February 4, 2010WHILE YOU WERE SLEEPING
Risk appetite is, in a word, fading. Global equity markets are under renewed selling pressure today as is the commodity complex with both gold and oil trading lower — even in the face of Cisco’s Chambers predicting a global recovery in business and consumer spending. Emerging market equities are down 1% today, snapping a three-day recovery streak. Proposed strike action by Greece’s largest union is apparently posing a threat to the government’s ability to carry through with its ultra-austere fiscal plan. Can you imagine what it is going to be like for the Greece economy to go from a 13% deficit-to-GDP ratio to 3% in a two-year span? Give me another shot of ouzo!
Credit default swaps are widening and government bond yields are soaring across the pond and not just in Greece but also in Spain, Portugal and Hungary too as investor concern over the fiscal outlook in those countries have all of a sudden re-surfaced on the front burner. Hence the U.S. dollar rally has been extended as it climbs to its highest level against the Euro since July — not exactly the way towards meeting President Obama’s goal of doubling U.S. exports.
The economic data flow out of the once-hot regions of the world, and the ones connected to China, are starting to take a turn for the worse. New Zealand’s jobless rate surged the most in a decade, to 7.3% in Q4 from 6.5% in Q3 (the consensus was 6.8%) and the workweek sagged to a five-year low, taking the Kiwi down well below the 70 cent level. And, the Aussie dollar dropped to a six-week low after a surprising decline in December retail sales (-0.7% MoM versus consensus estimates of +0.2%). Elsewhere, we saw German manufacturing orders come in well below expected in December too — down 2.3% MoM versus consensus expectations of a 0.5% advance.
In a sign of just how mixed the U.S. job market news still is, the Monster employment index dipped a point in January, to 114 (the index was at 118 a year ago — when payrolls plunged 741k). Needless to say, Treasuries have caught a bid with all this negative news, though this follows yesterday’s sharp yield runup. Keep an eye on JGB yields — they are starting to creep higher on supply concerns.
As for the equity market, if there is a possible bright light it is that sentiment has swung massively to the bearish side. The American Association of Individual Investors survey shows that as of February 4th, there were 29.2% in the bull camp and 43.1% in the bear camp. Just a week ago these shares were at 35.0% and 36.7% respectively; and 41% and 26% at the turn of the year. Quite the swing. That said, the bear market rally off the March 2009 low was a rally more rooted in technicals than in fundamentals — a view validated by the fact that this rally stalled out after a classic 50% retracement from the bottom.
Now, what if we see a 50% reversal off the up-move? Well, that would mean a retest of 915 on the S&P 500 to the downside. Don’t think it can’t happen — this market, on a Shiller normalized P/E basis, is still 25% overvalued as it is. You do not want to pay a Cadillac price for a Ford focus that much we do know.
Meanwhile, the S&P 500 closed yesterday’s session at 1097.28; back on October 15, it was sitting at 1095.56. The S&P/TSX index is now at 11,390.46; back on September 15, it was sitting at 11,495.83. So here we have the U.S. market doing diddly-squat now for nearly four months — just moving sideways — and the Canadian market is actually lower now than it was five months ago. 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:
Imagine that — the time to have bought the market was when real GDP was hitting its cycle lows, and now Mr. Market doesn’t know what to do with a +5.7% print. But if it was time to buy at -6.4% on real GDP almost a year ago, since that was the trough and the ‘second derivative’ could only get better from there, maybe Mr. Market, in his infinite wisdom, now sees 5.7% as the peak and is deciding that it is now time to sell ahead of the eventual slowing in that fabled ‘second derivative’. Just a thought.
To reiterate, the era of the great policy reflation experiment is over. China and India are tightening credit policies. Much of Europe is tightening fiscal policies. Canada looks set to unveil a fiscal plan that will aim to reduce, not boost, the deficit going forward. The stimulus bought time and cushioned the blow in 2009, but the story for 2010 and beyond is likely to be much different — especially if the McKinsey report is correct in its finding that an average post-financial-crisis deleveraging cycle lasts 6-7 years (and let us pray that this time around proves to be only the “average”). We highly recommend a read of the op-ed column that found its way onto page A19 of today’s WSJ (A Short History of American Populism). To wit:
“Last year Mr. Obama and his policy strategists seem to have assumed that the financial crisis and deep recession would make Americans look more favorably on big government programs. But it turns out that economic distress did not make us Western Europeans.
Now the president and his advisers seem to be assuming that populist attacks on the rich will rally the downtrodden masses to their side. History does not provide much hope for this audacity. William Jennings Bryan, whose oratorical skills outshined even Mr. Obama's, got lower percentages of the vote each time he ran.”
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© Gluskin Sheff
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