Rosenberg Points Out That The Stock Market Is Now A Lagging Indicator; Discusses Byron Wien's Beliefs In The Tooth Fairy

Tyler Durden's picture

David Rosenberg does not pull any punches in his note today, when he makes an even bigger case for why the Fed and the administration's fiscal policies are now the sole power behind not only any and all stock market gains, but is the sole dynamo for pushing the economy to higher unsubstantiated highs, as it continues transferring wealth from taxpayer to shareholders. This was a topic first broached by Zero Hedge on April 11, 2009, when we said:

The truth is that the more taxpayer money is dumped to try to fill the
abyss, it may become marginally shallower, but only at the expense of
it getting wider. At some point soon (if not already), the U.S. economy
will be unweenable from the trillions and trillions of taxpayer
subsidies all the while it becomes more indebted to both its investors and taxpayers,
further exacerbating the abovementioned paradox (presumably not without
a motive). As the multi-trillion CRE crash continues to deplete the left side of the financials' balance sheet with
an exponentially growing pace (and I have not even touched on the
credit card topic), the banks will be left scratching their heads what
accounting rules to bend, which insurance companies to implode and get
another AIG-like piggybank, how to break REG-FD more and more
creatively with select memo leaks, how to manipulate the market, and
how to make the Tsy curve becomes even more upward sloping with the
compliments of the Fed and the Treasury. In the meantime the
disinformation rift between the American taxpayers and investors will
keep growing until inevitably, one day, it will escalate to the point
where empty promises on prime time TV by the administration's
photogenic representatives will not suffice, and real actions that
benefit future American generations will be demanded... What happens
after I have no idea.

Here are David's thoughts:

No doubt that the global economy appears to be on a firm footing, but much of this has reflected dramatic fiscal stimulus, overbuilding and credit extension in China. Only the future knows how sustainable this is.

We do know that just about all the growth in the U.S.A. in Q4 is coming from inventory restocking; and that every basis point of growth in Q3 came from government stimulus, directly and indirectly. The same stock market that couldn’t see a recession coming in late 2007 even though it was two months away, doesn’t see how low-quality this “recovery” is since there is nothing organic about it. The market is relying continuously on government support, so much so that nearly 20% — by far a record — of U.S. personal income is now coming from Uncle Sam’s generosity in the form of transfers. This deserves a lower-than-normal price-earnings multiple, but it may take time for Mr. Market to figure this out, just as it took several quarters for it to see the effects of a housing recession and credit collapse two years ago. The stock market, in other words, has managed to become a classic lagging indicator.

This is obviously a bold claim, as it means that the traditional phrase "The market is always right" is now completely wrong. With no volume, and various predatory algos determining daily market direction, it was only a matter of time.

Rosenberg, proceeds to destroy the optimistic groupthink:

We ran some simulations back to 1955 and found that historically, what is normal is that every basis point of nominal GDP growth typically generates 2.5 percentage points of corporate earnings growth. The consensus sees $76 of operating EPS for the S&P 500 next year, which compares to a likely $56 stream in 2009. In other words, that would imply an expected 36% profits boost this year. That in turn would require a 14% increase in nominal GDP, which is basically impossible. Okay — a spurt that strong was last posted in 1951, so let’s be fair. It’s a 1-in-58 event. In the past 75 years, there were a grand total of six when profit growth topped 30%, and guess what? That pace of profits required, on average, 10% growth in nominal GDP. And that last happened 25 years ago. Either way you slice it or dice it, achieving the consensus profit forecast is an extremely low-odds scenario.

The consensus sees $76 operating EPS for the S&P 500 in 2010, which would be a 36% increase from 2009
Meanwhile, the consensus basically sees 4% nominal GDP growth for 2010, which would suggest a 10% profit rise in 2010, which would imply a solid but somewhat less exuberant $62 EPS call for the year. Remember that this time last year the consensus was at $77 operating EPS for 2009 and we got $56 — what saved the market was the Geithner & Bernanke show. What do they do for an encore this year?

