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China's Currency Shift Not a Game-Changer
by David A. Rosenberg of Gluskin Sheff,
The big news over the weekend was the move by China to end the yuan peg to the U.S. dollar. This delink will allow the People?s Bank of China to pursue its own independent monetary policy. In turn, this will help to ease global trade imbalances, ward off the threat of trade protectionism, alleviate domestic credit strains and inflation pressures and accelerate the Chinese shift from export-led to consumer-led growth. It also suggests that the Chinese authorities have confidence in the sustainability of the global recovery.
An Intractable Fiscal Problem
by David A. Rosenberg of Gluskin Sheff,
Even with low interest rates, the massive debt bulge has become so large that interest charges on the public debt are within three years of absorbing over 30 percent of the revenue base, which then makes it that much tougher to reverse course. In other words, the fiscal problem is becoming increasingly structural and we are already at the stage where even if the economy were running flat out at full employment, the deficit would still be over 7 percent relative to GDP. At some point, this will begin to impede economic progress.
Getting a Grip on Reality
by David A. Rosenberg of Gluskin Sheff,
Double-dip risks in the U.S. have risen substantially in the past two months. While the economy's 'back end' of industrial production is still performing well, this lags the cycle. The 'front end' of consumer sales and housing leads the cycle. We have already endured two soft retail sales reports in a row and now the weekly chain-store data for June is pointing to subpar activity. The housing sector is going back into the tank - there is no question about it. The recovery in consumer sentiment leaves it at levels that in the past were consistent with outright recessions.
The Dow-Gold Relationship
by David A. Rosenberg of Gluskin Sheff,
David Rosenberg provides a chart comparing the Dow Jones Industrial Average to gold prices since 1900. If this ratio ends up retesting the two fundamental lows that it has achieved in the past, and if we are correct in our assertion that gold will go to $3,000 per ounce, then we may be getting a Dow 5,000 trough at some point down the road. Rosenberg also comments on the Fed's continued hold on monetary policy, and the threat posed by rising debt levels to growth.
Double Dip, Anyone?
by David A. Rosenberg of Gluskin Sheff,
The data suggest that we are now seeing the consumer sputter with what looks like a very weak handoff into the third quarter. The housing sector is collapsing again. The export-import data are pointing to a sudden deceleration in two-way trade flows. Commercial real estate is dead in the water. Bank credit is in freefall right now. A double-dip is not yet a sure thing, however. Not only are the economists calling for 3 percent real growth, but the consensus among equity analysts is that we will end up seeing over 30 percent operating EPS growth to a new high of $95.59 for 2011.
The 'Yield' Theme Continues Unabated
by David A. Rosenberg of Gluskin Sheff,
Fixed-income is woefully under-represented in U.S. and Canadian household balance sheets, while the average baby boomer is 55 years old and as a result is at an age where capital preservation strategies win out over a strict capital appreciation focus, which worked so well in the 80s and 90s. The market moves in 16- to 18-year cycles. Sadly, this secular down-phase in the equity market began in 2000 when the major averages hit their peak in real terms, so the best we can say now is that we are probably 60 percent of the way into it.
Not Your Typical Pullback
by David A. Rosenberg of Gluskin Sheff,
The outlook for the U.S. economy and the earnings backdrop have become highly uncertain due to the European debt crisis, which, with a lag, will end up hitting our shores. In the name of prudence, a higher risk premium must be applied to the investment decision-making process, which in turn means that a focus on income, capital preservation, and defensive, noncyclical strategies will work best. Trading up in quality and reducing risk will be the key to solid investment performance in coming months.
Bond Bubble?
by David A. Rosenberg of Gluskin Sheff,
The problem with trying to assess supply or demand in the current market environment is that everything is so confusing in the early stages of this new secular paradigm of a global credit collapse. Bond yields have been low for some time, and they will remain low. But don't be lulled into numerical micro-phobia. The near-30 percent slide in the Chinese stock market suggests that we have three to six more months of deflating commodity prices. And, if the trend in Japanese, German and Swiss yields are any indication, bonds in the United States and Canada have plenty of room to fall further.
