David A. RosenbergJune 12, 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
• Japan’s Finance Ministeropenly defended the U.S.debt market … we areseeing a rally in bonds thismorning • In four of the past fiveyears, we saw Treasuryyield peak in June … couldwe see a bond rally takehold in the second half of the year if this patternreasserts itself • The rally in the equitymarket appears to begetting exhausted• No sails in retail sales• For those who doubt thedeflation theme, may wesuggest that you read thelatest Beige bookIn the markets, we see that equities are mixed to higher, the dollar is bid,commodities are undergoing some profit-taking, but the big news is the rally ingovernment bonds (see more directly below). What happened was that Japan’sFinance Minister openly defended the U.S. debt market by saying that Japan’sfaith in Treasuries is “unshakable” and that current yield levels are “attractive”.We’ve been saying the same thing but the key difference is that Japan actuallyowns $687 billion of U.S. govies (not far off China’s $768 billion cache). Whatelse was interesting was the 49% indirect bidding share at yesterday’s long bondauction — a proxy for foreign central bank participation. This should help allayfears that Russia’s decision to diversify out of Treasuries into IMF bonds is not acase of follow-the-leader. We also saw on the data front a pretty stinky weed —industrial production in Euroland collapsed a record 21.6% YoY in April(consensus was for a 19.8% decline).
INTERESTING SESSION YESTERDAY
Nice rally in bonds and for a change, a late-day selloff in equities. Besidesvaluation and sentiment, the rally looks to be getting exhausted as volumewanes and the S&P 500 struggles with a serious breakout of the January 6 intra-day high of 943.85. To recap:
•
June 1
st
: 942.87
•
June 2
nd
: 944.74
•
June 3
rd
: 931.76
•
June 4
th
: 942.46
•
June 5
th
: 940.09
•
June 8
th
: 939.14
•
June 9
th
: 942.43
•
June 10
th
: 939.15
•
June 11
th
: 944.89
Remember, the intra-day high on January 6 was 943.85.
Notice the patternhere? There isn’t one — it is a flat, trendless market, and the question is thatwhen it breaks, which direction will it be?
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June 12, 2009
– BREAKFAST WITH DAVE
Part of the market’s dilemma is sentiment — it’s far too bullish at this juncture,which means that buying power could be diminishing. The latest Investors’Intelligence survey shows bullish sentiment at 47.7% (versus 42.5% last week)and bearish sentiment all the way down to 23.3% (from 25.3%). There are more than twice as many bulls as there are bears. The whole credit collapse andrecession must have been a hoax. Even those in the ‘correction camp’ have thrown in the towel and now total just 29.0% (down from 32.2% a week ago).
Net inflows into U.S. equity funds have been positive now for 12 consecutiveweeks — $2.83 billion alone last week — another sign of exuberance for thecontrarians among us.
Part of the market’sdilemma is sentiment;it is far too bullish atthis juncture
Meanwhile, the surge in oil prices, to $72/bbl from the lows, is equivalent to a two-percentage point drag from real GDP growth and on top of that we haveseen mortgage rates spare 80 basis points in just the past two weeks to 5.8%and against that backdrop the once-promising refinancing wave has not onlybeen snuffed out but has reversed course.
A SEASONAL PEAK IN BOND YIELDS?
This may sound uncanny, but in four of the past five years, we saw the yield on the 10-year Treasury note hit the peak right in June, and while the experts each time were lamenting about inflation, fiscal policy, growth and beta-assets, not tomention the oft-called-for end of the secular bull market in bonds, the secondquarter selloff that culminated in a classic blow off in June proved to be a greatbuying opportunity. Consider:
•
June 14
th
, 2004: 4.89%. The 10-year note closed the year at 4.24%.
•
June 26th, 2006: 5.25%. The 10-year note closed the year at 4.71%.
•
June 12
th
, 2007: 5.26%. The 10-year note closed the year at 4.04%.
