Is the Credit Malaise Really Over?

Tuesday, February 23rd, 2010

Interestingly, the Fed raised the discount rate last week as bank credit for the week contracted by a further $9 billion, According to David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, “this brings the year-to-date decline to $115 billion, or a 14% annual rate, with every component from mortgages, to consumer credit, to business lending shrinking”.

Source: Breakfast with Dave - Gluskin Sheff & Associates, February 22, 2010.

“There is no way the Fed is hiking the Fed funds rate with bank credit in secular decline and all bets are off on the sustainability of any recovery; a sustainable recovery without bank credit growth - that will be a new one. … a true tightening in monetary policy is still likely a 2011 story at this point. Those who were surprised by the early timing of the discount rate hike last Thursday should consider that perhaps the Fed wanted to have the market distinguish the move from an actual policy shift by doing it as far away from an FOMC meeting as possible,” said Rosenberg.

As mentioned before, it is difficult to see a significant economic recovery without the banks coming to the party. And this begs the question: Is this what the policymakers had in mind when bailing out the banks?

Tags: Bets, Business Lending, Chief Economist, Consumer Credit, David Rosenberg, Economic Recovery, February 22, Fed Funds Rate, Fomc Meeting, Gluskin Sheff, Last Thursday, Malaise, Monetary Policy, Policy Shift, Policymakers, Rate Hike, Secular Decline, Strategist, Sustainability, Sustainable Recovery
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David Rosenberg: “My Take on the Fed”

Friday, February 19th, 2010

WHILE YOU WERE SLEEPING

The U.S. consumer price data is hot off the press and while the headline came in below expected at +0.2% MoM (so much for the PPI being a leading indicator). The real key was the -0.14% print on the core index (which removes food and energy) - deflation in the core CPI is a 1-in-80 event and should be treated seriously in terms of what it means for bond yields and corporate pricing power in the broad retail sector (there were notable declines in recreation, clothing, new car prices, hotels and air fare).

The theme for 2010 is the return of volatility and the appropriate investment strategy is to minimize it through appropriate hedge funds strategies and portfolios that are negatively correlated to risk. Look at what we have on the worry list that we did not have 10 months and 70% ago on the S&P 500:

• China and India tightening credit policy
• The Fed embarking on an exit strategy
• The peak in fiscal stimulus behind us, not ahead of us
• Iran (see today’s WSJ editorial)
• Greece (Portugal? Spain?)
• Sovereign default risks
• China selling U.S. treasuries
• Stricter capital rules for banks

MY TAKE ON THE FED

The hike in the discount rate from 0.5% to 0.75% was only a surprise because of the timing, but the Fed had been warning for some time that this was going to be part of the process of taking the emergency stimulus out of the financial system. Ben Bernanke mentioned this at last week’s prepared text to Congress and

Wednesday’s FOMC meeting contained recommendations from the Fed staff to start raising the discount rate as soon as possible. (We see in today’s NYT that former Governor Larry Meyer quipped “don’t they [the markets] understand the meaning of soon?” Well, after looking up the word in the dictionary, “soon” was defined as “in the future”, not necessarily next week). A whole array of other emergency measures are slated to end in the course of the next month, so yesterday’s after-market-closing move in the discount rate is part and parcel of the Fed’s long-discussed exit strategy.

Before the crisis intensified in 2008, the normal spread between the discount rate and Fed funds was 100bps, and yesterday it went from 25bps to 50bps. The Fed also reduced the term on discount window loans back to overnight from 28 days - all in an effort to “normalize” policy (notwithstanding how fragile this recovery really is and how abnormal it is to still be over 8 million jobs shy of the former peak at this stage of the policy cycle).

The near-term reaction is predictable with equity futures selling off sharply but this is because Mr. Market has always held the discount rate in high esteem - likely more than it deserves (as we recall that old refrain “three hikes and a stumble”). Also keep in mind that the Fed first cut the discount rate before the market opened back on August 17, 2007, and the Dow rallied 233 points that day. It was hardly the right call and it is very likely the case that the market is over-reacting to yesterday’s hike in the opposite direction.

