar­kets is pro­vid­ing an off­set on the demand side (which does lit­tle good for the Amer­i­can or Euro­pean consumer).

Mean­while, esti­mates of spare capac­ity are all over the map but what we do know is that just to meet the bur­geon­ing demands of the emerg­ing mar­ket world requires a fur­ther 1 mbd this year of pro­duc­tion — and yet sup­plies are being with­drawn. It will not be very dif­fi­cult to see oil retest $150 a bar­rel, and we are talk­ing WTI here, not Brent.

...

It is also fas­ci­nat­ing to watch the action in the much-despised Trea­sury mar­ket (the net spec­u­la­tive short posi­tion on the 10-year 1-note is 63,328 con­tracts on the CBOT while the com­pa­ra­ble for Dow con­tracts is net long 14.803 con­tracts). Despite the slate of sup­ply last week ($99 bil­lion of new issue activ­ity) the yield on the 10-year T-note closed at 1.98%. Some­one out there (Bernanke?) is
com­ing in and buy­ing when­ever the yield pops above 2% — a level that sim­ply is not being sus­tained on appar­ent break-outs. The long bond yield actu­ally fin­ished the week lower in yield at 3.1% from 3.14% (the 10-year was down 2bps).

At a time when energy prices are spik­ing, this is a clear sign that the bond mar­ket is treat­ing this as a defla­tion­ary shock rather than a durable increase in infla­tion. That makes total sense to us. It's not as if global con­sump­tion is going up — even with higher auto sales, Amer­i­cans are spend­ing less time on the road: miles dri­ven are down 1% over the past year. And the IEA (Inter­na­tional Energy Agency) has cut its 2012 fore­cast for global oil demand twice since the begin­ning of the year. This is an exoge­nous sup­ply shock, pure and simple.

...

And now the con­sen­sus is that the reces­sion in the euro area will be mild because of one month's worth of dif­fu­sion indices. Such is human nature — extrap­o­late the most recent eco­nomic indi­ca­tor into the future. The region suf­fers from a credit shock, a fis­cal shock, and now an oil shock and at the same time, an over­val­ued cur­rency. What is the euro doing at an 11-week high and how does this help the region export its way out of its eco­nomic down­turn? Yet there are still a net short 137,479 spec­u­la­tive euro con­tracts on the CME, which could have a fur­ther impact as they cover in the near-term; there are 17,136 net long yen con­tracts and 29,101 net long spec­u­la­tive U.S. dol­lar contracts.

Brent crude oil hit a record high in euro terms (in Ster­ling as well) last week and has surged 11% in just the past month on this basis, and even if prices stay where they are, what energy is going to absorb out of Euro­zone GDP this year will be 5.5%, which would sur­pass the 2008 reces­sion shock of 4.8% (the high­est drainage from the econ­omy in three decades — see Soar­ing Oil Price Threat­ens Recov­ery on page 14 of the week­end FT).

...

The U.S. econ­omy is either gen­er­at­ing jobs in low-paying ser­vice sec­tor jobs or the employ­ment that is com­ing back home in man­u­fac­tur­ing is doing so at lower wage rates than when these jobs left for Asia years ago. So much for wage stick­i­ness. Throw in ris­ing gaso­line prices and real incomes are in a squeeze, and there is pre­cious lit­tle room for the per­sonal sav­ings rate to decline from cur­rent low lev­els. On a year-to-year basis, real after tax incomes are run­ning frac­tion­ally neg­a­tive and in the past that was either asso­ci­ated with an econ­omy in reces­sion, about to head into reces­sion or just com­ing out of reces­sion. So per­haps there is no con­trac­tion in real GDP just yet. but there is one in real incomes.

What else do peo­ple spend? Their wealth. And here too, cour­tesy of a flat equity mar­ket per­for­mance and renewed declines in home val­ues, house­hold net worth also con­tracted in the past year. So here we have real incomes and wealth both deflat­ing and the masses believe that reces­sion is off the table because of a liquidity-induced four-month rally in the stock mar­ket. Go figure.