Growth Slowdown Coming
by David A. Rosenberg of Gluskin Sheff,
The declines in the financial sector, construction and state and local governments are vivid reminders that the parts of the economy that were most affected by the bursting of the housing and credit bubble are still licking their wounds and cannot be relied upon to play any role in helping revive a moribund job market. If it weren?t for the plunge in the labor force, the U.S. unemployment rate would have climbed to 10 percent in May. And it's remarkable that with interest rates so low that we would be seeing mortgage applications for new purchases down to a 13-year low.
A Bear Market or Just a Correction?
by David A. Rosenberg of Gluskin Sheff,
So far the S&P 500 is down nearly 10 percent from the highs, so this is indeed a correction thus far. More often than not, however, declines like these morph into something more severe. Right now we are looking at a 50 percent retracement of the March 2009-April 2010 run-up, which means 943 on the S&P 500. Lows in the market tend to occur with the index 20 percent below the 200-day moving average, which at this stage would be 879. So at least we have a defined range of when to begin to put money to work.
Manufacturing, Construction and Gold
by David A. Rosenberg of Gluskin Sheff,
Deflation is still the primary trend, coupled with massive reflation efforts and the unintended consequences that come along with those efforts. The name of the game is therefore to focus on strategies that deliver income, minimize volatility and emphasize capital preservation in a secular bear market, and to use commodities as a buffer in a financially unstable world. Rosenberg also comments on rising manufacturing activity and construction, and rising gold sales at the U.S. Mint.
Margins Peak, Gold Saves Lives
by David A. Rosenberg of Gluskin Sheff,
There is no ?get-out-of-jail-free? card when it comes to the places where market prices could go during this period of pullback in investor risk appetite. The appetite for risk usually comes back because the Fed cuts rates. This time around, we may have to see more balance sheet expansion and more money printed. Gluskin still loves the bond market, but gold is a very good hedge here just in case we are wrong on the inflation call or if the markets begin to anticipate the massive reflation efforts that are still to come.
May Volatility, Downward GDP Revision and Sputtering Labor Markets
by David A. Rosenberg of Gluskin Sheff,
We are still in the midst of a credit collapse. There is simply too much debt and debt service globally relative to worldwide income. The fact that we had a year-long respite does not alter this view, because that respite was induced by an unsustainable pace of bailout and fiscal stimulus in practically every country on the planet, not just in the United States. Governments bailed out the banks and stimulated the economy. But because the revenue cupboard was bare, public sector debt loads exploded at all levels of government, and to varying degrees, in every jurisdiction.
Sentiment Deteriorates - But Still Not Enough
by David A. Rosenberg of Gluskin Sheff,
Bullish sentiment, as per the latest Investors Intelligence survey, fell again to 39.3 percent from 43.8 percent; the bear camp rose to 29.2 percent from 24.7 percent. This means bearish sentiment has risen to July 2009 levels and bullish sentiment has declined to February 2010 levels. It can be argued that at real lows, the bull camp gets to 26 percent (historical average) while the bear camp gets to 49 percent, so we may well have further to go before sending the all-clear signal out.
Gold Prices, Housing, Bond Yields and the Shiller P/E Ratio
by David A. Rosenberg of Gluskin Sheff,
The fact that earnings have been rising while the stock market has been correcting has helped cut the degree of overvaluation in half, to a 0.5 standard deviation from 1.0 just over a month ago on a normalized Shiller P/E ratio basis. The ECRI leading economic index is foreshadowing a deceleration in real GDP growth, however, to 1.5 percent in the second half of the year from the 3.75 percent average pace since the recession technically ended in mid-2009. The S&P 500 level that would be consistent with that sort of pace would be around 850, rather than the current level of 1,074.
W, Not V and Using ECRI Data as a Market Indicator
by David A. Rosenberg of Gluskin Sheff,
The downdraft in the market in recent weeks reflects the financial risk related to the European debt crisis, the monetary tightening in China and the re-regulation of the financial sector that is currently making its way through to Congress. The next leg down in the equity market specifically and cyclical assets more generally is economic risk. As the events of 2002 showed, more-than-fully valued markets do not need a double-dip scenario to falter - a growth relapse can easily do the trick. It?s still time to be defensive and too early in this correction to be picking the bottom.
