Commentary

Implications of the Debt Downgrade

As we had suggested in recent weeks, a U.S. downgrade was going to likely be more negative for the equity market than Treasuries, and that is exactly how the week is starting off. The reason is that history shows that downgrades light a fire under policymakers and the belt-tightening budget cuts ensue, taking a big chunk out of demand growth and hence profits. It is not just the United States the problem of excessive debt is global, from China to Brazil to many parts of Europe. And lets not forget the Canadian consumer.
Commentary

American Consumer Sputtering in Q1

The U.S. consumer spending and income report for February was a bit of a mixed bag. First, personal income in the U.S. did eke out a 0.3% MoM gain in February, but it was below expected and failed to keep up with the rise in inflation, which are largely, but not exclusively, being driven by food and fuel prices (accounting for half the increase). The personal consumption expenditure (PCE) price deflator rose 0.4% MoM and as such real income - straight up, net of taxes and excluding personal transfers - fell 0.1% in the first contraction since last September.
Commentary

The Profit Boom is Over

A seven-quarter run of positive profit growth ? six were double-digits ? came to an end in the fourth quarter as pre-tax corporate profits in the U.S.A. sagged at a 10% annual rate (looking at corporate earnings before tax without inventory valuation and capital consumption adjustments). That was the first decline since the fourth quarter of 2008. The YoY growth rate is still healthy at +16% but off the boil, that is for sure.
Commentary

Bullish Sentiment Entrenched

A mini corrective phase in the equity market came and went. Investors have been groomed to buy the dip this cycle, and this is not just a mere observation. The flare-up in the Middle East, the tragic nuclear disaster in Japan, and not even a recent slate of poor U.S. economic data have put much of a dent in what is still an extremely positive sentiment readings. Bob Farrell?s Rule 9 seems to be facing a stiff headwind from the Fed?s overt policy stance on lifting valuation levels for risk assets. The bulls are fully in control and can now see new highs in sight for the major averages.
Commentary

Shiller P/E Still Points to Extreme Overvalution

One of our favourite equity valuation metrics, the Shiller Cyclically Adjusted P/E ratio, continues to suggest that the equity market remains overvalued (the cyclically-adjusted P/E uses 10-year earnings to smooth out volatility). At 23.7x, it suggests an overvaluation of over 40% relative to historic norms (and in this case the data goes back to the late 1800s). Note that this indicator has been over 23x for three months in a row, something we haven?t seen since early 2008.
Commentary

In Search of Value

Within the space we do favour large-caps, strong balance sheets, high-quality, low P/E stocks, and commodities, especially energy. But among all the worries, we still see this as an overvalued market and we believe in buying low and selling high. We know that many pundits like to use short-term market measures of valuation using year-ahead or trailing earnings or cash flow, which at times seems a little disingenuous for an asset class that is inherently long-term in duration. Be that as it may, perhaps we can shed some light on why patience may still be virtuous here.
Commentary

There are Still So Many Unknowns

There are still many unknowns with regard to the global macro picture, but what we do know are the following 10 things: 1. There are more upside than downside risks to the oil price. 2. Japan was already the number-one importer of liquefied natural gas (LNG) and this status will be accentuated as replacements for a damaged nuclear grid is sought. 3. Nuclear energy development takes a near-term hit here by the politics of the Japanese crisis but not a permanent hit. 4. The aftershock in Japan will be related to contaminated food supply so we can expect to see more inflation on this score too.
Commentary

Equity Market Bounce-Back -- Don't get Too Excited

Between the put-to-call ratio and the 40% share of stocks trading below their 50-day moving average, the U.S. stock market became hugely oversold. Plus we had the skew from the quadruple-witching session. And the cease-fire announced in Libya and the FX intervention to reverse the yen?s strength provided some fodder for the shorts to cover. But trend lines have been broken, portfolio managers have little cash to work, and according to a ML-BAC survey, we had a net 67% of global portfolio managers overweight equities against their position. Plus, the world is still a very uncertain place.
Commentary

Has the Game Changed?

An object at rest will remain at rest unless acted on by an unbalanced force. An object in motion continues in motion with the same speed and in the same direction unless acted upon by an unbalanced force. This is otherwise known as Newton?s first law of motion. In market parlance, this implies that a trend remains in force until such time as an exogenous shock causes it to either stall or reverse. Economic, geopolitical, and natural disaster events aside, equity markets around the world have definitely broken their intermediate-term uptrend.
Commentary

Consumer Confidence Turns Back Down

According to an RBC consumer outlook poll, one in three U.S. households is already ?significantly? cutting back on spending because of rising gasoline prices. And this was a survey taken at a time when the national average price at the pumps was around $3.20 per gallon ? wait and see what happens when it costs four bucks to fill up the tank ? that is the pain threshold for 41% of the consumer sector as per this poll.
Commentary

Random Post-Employment Thoughts and Consensus On Oil Impact

The consensus is that the U.S. labor market is healing. That may well be the case but the slack in the job market remains huge allowing for a structural rise in the unemployment rate. Only 15% of the recession job losses have been recouped despite the fact that expansion has surpassed the downturn. The consensus is that the world economy has gotten used to high levels of oil prices so this latest run-up in crude poses little risk to the economic outlook. But it is change that matters to growth, not levels. As for the macro impact, do not understate the potential for economic contraction.
Commentary

Payroll Review ? Nice Job, Shame about the Paycheck

The reaction to the jobs report today is uniformly positive. I think a dose of reality is really needed here. It may as well come from this pen. Here is what I think is important: because of the winter storms, we really have to average out the past two months. While we are seeing positive job growth, it is not accelerating even though we are coming off the most intense impact of the fiscal and monetary easing that was unveiled late last year. We are disappointed with what is still a lackluster trend in net job creation, particularly in view of the peak stimulus we are currently experiencing.
Commentary

What Happens If There is No QE3?

?who picks up the slack if the Fed stops its bond-buying program?? The answer is hardly complicated since we have a template for this. It is a very simple guidepost. Last year, from April 23rd through to August 27th, the Fed allowed its balance sheet to shrink from $1.207 trillion to $1.057 trillion for a 12% contraction as QE1 drew to a close. Go back a year to the Federal Open Market Committee minutes and you will see a Federal Reserve consumed with forecasts of sustainable growth and exit strategy plans. A sizeable equity correction coupled with double-dip fears were nowhere to be found.
Commentary

Random Market Thoughts

Only time will tell if yesterday?s market action was a true watershed. It was the first time since last July that the stock market was down on the first day of the month. Till yesterday, the opening days in January and February had already accounted for over half the year-to-date gains in the S&P 500. It was also the first time since the last leg of the bear market rally began six months ago that ?good? news failed to ignite equity prices. Yesterday we saw auto sales shoot up 6.7% to 13.4 million units, which was the best level since August 2009, and we also saw the ISM inch higher.
Commentary

The Good, The Bad and The Ugly

The good: The manufacturing data in the U.S. continues to improve, at least within the confines of the major diffusion indices. The bad: The U.S. income and spending numbers were hardly stellar. It remains to be seen how much of the weakness was weather-related, but consumer spending dipped 0.1% in January ? the first decline since Apr 2010. The fact is that consumers kept a lid on their spending even with the fiscal windfall in Jan, pushing the savings rate up to a four-month high of 5.8% from 5.4% in both Nov and Dec. The ugly: The housing sector remains in the dumpster.