Keep that last point in the back of your mind. At the end of 2008, the consensus was at $77 for S&P 500 operating EPS for 2009. Even by the end of January, when it was so obvious that the bear market and recession were far from over, the bottom-up consensus was calling for operating earnings to come in at just under $70 per share. What did we end up with for 2009 when all was said and done? Try $56 EPS or 27% below what “market participants” were predicting when the year began.

Forget all the calculations off the “artificial” March lows. Forget the 25% slide in the first 10 weeks of the year to that awful trough. Here is the reality. The S&P 500, from point to point, rallied 23% in 2009 even though earnings for the year as whole came in a whopping $22 a share or 27% below what was being priced in at the start of the year. Now that is remarkable. It almost wants to make you believe in the tooth fairy.

What does this mean? A 22% overvaluation.

We are sure that if we told you on December 31, 2008, that the market was looking for $77 on operating EPS for 2009, but $56 is all we would muster, you wouldn’t have told us that your price forecast for year-end would be 1,115. And here we are today, and the same consensus crew is calling for just about the same level of earnings again — this time for 2010. If the consensus is correct, then the market is sitting very close to fair-value with a 15x forward P/E multiple. If we are right on earnings, then we are looking at over an 18x forward multiple or a market that is overvalued by 22%.

Yet this whole valuation aberration is the product of an overbullish groupthink crowd, headed by none other than Byron Wien, for whom Rosie shares the following kind words:

We’ve known Byron Wien for a long time — he was a formidable competitor while we were both on the sell side and in later years, a valued client and friend while he was on the buy side. He had a pretty good year in 2009, of that there is little doubt. But his just-released list again totally epitomized the consensus view — and it is useful to know this because as Bob Farrell told us in his Ten Commandments of investing, “When all the experts and forecasts agree, something else is going to happen” (the 9th commandment).

We won’t reprint Byron’s list here, though we were inundated with our views on it yesterday, but all the ‘surprises’ are on the upside as far as the economy, profits and interest rates are concerned. His whole piece involves world peace, a huge equity rally, massive bond selloff, Fed tightening, a dollar bull market, successful policy action on energy and financial sector reform. Nothing on double dip, deflation, renewed equity slide, Israeli military strike, 10% home price decline, sovereign default risk, Euro-area discord, or a Chinese relapse. These don’t seem to worry Byron — but then again, with the VIX index at 20 … the market seems unperturbed about downside risks as well.

And some simply hilarious observations from Rosie on the New Normal:

In the post-bubble credit collapse economy, what was previously unthinkable suddenly becomes the “new normal”. From March 1983 (when the Reagan-led economic expansion took hold) through to September 2008 (when Lehman collapsed) we never once had a month where U.S. vehicle sales came in as low as 11 million units at an annual rate. That is a span of 25 years.

In yesterday’s WSJ, page B1, there is a huge article titled Late Surge in Car Sales Raises Hopes for 2009. This “surge” seems to have taken sales up to 11 million units in December (data out later today), which would be up from 10.9 million in November. So here we are today, and it is apparently good news that we had virtually no growth in sales towards the end of the year even with dramatic incentives (according to the article, GM gave its dealers $7,000 for some of its models) and that we had 11 million units when the ‘old normal’ was 16 million units (not to mention that 12 million is the cutoff for replacement demand — autos are still being taken off the highways and driveways of America).

Yet none of this matters as buy programs take equities ever higher, with moral hazard the ultimate backstop until such time as the ability to finance an infinite stock market rally courtesy of trillions in new bond issuance comes to an end: that is the only "fundamental" that is relevant now and for the foreseeable future.


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Rainman's picture

Getting the SPX back in line with EPS projection is a simple math problem.

The Banksters will just mark their worst junk to 150 % of par. Profits appear, losses disappear.

Problem solved.

TraderMark's picture

Throw another $2 T in unfunded pension liabilities at the states in the category of "who cares, the stock market is up!"


