David A. Rosenberg December 3, 2009
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
WHILE YOU WERE SLEEPING
IN THIS ISSUE
Equities are rallying, the MSCI world index is on a four-day winning streak, and so
are commodities as the Dubai debacle fades into the background. Copper just hit • While you were sleeping —
a 14-month high, oil is back above $77/bbl and gold achieved a new record high global equities and
commodities are rallying
this morning (although it is now consolidating). as the Dubai World
debacle fades into the
Emerging markets have now gone all the way back to August 2008 levels after background
today’s 0.7% advance. Perhaps investors are giving a thumbs up to Bank of
• A whole lot of nothin’! The
America’s move to pay back the TARP funds, notwithstanding the share dilution Dow hit a new intraday
that comes alongside with it. high yesterday, but the
advance was limited to a
Government bond markets are selling off across the board in the wee hours of the select few
morning too. The renewed appetite for risk is also evident in the softening U.S. • The Dow is back in a bear
dollar (and the Yen — now down for three straight days against the Euro) and market — in gold terms,
pickup in the high-beta resource-based currencies (both the Australian dollar and the Dow actually peaked
the South African Rand are up 1% so far today). Maybe the markets like the fact back in August
that the Obama-led jobs summit begins today (though someone should tell Mr. • St. Louis Fed President
Market that unions will be highly represented at this meeting — expanding Bullard must be bullish …
corporate profits is probably not first and foremost on their mind). on bonds
• The Fed’s Beige book
Some of the data out of Europe overnight (PMIs, French employment) certainly had broadly mixed, but from
a good tone to them. Or maybe investors are hoping that Bernanke will talk up the our lens, the tone was
economy as best he can during his senate confirmation hearing today (the WSJ more consistent with a
editorial today — The Bernanke Record — is quite good). Or perhaps the markets stagnant economy
love the just-released Goldman Sachs forecast of an earnings-based recovery in • U.S. employment is still
2010 replacing the hope-based rally of 2009 and that equities will rally more than contracting
20% from here through the end of next year. Hard for us to believe, but that is • Frugality still a secular
what many portfolio managers certainly want to believe and are seemingly buying theme — Bargains, food
into right now. stamps, consignment
shops, coupons and now
We see today on page A13 of the WSJ that the Japanese government is the barter system is back
contemplating an $80 billion stimulus plan just days after the Bank of Japan gave
the banks $115 billion of free cash to lend out. And it’s not just the White House
that is pressuring banks to lend again — so are the Europeans (see German
Commercial Banks Agree to Boost Their Lending). Of course, if the banks start to
lend freely again, then this must mean that the recovery will be a durable one
(never mind that overextended credit was the problem to begin with — if feeding
the drunken sailor another single-malt is what it takes, then let’s go for it). We
probably have to go back centuries to see the last time that governments in
practically every country were so actively involved in the capital markets and the
real economy. In any event, it is clear that the ‘new normal’ is that today’s
institutional investor likes this sort of arrangement, and tomorrow’s taxpayer is
merely some future concept right now to most of us.
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 highest
level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports, visit www.gluskinsheff.com
December 3, 2009 – BREAKFAST WITH DAVE
We have been of the view, and remain of the view, that corporate bonds have
more attractive risk-return attributes than equities, particularly in the U.S.A. And We have been of the view,
we see an interesting Bloomberg News article today (Pensions Eliminating Stocks and remain of the view, that
Adding $40 Billion to Corporate Bonds) indicating that many pension fund corporate bonds have more
managers agree with our assessment. After all, the investment-grade bond attractive risk-return
market has generated a return exceeding 20% so far this year. attributes than equities,
particularly in the U.S.A.
It’s not just pension funds that are rebalancing in the face of the equity market
rally, but individual investors are doing likewise. We just received the data for the
week ending November 24, and retail investors were net sellers of U.S. equity
funds to the tune of $2.35 billion while bond funds added another $8.22 billion
(on top of $10.12 billion the week before).
So this remains the Houdini rally — no jobs; no pricing power; no broad
participation; and no volume! Indeed, yesterday was an exclamation mark on
that point as volume was down 3% on the Nasdaq and 9% on the NYSE.
A WHOLE LOT OF NOTHIN’!
The only index to have managed to hit a new high in the past 48 hours has been
the Dow Industrials, and even then the advances have been limited to a select few
blue-chip names with solid dividend growth/yield and/or a global footprint.
In fact, at the intraday 52-week high yesterday on the Dow, only three of the 30
stocks had actually made a new high (with yields of 3.0-4.0% — sounds good)! The
S&P 500 has been jerking around the 1,100 level now since October 15 — over six
weeks of no gains. The Russell 2000 has done nothing since the end of August.
Even the transports, which have just come off a couple of nice days, have basically
flat-lined since Labour Day. This conjures up the memory of Bob Farrell’s Rule #7.
To wit:
“Markets are strongest when they are broad and weakest when they narrow to a
handful of blue chip names.”
THE DOW IS BACK IN A BEAR MARKET!