Tags: All Time Highs, Bob Farrell, Central Banks, Central Planners, Chagrin, Daily Basis, David Rosenberg, Ditty, Economic Commentary, Economic Realities, Eight Months, Fund Flows, Gluskin Sheff, Inevitable Answer, Meltdown, Mortgage Market, Perils, S David, Stock Market, Vacuum Tubes
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David Rosenberg Presents The Six Pins That Can Pop The Complacency Bubble

Friday, February 24th, 2012

The record volatil­ity, and 400 point up and down days in the DJIA of last sum­mer seem like a life­time ago, hav­ing been replaced by a smooth, unper­turbed, 45 degree-inclined see of stock mar­ket appre­ci­a­tion, ris­ing purely on the $2 tril­lion or so in liq­uid­ity pumped into global mar­kets by the cen­tral print­ers, ever since Italy threat­ened to blow up the Ponzi last fall. In short — we have once again hit peak com­pla­cency. Yet with crude now match­ing every liq­uid­ity injec­tion tick for tick (and then some: Crude's WTI return is now higher than that of stocks), there is absolutely no more space for the world cen­tral banks to inject any more stock appre­ci­a­tion with­out blow­ing up Obama's reelec­tion chances (and you can be sure they know it). Sud­denly the mar­ket finds itself with­out an explicit back­stop. So what are some of the "real­iza­tions" that can pop the com­pla­cency bub­ble lead­ing to a stock mar­ket plunge, and fill­ing the liquidity-filled gap? Here are, cour­tesy of David Rosen­berg, six dis­tinct hur­dles that loom ever closer on the hori­zon, and hav­ing been ignored for too long, cour­tesy of Bernanke et cie, will almost cer­tainly become the market's pre­oc­cu­pa­tion all too soon.

From Gluskin Sheff

1. The nascent job mar­ket improve­ment was lit­tle more than a reflec­tion of dete­ri­o­rat­ing pro­duc­tiv­ity growth. As such, com­pa­nies will respond in the spring by curb­ing their hir­ing plans. This is exactly what hap­pened a year ago when pri­vate pay­roll gains aver­aged 207k from Jan­u­ary to April and the biggest mis­take the embold­ened bulls did at the time was extrap­o­late that per­for­mance into the future. No sooner did we men­tion the likely renewed cor­po­rate focus on reviv­ing pro­duc­tiv­ity growth than we saw Proc­tor & Gam­ble announce a 5,700 job cut or 10% of its man­u­fac­tur­ing work force — and the stock price was rewarded with a $2 advance.

2. The bal­ly­hooed hous­ing recov­ery rep­re­sented a weather report. Jan­u­ary was the fourth warmest on record, skew­ing the data, and Feb­ru­ary looks to be a record for balmy tem­per­a­tures. As such, we could be in for a set­back in the hous­ing data, and the lat­est weekly data on mort­gage appli­ca­tions for new pur­chases may already be sig­nal­ing a renewed down­turn in sales activ­ity. The vol­ume index for new pur­chases was down 2.9% in the week of Feb­ru­ary 17th on top of an 8.4% slide in the prior week and it has been trend­ing down for four of the past five weeks.

3. The Euro­pean reces­sion is just get­ting started (See Reces­sion Looms for 10 Nations on page 2 of the FT) and the impact on Asian trade flows is already evi­dent in the data — with Chi­nese export growth com­pletely van­ish­ing in Jan­u­ary and man­u­fac­tur­ing dif­fu­sion indices flash­ing mod­est con­trac­tion in Feb­ru­ary. We are poten­tially one to two quar­ters away from see­ing a sig­nif­i­cant shock to the U.S. GDP data from an erod­ing net for­eign trade per­for­mance. To catch a glimpse of just how far reach­ing the Euro­zone reces­sion is, have a look at Aus­ter­ity in Europe Puts Pres­sure on Drug Prices on page B6 of the NYT.

4. What upset the apple cart this time last year was the run-up in oil prices, fol­lowed by a lag with a surge in gas prices at the pump. So instead of get­ting the 4.0% first quar­ter GDP growth num­ber in 2011 that many pun­dits antic­i­pated, we got 0.4% instead — right dig­its but in the wrong place. The prob­lem was energy costs and what that did to the GDP price defla­tor — it crushed real eco­nomic growth (this time it's not the Arab Spring but height­ened Israel-Iran ten­sions at play). Within 24 hours of the release of that GDP report in late April, the stock mar­ket peaked for the year.