Not that I’m bullish on equities - from my lens, what was far more important in terms of describing the true economic backdrop was what Wal-Mart had to say yesterday in terms of its -1.7% YoY print on Q4 same-store sales (first decline in history and below the flat reading that was expected), not to mention reduced guidance for Q1. The CEO, Mike Duke, bluntly stated that “The economy remains challenged for many of our customers around the world…we expect first-quarter sales in the U.S. will be difficult.” Mr. Duke, you may run the largest retailer in the world, but the bubbleheads on television are telling you that you don’t know what you are talking about! What else does Wal-Mart represent except that 70% chunk of GDP otherwise known as the American consumer?

If the consumer is “challenged”, then how far is an inventory adjustment going to carry along this post-recession recovery. We know, we know - what about the leftover fiscal stimulus out of Washington? Our take: the drag out of the State and local government sector is going to provide a significant offset and the growing opposition to fiscal largesse from the Tea Party movement is going to put a cap on the White House intervention efforts going forward. The situation is so dire that over half of the States are reducing Medicaid services and payments to health care providers to save money (not that we have claimed sainthood, but for economists on CNBC to talk about the wonders of fiscal stimulus when the nation’s poorest people are facing budget cuts just doesn’t seem appropriate).

Yet Mr. Market was somehow able to ignore the message from Wal-Mart’s miss with the Dow rallying over 80 points. (Though yet again, on lower volume - down 6% on the NYSE!) That reaction basically makes as much sense as the dive that initially followed the discount rate increase - in a sign that this is a market that is manic and increasingly volatile.

Not only did the Fed telegraph the move, but the overall impact on bank funding costs is minimal with discount window borrowing at a mere $14.9 billion (a fraction of the pre-crisis levels of $110 billion) and the commercial banks sitting on a $1 trillion cash hoard as it is.

Moreover, the Fed kept on cutting and cutting and cutting rates all the way from August 2007 through to December 2008 and even at microscopic Japanese-like levels, this traditional mode of central bank stimulus still could not manage to put a floor under the economy, let along the markets. Only when the Fed began to treat this as a credit cycle as opposed to a liquidity cycle by rapidly expanding its balance sheet through quantitative easing measures did the turnaround in most economic indicators and investor confidence turn around.

So, it would stand to reason that the real test for the markets is going to come not from the discount rate, but by what happens when the Fed begins to shrink its balance sheet - particularly the ramifications for mortgage rates.

Bear in mind that the Fed in some sense had already been reducing its support by allowing several programs to run their course - the bond-buying program ended about four months ago too. These are all technical moves that symbolize the end to the emergency liquidity provisioning but the central bank is going out of its way to signal that these are not attempts to actually tighten monetary policy. Of course, Bernanke et al are going to have to walk a fine line and for Mr. Market, what defines “extended period” as far as the more important Fed funds rate is concerned is a key question if “before long” - the words Bernanke used to explain when the discount rate would be hiked - meant little more than a week.

All that said changes in the discount rate still can pack a psychological punch, at least in the near-term. Investors will now be reminded that the exit strategy, while gradual, is about to start in earnest. So don’t look for a lot of talk going forward of a liquidity-driven market. This could have a dampening impact on the market multiple, as has been the case in China where two moves this year to raise reserve requirements have knocked the Shanghai index down by roughly 8%. Those pundits laying claim that what the Fed is doing is great news for the stock market because it is somehow ratification of the view that we are into a sustainable growth phase should heed what has happened in China this year, and also understand that the reason the S&P 500 could muster a 70% rally off the lows of last March in advance of anything beyond ‘green shoots’ in the economy was in large part because of all this Fed- induced liquidity.

