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Rosenberg On Buying Rumors, Selling News, And The Interminable Consumer Deleveraging

Tyler Durden's picture




 

Even as economics has taken to back seat a geopolitics and a market uncharacteristically lacking in euphoria, Rosie once again provides the daily dose of must read economic summary sans the Kool Aid.

SETTING THE RECORD STRAIGHT … AGAIN

The equity market certainly did turn in a surprisingly vigorous rally in the past few months but it would be a mistake to relate this to any real fundamental improvement in the economic backdrop. As we will likely see in today’s FOMC minutes, the Fed is yet again going to take a knife to its growth and inflation forecast as it has done with regularity over the past eight months.

To be sure, the double-dip has been avoided for now, but what is interesting is that nobody really believed in that scenario back in the summer, nor was any Wall Street research department calling for such even though for a time the risks were rising. The bottom in the equity market rally came, not on a piece of data towards the end of August, but on the back of the comments from Ben Bernanke in Jackson Hole that another round of quantitative easing was coming our way. This is why the rally ended, not on any particular piece of economic data, but right after the FOMC meeting a few weeks ago — a classic case of buying the rumour and then selling the fact. This is how markets often work since so much perception and psychology is involved.

For all the talk of economic improvement, the number of data points that were positive since the market bottomed in late August has been exactly equal to the number of negative data points. We can understand the pre-occupation with nonfarm payrolls, but frankly, the bloom comes off the rose when one turns to the Household Survey and sees that full-time employment has declined now for five months in a row. So many pundits focus on the ISM index but don’t stop to think that this is only a diffusion index and while it is indeed above the 50 threshold, the reality is that industrial production has not budged one iota since July. And, while retail sales have held in nicely, the “control” segment that feeds into consumer spending, came in at a mere 0.2% MoM in October, which was slower than the 0.4% print in September. What about the fact that housing starts collapsed 11.7% in October after a dismal 4.2% decline the month before. (Oh, but of course, who doesn’t know that housing is weak? Right.)

While the upward revision to Q3 GDP was impressive and broad-based (to 2.5% at an annual rate from 2.0% initially and the 2.4% that was widely expected), the monthly data on GDP reveal a sharp deceleration. For example, over the three months to September (point-to-point as opposed to quarterly averages), real GDP actually slowed to a 1.0% annual rate — down from 1.7% in July, 2.6% in June and 4.6% at the turn of the year. Based on information at hand, it looks a though Q4 real GDP is coming in closer to a 1.7% annual rate, so the moderation in overall economic activity will be more evident this quarter than it was in Q3 (sometimes quarterly averages masks what the true momentum really is).

It is not just about the economy — that is our point. In fact, what is normal for Mr. Market to see heading into the second year of a recovery is a 5% growth economy that is accelerating; not a 1-2% growth economy that is rife with downside risks. To be sure, corporate profits have been terrific, but not due to any meaningful increase in top-line pricing power. Fully 96% of the rebound in output since the recession ended has been due to productivity growth — talk about a miracle, especially since there has been no capital deepening now for about a decade. Productivity leads to income growth, but when the U6 unemployment rate is 17% (which means dramatic excess capacity in the jobs market), that income accrues to capital, not to labour.

Compensation per hour is declining and unit labour costs have fallen nearly 2% in the past year, which has been a major underpinning for profit margins, to be sure. How long the productivity miracle can last is anyone’s guess, but the excess slack in the labour market will linger on. What kept the consumer alive through all this was the massive help from Uncle Sam, but that is now coming to an end, which in turn will have some negative impact on domestic demand and revenue growth for the business sector. So, the combination of strong ex-U.S. growth and sustained solid productivity gains are going to be needed more than ever in order for the string of profits-surpassing-expectations to be extended into 2011.

So yes, profits have come in just fine despite one of the weakest recoveries on record, but to some extent, much of this has already been priced in. During the summer, there was far too much attention paid to how much the stock market had come off the April highs, and recently, far too much a focus on how far the stock market has bounced off the July-August lows. The bottom line is that for the past year, the S&P 500 has crossed above the 1,200 mark five times and has moved below the 1,100 threshold no fewer than thirteen times. This is a sideways moving market now for over year — a low of 1,022 and a high of 1,225. Sell at the highs, buy at the lows, until there is a decisive break either way. No doubt the equity market never did cheapen up enough for our liking — that day will come — but the total return to date has been a bit better than 7% compared to 11% for the long bond, 12% for the 10-year T-note and 10% for the corporate bond market. Gold is up more than 20% and silver by over 60%. The bond-bullion barbell that we have been espousing for years actually worked again in 2010.

