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Rosenberg: Commodities are still in Bull Market

Rosenberg: Commodities are still in Bull Market

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Categories:Business/Law, Finance
Published by: ETFDesk.com on Jan 26, 2010
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January 26, 2010
Page 1 of 6
Breakfast with Dave
Global equities are taking an added hit today though European markets and U.S.futures are trying to stage a comeback. After a horrendous end to last week,yesterday’s lack of follow-through on a recovery move has to be disappointing for the market bulls (volume was also lower right across the board and all the majoraverages remain below their 50-day moving averages). The rally is sputtering and there is no denying the rupture made to the chart patterns. Asia was rockedfor another sizeable loss (-1.8%) with Japan (which just received a ratingsdowngrade threat from S&P) down 1.8%, the Hang Seng and Shanghai both off 2.4%; and the Kospi losing 2%. Asia is now down for seven days running, in thelongest losing streak in two years. Concerns over further Chinese policy tightening moves are still coming to the surface.There is even talk that President Obama is finding out that there are limits todeficit spending too because he is expected to announce a three-year freeze onfederal spending outside of national security and entitlement spending in hisState of the Union Address tomorrow night. Bonds, the most despised assetclass among the forecasting elite, are ripping, with the yield on the 10-year notedown to 3.57%. In the FX market, the dollar is firm as it hugs the 100-daymoving average and the cyclical commodity currencies are trading softly as ahealthy dose of risk aversion sets in.Resource prices are in a fundamental secular uptrend, but as we have said in the recent past, they are due for a breather and that is exactly what is occurring as oil dips fractionally below is 100-day trendline of $75/bbl, gold softens righton top of its 100-day moving average; and copper is still 10% above its similarm.a. but is clearly struggling now based on a quick look at the chart pattern – infact, copper could correct 20% from here and it still wouldn’t violate the long-runuptrend.The data releases overnight were mixed. The German Ifo business confidenceindex rose to an 18-month high in January – to 95.8 from 94.6 (consensus was95.1). Usually this is a big market mover. French consumer spending surged2.1% MoM in December, more than triple consensus estimates But across theChannel we saw the U.K. print a +0.1% real GDP result for Q4 which was below the +0.4% that was generally expected, so much like the U.S., the so-called post-recession recovery has started with an abnormal whimper.
Existing home sales sank 16.7% in December to a four-month low of 5.45million units at an annual rate, with every region down and down sharply – so this wasn’t just a commentary on the weather (it's a good thing that 'distressed'foreclosure sales are included or the data would look even uglier – they
The equity rally issputtering.• Obama expected toannounce non-securityspending freeze.• More bad housing data –existing home sales sink to four-month low• Positive thoughts onCanada: TSX undervaluedvis-à-vis the S&P 500 andoffers a higher dividendyield.• Canadian recovery lessreliant on monetary andfiscal support and there isno jobs crisis here.• US banks earnings resultsdisappoint – no dramaticimprovement in loan lossprovisioning.
December existing homesales sank and unsoldinventory rose. The housingmarket is still in an excesssupply situation.
January 26, 2010
Page 2 of 6
accounted for one-third of the December sales tally). The pending home salesdata told us to expect a number like this and it attests to the view that thiscritical sector of the economy remains in the doldrums fully three years after thebubble popped. The reported unsold inventory nudged back up to 7.2 months’supply from 6.5 months’ in November. After all these years and the housing market is still in an excess supply situation.It is very obvious now that the pent-up demand has been filled because the datashowed that the share of sales accounted for by first-time buyers plunged to43% in December from 51% in November. The fact that the University of Michigan homebuying plan index fell for the third month in a row in January to asix-month low and that the Conference Board’s index of homebuying intentionssagged in December (after hitting an interim ‘green shooty’ peak in August) to a28-year low tells you that, despite all the stimulus in the world, demand forhomeownership remains sluggish – and with an 11% apartment vacancy rate,maybe there is simply too much choice and bargains in the rental sector.