While the initial reaction to the Fed’s move may be overdone, we are still at the tip of the iceberg and the one thing Mr. Market does not like is the uncertainty when the game starts to change. I realize that the equity bull market continued well after the first set of policy tightenings in 2004, but credit growth was running rampant then and home prices were skyrocketing - a far cry from today’s landscape, especially the fact that bank lending is contracting at a record 15% annual rate at the current time. For all we know, Bernanke is about to pull a 1937-38 premature exit strategy that ultimately leads to a market and economic relapse. That may not be a base-case scenario but the odds of a policy mis-step are still greater than zero.

To be sure, it does look as though the U.S. economy has moved into an expansion phase, but like the markets, it is volatility around the downward trend. This time last year we are seeing -6.4% GDP growth and then by the fourth quarter of 2009 we are at +5.7%. What a swing. It does remind me of Japan, which has experienced no fewer than 12 quarters of 5%+ GDP growth since its bubble burst in 1990 and one-third of these occurred in the initial years after the crisis began. But there have been twice as many quarters with negative growth. Therefore, volatility is the only certainty in the economy following a credit collapse - and the markets as well.

We recall that that the Nikkei enjoyed 230,000 rally points since 1990 and the market is still down 70% from the peak at that time. It’s no different for the U.S.A. following the prior credit collapse in the 1930s - the decade saw 20 quarters of 5%+ sequential GDP growth! That’s a depression? Of course it was because there were 13 quarters of contractions mingled into those intermittent positive spasms. Real GDP did a bungee jump of 11% in 1934 and yet if memory serves me correctly, the level of economic activity was basically no higher in 1939 than it was in 1929; and because it was deflation and not inflation that predominated in that period (even with the New Deal!) nominal GDP finished the decade with a 13% loss.

It was not until the first quarter of 1941 - with the help of the war effort - that the prior 1929 Q3 peak in nominal economic activity was taken out (despite seven years of massive FDR stimulus and the odd extremely whippy positive GDP quarter). Moreover, the next secular bull market in equities did not begin until 1954 - 25 years after the prior peak. So the message here is to focus on the forest, not the trees … and to look at an inventory-led 5.7% growth rate in Q4 in the context of wiggles around what is still a fundamental downtrend.

So what does the current backdrop resemble in a modern-day sense? The summer and fall of 2007. Think about it. The S&P 500 has been jerking around on either side of 1,100 for five months now. The 10-year note yield has jumped 20 basis points from the nearby low with hardly any reason outside of negative technicals.

Go back to that period between May and October of 2007, and the S&P was just above or just below the 1,500 mark for over five months. Many didn’t know it then, and we should all be taking it into consideration now, but we were in a classic topping formation. Back then, as is the case today, the bond market was getting hit hard with the 10-year note yield surging 50bps, to 5.2%, and the universe of economists and strategists completely bearish on the Treasury market at just the wrong time. What goes around comes around.

Read the summary of today’s report here.

Read the complete report here.

Tags: 28 Days, Bond Yields, Core Cpi, Core Index, David Rosenberg, Declines, Deflation, Emergency Measures, Exit Strategy, Fed Funds, Fed Staff, Fiscal Stimulus, Fomc Meeting, Hedge Funds, Hot Off The Press, Investment Strategy, Larry Meyer, Leading Indicator, New Car Prices, Nyt, Portugal Spain, Ppi, Retail Sector, Stimulus, Treasuries, Wsj Editorial
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Rosenberg’s Take On The Discount Rate Hike (CNBC)

Thursday, February 18th, 2010

David Rosenberg, and several other economists, as well as Steve Liesman, share their first perspectives on the sudden (yet oh so “telegraphed”) discount rate hike.

Source: ZeroHedge.com

Tags: Cnbc, David Rosenberg, Economists, Perspectives, Rate Hike, Steve Liesman
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David Rosenberg: How to Play Inflation

Thursday, February 11th, 2010

Here is a reprise of David Rosenberg’s thoughts on how to prepare for inflation, from Breakfast with Dave, December 15, 2010.