And some more color on why we expect the December 9 Z1 update to confirm another $750-$1 trillion quarterly drop in shadow banking liabilities.

MORE EVIDENCE ON HOUSEHOLDS CUTTING BACK ON CREDIT

No sooner did we quote some research out of the New York Fed regarding the consumer frugality theme that we saw a similar report drawing similar conclusions out of the Federal Reserve Bank of Cleveland — titled Mortgage Borrowers Deleverage.
Yes, Virginia, the deleveraging cycle is not just about banks taking write-downs but also about a secular shift in household attitudes towards debt as we discussed yesterday.

The conclusions from the Cleveland Fed:

“Consumers have been able to deleverage by reducing both the amount of debt and the term to maturity of their mortgage debt. Loan-to-value ratios have steadily declined since they peaked, falling 680 basis points for existing homes and 520 basis points for new homes. Moreover, consumers have reduced their exposure to mortgage debt by reducing the debt’s term to maturity. In June, 2007, the term to maturity of all loans closed was 29.5 years; however, as of September of the term to maturity of all loans closed was 27.6 years.”

And, here are other forms of deleveraging coming from the sharp plunge in cash-out refinancing. Home equity is no longer being gutted by the masses.

 

 

 

 

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Tue, 11/23/2010 - 12:11 | 749531 Panafrican Funk...
Panafrican Funktron Robot's picture

Some other related economic data:

Existing home sales were spun to be "slightly down"

http://finance.yahoo.com/news/Existing-home-sales-drop-cnnm-3446938743.html?x=0

But per their data source:

http://www.realtor.org/research/research/ehsdata

Existing home sales dropped from 5,980,000 in October 2009 (at $172,000 median price) down to 4,430,000 in October 2010 (at 170,500).  The total existing home sales market size therefore dropped from $1.029 trillion down to $755 billion dollars, a $274 billion dollar drop in market size in one year.

 

Tue, 11/23/2010 - 12:16 | 749546 snowball777
snowball777's picture

It's a start.

Tue, 11/23/2010 - 12:16 | 749548 redpill
redpill's picture

Data from the Realtors is massively overstated anyway. It is a meager and overly optimistic sample from MLS that is then extrapolated to a supposedly "national" figure based upon a 2004 baseline analysis that looked at existing home sales in 1999 and 2000 from the Census data in that year. Think the housing market has changed at all over the last decade?

I estimate the nominal figures are 30% high, at least.

Tue, 11/23/2010 - 12:21 | 749573 ZackAttack
ZackAttack's picture

The population sure has changed.

Tue, 11/23/2010 - 12:37 | 749600 SheepDog-One
SheepDog-One's picture

If youve got real estate agents among your family and friends, you know theyre the most annoyingly over optimistic rose colored glasses wearing 'all is well' Kool Aid drinkers ever.

Tue, 11/23/2010 - 13:08 | 749703 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

I am guessing a good portion of them are ADD and cannot remember back to before 2004 when the market was not good. Think of the Thanksgiving turkey last week. All is well in the world on the farm until......

Tue, 11/23/2010 - 17:30 | 750592 Pat Hand
Pat Hand's picture

There are Realtor(TM) TV commercials running here (Connecticut) about how "the real estate market is RED HOT again!".  Even though perhaps 15% of the home have for sale signs and I haven't seen one sold since the summer...

Tue, 11/23/2010 - 12:11 | 749534 Cognitive Dissonance
Cognitive Dissonance's picture

This is how markets often work since so much perception and psychology is involved.

That's odd because my text books say very little about perception and psychology and a lot about efficient markets and reasonable people assimilating the news and acting rationally. Pray tell there's more to this than just spreadsheets?

The bottom line is that for the past year, the S&P 500 has crossed above the 1,200 mark five times and has moved below the 1,100 threshold no fewer than thirteen times.

Now where is that air sickness bag when you need it?

The bond-bullion barbell that we have been espousing for years actually worked again in 2010.

So the so-called "crazies" here on ZH (me included) won? Does that wash away the "crazy" stigma? How long must you be correct before you're accepted by the masses as one of the many?

Tue, 11/23/2010 - 12:19 | 749566 Dr. No
Dr. No's picture

COLE: Germs?!

JEFFREY: In the 18th century there was no such thing!  Nobody'd ever imagined such a thing -- no sane person anyway.  Along comes this doctor...Semmelweiss, I think.  He tries to convince people...
other doctors mostly...that there are these teeny tiny invisible "bad things" called germs that get into your body and make you...sick!  He's trying to get doctors to wash their hands.  What is this guy...crazy?  Teeny tiny invisible whaddayou call 'em?..."germs"!

