Rosenberg On The 6 Things That Drives The Market, Asks If Bullard Is Long Stocks
Some great observations from Rosie this morning, starting off with several completely false myths that are assumed true on the otherwise "very efficient" and "never wrong" Wall Street:
Few economists we read have much fiscal drag in this year’s macro forecasts and that could end up being a critical error. At the same time, one has to wonder what businesses are thinking when the trend in core capex orders and shipments start the year in decline — hopefully that is not more than a weather report (see more below). It is also worth contemplating what it means to have a tech giant like HP cut its revenue forecast for the entire year — that is not the news a stock market bracing for 15% profit growth for 2011 wants to hear, that much we are certain of. While the jobless claims trending down is a good sign that the pace of firings is abating, there is scant evidence of a significant pickup in new hirings. The excess supply of labour in the U.S.A. may be as understated as much as the official home sales data (as we now find out) have been overstated.
The IBD/TIPP poll of American adults that was just published showed 35 million American households — 28% of the universe — which have at least one member looking for work right now. This translates into a job-seeker rate of 23%, which is one reason why, unlike the 1970s, the surge in energy and food prices are highly unlikely to get passed on to Mr. and Mrs. Consumer for very long, if at all (good luck to the airlines). Households deemed to be “job-sensitive” — those with at least one job seeker or a household concerned about layoffs — now total 47%. That should shed some light on the recent consumer sentiment surveys, which have been lately driven by the wondrous gains in the Bernanke-led equity market rally than any meaningful improvement in the labour market.
I have to say that it is amazing how myths become so quickly promulgated in the financial industry. First, it is now taken as a given that the Saudi Arabian political regime will remain intact because surveys show how well loved the King is and how great it is to see the population now being bought off with $36 billion of fiscal assistance from the Royal Family. As if the population is going to be bribed into trading in economic freedom for fiscal transfers, especially if the large Shiite population sees democratic concessions take hold in neighbouring Bahrain (where most of the people are Shiites, many from Iran, and ruled by the Sunnis).
Second, this emerging view that Saudi Arabia can just step in and replace Libyan oil seems totally off base, as a loyal subscriber informed us yesterday, it is not so simple. The reason: Libya’s crude is a perfect feed for ultra low sulphur diesel. The oil Saudi Arabia would supply to replace, it is not. Apparently you need three barrels of Saudi crude to get the same number of barrels of diesel you could get from one Libyan barrel. Further, the Saudi crude is very high in sulphur. The refineries that process the Libyan crude cannot remove the sulphur. The question is what happens if we lose Libyan crude and if strategic stocks are not released (1.6 billion barrels I believe) — then $150/bbl is certainly not out of the question and that is before we start talking about Algeria.
Third, the view that the economy will escape relatively unscathed is another pie-in-the-sky view from Wall Street research houses that we heard not just in 2007 but through the first nine months of 2008 when the recession was in full flight. If economic research houses were already assuming say $80 oil for the year, and now we are heading to $100, then right there that subtracts one percentage point off real GDP growth. If WTI follows Brent to $120/bbl, then we are talking about a two percentage point drag on the pace of U.S. activity. As it stands, about half of this quarter’s fiscal stimulus from the payroll tax cut has been wiped out by what is happening at the pumps. For the rest of the year, between the moderate spending cutbacks being proposed by the Republicans and the accelerating fiscal restraint at the state and local government levels, we could easily be talking about an additional one to two percentage point drain from real growth.
Most interesting is Rosie's update on the factors that truly drive stocks in the age of central planning:
WHAT REALLY DRIVES THE MARKET?
Well, we use to say there were four key drivers:
- Fund flows
Then we introduced another one last week:
5. The Fed’s balance sheet
Now that is not going to be included in any of the Graham & Dodd textbooks, that is for sure. But since Dr. Bernanke embarked on his non-traditional monetary maneuvers two years ago, there has been an 86% correlation between the S&P 500 and the movement in the Fed’s balance sheet. No wonder St. Louis Federal Reserve Bank President Bullard is opting for QE3 — he’s probably long the market!
And now there is a sixth:
6. Corporate earnings surprises
Yes, this works with a 90% historical accuracy rate. For example, we went into 2008 with consensus S&P 500 EPS forecasts at $102.67 and finished the year at $65.47. The S&P 500 was down 39% that year. Then we went into 2010 with the consensus at $77.71 but instead we got $84.60 and the market rallied 13% point-to-point. The only year in the last 10 that this metric didn’t work was 2009, which was a completely bizarre year with an economic detonation and market plunge in the first several months of the year followed by a policy-induced bounce-back of historical proportions in the second half.
Going into 2011, the consensus is going with $97 on EPS, which is a 15% rise over 2010 and the last time we went into a year with an estimate that high was back in … 2008.
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