Rosenberg: "Pig Farmers" Placing Short Bets Now As We Retest S&P 900

Tyler Durden's picture

As always, very useful economic and market commentary from David Rosenberg.

If this European crisis has accomplished anything, it has taken the froth out of commodity prices. Even gold is softening but every time it goes to test the 200-day m.a. — now at $1,100 oz — it becomes a great buying opportunity. Moreover, this has all but eliminated the overvaluation gap in the Canadian dollar for the first time in four months.

Take note that there was not one particular piece of news that drove the markets lower yesterday and this is key because it goes to the root of Bob Farrell’s rule that “the markets make the news, the news does not make the markets.” There are simply now more sellers than there are buyers because portfolio managers went into this latest chapter of the global credit story fully invested, the hedgies had already met their high-water marks, the shorts had been covered long ago and the general investing public seem to be in a multi-year phase of bolstering its underweight position in the fixed-income market.

Moreover, the “pig farmers” at the prop desks at the big banks, the ones who drove the last leg of the bear market rally, seem to be placing their bets the other way right now and with few bids, the prices are adjusting lower (the ‘flash crash’ was an exaggerated version of how a market can move when there is no bid). Since much of the bear market rally off the March 2009 lows was technical rather than fundamental in nature, one cannot rule out a move down towards the 900-950 area for the S&P 500, which is where a classic retracement would take it; not to mention where it would offer fair-value on a normalized P/E ratio basis.

  • As it stands, this is the first official correction in equities since the market came off the lows 14 months ago:
  • The S&P 500 is now down 12% from the nearby highs.
  • The Russell 2000 is down 14%.
  • TSX is down 7%.
  • Oil is down 21%.
  • Copper down 19%.
  • The CRB is off 15%.
  • The yield on the 10-year note is down 80bps.
  • Investment grade corporate spreads have widened 61bps while high-yield spreads have moved out 161bps.
  • The VIX has surged 193%.
  • The euro is down 15% and while the CAD has outperformed its commodity counterparts, it has sagged 7% from the recent highs.

Since the market highs in the S&P 500, the best performing equity sectors have been Telecom, Consumer Staples, and Industrials; the worst three have been Financials, Energy and Health Care — in a sign of how the complexion has shifted towards a less cyclical stance.

Look, there’s no sense getting overly bearish and while those of us with cash on hand that had been waiting for this opportunity in Godot-like fashion, the correction comes as good news. But for the economy, it cannot be a bad thing to have oil prices come down, which helps add cash to consumer pocketbooks and protect profit margins, and of course this wonderful bond rally has acted as a source of social policy seeing as it has helped pull mortgage rates down to six-month lows, to 4.8% for the U.S. 30-year fixed rate product.

While we did have a few quarters of respite in consumer spending, make no mistake that the trend is down, not up (real per capital household spending has not even made a new high yet) and the frugality theme we introduced more than two years ago is fully intact. For some evidence on this front, the just-released USA Today/Gallup poll show that 27% of Americans plan to travel less this summer; only 18% intend to travel more. This will likely put a dent in the hotel and airline sectors, which, according to the latest CPI statistics, had been showing some nice pricing power improvement in the past 2-3 months.

The must read of the day, if there is one, is the Paul Krugman’s column on page A23 of the NYT — Lost Decade Looming? He starts off with “despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.”

We have been saying this since late 2008 when the Fed dropped the funds rate to zero and that still couldn’t put a floor under either the economy or the equity and debt markets. What did put in a bottom was an experimental toolkit that involved an unprecedented expansion of the central bank’s balance sheet, which is now concentrated more in residential mortgages than in government securities. One other thing — it is not one lost decade in Japan, it is two.


The equity market is technically oversold right now and is due for a near-term bounce, but that would be a rally that I would fade if we see it. There has been too much of a rupture to ignore with the S&P 500, Dow and Nasdaq all closing below their 200-day moving averages (fist time in almost a year for the Nasdaq). There were only 11 new highs yesterday and 212 new lows, so this ratio is still quite bleak. Decliners/advancers were also 11-to-1 on the major exchanges. This is what I mean by rupture.

On average, corrections that take place after such a massive move up from a depressed low is 20%, which would mean that we could expect to see the S&P 500 still test the 970 level; with a prospect of a second-order Fibonacci retracement implying a move below 950. Remember that before the last big leg up in the market last summer, the S&P 500 was hovering around the 920 level, which is my target to begin getting interested again.

A 10% correction, even in a bull market, is pretty normal, and historically has occurred about every 12 months — and tends to occur more in the second year of a rebound, or bull market, than in year-one. So the European debt crisis is certainly the catalyst for this renewed round of risk aversion, but is not out of line with market patterns over the past century.

Two critical data points to watch for — the May 6 flash-crash intraday low of 1,065 on the S&P 500, followed by the 1,044.5 low on February 5. If these don’t hold, and the bulls need these levels to hold, then another leg down to or through the 950-970 levels is likely.