Tue, 11/23/2010 - 13:18 | 749721 jmc8888
jmc8888's picture

Exactly, I've used this before as well.  We didn't even know about Germs until germ theory in the 1800's. 

 

Just like a lot of smart people, were completely 100 percent dumb fuck wrong about man not being able to fly, in 1902.  Some of them probably Wall street squid like fucks from then too.  Some were even gasp, scientists.

If you want to see how stupid people were even 100 years ago, or that same 1902 year, watch


Le Voyage Dans La Lune (A Trip To The Moon) (1902) ...and tell me how stupid these people were to make these mistakes.  They just didn't know.  We do.  *and we're stupid in an equal number of ways [at least], today*

 

Tue, 11/23/2010 - 16:58 | 750474 RockyRacoon
RockyRacoon's picture

Let's not forget those who think the earth is 6,000 years old and hold that evolution is a "theory".   They get to vote, too!

Tue, 11/23/2010 - 13:24 | 749713 jmc8888
jmc8888's picture

ROFL CD, you spot some good ones.

Exactly, psychology and perception are completely bullshit.  When people say 'it's most of the market', that should clue you in, that most of the market, is full of shit. 

Even the pyschologists, don't know if they're right. 

They guess, like a crappy squiddy Goldman Sucks economist, using pieces of data (highly fractional pieces) stretched to mean the world in a vacuum tube...except it's just incomplete data, representative of nothing for certain, and what's worse, is you have the variability of the psychologists AND economists at play.

Meaning it's like a police officer getting the truth about a crime from a drunk and a liar.  Or about the brothel from the owner and a hooker.  Or a drug house from the junkie and the dealer.

People really don't understand they base so much of their knowledege and cede so much of their control, to complete bullshit.

The sad thing is, 'many a fortunes' are risked on the altar of 'bullshit', and boy does the altar's statue look homely.  All these rich people walking around with a blow up doll thinking they have a pin-up.

 

 

Tue, 11/23/2010 - 14:18 | 749901 lunaticfringe
lunaticfringe's picture

According to the German philosopher, Arthur Schopenhauer, "All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.

Tue, 11/23/2010 - 14:44 | 749981 Cognitive Dissonance
Cognitive Dissonance's picture

LOL

So says the "lunatic fringe".

Brilliant. :>)

Tue, 11/23/2010 - 16:47 | 750440 Kayman
Kayman's picture

Sorry CD

You're a lifer. You'll be carrying that Ball and Chain a long, long time.

We, over here in Abbynormaland, don't want crazies inciting the truth.

Tue, 11/23/2010 - 12:20 | 749569 Rainman
Rainman's picture

My Dow 10k hat is tattered and torn but ready for immediate use. 

Tue, 11/23/2010 - 12:41 | 749613 pat53
pat53's picture

You won't be wearing that anytime soon, maybe a year from now, but Dow 12K first.

Tue, 11/23/2010 - 12:27 | 749580 NOTW777
NOTW777's picture

how do banks make $ going forward?

Tue, 11/23/2010 - 12:34 | 749594 SheepDog-One
SheepDog-One's picture

Become street crack dealers?

Tue, 11/23/2010 - 12:40 | 749607 Rainman
Rainman's picture

Banksters still have 40% of mortgage holders carrying 6% rates without a possibility of refinance because they are underwater. This is the group that helps to subsidize the nonpayers in distress.....until they become distressed themselves. Dr. Bubble has the chart.

                      www.doctorhousingbubble.com 

Tue, 11/23/2010 - 12:43 | 749623 AccreditedEYE
AccreditedEYE's picture

They won't. At least, not like they used to. Their earnings will increasingly look like public utility companies. (Between bad assets and higher required capital ratios, there is no way out for BHC's) You want volatility and potential for larger returns, you go to the publicly traded alt. asset mgrs.... they are the investment banks of the future.

Tue, 11/23/2010 - 16:52 | 750460 Kayman
Kayman's picture

Since they are TBTF why would they care ?

Tue, 11/23/2010 - 17:00 | 750483 RockyRacoon
RockyRacoon's picture

how do banks make $ going forward?

They lie their asses off and investors believe 'em.

Wed, 11/24/2010 - 00:43 | 750490 RockyRacoon
RockyRacoon's picture
Aaargh...
Wed, 11/24/2010 - 00:43 | 750493 RockyRacoon
RockyRacoon's picture

POS latency...

