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David Rosenberg: This Is Your Last Chance
Over the last several months, we have been very fortunate to read the missives of Gluskin Sheff's chief economist and strategist, David Rosenberg. Aside from a stellar career at Merrill Lynch, Mr. Rosenberg gained notoriety for his early "call" on the recession that began in December, 2007. Now Mr. Rosenberg is gaining notoriety as the last bear standing. Despite a 50% run in the S&P500 and a growing chorus that the economy has turned a corner, Mr. Rosenberg has been steadfast in his resolve:
"This rally is based on a lot of hope that we are going to
see a V-shaped economic recovery in the U.S. The S&P 500 is priced for
4% real GDP growth. We don’t see it."
I am empathetic towards Mr. Rosenberg as I too have had a cautionary view towards equities since mid-May. Being cautious while the market goes up day after day and not seeing what everyone else is seeing (sic) is very frustrating. But leave it to Mr. Market. One minute you are a hero for calling the recession, the next minute you are a goat for missing the recovery. The market beast can be very humbling.
But truth be told, Mr. Rosenberg could be right in the end, and I believe we are now approaching that juncture in the markets that could prove him right. In essence, this is his last chance.
In particular, there is a growing divergence between the 10 year Treasury yield, which is falling, and the equity markets, which are rising.
In "Long Term Treasury Yields: Someone Is Going To Be Wrong", which I wrote on August 26, 2009, I stated:
"the divergence between lower yields - a sign of economic weakness - and higher equity prices - a sign of economic strength - will not persist for long. Most importantly, it was the failed signal in June, 2002 that coincided with a 25% plus drop in equities over the next two months. It should be noted that the current set up in Treasury yields and likely failure is exactly the same as in 2002!"
So why is this Mr. Rosenberg's last chance? Treasury yields are falling (and likely to go lower) and during equity bull markets that is a good thing. But if we are still in a bear market, then falling Treasury yields is a bad sign for equities.And this is the first time since the March, 2009 bottom that Treasury yields are falling. So Mr. Rosenberg still has a chance of being proven right.
Let me demonstrate graphically. See figure 1 and figure 2, weekly charts comparing the S&P500 (symbol: $INX) to the yield on the 10 year Treasury (symbol: $TNX). (Treasury yield data is hidden.) When the 14 week rate of change (i.e., a simple default value) of the 10 year Treasury yield is below zero (as it is now), the price bars appear red. Blue price bars (on the S&P500 price graph) are when the 14 week rate of change on the 10 year Treasury yield is positive.
Figure 1. S&P500 v. 10 Year Treasury Yield/ weekly
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As you can see, there is a lot of red from 2000 to 2003 and from 2007 to the recent bottom in 2009. During these bear markets, lower yields translated into equity weakness. Currently, the 14 week rate of change of Treasury yields is negative, and as stated previously, this is the first time since the March bottom.
In figure 2, which is from 1988 to 2000, lower 10 year Treasury yields (red bars) always translated to higher equity prices. The lone exception was 1998. After all this was a bull market. Referring back to figure 1, lower Treasury yields were kind to equities during the bull run from 2003 to 2007.
Figure 2. S&P500 v. 10 Year Treasury Yield/ weekly
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So this is it. This is where the rubber meets the road for Mr. Rosenberg. This is the first time since the March, 2009 low that the 10 year Treasury yield is heading lower (on a 14 week rate of change basis). If equities are in a new bull market as many claim, then lower yields will be a buying opportunity. Mr. Rosenberg will suffer the market's humiliation. If equities are in a bear market and the past 6 months have been nothing more than a monster bear market rally, then lower yields should spell trouble for equities. They did in 2002.
So hang in there, Mr. Rosenberg. I hope you don't throw in the towel. You could turn out to be a hero after all.
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I thank you two gentlemen as being for the common man with data and opinion for B- students like me for sure. The G20 meeting will move us to end of third quarter. Base chemical's in areas appear to being max rates and do evaluate closer at the end of this month on supply chain. Humble and thankfull for the patience and time all have provided.
Monetary steriod abuse = bulging muscles and shrinking nut sack.
A new Bull Bubble--and then..boom--he is right. When? between 18 months and 4 years? Lags, lags, lags.
"In the republic of mediocrity, genius is dangerous" R. Ingersoll
I find the only sane approach is to day-trade to the long side, and build up short positions. This way I am not ignoring the trend or the reality (regardless of when reality matters again.)
""Joseph Stiglitz, the Nobel Prize-winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”
A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.""