HOW TO PLAY INFLATION?

There is no sense in being dogmatic. But just in case inflation were to stage a comeback, this is how one would prepare for it:

• Precious metals (while gold grabs the spotlight, silver has surged 52% this year and has far outpaced the 27% runup in gold; and the gold/silver ratio, while down from a peak of 84 to 66, is still above the average of 54 over the past three decades).
• An even steeper U.S. yield curve!
• TIPS (or real return bonds) - the 5-year TIPS breakevens right now point to an inflation expectation of just over 1.7%, whereas consumer expectations are closer to 2.6%.
• Short-term duration corporate bonds (and go out the credit curve).
• Commodity currencies - Canadian Loonie, New Zealand Kiwi, Aussie dollar, Brazilian Real, and Norwegian Kroner.
• Basic material stocks (including energy) as well as consumer staples (tobacco, food/beverage).

We don’t have a big inflation view, but you never score brownie points by being dogmatic. If (when?) the massive amounts of fiscal and monetary stimulus ever do show through in final inflation (this will hinge on a renewed expansion in household balance sheets and a fresh credit-creation cycle), these are the areas that would likely garner the most investor interest.

Source: Breakfast with Dave, December 15, 2010

Tags: Balance Sheets, Brownie Points, Canada, Commodities, Consumer Expectations, Consumer Staples, Corporate Bonds, Credit Creation, David Rosenberg, Food Beverage, Gold, inflation, Investor Interest, Massive Amounts, New Zealand Kiwi, Norwegian Kroner, precious metals, Real Return Bonds, Runup, Stimulus, Term Duration, Three Decades, Yield Curve
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David Rosenberg: “Risk Appetite Back on the Front Burner”

Thursday, February 11th, 2010

David Rosenberg writes today that with the Greece issue on the backburner again, benign economic news from China and Australia, it appears that risk appetite is back on. The dollar and yen are selling off:

Global investor risk appetite is back on the front burner with the U.S. dollar and Yen selling off; oil, copper and gold rallying; bonds trading defensively (actually selling off noticeably in Europe); equities firming across the board with Asian markets up 1.8%, emerging markets up 1%, and the global MSCI index up 0.5% at the moment.

EU policymakers are meeting with an aim to backstop Greece’s financial problems — all we need are headlines like that to pop up every day so that investors can keep on breathing a sigh of relief. And, the data were also Goldilocks in nature. China’s inflation rate fell to 1.5% YoY in January from 1.9% and well below the 2.1% consensus estimate, and hence another reason to breathe a sigh of relief since this alleviates concerns over another round of policy tightening.

Then we had Australian employment come out and ratified the view that the global economy is humming along at a very nice clip — jobs rose 52,700 in January, which was more than triple what the consensus community had penned in and the unemployment rate dropped to 5.3% in January from 5.5% the prior month.

The concerns from yesterday over what Ben Bernanke had to say that at some point in the future the Fed will have to start snugging liquidity, and do so without initially touching the funds rate but rather widening the spread between it and the discount rate, conducting reverse repos and raising interest rates on commercial bank deficits at the Fed, has totally dissipated. Meanwhile, the problems in the U.S. housing market continue unabated with the number of foreclosure filings (RealtyTrac data) topping the 300k mark for the 11th month in a row in January (nice to see the Obama modification plan at work) — 315,716 to be exact, up 15% from a year earlier. Banks also repossessed more than 87,000 homes last month, down 5% from December but still up 31% from January 2009.

Moreover, for all those pundits believing that companies are about to embark on a capex cycle, they should consider that the data so far for Q4 show that the reporting S&P 500 companies have thus far boosted their cash holdings by 78% YoY, to $1.2 trillion, and have cut their spending budgets to $30 billion from $41.5 billion.