We’re not sure if you saw the Financial Times yesterday but the Bank of CanadaGovernor, Mark Carney, was interviewed and it’s an interview worth reading toget a sense of the pragmatism that exists here. He is arguably the best head of  the central bank that I recall and there’s a pretty impressive list of predecessors(none of them serial bubble blowers, as an aside). It’s inappropriate to debateat this time how Mr. Carney stacks up against Ben Bernanke, except to say thatCarney’s expiry date is 2015 and so the one thing investors are not going tohave to put up with in Canada for at least the next five years is uncertainty over the longevity as to who is controlling the monetary levers.My overall views continue to evolve but what has not changed are my opinionsregarding the secular bull market in raw materials (hard assets) and income. Atleast now we are getting a better buying opportunity with the recent giveback inmost commodity prices, and by extension, the Canadian dollar. I still emphasize that what investors get in Canada that they do not get in many other areas,specifically the United Sates, is exposure to the resource sector, and despiteChina’s recent restraint measures, and undoubtedly more will be coming, thecountry is unlikely to relapse back into a downturn any time soon from what Ican see.In terms of income orientation, the TSX dividend yield is 2.7%, which is a 70basis point pickup over the S&P 500. And with respect to valuation, theCanadian stock market is close to fair-value on a Shiller normalized P/E ratioversus a near-10% overvaluation south of the border (data back to 1965). On aprice-to-book basis, the TSX (1.9x) is 20% less expensive than the S&P 500(2.4x).In terms of macro fundamentals, and believe me, I am not that bullish at all over the economic outlook, but at least in relative terms Canada seems to be posting a more “organic recovery” than is evident in the United States, notwithstanding 
Commodities are still ina secular bull market.
January 26, 2010
Page 3 of 6
 the prospect of a “blowout” GDP number this Friday. The Canadian economicrevival has been far less reliant on aggressive monetary and fiscal support, though there is no doubt that the moves here to revive the housing market haveperhaps been too good to be true, as home prices have surged to recordhighs. But what is critical is that there is no job crisis in Canada, which is why the political atmosphere, proroguing aside, is far less poisonous in Canada at the present time.Since September, Canada has posted nearly 70,000 net new jobs and every oneof them has been in full-time positions, which means that the corporate sectorhere is beginning to make more of a commitment to the labor market. This iswhere the organic trends in personal income are derived from – in the U.S., there have been 350,000 losses and companies continue to rely on part-timehelp and temp agencies to fill whatever labor requirements there are. Even witha downbeat export sector for the time being, Canada is much further along theroad towards a non-government-assisted renewal – so look for some pullback infederal support when Ottawa releases its budget on March 4
.Another key, and this may end up playing a key role in how monetary policy mayalso diverge between Canada and the U.S. in the future, is the differencebetween the degrees of economic slack that exists in the two countries. Canadahas an 8.5% unemployment rate, down from the 8.7% peak in August and wellbelow the 10% rate south of the border. But that really understates the gapbecause Statistics Canada deploys a broader definition of the labor force than the BLS does -- on an apples-to-apples comparison, the Canadian jobless rate is7.1% which is nearly 300 basis points lower than the prevailing U.S. level and that is unprecedented. Indeed, if the Bank of Canada is correct that the outputgap is 3.7%, then it is roughly half the magnitude of excess capacity in the U.S.economy. This would then suggest that the Bank of Canada will begin to snug policy ahead of the Fed, and the fact that 2-year Government of Canada bondyields are trading almost 40 basis points north of comparable Treasuriessuggests that market participants are beginning to sniff this out. It may pay tonote that the Bank of Canada has already started to take some measures toreduce the size of its balance sheet – compressing it by 8% over the past yearwhile the Fed’s balance sheet has remained at its pregnant level of $2.2 trillion.Indeed, the Canadian dollar plays a significant role in the relative return gapbetween the U.S. and Canada in any given year – on average, half of the totalreturn gap is influenced by how the loonie and greenback perform. So investorsshould keep in mind which country has the superior fiscal, financial, political andbalance sheet fundamentals, not to mention the exposure to Asia via theresource orientation in Canada’s equity market and balance of payments. As the chart below illustrates, the Canadian dollar’s fair-value line is pointing north,indicating that through the interim peaks and valleys, the loonie is in afundamental bull market. And the fact that the fair-value line has continued torise, together with the loonie pulling back in this most recent countertrend rallyin the U.S. dollar, has placed the Canadian dollar into virtual realignment with itsequilibrium level. In other words, most, but not quite all, of the Canadian
There is no job crisis inCanada with nearly 70,000full-time jobs created sinceSeptember.

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