Posts Tagged David Rosenberg
The dramatic bounce-back in the equity markets yesterday (with follow-through today) boiled down to several factors:
1. Strong hints from Trichet that the ECB is going to step up to the plate and aggressively support the bond markets of Portugal and Spain.
2. The strong global purchasing managers’ indices, especially the number out of China.
3. Signs that Bernanke is working behind the scenes on Capitol Hill to promote more short-term fiscal stimulus.
4. The strong ADP jobs data.
5. Growing talk that a deal will soon be reached that will extend the Bush tax cuts as well as the emergency jobless benefits.
6. Goldman Sachs’ economics department threw in the towel and substantially raised its GDP forecast for the U.S. for 2011 and 2012.
From my lens, the S&P 500 had become near-term oversold and turned in a classic Fibonacci retracement from the early November highs to the recent lows. Much of what we are seeing is technical, not fundamental.
The ECB can assist in the provision of liquidity, to be sure, but is not equipped to deal with solvency issues. Nothing Trichet does will prevent massive fiscal tightening in much of the Eurozone in the coming year as structural deficits will be addressed.
While China’s PMI was solid (55.2 in November from 54.7 in October), is this really going to be conducive to risk-on trades? After all, if anything, it means the People’s Bank of China (PBOC) has more work to do in coming months with respect to the policy restraint needed to thwart burgeoning inflation pressures. Furthermore, one less-cited piece of information was the price component of the Chinese index, which came in at 73.5 in November from 69.9 the month before.
Yet, there are signs of slowing growth taking hold across large swaths of the emerging market world — real GDP contracted sequentially in Q3 in Singapore, Malaysia, the Philippines and Thailand and was roughly flat in Hong Kong, Korea, Taiwan and Malaysia.
ECRI WAS RIGHT ALL ALONG!
We rarely pay attention to blogs (John Mauldin, Barry Ritholtz and Tyler Durden aside) but yesterday yours truly was slammed by one Vincent Fernando (Here’s Why It Was Ridiculous When David Rosenberg Used The ECRI To Predict A Double Dip — nice catchy title).
Well, if the truth be told, if things in the economy are so good and the ECRI was so wrong, why then did Bernanke hint about another major round of QE. No mention in this article, by the way, of how the Fed has now cut its forecast three times in the last four months. The fact that the 10-year Treasury note yield has plunged 150 basis points since April is actually telling you that there is an asset class out there that has responded forcefully to double-dip risks. And, let’s not forget that the Macroeconomic Adviser’s GDP figures show that the economy has contracted in three of the past four months.
“Amidst concerns about the world economy, the transparency and understanding of finance and indeed with a desire to try to help the world at a time of economic difficulty. Thus the concept of “The Gathering Storm” was created by Lee Robinson, a leading credit hedge fund manager based in Monaco.
The book has developed rapidly during the summer of 2010, based on a simple format: a series of leading managers and analysts have given their time free of charge to contribute a chapter. Each author then nominates a charity which will receive a portion of the revenues. The Gathering Storm has been published at cost, so all surplus revenues (not merely author royalties) will be donated to the charities which support a broad range of good causes throughout the world.
The Gathering Storm was a concept created by Trafalgar Asset Management co-principal Lee Robinson who organised the initial contributors and subsequently enlisted the help of Patrick L Young (trader/advisor and author of “Capital Market Revolution!” “The Promiscuous Investor,” “The Exchange Manifesto”) to bring the project to fruition.
A unique perspective on world economics and markets has been created by a truly remarkable group of individuals who all managed to discern the gathering storm about to hit financial markets before the ‘credit crunch’ and subsequent market ructions.
Like so many things related to financial markets, events moved rapidly. Indeed this entire project has been completed in a fairly remarkably brief period throughout what was a rather hectic summer!
The end result is a book we hope you will find stimulating and educational as well as entertaining in parts. Thanks to some specialist partners in PR, accounting and so forth, the total cost of The Gathering Storm has been kept to an absolute minimum, allowing more money to be distributed to charity. (Note that _all_ profits are going to charity, including the publisher’s profit, not merely the author’s royalties). Perhaps most importantly of all, by purchasing this book we thank you for assisting a broad range of charities throughout the world which have been nominated by the contributors themselves.
Page C7 of yesterday’s WSJ discusses the VIX index, which has broken below the 20 level now for three days running, as a possible sign of complacency. It probably is — we have only seen a sub-20 reading on the VIX a mere 14% of time since the stock market peaked in October 2007, so this is not an usual development. But even though the VIX index is at 19.07, the lessons of the last two forays below 20 suggest that it has yet to hit an extreme low just yet.
It dipped below 20 on February 26th of this year and went as low as 16.6x on February 3rd and during that time we had a 10% gain in the S&P 500. It was at that 16.6x threshold that the selling started because we then endured a 16% correction to the July lows. Go back before then to December 22, 2009 and the VIX broke below 20 and then went as low as 17.6 on January 19th — during which the S&P 500 advanced 3%. It then went for an 8% setback in the next few weeks.