The First Official Correction in Equities
by David A. Rosenberg of Gluskin Sheff,
There?s no sense getting overly bearish over the latest stock market correction. For those of us with cash on hand, who had been waiting for this opportunity in a Godot-like fashion, the correction comes as good news. For the economy, it cannot be a bad thing to have oil prices come down, which helps add cash to consumer pocketbooks and protect profit margins. And of course this wonderful bond rally has acted as a source of social policy, as it has helped pull mortgage rates down to six-month lows, to 4.8 percent for the U.S. 30-year fixed rate product.
Shiller P/E Ratios, Deflation, and FOMC Notes
by David A. Rosenberg of Gluskin Sheff,
During the past 130 years, whenever the Graham/Dodd/Shiller normalized P/E ratio goes above 20.6x (it is 21x today), the market experiences a significant correction - a correction of 31 percent on average over the next 16 months. It never fails. Rosenberg also examines new evidence of deflation from the labor market, and statements from the Federal Reserve suggesting that the central bank will not consider raising interest rates until 2012.
Why the Depression is Ongoing; Gold Glitters
by David A. Rosenberg of Gluskin Sheff,
The "depression" is ongoing because real personal income, once you remove all the government handouts, has barely budged. Outside of the lagged impact of all the government stimulus and the arithmetic impact of inventory accumulation, the U.S. economy is not growing. Separately, gold has broken out to the upside even as the U.S. dollar has done likewise on the back of a renewed flight-to-safety bid.
Bazooka Bust and Gold Glitters
by David A. Rosenberg of Gluskin Sheff,
On July 15, 2008, former Treasury Secretary Hank Paulson described his plan to back the liabilities of Fannie Mae and Freddie Mac as a 'bazooka.' The stock market rallied that day by more than 1 percent, to 1,215 on the S&P 500, and the short-covering rally took the index above 1,300 by early August. Little did anyone know that we had almost 50 percent to go on the downside before reaching interim lows. Meanwhile, gold has managed to hit new highs in all currencies during the recent round of intense European-led volatility and financial market weakness.
Across the Pond - Still a Sea of Red
by David A. Rosenberg of Gluskin Sheff,
It remains to be seen how Greece and the other problem countries in the euro area will manage to cut their deficits without at the same time controlling their monetary policy and their currency. While coincident economic indicators such as employment have improved in recent months, many of the leading indicators are pointing towards a discernible slowing in economic and earnings growth in the second half of the year and into 2011 as countries worldwide shift from stimulus to fiscal restraint.
Euro-Sclerosis No Longer and Last Week's Market
by David A. Rosenberg of Gluskin Sheff,
In what can only be described as a spectacular showing of solidarity, European Union finance ministers managed to cobble together a 750 billion euro stabilization program. This is over and above the 110 billion euro Greek bailout package announced last week and is widely seen as a very powerful countermove against the 'wolf pack' that had been attacking the peripheral euro area financial markets over the past few weeks. Equities, commodities , credit and lower-tiered sovereign bonds should all improve markedly. Gluskin also comments on last week's uncertainty in capital markets.
Thoughts on Unemployment and the Market
by David A. Rosenberg of Gluskin Sheff,
The U.S. employment report was strong on the headline but masked underlying deflationary trends beneath the surface. While the primary focus in the media and Wall Street research reports will likely be on the obvious - nonfarm payrolls surging 290,000 and an even stronger 550,000 gain in the household survey - what was most notable was the buildup of excess capacity in the labor market last month and further evidence of wage deflation coming to the fore. Gluskin also comments on yesterday's market dip.
All Part of the Global Deleveraging Story
by David A. Rosenberg of Gluskin Sheff,
Greek default now seems inevitable, as does an exit from the euro zone. This is all part and parcel of the global deleveraging cycle. Entities or countries that massively overextended themselves during the boom years are going to be paying the piper, as we are now, on the opposite side of the credit cycle - the secular contraction phase. It may have started with U.S. banks and American real estate three years ago, but it is now about European banks and welfare states within the euro zone.
Ten Reasons for a Dose of Caution and Other Thoughts
by David A. Rosenberg of Gluskin Sheff,
One could say the stimulus is keeping the economy above water; however, the recovery thus far lacks the same organic vigor we saw in the failed recovery and risk asset rally in the opening months of 2002. Real final sales, despite all the government?s efforts, have only managed to recover at a 1.5 percent annual rate since the recession supposedly ended last summer. In a typical post-recession bounce-back, the rebound is closer to 3.5 percent and with far less intervention out of the Fed, Treasury, White House and Congress.