To turn bullish, we would need to see Libor-OIS spreads begin to narrow again, corporate spreads tighten, and stability in the euro. That would be important signals from the other asset classes. Technically, it would be encouraging to see two big up-days in the stock market with large volume — we need a follow-through with huge participation. It would also help if market sentiments swung towards the bearish camp — believe it or not, the most recent Investors Intelligence survey has the bulls at 43.8% and the bears at 24.7%. At the lows, we would expect these numbers to be reversed.

The fly-in-the-ointment is that unlike 1987 or 1998, this is not just a financial crisis but one that is occurring with the global economy in a post-bubble fragile state — if it is a recovery, it is a nascent recovery. And, already we see that the U.S. leading economic indicator fell in April, which is unusual at this early stage of the cycle, and jobless claims heading back above 470k, if sustained, is worrisome because in the past this has coincided with job losses fully 75% of the time. By the time the jobless recoveries were over and done with in 2003 and 1993, claims had already moved down to 400k in the former and 350k in the latter. And, practically every house price measure in the U.S.A. is rolling over right now. The lesson of 2002 is that market priced for perfection does not even need a classic double-dip to falter — a simple growth relapse will do the trick.

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john_connor's picture

I figured that you would turn up with a post once the market bounced.

Bananamerican's picture

why are predictions so compelling?


The Cycles Show Final Highs Soon, Then Down, Next Highs In 2012

High Conviction Trends

  • Stocks peak around the third week in April around 1170 (S&P 500),
  • Pullback May – June, potentially up to 10-20%
  • Then recovery and final peak in August (no level given)
  • Then down for the next 6-12 months, potentially to around March 2009  lows well into 2011,
  • At some point around mid 2011, stocks to recover to prior highs peaking in 2012
  • Then begins a longer term downtrend from 2013 for many years. Indeed, in prior interviews Nenner has called the period a ‘lost decade’ similar to that experienced by Japan. FYI, his cycles regarding military conflicts point to a big one in 2013.

The cycles show that’s the big picture for stocks.

Beginners should be reminded that within these time frames there will be, as always, shorter term counter trends, and some indices will of course perform relatively better, but will still follow overall trend.

Contrary to many pundits, Nenner‘s cycles show the global economy for the coming months is stronger than people think. While his cycles top in April and show some weakness in May-June, stocks may not drop much until after the final peak around August 2010.

Marley's picture

Annnnnd... it's lunch time.  Bubble machine off.

pauldia's picture

What may be  around the corner??????


First……..from Yahoo…” Geithner will "meet with European officials to discuss the economic situation in the region and the measures being taken to restore global confidence and financial stability and to promote global recovery.” In addition, this will be on the heels of Hillary Clinton meeting with our Sugar Daddy in Beijing, and Black hawk Ben will be in attendance. Next, Tiny Tim, not referring to “Tiptoe in the Tulips”, but, rather the new airport scanner indicator, will meet with Trichet, the British P.M. and Wolfgang “Puck You” Schaeuble in  Berlin. Does this set the table for the upcoming G20 in June? Sooooooo. What’ the Jean Dixon take on this??  The only solution, a new worldwide monetary system, a massive unified devaluation! That is the only real solution folks. Shock and AwShucks, asset prices will go like the balloon boy never did. Will this definitely occur, only the shadow banksters know, but this schmuck with a laptop doesn’t see anything else but devastating deflation, and more importantly election defeats if devaluation does not happen. And you thought ACORN was only election fraudster, these guys will have the whole world registering as Dems. When? Sooner than I thought as events are moving in the HOV lane only.


silvertrain's picture

 What or who will be the winners in that type of situation?

inflation.studentloan--0's picture

it's good news for cocaine sellers and prostitutes in that city.

ergo, green shoots.  ergo, world economy recovers.

godfader's picture

Gotta love Rosie and his Shiller normalized PE non-sense. Good luck trading on that.  If trading was as easy as looking at some fair value metric then why is this guy writing newsletters for a bank instead of running a multi-billion dollar hedge fund?

Astute Investor's picture

So I guess that makes two of you not running multi-billion dollar hedge funds?

Popo's picture

Fair value at 900-950 is generous.

Crab Cake's picture

I think we are seeing the manipulation easy button losing it's effectiveness.  They are still pressing the button, but it isn't working like it used to.

66Sexy's picture


Looks like we got us a sow here 'stead of a boar..

chasing falling daggers in commodities now, reminds me of 2008 chasing banks as they fell then getting out. new positions leak then get out; etc etc


a deep correction should be coming

Marley's picture

eeeewwwwwwww.  You didn't even throw Pig Farmers the obligatory apology for the comparision.  Pig Farming is a honorable profession.  Some of my best friends are Pig Farmers.  Those prop traders are no Pig Farmers.  Better be looking over your shoulder tonight as you're out trolling the dark streets looking to score some loose pig fat.

inflation.studentloan--0's picture

what about calling them PIIG farmers?

Invisible Hand's picture

Good article. Thanks, ZH, for giving us little guys access to info like this.

