David A. RosenbergJune 19, 2009
Chief Economist & Strategist Economics Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave — A Snapshot
DAVE IS ON VACATION AFTER TODAY AND WILL JOIN YOU AGAIN FORBREAKFAST ON JUNE 29. TILL THEN.WHILE YOU WERE SLEEPINGIN THIS ISSUE
• It seems that it’s toomuch effort for themarkets or for mosteconomists to dig beneath the surface in most of these economic reports• Where are the roots for the next cycle?• Our thoughts on corporatebond spreads• A rudderless leader?Keep in mind that while the LEI was impressive,both months had adiffusion index of 70%• Philly cheese steak. Yes, the Philly Fed indeximproved dramatically inJune, but beneath theveneer, only 30% of respondents stated thatconditions improved• Market led by multiple.Forward P/E ratio for theS&P 500 is at 14.5x and trailing P/E has expandedfrom 17.0x to 23.3x now
Risk appetite picks up:
Equities are firm in Europe and Asia today and U.S.futures are flashing green. In FX, the Yen is slipping and commodity currenciesare firming again — essentially confirming the up-move in equities. Governmentbond yields are also higher, up one beep here and across the pond. Libor/OISspreads are narrowing. On the data front, German PPI was flat in May and down3.6% on a YoY basis, the steepest deflation rate in 22 years.
Lower bond yieldsare a good thing:
Courtesy of the bond vigilantes taking a respite, the rate on the 30-year fixed mortgage fell 21bps last week to 5.38%.
Delinquency ratesstill rising sharply:
This is not particularly the case in the U.S. multi-familysector where defaulted apartment loans backed by CMBS broke above 5.0% inMay while the default rate for retail/lodging pierced the 3.0% threshold.
WHERE ARE THE ROOTS FOR THE NEXT CYCLE?
While many investors are consumed with the rapid expansion of the Fed’sbalance sheet and money supply, the ongoing contraction of the householdbalance sheet is a far more pronounced event that renders deflationary risks themore predominant near-term risk. This may not be any more evident now than itwas in the reflation days of early 2002 when government stimulus also ranrampant, but we believe that the second half of the year will have shown moredefensive and income-oriented strategies to have carried the day as it did back then.Post-credit collapse and asset deflation cycles are always gripped with fragility; the intermittent beta-trades and flashy rallies only serve to tell us that nothing moves in a straight line. From our lens, the stock market is only really back to the levels of last October when Warren Buffet was telling everyone to buyequities in the op-ed section of the New York Times. The reality is that the rallyreally looks fatigued even with yesterday’s bounce — the S&P 500 has made noheadway at all since the very beginning of May.
THOUGHTS ON CORPORATE SPREADS
Chart 1 is a bar chart of Baa corporate spreads comparing where we are(374bps) to where we were (611bps at the end of last year) as well as to otherperiods of intense economic, financial and geopolitical strains. To be sure,corporate spreads have come in a long way from their nearby crisis highs butlooking at prior peaks around major events and economic downturns, it doesappear as though there is still a lot of very bad news priced into the sector.
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