Tue, 11/23/2010 - 12:39 | 749603 SheepDog-One
SheepDog-One's picture

Who will be the first to point out Ben and Timmah should not only be thoroughly criticized for their plans and actions, but are actually now CONFIRMED utter failures, biggest in history, and charged with mutliple treason charges?

Tue, 11/23/2010 - 13:03 | 749689 goldmiddelfinger
goldmiddelfinger's picture

Who will be the first? Who will be the last!

Tue, 11/23/2010 - 13:02 | 749681 HarryWanger
HarryWanger's picture

 

 

 

The equity market certainly did turn in a surprisingly vigorous rally in the past few months but it would be a mistake to relate this to any real fundamental improvement in the economic backdrop. As we will likely see in today’s FOMC minutes, the Fed is yet again going to take a knife to its growth and inflation forecast as it has done with regularity over the past eight months.

 

Heeeeeere's Rosie! Revised higher GDP, all the manufacturing reports coming in as fairly strong improvement and some nice earnings out of most bellwethers. 

Must be a negative day so out comes Rosie. Should be hearing from Nic any time now.

 

Tue, 11/23/2010 - 13:05 | 749695 goldmiddelfinger
goldmiddelfinger's picture

Buy netflix.

Tue, 11/23/2010 - 13:14 | 749718 AccreditedEYE
AccreditedEYE's picture

Harry, go buy a boatload of AAPL! Economy is getting better right? You'll make a fortune!

Tue, 11/23/2010 - 14:07 | 749871 HarryWanger
HarryWanger's picture

Yes, the economy is slowly improving - slowly. And, I already own a "boatload" of AAPL, thanks.

Tue, 11/23/2010 - 13:25 | 749747 1100-TACTICAL-12
1100-TACTICAL-12's picture

Harry you are a idiot, ask the 2 million people about to lose their UE how fucking much improvement they see .....Don't go away mad...

Tue, 11/23/2010 - 14:06 | 749866 HarryWanger
HarryWanger's picture

Are you referring to all of the people that will be lining up all weekend to get Black Friday deals or get $20 off on a new iGadget? Because from what I've seen, consumer spending is up nicely already this holiday. I sell consumer discretionary and we had our best September in 9 years our best October in 8 years and this will be our best November ever. 

I have a pretty good gauge on the consumer.

Tue, 11/23/2010 - 14:23 | 749928 erik
erik's picture

Sure, we believe you.  After all, you sold in an instant when Apple came out and mentioned margin compression.  But I'm sure you bought back in at the lows and road it all the way up.  You may have even invented the Internet with Al Gore too for all we know.

See Harry, the reason people don't like you is because you're smug, just like people who bought real estate from 2004-2007, or tech from 1998-2000.

Tue, 11/23/2010 - 14:24 | 749930 Panafrican Funk...
Panafrican Funktron Robot's picture

How's your margins?  Margin compression is going to be repeated a lot when 4Q reporting season starts. Even if your particular business is anecdotally squeezing out better margins, most retail/supply chain shops are having a heck of a time actually making money.  Bottom line, gross sales don't mean shit.

Tue, 11/23/2010 - 15:27 | 750138 DollarMenu
DollarMenu's picture

I think Mr. W's 'consumer discretionary' is an array of drugs.

Sure he sees a y-o-y rise and best ever month.

Drugs are where it's at when people sit around with not much to do.

 

Tue, 11/23/2010 - 14:26 | 749938 brent1023
brent1023's picture

Most think of Rosenberg as a bear but this letter puts a rosy hue on home owner debt.

All the measures indicate improvment in the sense of lower debt. However, they could all simply be tighter borrowing requirements by the lenders. Yes, we will renew that mortgage but, no, we won't lend you as much as last time. While protrayed as "a secular shift in household attitudes towards debt" these charts don't prove that. It could be. It probably is not.

Not to say that a lot of people did not get burned and a lot of people with no money will be spending a lot less. People who can borrow still are borrowing.

And of course, the government is still borrowing and printing.

Saving is still not a way of life - not with 3D televisions and ipads and wars to fight out there!

Tue, 11/23/2010 - 14:31 | 749953 hawk295903
hawk295903's picture

Really, what is the big deal? 83% are still working, paying down debt, and spending whatever they have left. Clearly that's enough to generate the kind of growth we have now. The other 17% need to re-tool and acquire new skills to get back to the job market; it will not happen overnight; but we will get there. It has happened before. The market is up because of artificial fed intervention, animal spirits front running the fed, and corporate earnings coming better than already low expectations....well I'd rather take all this going into holiday season than the Armageddon that most people here are expecting.

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