Bye-the-bye, looks like we are getting a bounce today on everything.  Wish I had enough knowledge to trade. However, I think the old saying about elephants fighting (the grass gets trampled) may apply here.

bruce wayne's picture

You can sign up to get Rosenberg's letters in your email inbox.  Just visit Gluskin Sheff's website.

geminiRX's picture

I'm getting ADHD from watching the DOW ticker. Jumping from positive to negative like crazy. Can you feel the downward pressure?

Crab Cake's picture

I can't feel the downward pressure, but I sure can see Binkie Ben slamming a big red button on his desk over and over and screaming, "There is no plan B! There is no plan B!"

HarryWanger's picture

As I said last night, I would sell my SDS position at the open if we were at or below the flash crash low. So I did. Now I'm 100% cash. I think this bounce, probably on Monday, will take us back to the 200 dma. That is where I go long SDS again. Til then, just watching the show and working my real job.

Astute Investor's picture

I thought this was your real job.....

doggings's picture

whats your real job Harry?

HarryWanger's picture

Partner in a very small firm that focuses on financial advice regarding CRE investments. Which is why on a macro scale I was so pumped by what I was hearing on my recent client visits. It had changed substantially. But, reality in the equities markets, which I trade on my dime, forced me to change my personal position as I did the other day.

doggings's picture

no worries and good luck to you dude.

takes a bigger man to say I was wrong on this, now I see, than go on and on beating the dead horse as others do on here.


HelluvaEngineer's picture

Interestingly enough, I see that the IYR short squeeze is back on again today.  Does anyone actually expect that garbage to be worth anything a year from now?

Crab Cake's picture

Harry, not that you care, but my issue with you is not that you aren't right; sometimes even most of the time to be generous.  It's that you don't see the larger picture.  Even if you are right about the numbers, so what?  You just made out like a bandit on AAPL, woohoo.  How does that affect the income disparities at a macro level, seething public anger, loss of faith in the full faith and credit clause, the social instabilities we are witnessing bloom across the globe that historically trend toward violence/warfare/totalitarianism, the fact that hyperinflation and default are the only possible outcomes to the games being played by the CBs with monetary policy, or the general upswing in mother nature's pissedoffedness?

Can you not see the larger scope of events?  Do you think this all ends well?  Seriously, where do you see the world in 5/10/20 years?  I would like to know.

JW n FL's picture

10,060 floor? says the market? we can mince points back and forth... but, it is. What it is.

You can Junk me all day every day but the FACTS!! are the Facts!

buy! Buy! BUY!

Bananamerican's picture

"I was so pumped by what I was hearing on my recent client visits."

"we are leveraging new branding strategies with our realtime scalable investment solution synergies in strip malls"

JW n FL's picture

You should be pushing private offerings into the 6% to 8% cap range... you would make a killing out there! Those $100k slices would be burning up the printers!

Whizbang's picture

Dude, I love this stuff. I love seeing the USD drop as every other currency plus equities bounce. I love knowing that the dollars being used to purchase other assets is monetized from the fed, exchanged for useless assets in europe through a swap. and I love knowing that this money will eventually destroy the value of the little accumulated wealth I have. I love these freaking markets!!!

Bryan's picture

A normalized P/E at 900-950?  What about Nic's 'fair value' estimate at 380?  Who is right?

whatsinaname's picture

Neither. Nobody is ever right in this game. haha.

Bryan's picture

Well, I guess that's my point.  We get all these predictions and then have to sort through which ones to believe or not.  In the end, no one really knows, and it's all a crap shoot.  Making numeric predictions is just barking at the moon.

Dismal Scientist's picture

Equities will be worth buying, when utter revulsion is the predominant attitude towards them. We are nowhere near that point. If I don't get the chance to buy large cap high quality franchises on single digit multiples, I'll be astonished. And thats with the earnings actually growing at trend rates, not cyclically depressed. A true bull market can only begin once this has happened. All we can say for sure right now is that the future is the opposite of bright, and that big government is groping in the dark everywhere. Make sure they don't grope too close to you and get their hands on your wallet.

SteveNYC's picture

I concur 100%. The ONLY time I go back into equities are under the conditions you stated, PLUS I want to see a 5% ++ dividend yield on some big names.

gtown2007's picture

love rosenberg's "breakfast" commentary.  he's certainly getting a little vindication over the last week or two.

found this story at nice digg-like frontpage for news / discussion


Noah Vail's picture

Its nice to know that all is well in hand and that we can now go back to biz as usual. Just a wee bit of a correction. I always take good advice from people who are selling stuff. After all, they are the xperts.


BTW, love today's volume, need microscope and tweezers to see it.

Sudden Debt's picture

Don't forget the good Q1 numbers where company spending.

Q2 will be A LOT LESS!

SheepDog-One's picture

And it all assumes drunken casino style gambling behavior unchanged from the 'retail investor', who is now deciding whether or not to splurge and cut up 2 hot dogs into the Ramen noodles for lunch. Funny how the market gurus are only about numbers and FIBonaci waves and never consider that america is being actively 3rd worlded by a Marxist regime. Risk off!