David Rosenberg, formerly the Chief North American Economist at Merrill Lynch in New York, returned to his native Canada to settle at Toronto-based Gluskin Sheff, following the Bank of America acquisition. He is highly respected and one of the most candid and lucid macro-economists and his grasp of the market related economics is refreshing. Rosenberg says there is no point in making economic forecasts that are not backed up by actionable investment calls. His Breakfast, Lunch, Coffee and Tea With Dave newsletters are worth reading.
Last week, Rosenberg shared his thoughts on the question, "Is the financial crisis over?" (08/25)
Not if you're not too big to fail. We are now up to 77 failed U.S. banks so far in 2009. This already matches, in just eight months, the number of lenders who failed in the previous 16 years combined.
About bear markets and valuation:
One should always keep an open mind. Practically all bear markets have a 50% retracement and this cycle has been no different. However, what we have witnessed is unprecedented because at no time in the past has the stock market rallied more than 50% ahead of the supposed end of a recession. Normally, the
move off the lows to the official end of the economic downturn is 20%. And, the trailing P/E multiple on operating earnings is now north of 25, a record eight point expansion in a short time frame (the P/E on reported earnings is nearly 130x!).Go back to the March lows, and the market was down around 60% from the peak,but then again, earnings plunged the same amount. At the lows, valuation levels
suggested that equities were pricing in $50 of operating earnings and -2.5% real GDP growth for 2009. And guess what? That's exactly what we are likely to get.What's priced in five months and 50% later? Call it $70 on operating EPS for the coming year and +4.0% real economic growth. In other words - the stock market is fully priced and then some. But for the time being, the technicals and sentiment - the high level of enthusiasm - and the risk of a "buying panic" by lagging portfolio managers are very likely going to make folks, like Walter Murphy, look prescient.
About last week's so called good news (08/26):
1. Bernanke reappointed
We really fail to see how it could possibly be that the same central bank official, who, over a span of a decade, presided over two massive bubbles and their busts, can be viewed as being a positive force for the markets. Perhaps there is some solace in knowing that the same person who created this awesome and complex $2 trillion Fed balance sheet will be around to dismantle the largesse since he's probably the only one that knows how.
2. The first monthly increase in the Case-Shiller home price index
As for the second point, there is a difference between a trendline and the noise around that trendline. Home prices are down a massive 31% from their peak and have been in a vertical-down pattern for nearly three years. Perhaps a respite is in order, but with the true underlying unsold inventory near 12 months' supply, which is double what would typify a balanced housing market, it would seem like wishful thinking that we have suddenly achieved a fundamental low in residential real estate values (especially at the high end).
3. The seven-point jump in consumer confidence in August
With regard to point number three, we welcome any rise in consumer confidence but an honest appraisal of the data would show that 54.1 is still a very depressed level. In fact, the average index level during recessions is 73.0 - August's reading was nearly 20 points below that. So, if the recession is indeed over and done, somebody forgot to tell this 70% chunk of GDP otherwise known as the consumer.
Now, what about Mr. Market, who is still in a most joyful mood. Well, the normal level of consumer confidence in the month in which the S&P 500 is up 55% from an oversold bear market low is 100. So, the stock market is behaving as if consumer confidence is twice the level it really is.
What is the enemy of this bear market rally?
The real enemy for the equity market is Mr. Bond - that pesky Treasury market that just won't sell off and validate the great reflation trade. Indeed, if we were seeing a real asset allocation move on the part of investors, as opposed to massive and ongoing short covering, then the 10-year Treasury note yield would be trading close to 5.0% - especially with these freshly minted Obama debt forecasts. But instead, the 10-year note is now getting perilously close to the July 10 low of 3.32%. Keep in mind that July 10 was the day when Meredith Whitney gave the green light to Goldman, and Roubini declared the recession to be ending, and what a spark that provided to this last leg of the bear market rally. Now what if Doug Kass' declaration yesterday that the major averages have hit their highs for the year proves as prescient in the other direction? Come on, not only is the market trading at a nutty 130x multiple, but September-October is right around the corner (as is H1N1).
Equities are on a roll... but still overvalued (08/28):
We continue to hear how undervalued the stock market got to this cycle, but it was really the corporate market that was priced for Armageddon. The equity market, at the lows, was discounting -2.5% real GDP, but if it was pricing in the same outlook as corporates, Baa spreads pierced the 600 basis point threshold, then the S&P 500 would have bottomed near 315, not 666. (Hey, that still would have been a triple-bagger from the 1982 lows!)
Be that as it may, what we have on our hands is a liquidity-induced and technically-strong equity market, and as Bob Farrell has been known to say, these types of rallies quite often “go further than you think” but they do not generally correct by “going sideways”. Even if the recession is over, the market usually is up 20% from the time of the bottom to the end of the downturn. By the time we are up over 50% on the S&P 500, what is “normal” is that we are heading into the second year of recovery (recession being over isn’t even a debate), the economy has shown an ability to expand without the need for government assistance and GDP would have risen nearly 5.0% by now and helped create about 1 million jobs. In other words, after the market has jumped over 50% from the low, we have moved beyond hope and into reality.
You can sign up to receive David Rosenberg's letters by email here.
