David A. RosenbergJune 1, 2009
Chief Economist & Strategist Economics Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
WHILE YOU WERE SLEEPINGIN THIS ISSUE
• Inflation fears overrated,in our view• Foreclosure crisiscontinues unabated …• … And troubled loans ingeneral are still mounting • Signs of credit marketimprovement are stillmixed• Retail investors caught the bounce — equitymutual funds posted a$12.3bln net inflow inApril• Asia revival may be forrealIt really is a whole new investing world when a Chinese manufacturing diffusionindex can generate a gigantic melt-up in equity prices across the globe. But thatis indeed what is happening. Even in the face of GM’s imminent bankruptcyfiling, the news that China’s purchasing managers’ index came in at 53.1 in Mayfrom 53.5 in April (the CLSA comparable was 51.2 from 50.1) was enough tokick the MSCI Global index up 1.4% to its highest level since last November(markets had been led to believe for the past few weeks that a sub-50 reading was quite possible).Emerging markets advanced 2.6% and now up 55% from the lows. Russianequities soared 5.8%, helped out by the rising oil price (page A2 of today’s WSJcontains a healthy dose of scepticism over the longevity of the oil price rallygiven lingering weakness in global crude demand). Asian equities climbed 2.9%,led by a 4.0% surge in the Hang Seng index to 18,888 (now how lucky is that?).But gains were broad based right across the continent, with Japan up 1.6%, theKospi rising 1.4% and the Shanghai index rallying 3.4%. European marts are up2.7% (up now in five of the last six sessions) and again, practically every countryis flashing green.Bonds are selling off, as one would expect, with the yield on the 10-year note up6bps this morning to 3.53% as risk appetite gets whetted even further. This isfurther ratified in the commodity complex where oil has firmed $2.00/bbl to$68.29/bbl, copper has soared 3.5% and gold has risen nearly 1.0% to around$988/bbl as it closes in on the cycle highs.The dollar continues to lose ground, hitting its low-water mark for the year, and the flip side is big rallies in Asian FX (led by the Korean won and Taiwan dollar), the Euro (five-month high), Sterling (eight-month high), the Russian Ruble (six-month high) and the commodity currencies (notably the Aussie and Kiwi). CDSspreads, which gauge corporate bond risk in Europe also have come in 14bps to710bps.
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June 1, 2009
– BREAKFAST WITH DAVE
Elsewhere on the data front, it was all good.
The European PMI came inbetter than advertised, at 40.7 in May from 36.8 in April (consensus was 40.5).The U.K. comparable improved to 45.4 from 43.1 in April too – best result in ayear. And not only that, but UK home prices as measured by the Hometracksurvey were flat in May – first time in 20 months that it did not show a decline.It also looks as though Treasury Secretary Geithner managed to soothe Chineseconcerns over the U.S. fiscal situation — by most accounts we have seenregarding his trip to Beijing. And the data show that foreign central banksupport for the Treasury market remains intact — custodial bond holdings at theFed rose 3.3% in May to $69 billion, the third most on record. This has helpedease fears that the U.S.A. would be facing a credit outlook downgrade in thenear future (as the U.K. experienced last week).
Equity market still ripping:
The late-day surge in the Dow pushed it up 1.1%for the session and 4.1% for the month. Over the last three months, it is up20.4%, which is the best performance in such a short span since November1998. For the S&P 500, it advanced 5.3% in May and 25% in the last threemonths, which is a feat last achieved in August 1938.
Oh Canada!
For the week, the TSX rose 3.8% and for the month the index wasup 11.2% — the best performance since June 2000 and the fifth highest monthlygain in recent history (data back to 1984). The TSX has now risen three-monthsin a row, a feat last accomplished back in the spring of 2007. The monthlypattern is +7.4% in March, +7.0% in April and 11.2% in May and that is the best three-month performance ever. But note that in the past, when the TSX is up10% or more, which only happened 5 times going back to 1984, the indexusually takes a breather and is flat as a beaver-tail three months later.
Global institutional investors still lagging behind this rally:
See page 13 of today’s Financial Times – it cites a Barclay’s survey that shows:
•
Only 17.5% believe “risky assets” have more room to rally
•
4.5% are believers in the V-shaped recovery
•
69% see a U-shaped or W-shaped recovery
•
60% see what we have experienced in equities as a “bear market rally”
•
91% are running positions that are “average” or “light” in terms of equityexposure (there is cash on the sidelines, but no conviction)
•
Just 9% are at limit or capacity in their equity investments
Critical test ahead for the Treasury market:
not only is this a heavy data-week(see below), but on Thursday the Treasury is expected to announce the size of the 3, 10 and 30-year auctions for the following week (likely to be a $65 billionpackage).
Awaiting the testing phase;
the equity market has been moving in a saw-tooth pattern since hitting its interim high back on May 8.
We have said for
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June 1, 2009
– BREAKFAST WITH DAVE
some time that for there to be proof that the March lows were
the
lows, themarket would have to successfully retest those lows as it did in March 2003(though the July 2002 test did fail). With this in mind, it is encouraging to see that the folks at S&P are in general agreement with this premise, and SamStovall, who is the Chief Investment Strategist for the agency, found that typicalretests usually see the stock market correct 7.0% from the interim post-troughhighs; but the decline is closer to 14% on average after a “mega downturn” of the likes we saw from October 2007-March 2009. That would put 800 on theS&P 500 as the proverbial line in the sand. See
What About the Valley After theRally
on page 4 of the Sunday New York Times business section.
Big fiscal squeeze coming in the world’s 8th largest economy --California:
It’s interesting that so many pundits dismiss the notion that weare in some form of economic depression because the policy response is sofar more pronounced than it was in the 1930s. While there is an element of truth to that from a Fed policy standpoint, fiscal policy has so far been whollyineffective and in fact, as California now takes a sharp knife to its socialprograms, historians may well look back at this as a classic policy error. Thenagain, the laws are such that state governments are not allowed to runoperating deficits. See
Deep Cuts Threaten to Reshape California
on page 15of the Sunday New York Times (front section).
Gasoline prices are soaring and this may be one reason why the taxstimulus is not working
— the savings are being siphoned into the gas tank:
Indeed, U.S. retail gasoline prices have spiked 45 cents in the last month to$2.50/gallon — the equivalent of a $60 billion annualized pay cut (whichbasically offsets the reduction low-and middle-income workers are seeing come off their paychecks in terms of reduced withholding taxes).
Best read of the weekend:
For a truly wonderful indictment of the pro-labourand anti-market initiatives the White House is pursuing, have a look at
Driving the Bond Markets to Ruin
by James Glassman on page A17 of the Saturday New York Times.
Keys for the week:
It’s jam packed – Canadian real GDP today for Q1, the Bankof Canada policy statement on Thursday and May employment on Friday. Wewould advise against being long the Canadian dollar ahead of the BoCstatement because there is little chance that it won’t be addressed. The looniehas rallied 15% in less than three months, double the increase in the commodityprice index that matters most for the central bank (while oil, gold and copperhave soared, wood products and natural gas – which represent 10% of Canada’s export base – have actually fallen). In other words, half of theCanadian dollar’s rally has been
de facto
monetary restraint on the overall(fragile) economy and as such is unwelcome and troublesome. In the U.S.A., there is a ton of data, from ISM today to nonfarm payrolls on Friday, and we willhear twice from Fed Chairman Bernanke too, with his Wednesday 10 a.m. testimony to the House Budget Committee likely to be a key event. The BoE andECB also meet on Thursday.
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Breakfast With Dave June 1
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