•
June 13
th
, 2008: 4.27%: The 10-year note closed the year at 2.25%.But as the data above illustrate, after the June peak in yields, the 10-year note,on average, went on to rally 111 basis points (in 2005, it did look as though thebond market was looking to peak in terms of yield into June, but then we had thevolatility amidst the Katrina hurricane, which begat a quick rally and then a hugeselloff during the fall). So we should be seeing a nice little bond rally take holdin the second half of the year if this pattern reasserts itself.We also ran some correlations and found that the 10-year note yield has thehighest relationships with the ‘carry’ (funds rate) at 88%; inflation (68%); fiscaldeficits (46%) and the dollar (but with a positive 60% correlation — in otherwords, bonds tend to rally when the dollar is weak, not the other way around!).So, if the problem for Treasuries is fiscal deficits and the dollar, then we can restassured that the far more important drivers are the Fed, which is not raising rates any time soon, and inflation, which is hardly going anywhere on asustained basis, until the dramatic amount of excess capacity gets mopped upand the debt-strained household balance sheet begins to re-expand. Fiscalpolicy comes in a distant third in the bond yield-determination process and thedollar has the “wrong” sign as far as the inflation-phobes are concerned.
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June 12, 2009
– BREAKFAST WITH DAVE
But we still have to shake our heads at how fiscal forecasts are made. Not onlyin the U.S., but in Canada — where a pledged balanced budget a little more thansix months ago turns into a $50 billion+ deficit as auto sector bailouts become the intervention du jour. The U.S., though, really takes the cake. In January2001, believe it or not, the Congressional Budget Office was forecasting budgetsurpluses of over $800 billion annually from 2009 to 2012. That was under BillClinton. Fast forward to Barrack Obama, and we now have projected deficits of $1.2 trillion on average over those three years. That is cause for pause, even forold bond bulls like us.
The U.S. consumer isagain benefiting fromhuge fiscal stimulus…
NO SAILS IN RETAIL SALES
The U.S. consumer is yet again, for the first time in two years, benefiting fromhuge fiscal stimulus (tax relief and extra social security receipts) and yet the‘core’ retail sales index that feeds directly into GDP was flat as a pancake in Mayand down at a 4.0% annual rate over the last three months. We have no ideahow that gets translated into a ‘green shoot’ unless we want to compare that to the -10.0% trend at the end of 2008 when the post-Lehman collapse economywent into free-fall.
… yet ‘core’ retailsales, which feedsdirectly in GDP, comein flat as a pancake inMay
Much like the tax rebates last year, the stimulus is having very little effect onconsumer spending. The message from the retail sales report is that whilespending is not collapsing, it is still very soft and there is still a clear trend awayfrom discretionary towards essentials.
•
Furniture sales fell 0.4% MoM in May and are down in each of the last threemonths — a 14.0% annualized collapse.
•
Electronics/appliance stores are also under downward pressure after a brief January-February countertrend bounce — down 0.5% MoM in May, also down three months running, and sliding at a 33.6% annual rate over that timeframe.
•
Clothing sales did hook up 0.4% in May but that followed two months of big declines and left the trend since March running at a -9.0% annual rate.
•
General merchandise stores (ie, department stores) posted a 0.2% drop, the third decline in a row (sound familiar?) and running at a -4.8% annual rateover the last three months.
•
Sporting goods/music/books sales fell 0.8% in May and off at a 3.3% annualrate over the last three months.
•
Nonstore retail sales (online sales) fell for the fourth month in a row — down0.4% in May and the three-month trend is at a -5.6% annual rate.
•
Restaurants did turn in a 0.2% gain in May but sales here are on a -2.5% trend over the last three months.The positives:
Food/beverage stores
saw retail sales rise 0.4% in May andhave advanced at a 2.7% annual rate over the last three months.
Pharmastores
jumped 0.7% MoM and up at a ripping 8.0% annual rate over the last three months.
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Breakfast With Dave June 12
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