That is correct. While the market did make a new high in ‘deflated dollar’ terms
just a short two-days ago, in gold terms, the Dow actually peaked on August 27
and is down 13.5% since then. As an aside — just to show that the gold story is
not JUST a weak U.S. dollar, bullion prices rose a further 1.6% yesterday to yet
another new high even in the face of a 19bps recovery in the greenback (all sorts
of talk now that the Bank of Japan is set to intervene).
Page 2 of 6
December 3, 2009 – BREAKFAST WITH DAVE
CHART 1: DID THE BULL RUN END IN AUGUST?
United States: Dow Industrials Index relative to the Price of Gold
(ratio)
16
14
12
10
8
6
08 09
Source: Haver Analytics, Gluskin Sheff
SENTIMENT IS A SELL?
The latest Investors Intelligence poll shows the bull camp at 50% and the bear
camp at 16.7%. That bear-share is down to a six-year low. Note the current level
on the VIX index, it is at 21.12 — complacency reigns.
BULLARD MUST BE BULLS (ON BONDS)
The St. Louis Fed president was on CNBC yesterday (and he is an FOMC voter next
year) and according to press reports, he believes that the “medium term risk is for
deflation” (2-4 years). This doesn’t seem to be too consistent with Richmond Fed
President Lacker’s comment that a recovery is well under way. That is not correct.
As we said earlier: it now seems that we are going to see Q3 real GDP revised
down to +2.5% at an annual rate even in the face of the mountain of fiscal
stimulus. What is normal coming out of a recession is closer to 6.5% growth rate
for that precious first post-recession launch pad. In fact, more often than not (80%
of the time, to be exact) that opening quarter of post-recession activity
foreshadows just how strong or weak the ensuing four quarters are going to be.
Let’s just add that at no point in the post-WWII experience (insofar as that is
relevant, which it isn’t for the current post-credit-bubble economy) have we ever
seen a recovery start with such a whimper as what we saw unfold last quarter. It’s
really quite sad.
FED’S BEIGE BOOK BROADLY MIXED
While many pundits are laying claim that the Fed’s Beige book represented an
improvement in economic activity, one must keep in mind that the economy is
operating on government-fed steroids right now. From our lens, the tone was more
or less consistent with a stagnant economy. What did catch our eye, and this is
likely pertinent for tomorrow’s payroll report in the U.S., was this little ditty:
Page 3 of 6
December 3, 2009 – BREAKFAST WITH DAVE
“Expectations for the holiday season were mixed across districts, with contacts in Yes, according to the
the New York and Dallas Districts reporting lighter-than-normal seasonal hiring Challenger report, the pace
and/or increases in the hours of existing employees, as opposed to hiring of firings may have receded,
temporary workers, to meet the seasonal demand.” but the pace of new hires is
also falling
EMPLOYMENT STILL CONTRACTING
It is totally bizarre to us that folks still look at less-negative data, or in this case a
moderation in job losses, as a good thing; this remains a market psychology still
hitched to the second derivative. The way we look at a -169k print in ADP payrolls
(what we got in November) is that this was basically the average decline we saw
during the 2001-02 recession/tech wreck. The fact that we have lost 3.3 million
private sector jobs since the depths of the market’s despair nine months ago, not
to mention the 6.2 million payroll slide since Lehman collapsed, attests to our view
that what we have on our hands is a secular post-credit-bubble shift in labour
practices.
As for Friday’s payroll number, as we said the other day, retailers went into this
season lean and mean and could be a wild card. In fact, what did not improve
“sequentially” in the ADP data were service sector jobs, which fell 81k (after
declining 79k in October and 78k in September).
Now there was much attention to the Challenger data about layoff announcements
which, of course, fell 5,330 in November, and the good news is that layoff
announcements has now declined for four months in a row. But what was not
clearly delineated anywhere from what we can tell was the associated survey,
which showed that hiring announcements tanked 47,444 in what was the worst
such month in over two years.
So basically, as far as the month of November is concerned, there were nine cuts
in new hirings as there were cuts in firings. The number of new hires in fact is
down 10% from a year ago and that is off a pretty depressed base. So the
difficulty in assessing what the jobless claims numbers are telling us now is a bit
muddled because all they reflect are the firings, and it is very difficult to grow an
economy, productivity aside, without any new hires taking place.
While the Monster employment index is not seasonally adjusted, traders still like to
watch it and the data for November just came out – 119 from 120 in October (and
retail was off 3 points to 125).
FRUGALITY STILL A SECULAR THEME
What have we mentioned this week? Coupons. Food stamps. Consignment
stores. And today, we see that the barter system is back! Have a look at In Lean
Times, Restaurants Barter for Trade Services on page B6 of the WSJ. Oh yes, not
to be outdone, today’s NYT ran with the newest fad for the holidays — companies
sharing the bill for the holiday party (see Ringing in the Holiday But Sharing the
Bill” on page B10). Folks, this is the hallmark of a deflationary, not inflationary
environment, at least as it pertains to finished goods and services (as opposed to
primary producers — now that is where the pricing power is!).
Page 4 of 6
December 3, 2009 – BREAKFAST WITH DAVE
Gluskin Sheff at a Glance
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Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to the
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1 September 30, 2009
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December 3, 2009 – BREAKFAST WITH DAVE
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