Once again, oil prices have ratch­eted up and with a lag, we can prob­a­bly expect a return to $4 per gal­lon for reg­u­lar gas at the pumps by the time spring rolls around. The front page of the USA Today makes the case for why $5 per gal­lon is likely com­ing ... that would rep­re­sent more than a $200 bil­lion drag out of house­hold cash flows. As it stands, con­sumers have responded by cut­ting back on energy usage at a pace we have not seen in 15 years. Note that motorists in Cal­i­for­nia are already pay­ing north of $4 per gal­lon. And Brent crude prices have hit record highs in the U.K. in ster­ling terms and back to 2008 lev­els in euro terms for the already recession-gripped euro area.

Not only were Jan­u­ary retail sales already weak, but we just saw two bell­wethers —Gap and Kohl's — all post lower Q4 earn­ings. Kohl's actu­ally posted its first rev­enue decline in three years. And we haven't even seen the full brunt of the energy price impact hit home yet.

The trans­port stocks see what's com­ing, hav­ing peaked on Feb­ru­ary 3rd, and since then this group has suf­fered 9 losses out of the past 13 ses­sions, rep­re­sent­ing a 4% decline from the nearby peak. This is a bit of a prob­lem for the bulls because the trans­ports never did con­firm the new highs that the Dow and S&P 500 made — and the index is now at a crit­i­cal junc­ture as it kisses the 50-day mov­ing aver­age on the downslope.

5. This hur­dle will likely only become appar­ent in the sec­ond half of the year and it relates to tax uncer­tain­ties and the impli­ca­tions for ris­ing per­sonal and cor­po­rate sav­ings rates.

First, the top mar­ginal per­sonal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012. A limit on item­ized deduc­tions will add a fur­ther 1.2 per­cent­age points to the top rate. Sec­ond, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint fil­ers). More­over, the top 15% rate on long-term cap­i­tal gains rises to 20%. And div­i­dends will once again be taxed at ordi­nary rates — 39.6% for the top income earn­ers. A new 3.8% tax on invest­ment income also gets intro­duced for incomes over $200,000 ($250,000 for joint fil­ers). The top estate tax rate goes from 35% to 55% (60% in some cases). The estate tax exemp­tion falls to $1 mil­lion from $5 mil­lion (the gift-tax exemp­tion also drops to $1 mil­lion and the rate adjusts hither to 55%). In all, 41 sep­a­rate tax pro­vi­sions expire this year.

6. Finan­cial con­ta­gion. Just as there is a deep-seated view of eco­nomic re-acceleration in the United States, so too is there a wide­spread con­sen­sus that Europe will mud­dle through. The ECB's mas­sive liq­uid­ity infu­sion last Novem­ber and the upcom­ing move on Feb­ru­ary 29th for what prac­ti­cally every­one hopes will be a huge LTRO (Longer-term Refi­nanc­ing Oper­a­tion) take-up has the masses con­vinced that Europe is out of the woods.

Mar­kets have treated Greece's default with a shrug. But what if a CDS event does get trig­gered? It is pos­si­ble. And what if Por­tu­gal decides that it wants its bail-out terms rene­go­ti­ated, as the FT hints at? Spain is doing like­wise as well — see Spain Pushes Brus­sels to Cut Deficit Tar­get as Growth Hopes are Dashed on the front page of the FT and also have a look at Spain Counts Social Costs of Aus­ter­ity Drive on page 2 of the FT.

The lack of con­fi­dence is so pal­pa­ble that some cor­po­rates in Por­tu­gal, like Por­tu­gal Tele­com, trade at a 600 basis point dis­count to com­pa­ra­ble gov­ern­ment bonds. Even Italy is far from out of the woods (let alone Spain) — the ECB's inter­ven­tion efforts may have helped drag 10-year yields down to 5.4% from the recent peak of over 7%, but debt and debt-service dynam­ics are such that fis­cal sus­tain­abil­ity can only be achieved, bar­ring an eco­nomic boom (which is not in the cards), if yields can break deci­sively below 4% and stay there.