Source: Breakfast with Dave, February 11, 2010 (free registration required)

Tags: Asian Markets, Australian Employment, Backburner, Backstop, Ben Bernanke, China, Consensus Estimate, David Rosenberg, Economic News, Emerging Markets, Global Economy, Global Investor, Gold, Greece Issue, Housing Market, Inflation Rate, Investor Risk, Msci Index, oil, Repos, Risk Appetite, Sigh Of Relief, Unemployment Rate, Yoy
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David Rosenberg: Update and 5 Ways to Protect a Portfolio in a Deflationary Backdrop

Tuesday, February 9th, 2010

Below is an excerpt from Breakfast with Dave, February 9, 2010.

“We highlighted yesterday what this means for asset classes and sectors: If past is prescient, it would mean a test of 900 on the S&P 500 with defensive “yield” sectors taking over leadership (utilities, staples, health care — in fact, biotechs have held in very nicely during this recent market selloff). Bonds outperform stocks (with the Treasury market undergoing a bull-steepener — though see below why a bond rally may be led by the longer end of the curve this time around). Volatility increases substantially. Credit spreads widen and commodities get crushed. This is a time for conservative investing with cash on hand to be put to work once better valuations emerge — we are not quite there yet, in our view.

“It always pays to look and see how the market is positioned — this would have helped a lot when the appetite for risk peaked in late 2007 and reappeared in early 2009. So, we look to the Commitment of Traders report that is published every week and look at the “net” long or short position across the various asset classes (futures and options), particular among the ‘non commercial’ accounts, which is a proxy for the ’speculators’ or momentum investors.

We found that even after the move towards risk aversion and defensive positioning in recent weeks, there may be more to go. The VIX still has a net short position of 2,395 contracts. There are 9,225 net long Dow contracts and as far as the S&P 500 is concerned, speculators are still net long 99,675 contracts. The Australian dollar still commands a net long position of 33,524 contracts; and 17,209 net long contracts out there for the Canadian dollar.

There are 90,709 net short contracts with respect to the 10-year Treasury note, but 173,637 net long positions for the 2-year Treasury note (this would actually augur then for a bull flattener if these shorts on the 10-year not close out). The long bond is still net short by 92,358 contracts — again, if these shorts are covered then we could get one humdinger of a rally at the back end of the Treasury curve.

In the commodity space, only natural gas has a net short position (81,010 contracts) – there are 160,232 net long crude oil contracts, 222,282 net long gold contracts and 18,069 net longs on copper. Invest accordingly.

All we can say is that here we are with a 0% policy rate, a $2.2 trillion Fed balance sheet and a massive 10.5% deficit-to-GDP ratio and the strong undertow of deflation has not gone away, and governments have few, if any, bullets left in the chamber. We have industrial metals prices coming under downward pressure, price wars in the telecom sphere, and of course, ever since the Department of Agriculture told us last month that this year will provide a bumper crop of farm products, we have seen the likes of corn prices plunge 16% and soybeans by 7% (see page C1 of the WSJ for more). Below we list how to position the portfolio for a deflationary backdrop.”

FIVE WAYS TO PROTECT A PORTFOLIO IN A DEFLATIONARY BACKDROP

1. A focus on safe yield, wherever you can get it. High-quality corporates (non-cyclical, high cash reserves, minimal refinancing needs)
2. Equities: focus on reliable dividend growth/yield; preferred shares (”income” orientation)
3. Whether it be credit or equities, focus on companies with low debt/equity ratios and high liquid asset ratios – balance sheet quality is even more important than usual. Avoid highly leveraged companies at all costs.
4. Ultra-selectivity with regard to financials. Same for retailing.
   
5. Focus on sectors or companies with these micro characteristics: low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care).
   