Message: the VIX below 20 is something new here, but if the past two episodes this year are any indication, the best way to play it is to wait for the break below 18 or 17 before taking chips off the table.
The WSJ (same page as above) makes much of the “gold cross” (the 50-day on the Dow breaking above the 200-day) though the “death cross” (in reverse) during the summer did not exactly trigger the expected plunge as was expected back then. However, the article does contain a good tidbit of information in terms of trading from the long side (for now). When Alcoa’s stock rises the day after its earnings release, the overall market rises 80% of the time in the next 10 sessions. And when Alcoa’s stock declines the day after its results, the market only manages to advance 38% of the time. I guess that’s why as ‘old economy’ as it is, it’s viewed as a bellwether — at least for a trade.
The one fly in the ointment is the Investors Intelligence Poll, which does limit but not prevent upside potential. Bob Farrell is not ready to call an end to the secular bear market but does say that the break of resistance has been critical, not to mention doing so on days when the economic data were poor. His biggest near-term concern is a possible countertrend reversal in the U.S. dollar — he views that as the most pronounced risk for a market correction.
David Rosenberg, Gluskin Sheff:
Page 14 of the weekend Financial Times ran with this headline: Weak Jobs Data Help Propel Dow Above 11,000 points.
Think of how crazy that is. Jobs create income. Income creates spending. U.S. consumer spending drives 70% of U.S. GDP and 17% global GDP. GDP must equal GDI (Gross Domestic Income) of which 11% is comprised of corporate profits. And, equity investors supposedly are buying a profit stream?
This was not, by the way, the only article to cite the awful employment report as the primary reason for the stock market advance on Friday. I have to admit that this is totally surreal. At the same time, a mea culpa of sorts is necessary because Dave Tepper was actually bang on the money with his assertion on CNBC that soft data was actually a good thing because it would mean a more aggressive attempt by the Fed to prime the pump in the looming QE2 assault on deflation risks.
I still have difficulty with that logic, but no doubt there are enough investors who are buying into it. Someone was investing in the market last week in the face of not only a sick employment report but a very soft ISM release as well, which pretty well told everyone that the plug is being pulled on the inventory cycle, which was responsible for about two-thirds of the rebound in real GDP off the mid-2009 bottom.
And, page B1 of the Saturday New York Times ran with this: Faith in Fed Pushes Dow Past 11,000.
Page 15 of the weekend FT had this title in big bold letters too — Equities Fired Up for Fed Easing and on the front page, you can see this — Jobs Data Point to Fresh Stimulus.
This is a market completely based on hope. Throw fundamental investment principles out the window. It’s now all about how the Fed can manage to inflate asset prices now that fiscal policy has tested its limits with the voting public. But where does this renewed faith in the Fed come from? Is this not the same Fed that took the funds rate from 5.5% to near- zero? The same Fed that tripled the size of its balance sheet in QE1? The same Fed that thought the housing and mortgage crisis would stay “contained” back in 2007? The same Fed that confused a credit contraction with a liquidity squeeze? The same Fed that believed, in the summer of 2007 when the crisis first broke that we would see 2.5- 3.0% real GDP growth in 2008? The same Fed that was contemplating its exit strategy just a short six-months ago and believed it could start to shrink its balance sheet last spring? The same Fed that investors have so much faith in, and is the same Fed that passively tightened policy with a 25 basis point hike in the discount rate to 0.75% back on February 19th. The same Fed that just trimmed its forecast three times in the past four months, and is this not the same Fed that investors now have “faith” in? The question is, the “faith” to do what?
David Rosenberg, Gluskin Sheff:
This is no time to mince words. The U.S. labour market is in horrible shape. In fact, considering that policy rates are at zero, the Fed’s balance sheet has tripled in size (with more to come), and a 10% deficit-to-GDP ratio that would have even made FDR blush, the unemployment situation is an unmitigated disaster that deserves the government’s undivided attention. Instead of providing zero-percent mortgage financing to unemployed workers, which is only going to make them more vulnerable to credit conditions in the future, why not instead create conditions that will allow the economy to nurture a sustained pace of job creation. This may mean reducing the cloud of uncertainty overhanging the small business sector, including a second look at how the health care reforms are impeding employment growth, not to mention other supply-side measures such as payroll tax relief for the broad corporate sector.
As far as the September data is concerned, the key was that excluding the Census worker layoffs, payrolls fell 18,000. Full stop. This marks the first time since December 2009 that the underlying level of nonfarm payrolls fell in a month. So perhaps the equity market will rally on hopes that a weak economy will spur on more aggressive Fed intervention. Make no mistake, the economy is on very soft ground, especially benchmarked to all the steroids that have already been injected in terms of monetary, fiscal and bailout stimulus. This economy is still 7.75 million jobs shy of where it was when the Great Recession began in late 2007 — by this stage of the cycle, what is normal is that we are either at a new peak or well on our way.