U.S. GDP, Reflecting on the Market Rally, and Unemployment
by David A. Rosenberg of Gluskin Sheff,
While many economists will undoubtedly rejoice over the strongest headline GDP results in six years, today?s Q1 2010 number actually came in a tad light relatively to expectations, not to mention the fact that it was a very mixed performance, from a sector standpoint. Real GDP expanded at a 3.2 percent annual rate versus the 3.4 percent rate that the consensus had penned in, and once again the mathematics of a renewed inventory build was responsible for half the GDP growth last quarter.
Bleak Job Outlook, Consumer Reality Check and Bailouts
by David A. Rosenberg of Gluskin Sheff,
What really stands out in this recession is the permanency of job decay. The National Association of Manufacturers just announced that fewer than 30 percent of the manufacturing jobs lost in the sector will be recouped in the next six years. If this holds true for the economy as a whole, and assuming a normal cyclical upturn in the labor force participation rate, then the nationwide unemployment rate will be 15 percent in six years' time. How anyone can believe that we can squeeze inflation out of that scenario is a mystery.
Greece, Europe and the Significance of Yesterday's Market Action
by David A. Rosenberg of Gluskin Sheff,
The Euro bounced back this morning, and the flight to higher quality German and French bonds has partly reversed course as markets swirl with speculation that the IMF will announce a stepped-up aid package. The problem, however, is that if Greece is bailed out then Portugal, Ireland, Spain and perhaps Italy may not be far behind. The inability of Greece - and others within European monetary union - to enact an independent monetary policy at a time of crisis has exposed the flaws of the union. The lack of a cohesive national government is another flaw in times of turbulence.
Recovery U.S.A.?
by David A. Rosenberg of Gluskin Sheff,
Nobody would dispute that the U.S. government has spent the economy into some sort of statistical recovery. Look at the largesse - a 0 percent policy rate, a $2.3 trillion Fed balance sheet loaded up with mortgages, a $1.4 trillion fiscal deficit loaded with bailouts and freebies and accounting changes that have allowed the banks to mark-to-model their way back towards earnings heaven. The time gap between recessions is shortening, however, and growing government debt loads mean that next time the policy response will just not be there to turn things around.
The Over-Under on Valuation
by David A. Rosenberg of Gluskin Sheff,
According to the Shiller P/E ratio, the S&P 500 is now 35 percent overvalued - a full one standard deviation event. It would be nice to say that a higher-than-normal P/E is justified by low inflation and low interest rates. Real bond yields are not that far from their long-run averages, but equity valuation is, and something is going to give at some point. The operative strategy is to buy low and sell high, not the opposite. Defensive income-oriented strategies make perfect sense right now.
No Free Lunch
by David A. Rosenberg of Gluskin Sheff,
The fiscal mess will not be fixed through spending restraint because spending is increasingly being dominated by locked-in mandatory entitlement spending and interest costs on the rapidly rising stock of public debt. In addition, the fact that the Goldman Sachs revelation came at a time when bank earnings are being reported and showing that these guys are now making money hand-over-fist (mostly via trading and recoveries) thanks to the government's help is potentially huge from a political standpoint, especially since financial reform is front and center right in Congress right now.
Deflation Pressures Mounting - And What To Do With It
by David A. Rosenberg of Gluskin Sheff,
The economy may be doing better, but it could take years to absorb all the slack evident in the labor, product and housing markets. Deflation remains the primary trend, notwithstanding the bounce in commodity prices, which will surely act as a significant margin squeeze for retailers. There is no shortage of complaints that the disinflation trend is being skewed by lower rents. Rent matters a lot in the consumption basket, and the fact that it is deflating is a sign of stress in both labor markets and the housing market.
Where is Inflation Going?
by David A. Rosenberg of Gluskin Sheff,
Inflation is going down. Fully 87 percent of the time, for five decades, U.S. core inflation has been lower the year after a recession ended, while core inflation has been down 75 percent of the time two years after a recession ended. This is because, even as the economy moves off the bottom, the output gap lingers and exerts downward pressure on inflation. In addition, nominal GDP growth rates have been in the 3-4 percent range in U.S. and Canada over the past five to 10 years. This has big implications for assumed returns in pension funds as the population ages.