Tags: Asset Classes, Australian Dollar, Biotechs, Canada, Canadian Dollar, Commercial Accounts, Commitment Of Traders, Commitment Of Traders Report, Commodities, David Rosenberg, Futures And Options, Gold, Momentum Investors, Move Towards, oil, Risk Aversion, Selloff, Short Position, Speculators, Staples, Treasury Market, Valuations, Vix, What This Means, Year Treasury Note
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David Rosenberg: What a Difference a Year Makes

Friday, February 5th, 2010

One year makes a quite a difference:

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

Source: Breakfast with Dave, February 3, 2010

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

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

Source: Breakfast with Dave, February 4, 2010

Tags: Asian Central Banks, Bank Of Australia, Bank Of China, China, Chinese Economic Outlook, Chinese Stock Market, Commodities, Commodity Prices, Corporate Bond Spreads, David Rosenberg, Emerging Markets, Global Exports, Hike Rates, India, Ism Index, Market Rally, Moving Averages, oil, Pboc, Real Gdp, Reflation, Reserve Bank Of Australia, Shiller, Small Business Incentives, Vix Index
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Lessons from Bernstein, Rosenberg and Farrell

Monday, January 11th, 2010

I have over the past year referred to parting comments from Richard Bernstein and David Rosenberg as they left Merrill Lynch for less restrictive surroundings. We were again reminded of these lessons, together with those by legendary Merrill analyst Bob Farrell (who retired in 1992), in a recent report by Jeff Saut as extracted below.

Treasure these words of wisdom and stick them onto your wall so that you are always reminded of them.

Richard Bernstein’s lessons

1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.

2. Most stock market indicators have never actually been tested. Most don’t work.

3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.

5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

6. Balance sheets are generally more important than income or cash-flow statements.

7. Investors should focus strongly on GAAP accounting, and should pay little attention to “pro forma” or “unaudited” financial statements.

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

9. Investors should research financial history as much as possible.

10. Leverage gives the illusion of wealth. Saving is wealth.

David Rosenberg’s lessons

1. In order for an economic forecast to be relevant, it must be combined with a market call.

2. Never be a slave to the data - they are no substitutes for astute observation of the big picture.

3. The consensus rarely gets it right and almost always errs on the side of optimism - except at the bottom.

4. Fall in love with your partner, not your forecast.

5. No two cycles are ever the same.

6. Never hide behind your model.

7. Always seek out corroborating evidence.

8. Have respect for what the markets are telling you.

Bob Farrell’s lessons

1. Markets tend to return to the mean over time.

2. Excesses in one direction will lead to an excess in the other direction.

3. There are no new eras - excesses are never permanent.

4. Exponential rising and falling markets usually go further than you think.

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-chips.

8. Bear markets have three stages.

9. When all the experts and forecasts agree, something else is going to happen.

10. Bull markets are more fun than bear markets.

Source: Jeffrey Saut, Raymond James - Investment Strategy, January 4, 2010 (hat tip: The Big Picture).

Tags: Asset Classes, Astute Observation, Bob Farrell, Bull Markets, Cash Flow Statements, David Rosenberg, Economic Forecast, Financial History, Income Opportunities, Merrill Lynch, Parting Comments, Portfolio 6, Return On Capital, Richard Bernstein, Risk Aversion, Scarce Capital, Stock Market Indicators, Time Horizons, Unaudited Financial Statements, Words Of Wisdom
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Rosenberg: US Bear, Canada Bull - Setting the Record Straight

Friday, December 11th, 2009

In today’s Breakfast with Dave, David Rosenberg (Rosie), Chief Economist, Gluskin Sheff, sets the record straight about being his being bearish the US and bullish Canada.

SETTING THE RECORD STRAIGHT

I get this all the time; how can you be bearish on the U.S. economy and the stock market and also be calling for an elongated period of credit contraction and still be bullish on Canada and commodities?

Well, here goes:

The U.S. credit crunch began in July 2007 (it took the stock market three months to figure it out). The Fed cut the discount rate in August 2007 so it began to be very nervous. And the GDP recession began in December 2007.

When did the Canadian stock market peak? How about June 18, 2008, at 15,073, which is almost a year after the U.S. credit crunch began and six months after the onset of the U.S. recession. At the peak in the Canadian stock market, the S&P 500 had already sagged by almost 15% from its prior highs. The two markets did not hit their peaks at the same time, believe it or not.