Tags: Backstop, Bernanke, Central Banks, Central Printers, Complacency, Corporate Focus, David Rosenberg, DJIA, Global Markets, liquidity, Market Appreciation, Market Improvement, Productivity Growth, Realizations, Reelection, Stock Appreciation, Stock Market Plunge, Stock Price, Weather Report, Wti
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David Rosenberg On Taxation-Shock-Syndrome

Wednesday, February 22nd, 2012

While noth­ing is more cer­tain than death and taxes (and cen­tral bank largesse), David Rosen­berg of Gluskin Sheff uncov­ers The Unlucky Seven major tax-related uncer­tain­ties fac­ing house­holds and busi­nesses that will likely lead to mul­ti­ple com­pres­sion in mar­kets (rather than the much-heralded mul­ti­ple expan­sion 'story' which appears to have topped the talking-head charts — just above 'money on the side­lines' and 'wall of worry', as 'earnings-driven' argu­ments are fail­ing on the back of this quar­ter). As he notes the rad­i­cally changed tax­a­tion cli­mate in 2013 and beyond will have an impact on all eco­nomic par­tic­i­pants as they will prob­a­bly opt to bol­ster their cash reserves in the sec­ond half of the year in prepa­ra­tion for the prover­bial rainy day.

First, the top mar­ginal per­sonal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.

Sec­ond, a limit on item­ized deduc­tions will add a fur­ther 1.2 per­cent­age points to the top rate.

Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).

Fourth, the top 15% rate on long-term cap­i­tal gains rises to 20%.

Fifth, div­i­dends will once again be taxed at ordi­nary rates — 39.6% for the top income earners.

Sixth, a new 3.8% tax on invest­ment income gets intro­duced for incomes over $200,000 ($250.000 for joint filers).

Sev­enth, the top estate tax rate goes from 35% to 55% (60% in some cases). The estate tax exemp­tion falls to $1 mil­lion from $5 mil­lion (the gift-tax exemp­tion also drops to $1 mil­lion and the rate adjusts hither to 55%).

Forty-one sep­a­rate tax pro­vi­sions expire this year — see page 32 of the Econ­o­mist. Of course, there is always the chance that after the Novem­ber 6th elec­tion, a Con­gress that can never seem to allow any­thing tem­po­rary to meet its expiry date will pass an exten­sion — for more on all this, see More Uncer­tainty for 2013 on page B9 of the Week­end WSJ.

Tags: B9, Bush Tax Cuts, Cash Reserves, David Rosenberg, Death And Taxes, Estate Tax Exemption, Estate Tax Rate, Filers, Gift Tax Exemption, Income Earners, Investment Income, Itemized Deductions, Largesse, Long Term Capital, Long Term Capital Gains, Medicare Tax, Personal Tax Rate, Sheff, Shock Syndrome, Tax Provisions
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TOP 15 Stories of February 2012

Monday, February 20th, 2012

TOP 15 Sto­ries of Feb­ru­ary 2012, Accord­ing to You

David Rosen­berg: Let's Get Real — Risks are Loom­ing Big Time

David Ein­horn: Green­light Cap­i­tal Q4 2011 Let­ter to Investors

The Unlikely Bull Market

Least Volatile Stocks Over The Last Decade (Bespoke)

Jeremy Siegel: 66% Chance of Dow 15,000, and 50% Chance of Dow 17000 in Two Years

Tying It All Together with David Rosenberg

Visu­al­ize: The Euro­pean Super­high­way of Debt

Bill Gross: The Death of Abun­dance and the Birth of Austerity

What The Bond Mar­ket Knows That You Don't

Obama Pup­pet­mas­ter War­ren Buf­fett Biggest Win­ner from Key­stone Pipeline Rejection

The Great Mar­ket Dis­con­nect Seen All Around the Globe (Busi­ness Insider)

Radio Shack Cell Phone Com­mer­cial from 1989

Com­pelling Val­u­a­tion or Value Trap?

World Eco­nomic and Equity Mar­kets Out­look (O'Neill, Faber, Siegel, Dreman)

The Div­i­dend Yield Love Affair

Tags: Austerity, Bill Gross, Bond Market, Business Insider, David Einhorn Greenlight, David Einhorn Greenlight Capital, David Rosenberg, Dividend Yield, Dreman, Insider Radio, Jeremy Siegel, Last Decade, Love Affair, O Neill, Obama, Puppetmaster, Radio Shack, Time David, Volatile Stocks, Warren Buffett
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David Rosenberg — "Let's Get Real — Risks Are Looming Big Time"

Wednesday, February 15th, 2012

Ear­lier, you heard it from Jeff Gund­lach, whom one can not accuse (at least not yet) of sleep­ing on his lau­rels and/or being a bro­ken watch, who told his lis­ten­ers to "reduce risk right now" espe­cially in the fren­zied momo stocks. Now, it is David Rosenberg's turn who tries to refute the pre­sid­ing tran­si­tory dogma that 'things are ok" and that a Greek default will be con­tained (no, it won't be, and if nobody remem­bers what hap­pened in 2008, here is a reminder of every­thing one needs to know ahead of the "con­trolled", what­ever that is, Greek default). Alas, it will be to no avail, as one of the dom­i­nant fea­tures of the lem­ming herd is that it will gladly believe the grand­est of delu­sions well past the ledge. On the other hand, they don't call it the pain trade for nothing.

