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Breakfast With Dave Rosenberg Jan. 04 2010

Breakfast With Dave Rosenberg Jan. 04 2010

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Published by ETFDesk.com
Market Musings & Data Deciphering
Market Musings & Data Deciphering

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Published by: ETFDesk.com on Jan 04, 2010
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David A. RosenbergJanuary 4, 2010
 Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
Breakfast with Dave
Reviewing some 2010macro and market themesThe recession in the U.S.may not be over just yetSame contractionarymessage in theConference Board’smeasure of consumerconfidence in the U.S.How can there be arecovery if tax revenuesare still declining?• The late-payment U.S.economyModerate holiday cheerSecular shifts in spending and investing behaviour ..get use to itDeflation is the number 1risk in the U.S.; bondbears have it backwardsImprovement in initial jobless claims, but slackpersistsU.S. small businesses stillin a funkGold will glitter againChallenges for the equitymarkets• Re-emergence of emerging marketsAs Jack Torrance said to the bartender, “It’s good to be back, Lloyd”. After aphenomenal two-week vacation that involved a top-to-bottom tour of the HolyLand with my three boys, it is good to be back in the saddle again. And it goeswithout saying that there was plenty of time spent praying at the Western Wall(“kotel”) — appropriate for any bear enduring the most pronounced surge off of alow in recorded history.The year 2010 started much in the same way as 2009 did — with global equitiesfirm (Asia Pac up 1% overnight, building on the 34% advance last year; emerging markets rising 0.6% today after a 75% surge in 2009) and bonds selling off (lastyear, U.S. equities outperformed the long bond by a record 46 percentage points!).Commodities are strong this morning too (oil is back above $80/bbl and is riding an eight-day winning streak) in the aftermath of some strong export data out of Korea (mostly bound for China, which posted a solid PMI reading this morning —it jumped to a five-year high of 56.6 in December from 55.2 in November,beating market expectations of 55.4 and the best level since April 2008) andFrench auto sales, which zoomed ahead 49% YoY. U.K. home prices(Nationwide survey) are now reportedly rising at their fastest pace sinceNovember 2007 (+5.9%). The cold weather snap has also helped push naturalgas prices up as it nudges towards $6.00/btu this morning.Gold is up almost $20/oz and seems to have successfully tested the 50-daymoving average during the recent corrective phase. Copper just hit a fresh 16-month high. A softer tone to the DXY (trade-weighted U.S. dollar) may also be atplay. What does not fit the bill, however, in terms of the sudden turnaround in the CRB index is the faltering Baltic Dry Index of global shipping rates.As we mentioned, government bonds are taking a bit of a hit to start off the newyear and that may also be related to the news that PIMCO has trimmed itsholdings of U.S. Treasuries and U.K. Gilts; the firm has also become morecautious on corporate bonds, is underweight TIPS as well as mortgages, andneutral on muni’s (running “light on risk” it seems and acknowledging that it is“hugging the benchmarks with no bold positioning”). Sentiment is so bearish towards Treasuries that the Ried Thunberg index of bond market optimism hascratered to 42 (50 is neutral).
Please see important disclosures at the end of this document.
Gluskin Sheff + Associates Inc.is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highestlevel of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports
visit www.gluskinsheff.com
January 4, 2010
Based on the market commentary we have gleaned, there also seems to be thisinterpretation out there (mis-interpretation, in our view) that in separatespeeches yesterday, Messrs Bernanke and Kohn sounded “hawkish” because they mentioned that monetary policy should be pre-emptive and forward-looking.If Bernanke is truly the mogul over the 1930s that everyone claims he is, thenan early withdrawal of rate stimulus seems like a low-odds event unless hewants to risk a repeat of 1937-38.
Everyone is pre-occupiedwith the Fed’s exitstrategy this year … butin our view there is nosuch strategy
It still amazes us, more than six months after making the transition to the ‘buyside’, as to how many ‘sell side’ economists and strategists out there whohyperventilate over the moment, can’t for some reason see much beyond thenext quarterly GDP or ISM report, and are so clueless over the lessons thathistory have to provide in the aftermath of a credit collapse.