And when did the Canadian dollar peak? How about May 21, 2008. Again, 10 months after the credit crunch began. Go figure.

Oil peaked at $145/bbl in July 2008, which is nearly a year after the beginning of the credit collapse and seven months after the U.S. recession began. The CRB also peaked in July - from the time the U.S. recession began to the peak seven months later, commodity prices were up 15%. I would therefore have to assume that there is a very loose connection between the U.S. economy and the performance of resource prices.

In fact, the U.S. was more than a half-year into an economic downturn and a full year into a credit collapse, and copper was still north of $4 a pound; wheat over $10 a bushel; and soybeans above $15 a bushel. At the time these commodities were hitting their highs, not only were U.S. Baa credit spreads in excess of 300bps (from 160bps at the height of the credit bubble) and S&P financials were down more than 40%! Again, go figure.

The reality is that during the first nine months of the U.S. recession, China’s GDP (its imperfections notwithstanding) was still expanding at an average annual rate of 8.9%; India by 6.7%; Brazil by 6.7% too; Russia by 4%; the Philippines by 3.7%; Korea and Thailand by around 2.5%. So the rest of the world did not exactly go to sleep just because the U.S. economy became comatose for a period of nine months. But when Lehman collapsed and global trade finance vanished and it became impossible to secure export credits, well then, it was vertical down everywhere.

So at least we know that it will take to pull the rug from underneath the commodity sector, the Canadian stock market and the Loonie - not just a U.S. recession; and not just a contraction in credit; but a major financial event that infects the entire world economy and trade flows. We certainly are not bullish on the outlook, but nor are we calling for a resumption of the awful destabilizing conditions that prevailed a year ago.

Meanwhile, despite the fact that the U.S. consumer cannot seem to revive without ongoing government life support; despite the fact that 130 U.S. banks have failed so far this year; despite the fact that consumers have had to liquidate their debt for each of the past nine months; despite the fact that 1 in 7 Americans with a mortgage are either in arrears or in the foreclosure process; and despite the fact that the U.S. has shed four million jobs through the first 10 months, commodity prices are up more than 30%, the Canadian stock market is up 27%, and the Canadian dollar is up 14%. Go figure.

Tags: 10 Months, Bbl, Bear Canada, Bushel, Canada, Canadian Dollar, Canadian Stock Market, Chief Economist, China, Commodities, Commodity Prices, Contraction, Crb, Credit Bubble, Credit Crunch, David Rosenberg, Economic Downturn, Emerging Markets, Half Year, India, Loose Connection, Market Peak, oil, Recession, Resource Prices, Rosie, Seven Months, Soybeans
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Rosenberg: Is the Canadian Housing Market in a Bubble?

Thursday, December 10th, 2009

In today’s Breakfast with Dave, Rosie discusses the Canadian housing market:

It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.

While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).

In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …

Source: Breakfast with Dave, Gluskin Sheff, December 10, 2009

Tags: Canada, Canadian Economy, Closest Thing, David Rosenberg, Economic Expansion, Education Sector, Employment Conditions, Excess Inventories, Gluskin Sheff, Headline Number, Home Price Appreciation, Housing Market, Lows, Market Musings, Personal Income, S Market, Standard Deviation, Statisticians, Target, Textcolor, Workweek
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David Rosenberg: The Sweet Spot is Over

Tuesday, December 8th, 2009

In yesterday’s Breakfast with Dave, Rosie shares his thoughts about why the easy money has already been made in equity markets.

Below are 10 reasons why we believe this:

1. For the time being, the equity market is going to have to contend with more chatter of the Fed’s exit strategy.

2. The market also faces a new reality. While employment stabilizing (maybe) is a good thing, it means the era of declining unit labour costs and margin expansion is behind us.