What Correlates With Bond Yields: The Core and the CPI Are All That Matter
by David A. Rosenberg of Gluskin Sheff,
Monetary policy is the strongest single predictor of bond yields, with an 88 percent correlation. Inflation and inflation expectations, meanwhile, drive Fed policy, and core inflation commands a 75 percent historical relationship with bond yields. Slack in the economy drives inflation expectations, and we currently have tremendous spare capacity in goods, labor and housing. Rosenberg also comments on the tenuous prospects for a big recovery, despite hopeful signals from equity markets.
Setting the Record Straight on the Bond Debate
by David A. Rosenberg of Gluskin Sheff,
Bond bears argue that the U.S. government has never before raised so much debt to finance the bloated fiscal deficit and roll over existing obligations. With credit contracting, rents deflating, the broad money supply measures now declining and unit labor costs dropping at a record rate, however, it hardly seems plausible that inflation is a risk at any time on the near- or intermediate-term forecasting horizon. Rosenberg also comments on currency, equity, commodity and corporate bond valuations, as well as money and credit contractions.
Market Thoughts
by David A. Rosenberg of Gluskin Sheff,
The recent rally shows us that markets can stay overvalued far longer than many people realize. While technicals and momentum could take the market higher in the near term, investors should still not abandon capital-preservation strategies. The primary trend is what is important, not the noise surrounding it. Right now the primary trend is one of private sector credit contraction, as well as excess supply in finished goods, retail space, houses and labor, all of which is deflationary. This makes an ongoing emphasis on income-gathering securities and assets critical.
Stylized Facts, U.S. Earnings Update and the Unemployment Numbers
by David A. Rosenberg of Gluskin Sheff,
Things are not really as they appear. U.S. consumer spending is higher because the savings rate has slipped. Organically, spending is actually doing quite poorly as wage-based incomes remain under pressure. The earnings outlook is bright, however, and regressions suggest that we will get 15 percent earnings per share growth in 2010. Finally, while it may be encouraging to see employment finally begin to rise after such a lengthy and precipitous decline, especially in the business sector, the labor market still remains in the grips of a serious deflationary undertow.
Market Thoughts
by David A. Rosenberg of Gluskin Sheff,
The market is overvalued by more than 25 percent, but is also extremely overbought after going 24 sessions without a decline of 1 percent or more. Eighty-nine percent of the stocks on the S&P 500 are now trading above their 50-day moving averages, and the Dow has advanced in 17 of the last 24 days. This suggests that the prop desks at the five large banks are all selling securities, with leverage, to each other. There is no sign of any other major buyer, including the Fed. This provides reason for caution, because the banks could decide to switch direction at any time.
Market Thoughts and Shiller Valuations
by David A. Rosenberg of Gluskin Sheff,
With a stronger U.S. dollar, rising bond yields, lower commodity prices, slower growth and the stock market flirting with post-crisis highs, the stars are aligning for something big to happen. Bond yields are rising temporarily, and this will very likely prove to be a good buying opportunity. In the near term, however, higher yield activity may well persist and the question is how the equity market is going to handle this backup in market rates. In addition, the latest Shiller data shows that the S&P 500 is overvalued by at least 30 percent, benchmarked against historical norms.
What Is Priced In?
by David A. Rosenberg of Gluskin Sheff,
The cyclically sensitive segments of the S&P 500 have priced in an extremely robust economic landscape. Sentiment is also very bullish, with the latest Investors Intelligence poll finding 46.2 percent bullish sentiment versus 21.3 for bears. Some of this bullish sentiment may be a product of complacency, however. Most leading economic indicators have peaked, indicating a slowdown ahead.
Jobless Claims, Inflation and Retail Pricing Power
by David A. Rosenberg of Gluskin Sheff,
Jobless claims are down to 457,000, the same place they were in late 2001 after the terrorist attacks. Sustained job creation does not occur, however, until claims drop below 400,000. The headline inflation rate was 2.1 percent in February and the core was 1.3 percent, the lowest core inflation rate since February 2004. Pricing trends suggest that airlines, shipping and hospital services have retained pricing power, while restaurants, home improvement, apparel, movies, telecoms, books and newspapers have not.