"The last standing bear." Are you kidding me. There are thousands (probably millions) of bears out there. Nothing this guy writes should be takes seriously if he thinks this.
And yes, Americans will continue to spend themselves to "debt (death)" as they buy into this recovery story. Obama is being set up for the biggest "fall" that any american president will ever "weather". Amen !!
Obama is not a fool and is realizing that if the market goes up too fast its gonna come down equally hard and today's speech just was an indication. But he is a puppet in the hands of the Fed confederacy and Ben & Tim are just intent on feeding the wolves. Dave is right but time will tell when and how this gets resolved. Meanwhile lots of folks I talk to are buying the green shoots talk. Malls in Chicago area are full like in 1999 (even though not sure if people are buying like its 1999). Neverthless foot traffic suggests Ben & Tim have succeeded in fooling the public yet again !! America continues to live in denial and will pay a price at the altar !!
Yes, that is why it will probably take a lot longer to unwind than people expect. Americans want to be bullish.
Unforutnately since GDP measures so many useless things. In a normal working economy you could get 20 to 50% shrinkage max. This thing can shrink down to invisible ranges. With so much of it's revenue off books in drug and other nefarious activiities though it's going to look pretty strange.
This is not his last chance to be right. I firmly believe that this thing does not collapse until middle of next year, after the elections, almost exactly like the first depression.
This is the ultimate slow motion trainwreck of our lifetime.
The mainstream news will get better and better while the reality will get worse and worse exponentially BECAUSE we are so determined to avoid the unpleasantries. Hell, we have not even seen a single non-gov't spending related green shoot at any level, nada.
The banks are totally completely annihilated with no remote possibility of recovering from 40 to 1 leveraging no matter how much money we print out of thin air. Americans will be walking away from their debts next year enmass.
GM and Chrysler are going bankrupt again. They are back to padded CEO bonuses and hiring union members yet they couldn't peddle their product with Cash for Clunkers. Now they let you borrow their car for a couple months. While an interesting gimmick, it is also easily duplicated by the other car companies if it works. Their next step will have to be "cars for free, just take one".
The trade war with China was clearly pre-packaged on both sides. Taking a world economy based on free trade back to full scale protectionism is bound to have unexpected consequences, how could it not? We all sort of dislike Chinese goods but that is different than being outright co-erced to 'Buy American'.
All the policies of the administration have the end game of massive unthinkable debt levels with no actual positive results. A simple patient bill of rights would solve healthcare for most of us, and some level of government aid to the most unfortunate in exchange for scrapping medicare/medicade would be a constructive move. Cap and Tax is just wrong. As far as financial reform, how about mark to market? That ought to punish those 'evil doers' but good. Goldman is dead broke when mark to market is applied just like all the rest. Same with GE. That seems like good old school incentive to me.
Anyway I don't see any real recovery for another couple years, and only if deflationary creative destruction gets to run it's course. On the other hand Hyperdestaginflation is always likely.
Human nature and the structure of our government, central bank and political system has not changed at all since 1929. Even Goldman is still front and center in all policy matters.
Hyperdestaginflation...that explains it!
DOW / SP500 / FTSE daily chart shows increasing topping action.
Weekly chart remains bullish so far ...
Monthly chart remains bearish.
more here
http://www.zerohedge.com/forum/market-outlook
From a Dow Theory perspective, the trend is up when only prices are considered. Industrials and transports made a new secondary high.
But, two other metrics give mixed messages. One, the valuation is way too high for starting a new bull. Second, the volume should increase with the price, but it does not for the industrials and only on a limited basis for the transports if viewed on a weekly chart. To make it more confusing, the P&F charts for both averages show volume increasing while the prices go up.
An explanation might be that a Bear market rally got turned into a new bull market with a lot of freshly printed money. That explains why Bonds and stocks are up in dollars and the dollar itself is down. Not a pretty outlook if it continues; in Weimar it was called “Flucht in die Sachwerte” (Flight into any material assets.)
So, is the flight the logical place to go right now?
I.E. they say there is always a play. Given certain
sets of assumptions, where do you see the plays being?
Seems like gov't. head always like to paint a rosey picture. It does not matter which party is in. And yet
psychology is always an integral part of things... Too much fear immobilizes, but too much optimism could be fool hardy.
So many seem to be saying things both ways depending on their assumptions/predictions, you seem more definitive but have not been explititly. How about it?
Fact: Banks haven't been forced to take necessary marks
Fact: The system has and will continue to go through a period of deleveraging
Fact: The fed is using the same tools in similar methods that allowed for the expansion of previous bubbles.