Anonymous's picture

By Schlumpf
Hmm Trader Mark nobody see something bad about this.
Bad news are good news. Always in the top of a bull run, bad news are good news. They believe the plunge protection team will fix it. Mr market think..... dont fight
the FED. The same Mr market see, 95 % bullish is
good for stocks. Its hard to be now short or in the sidelines.
I fight the FED, I m short. I bought bac for
3.60 and lvs for 2.84 when Mr market was short.
I sold in sept. and in nov. until dec I m in the
Now Mr market is long. When I loose, OK, but I feel very strong its too bullish now. And see Japan 1989 - 1990,
they had also a big stock run and then...............
Maybe only I`m short now :) sorry my english :)
I know you from Seeking Alpha and I like your comments.

Anonymous's picture

Hmm Trader Mark nobody see something bad about this.
Bad news are good news. Always in the top of a bull run, bad news are good news. They believe the plunge protection team will fix it. Mr market think..... dont fight
the FED. The same Mr market see, 95 % bullish is
good for stocks. Its hard to be now short or in the sidelines.
I fight the FED, I m short. I bought bac for
3.60 and lvs for 2.84 when Mr market was short.
I sold in sept. and in nov. until dec I m in the
Now Mr market is long. When I loose, OK, but I feel very strong its too bullish now. And see Japan 1989 - 1990,
they had also a big stock run and then...............
Maybe only I`m short now :) sorry my english :)
I know you from Seeking Alpha and I like your comments.

Steak's picture

I was hoping that ZH would re-post Wein's predictions as some good humorous reading...some of the highlights include:

<Heavy borrowing by the U.S. Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. Banks loan more to corporations and individuals and pull away from the carry trade, thereby reducing demand for Treasuries. Obama says, “The suits are finally listening”>


<Civil unrest in Iran reaches a crescendo. Ayatollah Khameini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides.>

HA i say, HA...Byron Wein is the counterpoint to anyone who would claim that the US is anything resembling a meritocracy. 

ShankyS's picture

Just friggin insane and the price to pay will be dramatic. Hey, that trip to fantasy land was free - no it really wasn't free now was it. This is gonna be expensive and the dollar at $40 in a year or two should be about right.

Anonymous's picture

So, what's a girl to do with her 401k? Sell it down the river for cash and buy some gold... or TP???

Anonymous's picture


Carl Marks's picture

Cash and Gold. You can use the cash for TP.

Cognitive Dissonance's picture

The original article is what we call "old school" Zero Hedge. I remember lurking around ZH at the time this article was first written, within an ID or Avatar.

Ah, the good old days.

Scooby Dooby Doo's picture

Yes `faustroll`, those were the days...

Anonymous's picture

Rosenberg's logic is not there at all.

How much of last year's EPS was the effect of credit markets, writedowns, and business climate from credit crisis? Clearly the SPX gets ALL this back. And then gets any normal GDP growth induced earnings.

I think as Q1 and Q2 roll off, you will see that multiples are not what they appear to be. Most of my companies are ~15x 2010 estimates and those are ultra-conservative. Mgmts have been sand-bagging throughout 2009.

Estimates get beat in the up-swing and followed by guidance increases (just the opposite of the misses and guidance lowering the down move).

Anonymous's picture

Rosenberg QUOTE:

Keep that last point in the back of your mind. At the end of 2008, the consensus was at $77 for S&P 500 operating EPS for 2009.

This is JUST NOT TRUE. Its WRONG (and kinda a lie).

Goldman estimates were cut from $65 to $55 on Nov 24th, 2008. Citibank also cut on the same day to ~$50/shr. Here is the link:

Goldman further cuts estimates to $40/shr on Feb 9th, 2009. Other banks estimates were similar. Of course, the Lehamn crisis lowered all estimates and massively slowed business activity. But since the dramatic downturn, EPS #s continue to get beat to the upside. And that looks likely to continue.

zenon's picture

Although I agree with most, if not all, of what Rosie has to say, I still can't figure out why he insists on using pro-forma or "headline" earnings. The disconnect between earnings-without-trash and real earnings is profound and getting bigger. See:

Anonymous's picture

Nice chart. what are 'earnings without turds?'