Everyone is pre-occupied with the Fed’s exit strategy this year. But there is nosuch strategy because it is evident that the economy will never be able to recoverwithout sustained doses of government stimulus. Interest rates are either going tobe in a trading range or trend lower. We had mentioned emphatically a month ago that the Treasury market was at near-term risk, but looking ahead, bull flattenersin bonds are very likely going to be the best strategy, if for any other reason that the consensus is positioned the other way.We had also warned that the bearish stance on the U.S. dollar was too broad and that we could see a near-term countertrend rally that would cause a reversal incommodity prices and gold, which would open up a nice buying opportunity; that time has come.There are several troubling aspects to the outlook for equities.
We opine that we areabout to see a nicebuying opportunity incommodities and gold
From a valuation perspective, the S&P 500 is discounting a 5% GDPgrowth performance in 2010, which seems hardly likely.2.
The general public has stubbornly resisted to join the party and as such, the flow of funds landscape looks circumspect now that the shorts havebeen covered and the hedge funds have made up for their 2008 disaster,which means they can now afford to be more risk averse.3.
Sentiment is wildly bullish.4.
Equity market technicals look tenuous stalling at the 50% retracementlevel for the S&P 500.5.
The policy backdrop out of Washington is increasingly interventionist, and just as Japan accentuated its multi-year malaise by not allowing zombiecompanies to go belly up, current initiatives by the Administration is ineffect thwarting a durable recovery in real estate by enacting measures that delay the foreclosure process.Concerns over health care reform and taxation are substantial hurdles for thesmall business sector too, in terms of hiring plans and capital spending intentions,and this is on top of near-record low levels of industry capacity utilization levels.
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January 4, 2010
As we outline below, consumer confidence and spending plans are still atrecession levels. Any improvement we saw during the holiday season is largelydue to the effects of rampant fiscal and monetary stimulus. In 2010, the big storywill be the renewed upward trend in the personal savings rate.
In 2010, the big storywill be the renewedupward trend in thepersonal savings rate inthe U.S.
A focus on defensive sectors in a sub-par economic environment would seem inorder. We go into 2010 with consensus expectations for an earnings recoveryevery bit as intense as the downbeat expectations were heading into 2009. Thismeans the surprise will most likely be towards the downside. As a result, thesectors that have been out of favour for the past nine months — utilities, staplesand health care — are likely to outperform. As for health care, it is probablyworthwhile mentioning that this is the only S&P sector that managed to outperform the broad market during the massive positive-return period of 1990-2000 andagain in the negative-return era of 2000-2010. This is otherwise known as asecular bull market (and telecom services, by way of comparison, was the onlysector to underperform in both decades).
Focus on defensivesectors in a sub-pareconomic environmentwould seem in order
Quote of the month goes to … the former National Bureau of Economic Research(NBER) dean of dating business cycles, Martin Feldstein:
“The recession isn’t over.”
In a Bloomberg Radio interview on December 17th.That seems pretty blunt, doesn’t it?But he may be right. Imagine that the best we could do with the gargantuan fiscaland monetary stimulus was a 2.2% annualized growth in real GDP in the thirdquarter (real Gross Domestic Income (GDI) was closer to a 1% annual rate!). Thisresult must be put into three perspectives:1.
It came in the face of $100 billion of real stimulus out of Washington.This means that 90% of the growth in Q3 came courtesy of Uncle Sam’sgenerosity. In other words, the economy basically stagnated in the thirdquarter when GDP is measured “organically”.2.
What is normal is that the first quarter of post-recession growth is thatreal GDP expands at a 7.3% annual rate; 2.2% is really nothing to getexcited about — it’s actually quite worrisome.
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