Fact: Systemic risk still exists, and reforms haven't been made to address this problem.
Fact: Companies have and will find it difficult to grow their bottom lines because they have reduce employee count dramatically, reduced costs dramatically, and unless they increase their top line numbers - their stock prices should reflect that.
Question: Is this rally anything but an expansion of P/E ratios?
It's an expansion of "P" without any legitimate growth in "E", or so it seems. Maybe 1st half 2010 there might, might be a few items worth getting into a hoot about as for multiples expanding. Until then...more cheerleading from certain media commentary types.
I generally like Rosenberg...used to follow him at Merrill. He was wise to jump
"One minute you are a hero for calling the recession, the next minute you are a goat for missing the recovery. The market beast can be very humbling."
I note that Mr. Rosenberg has consistently said for the past several months that he could definitely foresee the SPX rising to 1200 on a technical basis. You imply that he is a "goat" yet Rosie's words speak differently.
Rosie has commented a number of times that an economic forecast without a market call is basically baloney. Rosie made the call on the spx.
that is nonsense. rosie has been bearish since march. his spx call was 500-550. he only allowed for a technical rally to these levels since 900 or so, out of frustraton. rosie has been wrong on the markets. had you followed rosie, you would have missed the entire rally. that said, his fundamental analysis is strong, regardless.
The market has been disconnected from the real economy since April.
Even irrefutable evidence that GDP shrinkage has not stopped and will continue is not likely to materially derail the kool-aid orgy.
Only an "unexpected" magnificent crisis of some kind or another will serve as a catalyst.
Totally agree about the market disconnect and to that I think the GDP is a real primitive measure of economic growth/decline/health. Outdated and hopefully will play a lesser role in gauging economies in the future.
http://blogs.wsj.com/economics/2007/11/29/gross-domestic-income-tells-different-story-than-gdp/
In 1917 the Bolsheviks seized the banking system, the money supply, and many industries. They de factor seized everything by controlling the money supply.
We are now widely a nation run by a government that is far closer to Bolshvism than capitalism. And capitalism is what Lenin successsfully destroyed and competing schools of economic thought were suppressed. Sound familiar?
It's hard to admit it -- it is impossible to refute it.
Ladies and gentlemen, we are witnessing a coup. That "thing" that won the election cannot love America, save for to rule it, because that 'thing" has no idea what being an American feels like.
What is the market worth? Whatever Obama says it is worth. "Houston, we have a problem."
why don't you take your racist tin-foil junk somewhere else and let the adults talk amongst themselves?
de factor. heh. you wouldn't know "bolshvism" if it slapped you in the face.
Ahh yes, only your brand of racism is allowed, right? That's the brand where everything Obama does is good, and any criticism is bad because OMG he's black!
well just how could a kenyan born indonesian
rockefeller sock puppet love america?
While I appreciate your analysis, what does it have to do with Rosenberg's initial comment, "This rally is based on a lot of hope that we are going to see a V-shaped economic recovery in the U.S. The S&P 500 is priced for 4% real GDP growth. We don't see it." ??
He doesn't see GDP growth that the market is expecting. Rosenberg is not prognosticating on how high the market will go, but that the economics don't justify the market valuations. Using market performance as a grading method for Rosenberg's conclusions is just as absurd as using it as a grading tool for Bernanke's conclusions.
oh come on, that is just lame excuse making. If there is no linkage to market outcomes, then why bother? His reports do in fact draw conclusions about market performance. He's been cautious. Yes, he's said that equities could go higher. He's said that bonds seem more attractive at the moment, because of the growth that equities have already priced in.
Don't get me wrong, I get his reports and think he makes sense.
But in the end he could end being ... let's not say 'wrong', but unnecessarily bearish.
We all know that measuring the accuracy of someone's economic forecast is crazy. But for CNBS and all the permabulls the stock market is the tell all. These same people judge bernake and obama's speeches by the direction of the intraday ticker so it should not be such a surprise.
i'm not a fan of bruce's articles in general. i find his logic faulty.
the divergence between yields and the stock market is meaningless at a time like this.
he free cash of the bailout is not politically sustainable and the news..well the news can be controlled longer than you think. but when the the playbutton is hit, and the show unpaused, the panic will resume but manifest itself in a different nature.
we can only hope that the treasury yields are not driven by a panic and a response to panic, and that the fed still has control.
Agreed. He's an economist, not a soothsayer. He's got another 18 months to be 'wrong'.
I share your pain.. Thx for the great info! GC