Market Comment
by David A. Rosenberg of Gluskin Sheff,
Government stop-and-go policies have fostered an environment of intense volatility for equity markets over the past 12 years. The market has basically been flat for a buy-and-hold investor during this period. While this may make a great case for active portfolio management, chasing performance at this juncture is probably unwise. Housing is the quintessential leading indicator for economic activity, and many realtors still say business is slow. As the Japanese experience shows us, a double-dip recession may come faster than we think.
Credit Contraction Continues
by David A. Rosenberg of Gluskin Sheff,
Consumer credit fell by $4.6 billion in December, according to a revision released Friday of the previous $1.7 billion figure. Revolving credit fell $1.7 billion in January, to $864.4 billion, the lowest figure since October 2006. The only gain in credit was a $10 billion increase in federal government loans due to a student loan program. Overall, lending and borrowing behavior suggests an ongoing credit contraction.
Damned If You Do...
by David A. Rosenberg of Gluskin Sheff,
The equity market refuses to go down, even in the face of a slate of disappointing economic news over the course of the past month. Forty-seven companies in the S&P 500 boosted their dividends in February, while only one company cut. Stock buybacks increased 37 percent year-over-year in the fourth quarter of 2009. Mergers and acquisitions are up 13 percent this year, to 1,579. Valuation may prove to be an impediment, however. Shiller places the normalized real P/E multiple at 20.64x, while the long-term trend is 16.36x. This suggests that the S&P is currently overvalued by 26 percent.
Bank Credit Still Contracting
by David A. Rosenberg of Gluskin Sheff,
Outstanding bank credit fell $33 billion during the week of February 17, adding to a seven-week cumulative decline of $150 billion. Bank lending to households and businesses fell at a 12 percent annual rate over the past 13 weeks. As long as bank credit is shrinking, the jury will still be out on Fed rate hikes during the second half of this year and the ability of the economy to sustain above-potential growth. In addition, the revised Q4 GDP numbers indicate a lack of pent-up consumer demand with most spending directed to essentials, reinforcing a bearish, deflationary U.S. economic outlook.
Focus on the Forest, Not the Trees
by David A. Rosenberg of Gluskin Sheff,
Despite the reflexive rebound in global equity markets, deflation is still the primary trend for consumer prices and asset values as households rebuild balance sheets and as governments face sovereign default risks. Investors should focus on bonds, hybrids, and dividends with consistent yields as they search for safety and income at a reasonable price.
Lacking Confidence
by David A. Rosenberg of Gluskin Sheff,
U.S. consumer confidence fell 10.5 points in February, to 46.0, the lowest reading since last April. The consensus estimate was 55.0. While some blame a seasonal bias or winter storms for the decline, news about European default risks, a declining stock market and continued employment difficulties may also be at play.
My Take on the Fed
by David A. Rosenberg of Gluskin Sheff,
The Federal Reserve's decision to increase the discount rate from 0.5 percent to 0.75 percent was only a surprise because of the timing. The rate hike was part of the Fed's long-discussed exit strategy from its emergency stimulus plan. A number of other emergency measures are also scheduled to end this month.
The Return of the Primary Trend
by David A. Rosenberg of Gluskin Sheff,
If credit, equity prices and the economy are on a downward primary trend this year and 2009 was indeed a counter-trend bounce, then the appropriate course of action is to capitalize off the rally in assets last March and figure out how to still make money on a risk-adjusted basis. Rosenberg also examines February's recovery in the National Association of Home Builders housing market index and fiscal woes at the state level.
Bernanke Ain't Doin' Nothin' plus Comments on Commercial Real Estate and Employment
by David A. Rosenberg of Gluskin Sheff,
David Rosenberg of Gluskin Sheff says Federal Reserve Chairman Ben Bernanke won't try to tighten up liquidity conditions until after the deleveraging cycle runs its course. Bank lending to households and businesses shrank $28 billion last week, and is down by $100 billion since mid-January. He also takes a look at declining commercial real estate figures and improving jobless claims numbers.
Results 151–200
of 211 found.