From Gluskin Sheff

LET'S GET REAL

We are con­stantly being told how much bet­ter the econ­omy is doing. It's incred­i­ble what the Jan­u­ary employ­ment report did to people's per­cep­tions of the macro land­scape. It's as if we were just trans­ported to the men­tal­ity that pre­vailed this time last year. Below we chart out the YoY trend in core capex orders on a quar­terly basis ... the pace has slowed now for six quar­ters in a row.

The peak was 20.8% in the sec­ond quar­ter of 2010, but then again, that com­par­i­son was skewed by com­ing off the depressed 2009 base. In Q4 of last year, the trend mod­er­ated to 7.3% from 9.5% in Q3, to actu­ally stand at its low­est level since the end of 2009. Food for thought.

Maybe the econ­omy seems to be doing bet­ter because we have all adjusted our expec­ta­tions so rad­i­cally after being dis­ap­pointed for so long — I mean — take 2011 as an exam­ple. A year that would nor­mally see 5% real GDP growth for this stage of the cycle came in at a woe­ful 1.7%. This, despite a $3 tril­lion Fed bal­ance sheet (triple its nor­mal size), zero per­cent pol­icy rates now for three years and now going on year num­ber four of $1 trillion-plus fis­cal deficits. Based on all this stim­u­lus, if this were a nor­mal post-recession recov­ery, GDP growth would be 8% right now, not sub-2!!

RISKS LOOMING BIG TIME

I remain amazed at how the con­sen­sus eco­nom­ics com­mu­nity is so cer­tain the U.S. econ­omy has sud­denly hit escape veloc­ity ... again! The econ­omy is on major duty life-support and yet the reces­sion, we are told, ended nearly three years ago. And the best the econ­omy can do is a trail­ing GDP trend of 1.7%. Go fig­ure. Hous­ing has bot­tomed, we are also told. No kid­ding? From a real GDP stand­point, res­i­den­tial con­struc­tion has actu­ally con­tributed to head­line growth for three quar­ters in a row, and over­all growth was still tepid.

In any event, in terms of peak con­tri­bu­tion, it's prob­a­bly over. And yet econ­o­mists talk about this as if it's new and not already priced into the mar­ket. Of course auto sales are doing fine and this is a heck of a model year—this is an area where an argu­ment can be made that there is some pent-up demand. But what is inter­est­ing is that miles dri­ven are down nearly 1% on a YoY basis — buy more cars, drive them less. But autos are just 10% of total con­sumer spend­ing on goods and the improv­ing trend here masks a seri­ous decel­er­a­tion in ser­vice expen­di­tures, which rep­re­sent the bulk of house­hold outlays.

One wild card is gaso­line prices which are on a ris­ing trend. Four bucks by May looks real­is­tic and that alone would siphon around $70 bil­lion from con­sumer pock­et­books right into the gas tank. Cap­i­tal spend­ing growth is fol­low­ing the pace of cor­po­rate prof­its on a down­ward trend to boot. The boost from inven­tory accu­mu­la­tion is behind us. Gov­ern­ments are bent on aus­ter­ity — that remains a sec­u­lar theme. The biggest hur­dle ahead: the hit to the econ­omy from a widen­ing trade deficit. The num­bers out for Decem­ber we saw on Fri­day were the thin edge of the wedge — that widen­ing occurred for dif­fer­ent rea­sons (inventory-induced import boom). Wait until the Euro­pean reces­sion and Asian slow­down hits the export sector.

Tags: Avail, Balance Sheet, Big Time, Broken Watch, David Rosenberg, Dogma, Dominant Features, Employment Report, Fiscal Deficits, GDP Growth, Gundlach, Laurels, Mentality, Perceptions, Q3, Q4, Quarterly Basis, Real Gdp, Size Zero, Trillion
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