Anonymous's picture

"It almost wants to make you believe in the tooth fairy."

tooth fairy, magic printing press, whats the difference?

Anonymous's picture

Rosie's daily newsletter is always good. Even better, and I'm not sure if you posted it yet, is Hussman's 1/4/10 screed. Must read.

Leo Kolivakis's picture

Rosenberg is an excellent economist but he wouldn't be able to manage money if his life depended upon it. Still works with the old paradigm and refuses to see that liquidity precedes fundamentals. Wait till Friday's employment report. You ain't seen nothing yet.

BS Inc.'s picture

My understanding is that he did quite well with corporate bonds after the March lows. There's more than one way to skin a cat and the same goes for managing money.

Cursive's picture


What are your expectations for the jobs number?  And how do you expect the "market" to react?  Curious.

Leo Kolivakis's picture

I already stated it in my Outlook 2010 that the next few jobs reports will suprise to the upside with significant upward revisions to previous reports. So even if we have a negative surprise, which I strongly doubt, I will continue to buy the dips.

Cursive's picture

OK, I didn't know if you had numbers to share.  By the looks of it, nothing could stop this "market" now.  Not bad jobs numbers, nothing.  Are you accounting for the February revision for the birth/death adjustment?

Anonymous's picture

Always nice to know that fundamentals are secondary....

Scooby Dooby Doo's picture

Leo is entitled to his opinion, flag people.

I think Mr.Rosenberg should create a visual representation of his work regarding equities. The Rosenberg Detachment Index. It would encompass various calculations that measure how far detached the S&P 500 is from `reality`(plus or minus).

A little widget that would plug into websites.

ZH could put his widget in that wasted piece of real estate under the search box:

RowdyRoddyPiper's picture

If I am a shareholder of Gluskin (not), I hope you are wrong Leo what with Ira taking some of his money off the table at GS.

Anonymous's picture

Why don't we ever get a direct link to Rosie's stuff?

MiningJunkie's picture

Never underestimate the replacement power of equities within an inflationary spiral...

BS Inc.'s picture

I think that is the one real fly in the bearish ointment. It doesn't mean any value would be created by moving the market from 1100 to 2000 SPX, but it could happen with today's short-sighted policies.

But, if that is what the market is discounting, that means it is vulnerable to any signs that a hyperinflationary scenario won't come to pass.

Anonymous's picture

I'm sorry, but selling 16 million autos per year was never "normal" was an abnormal peak created by unrealistic incentives and degenerate lending standards that artificially distorted demand during the bubble years of the last decade.

Gwynplaine's picture
Gwynplaine (not verified) Jan 5, 2010 12:51 PM

"Yet none of this matters as buy programs take equities ever higher, with moral hazard the ultimate backstop until such time as the ability to finance an infinite stock market rally courtesy of trillions in new bond issuance comes to an end: that is the only "fundamental" that is relevant now and for the foreseeable future."

Tyler's last sentence sums it best.  But, what comes next?  Nobody has even a good guess.

Anonymous's picture

all this back and forth trying to figure out what comes next. What comes next is...............same as before...............the banks and government are going to try and extend and pretend this economy into health until something happens to cause it not to. Whether that's an exogenous event like Iran or Greece failing, who knows.....whatever it is, it will cause people to run for the exits (the banks, I mean). then, we'll have an event although the only thing I'm sure of is the average taxpayer is going to get screwed and screwed.

Here's how you start down the path to fix the problem: sever the tie between washington and Wall Street forever, re-instate Glass-Steagall (not a watered down version thereof), Stop the bailouts of everyone, let the chips fall where they may. That's just a start, of course. Then, we have to have a million man march on WDC and at the same time remove all our money from GS, JPM, BAC, WFC, Citi, and place in regional banks.