3. Market leadership is beginning to fade as seen by the receding advance- decline line on the big board.

4. Market complacency is a worry with the VIX index back down to 21.25. The good news is that insurance against a correction is priced about as low as it can go. Protection is cheap.

5. The WSJ (page C1, December 7, 2009) reports that not only have individual investors been selling into this last leg of the rally (then again, the S&P 500 has really done nothing for over six weeks), but pension funds have been rebalancing too.

6. Volume has declined markedly and has surpassed 4.7 billion shares on the NYSE just once in the past three weeks.

7. With the correlation between a weak greenback and a positive stock market above 90% over the past eight months (versus zero over the past 30 years), a countertrend rally in the U.S. dollar would likely coincide with sputtering equity prices.

8. The Dow transports/utilities ratio has turned in a classic triple-top and this is a signpost to get defensive.

9. The latest Investors Intelligence poll shows the bull camp at 50%; the bear share at a mere 16.7%. In other words, there are three bulls for every bear. This is negative from a contrary perspective (another sign of complacency).

10. Corporate bond yields have stopped narrowing over the past three months and have actually recently shown modest signs of an upward bias.

Source: Breakfast with Dave, Gluskin Sheff, December 7, 2009

Tags: Advance Decline Line, Bear Share, Cheap Advertisement, Complacency, Corporate Bond Yields, David Rosenberg, Dow Transports, Exit Strategy, Ffffff, Gluskin Sheff, Greenback, Individual Investors, Investors Intelligence, Market Leadership, Market Musings, New Reality, Nyse, Page C1, S Market, Signpost, Target, Textcolor, Unit Labour Costs, Upward Bias, Vix Index, Wsj
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Goldberg, not Rosenberg

Wednesday, December 2nd, 2009

The stock market assessment below comes from highly regarded David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates.

Gold just capped off its best month in a year - ±14% in November and 34% year-to-date. It’s not just the middle-class in China that is starting to buy gold, but the central bank, which has very deep pockets, is going to do likewise. We just came across a Bloomberg News article quoting an official from the state-owned Assets Supervision and Administration Commission (Ji Xiaonan, the Chief) as saying “we recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years.” China’s reserves, after a 76% buildup since 2003, currently stand at 1,054 tons, so we are talking here about the prospect of some pretty heaving buying in coming years.

If China were to lift their gold reserves to 5,000 tonnes, which is equivalent to about two years of global production, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978) based on our models. If China moves towards 10,000 tonnes, well, that would end up taking the gold price to $2,623/ounce if our calculations are in the ball-park.

Make no mistake, we are gold bulls. Central banks have deep pockets and production of gold is stagnant so the demand-supply backdrop for bullion is bullish. At the same time, we have to pay respect for market positioning over the near-term. The market for precious metals is overextended right now after the parabolic move of the past two months. The net speculative long position has swelled to a record 273,552 contracts (100 ounces each) on the COMEX. Open interest has never been higher, at 693,661 contracts. So this is one crowded trade - as is the short-trade on the USD against all the major currencies, especially the commodity-based units.

So, we could get a meaningful gold correction at any time, and we are talking about a correction in what is still a secular bull market - the 200-day moving average is $970/oz, which means we could get as much as a 20% pullback and no fundamental trendline would be violated. We remain long-term gold bulls, and our commentary remains fundamentally bullish, but anything that could spark a countertrend rally in the U.S. dollar, which is our principal near-term concern, would put gold at a much better price point for investors than the peak we are at today.

Source: David Rosenberg, Gluskin Sheff & Associates - Breakfast with Dave, December 1, 2009.

Tags: Administration Commission, Ball Park, Bloomberg News, Bullion, Central Banks, Chief Economist, China, China Moves, Comex, Commodities, David Rosenberg, Deep Pockets, Emerging Markets, Global Production, Gluskin Sheff, Gold, Gold Bulls, Gold Price, Gold Reserves, Market Assessment, Market Positioning, Metric Tons, Open Interest, precious metals
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