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Breakfast With Dave 122310

Breakfast With Dave 122310

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Published by: richardck50 on Dec 23, 2010
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David A. RosenbergDecember 23, 2010
 Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
Breakfast with Dave
Baltic bust: Baltic DryIndex may be indicating adramatic slowing of Asia’sdemand• Housing still soft:Inventories remain ahurdle and mortgageapplications are downTen reasons to becautious for the 2011market outlookBig recovery all right
 0.9% on Q3 real finalsales: mix of higher thanexpected inventories andlower than expected realfinal sales is a cloud overcurrent quarter GDP
While you were sleeping:mixed markets overseas,VIX index has collapsed,fairly quiet in bond-land,shoppers are loosening  their purse strings but it isdangerous to use this as asign of changing consumer attitudesThis has been the same story all week long — overseas the markets arecompletely mixed to start off the day. Europe is all over the map but most of thebourses are in a sea of red over in Asia. We can’t help but notice that theShanghai index is down another 0.8%, and the oil price is flirting with a two-yearhigh of $90 a barrel. Chinese stock market has this nasty historical habit of leading commodity prices by around 3-4 months with an 80% correlation. As anaside, the run-up in energy prices is costing American consumers something close to $60 billion annual rate, just in case you wanted to know where most of  that payroll tax cut is going to go — siphoned into the gas tank. Add to that thereality of a really sick-looking Baltic Dry Index (see more below).Everyone seems to believe in a sustainable V-shaped recovery here and yet wehave a significant Q3 downward revision to U.S. real consumer spending, a 0.2%contraction in New Zealand’s real GDP for the same quarter (consensus was at+0.1%), the Bank of Japan just cut its year-ahead GDP growth forecast to 1.5%from the 3% pace of the past year, and a Bank of England official on the wires(Paul Fisher) is hinting of at least one quarter of U.K. GDP contraction in 2011as well. The IMF also issued a growth risk signal for Canada due to high levels of consumer debt, a fragile housing market and exposure to a potentially stalling global economy and urged the Bank of Canada to refrain from any further policy tightening.As far as the FX market is concerned, it is interesting to see the commoditycomplex giving up some gains even with the USD showing some struggle signsright after crossing above the 100-day moving average. It’s mostly quiet inbond-land, though we do see Portugal 10-year yields up 7bps today and Greeceup 17bps to back above the 12% mark.In a sign of these complacent times, the VIX index (a measure of volatility) hascollapsed to 15.45. It was last here in July 2007 when the majority of investorsonly saw blue skies ahead and that the Fed and Congress had things undercontrol. The problems in housing and mortgages were deemed to be contained.Looking for something cheap — there is nothing more inexpensive right now thanan insurance policy against the consensus being off the mark. The equitymarket is hitting highs for the cycle on below-average volume, cash ratios are athistorical lows and market sentiment at three-year highs. If there is a bright lightfrom a technical perspective it is that the Nasdaq’s A-D line has improved tolevels we have not seen since last May.
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
December 23, 2010
CBOE Market Volatility Index, VIX
(index level)
10987 100806040200
Source: Haver Analytics, Gluskin Sheff 
As a sign of these exuberant market times, Reuters just published the results of a global portfolio manager poll that showed equity exposures in mixed-assetstrategies at 54.1% in December, the highest since last February (a couple of months from the interim springtime peak); bond exposure is down to 33.9%,again the lowest since last February, and again, just two months ahead of theyield peak for 2010.For now, the “spin” on the economic data from most pundits is on the positiveside. This is being hailed as the best holiday shopping season since 2006 asShopperTrack released numbers yesterday showing in-store sales running at+5.5% YoY and comScore data suggest that online sales are running at 12%above year-ago levels. Admittedly, these are surprising numbers but the take weare seeing in the media is equally surprising. Look at what the folks at the New York Times had to say today (page B1):
Let’s wait and see whathappens in the next fewmonths as the bills come inand the reality of deflatinghome values and inflating gasprices start to sink in
“The last-minute holiday surge is heralding the return of the American consumer,who is shedding the recession’s thrifty ways and rediscovering the pleasure of shopping. The malls are jammed, parking lots snarled and sales expected tostay strong in the few remaining days before Christmas.”So people are loosening their purse strings during the holiday season and journalists are going to use that as a commentary on how the entire thing isplaying out or how it will continue to play out. Let’s wait and see what happensin the next few months as the bills come in and the reality of deflating homevalues and inflating gas prices start to sink in.
Page 2 of 9
December 23, 2010
There are forecasts everywhere of better times ahead in terms of employment,but the reality is that employment bottomed in December 2009. The problem is that most of the jobs being created are part-time and the pace of job creation isnot taking the unemployment rate down from near-10% levels, which in turn isexerting downward pressure on organic wages and salaries. This is then forcing  the government to borrow money to enact more tax stimulus and of courseeveryone is bulled up over tapping Social Security for spending purposes. Weshall see how far this goes.
The consumer may indeedhave socked away somemoney to avoid being Scroogefor the current holiday season,but we wouldn’t beextrapolating this into 2011 byany means
No doubt the savings rate is being drawn down in Q4 and this is helping fuelconsumer spending. But keep in mind that it is very dangerous to use theholidays as a guide for any fundamental shifts in consumer attitudes. In thedays of free-flowing credit, the massive wealth build-up from double-digit homeprice appreciation and sustainable strong employment that ultimately pulled the jobless rate down to 4.5%, consumer spending in real terms surpassed a 2.5%annual rate no fewer than 13 quarters and 3% on nine occasions. It has yet tohappen so far — keep that in mind. The consumer may indeed have sockedaway some money — the savings rate did get as high as 7% — to avoid being Scrooge for the current holiday season, but we wouldn’t be extrapolating thisinto 2011 by any means.In fact, what we found very interesting (if not amusing) was an article that foundits way on page A22 of the NYT — though it seemed to fly in the face of the“frugality is over” column on page B1. The article on page A22 was titled
ThisHoliday, Secondhand items Gains Some Respect
. Here’s what this particulararticle concluded:
“Some retail experts see a cultural shift in the making as government deficits,high unemployment and the mortgage crisis depress living standards. Whileretail sales have lagged, they note, secondhand sales are flourishing: TheNational Association of Resale and Thrift Shops reported that net sales were up13 percent this year from 2009, the strongest in five years
If you haven’t noticed, the Baltic Dry index is back to the 1,886 level. It hasn’tbeen there since the end of July, and along with the 9% decline in the Shanghaiindex from the nearby high, may well be an indicator of dramatic slowing inAsian demand ahead (with obvious implications for the commodity complex).
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