Anonymous's picture

Of the 140+ bank failures... over 100 were sub 1B$ "small regional banks".

Those guys are even more corrupt and useless.

crzyhun's picture

BW or Rosie? Up to you and it all depends on where you sit- in the class, will tell where you stand.

All I can say is that when this goes, it may mirror what we saw in 08-early 09, big down days. For me when we go through 10K with conviction, well shorts are up and off we go-down. The ground is saturated and the basement leaks.

Anonymous's picture

I think I understand. Rosenberg has been 100% wrong with his market calls since March so now he just says "I'm not wrong the index is wrong/lagging"

Also I'm not sure how you can say "price deserves to be lower". The only price anything ever deserves is the one the market sets (regardless of its participants) which is also the one you see on the screen. It's pretty clear the price on the screen is making him upset as evident by blaming the price instead of himself for his totally incorrect predictions thus far.

So far Rosenberg is continuing his 2009 achievement of being the worlds best counter indicator ever. He's becoming better than Crammer.

Bruce Krasting's picture

A question for some smart guy. Take an estimate for S&P profits for 2010. Then tell me what happens to that number if the dollar averages 10% higher for the year?

For what it is worth my guess is that a 10% rise in the dollar would cut profits by the same 10% (lagged). Foreign earnings (and some assets) would be translated into income at lower values.

Is 'one to one' in the ball park? Rosie?

I ask this because it seems to me that many of the folks who think a big dollar rally is in front of us also think that stocks are going higher because of a big Jump in earnings.

Can you have one and the other as well?

Rainman's picture

Hmmm.....these cake and eat it too questions are always head scratchers.

Need a researcher to see when/if this has occured in the past.

A good question. 

Anonymous's picture

Yes the market can handle it here's how:

Step 1:
stock market surge as dollar rises as hot money flowa back to US assets from emerging markets (many of which surged 80% or even 100% in 2009) some of this backflow if not all will find happy home in stocks.

Step 2: Come April or May, as the Q2 earnings season approaches, analysts realises the negative impact of USD strength on earnings of Intel/Mac/Apple etc, proceeds to lower earnings citing "strong dollar" and companies guidance: "volume up strongly, we sold x% more chips/burgers/iphones thanks to overseas demand"; stocks surge on companies guidance, but does not pull back when actual sales come in flat. This is because the lowered earnings were met. And the earnings were lowered due to "external" factor of strong USD.

This game has been going on throughout the dot-com era of the 1990s, a new bunch of analysts will re-hash the old trick again. Bottom line - Leo will be right, but only because they are all in a groupthink which usually last at least 2 to 3 years. We are really in a cyclical bull people, and another 30-sigma event would be needed to change the course of the stock market.

Anonymous's picture

This is hugely like academic history departments who utterly, absolutely HATE the reality that a temporary climate shift in the Med. brought malaria to Rome and eviscerated its military strength. See, that reality renders silly the PhD dissertation material of the whichness of what of slavery and economic pressures and court intrigue and all those many things grad students could write about. Once malaria entered the picture, nothing else mattered and they know it.

Well, folk, I direct your attention to oil depletion and encourage you to stop wasting your time on liquidity and rates and the PPT and Rosie and pretty much everything else. Nothing else matters. And you know it.

Anonymous's picture

So Malaria causes oil depletion?

Silver_Bullet's picture

Don't ignore the Diocletian Reforms which locked in the technological state and prevented progress, and the damage of the barracks emperrors before that.  Perhaps the murders of the Brothers Gracchi were the real death of the republic and not the actions of Sula leading to the Triumvirate of Caesar, Pompey and Crassus.  Being vulnerable to a simple disease is itself only a symptom of political decay and economic disorganization.

Anonymous's picture

I belive this is the top of this bull run. Everybody believes there is a 100 % insurance from the FED side.
The PPT will straightening then. But, what was last year??
And in march??
Greed take the money in and out.

The Rock's picture

"Markets can remain criminal and manipulated longer than you can remain solvent."