Rosie On "Rented" Market Rallies
Not much to discuss here, as the market has clearly entered a parabolic phase (which never ends well, we might add), supported not by economic factors but by a collapse in the US reserve currency status, which, as Zero Hedge has been repeating over the past few months, is purely predicated by the dollar now being the new carry currency choice. Yet here is Rosenberg's market commentary released today. While he is undoutedly correct, the low volume, momentum chasing, "don't fight the tape" rally continues.
MR. MARKET IS ON STEROIDS
Not much more to say. The S&P 500 is now up more than 60% from the lows, which is truly amazing and kudos to those who called it. But the question is whether the fundamentals will ever catch up to this level of valuation — usually after a 60% rally, we are fully entrenched in the next business cycle. Never before have we seen the stock market rise so much off a low over such a short time period, and usually at this state, the economy has already created over one million new jobs — during this extremely flashy move, the U.S. has shed 2.5 million jobs (as may as were lost in the entire 2001 recession).
It is acknowledged by all the pundits that the recession is over, even though we can see that only industrial production and maybe with the help of the government, real sales, but employment and real income are still falling from where we sit. So dating the end of the recession as the NBER did in late 2001 is one thing just because industrial activity troughs, but it took several quarters for income and employment to bottom back then, so we had a listless recovery in 2002 and a stock market that did not really embark on a sustainable rally until mid-2003. A recession coming to an end is one thing, but sustainable market rallies require solid recoveries. The stock market right now believes that we are going to see that V-shaped recovery, but we remain skeptical since post-credit bubble collapses typically see consumer spending, which is over 70% of GDP right now, sputter even as other line items, such as government spending, kick into gear.
In any event, it’s not even worthwhile debating the economic outlook at this juncture. It’s about how much good news is already being discounted in the equity market, and believe it or not, there is more good news being priced in today than there was bad news being discounted back at the March lows. This is an overbought and overpriced equity market and we remain of the view that there is too much risk and too much growth being discounted to be a full participant.
It is not apparent today, to be sure, but it will be — if not by the fourth quarter, then certainly by the first quarter of next year — that there is not going to be normal recovery following what was an abnormal credit-induced recession. We say that knowing how forgiving Mr. Market is today over any adverse data points, and how giddily it is responding to positive news. We have preferred to express any pro-cyclical views in the fixed-income market where corporate bonds provide better income than a 2% dividend yield, better downside protection if there is a relapse, and a more reasonable assessment of the economic climate that lies ahead.
By the time the U.S. stock market rallied 60% off the October 2002 lows, we were into July 2005. We were into the third year of the expansion. Go back to the onset of the prior bull market in October 1990 — by the time we were up 60%, it was January 1994! It took almost a year to accomplish this feat coming off the 1982 lows too and back then, we had lower interest rates, lower inflation, lower tax rates, lower regulation and an eight-year uninterrupted economic expansion to sink out teeth into. So we are witnessing something truly without precedent — a 60% surge off a low in six months. This didn’t even happen in the 1930s!
The counter-argument, of course, is that the market this time around is coming off massively oversold lows. Not true. The market was far more oversold and the internals were much more compelling at the 1982 and 1990 troughs. The multiples on price-to-earnings and price-to-book, not to mention dividend yields, were much more attractive at the other lows.
No doubt we had a financial scare at the March trough, but valuation at the time was priced for -2.5% real GDP growth and $50 EPS, which is hardly Armageddon even if a bad outcome. And while it is true that the S&P 500 slid 60% from peak-to-trough, we have news for you — so did corporate earnings.
In any event, this is the same market that lost its marbles in 2007, hitting fresh all time highs by October of that year with visions of new definitions of global liquidity, and at the time it was pricing in 5.5% real economic growth for the coming year. Instead, we had zero growth on average. Mr. Market is a discounting barometer to be sure, but he is not always right.
To reiterate, while acknowledging the obvious, which is that there is more momentum in the economy and the markets over the short-term than we had thought would be the case. However, our overall fundamental views and our outlook for 2010 have not changed at all and neither has our investment philosophy. If the S&P 500 was hovering closer to 800 or 850 right now, we could see the case for equities, but the market has simply moved too fast and is way ahead of the fundamentals, even if they do turn positive. Understanding that equities are a long duration asset, we have found over the years that investors have shortened their time horizons, and while it has become fashionable to price the market on an earnings stream three years out, the error term around any profit projection that far out is extremely wide. All we know is that as far as the coming year is concerned there is currently more room for disappointment than there is for upside surprises.
There is too much growth priced into the market and equities remain highly risky. Then again, this is a market that is “all in” on the V-shaped recovery view and it will likely take some shockingly weak data points to shake this conviction. By and large, the data are coming in above consensus estimates and there could well be enough of a spillover into 4Q to prevent a complete relapse, thought 2010 remains a wild card. We also cannot underestimate the extent to which the government, having invoked multiple stimulus measures, from becoming even more aggressive. We are hearing rumblings that not only will the $8,000 first-time homebuyer tax credit be extended beyond the November 30 expiry date, but that the cap will be raised significantly. Damn the torpedoes, full steam ahead — there’s a mid-term election to fight in 2010.
Sentiment is clearly bullish, which normally would indicate an overbought market, but as we said earlier, these are far from normal markets. According to the latest Investors Intelligence poll, bulls command a 47.8% share of the respondents and bears are at 24.4%. Only 27.8% are in the “correction” camp, which is startling considering (i) how extended this rally is, and (ii) the time of year we are in.
We noted yesterday that the Nikkei posted six 20%+ rallies since its bubble burst in 1990 and no fewer than four 50%+ rallies. Indeed, you can count 423,000 rally points from all the up-days since the secular bear market began in 1990 and yet the index is down 74% since that time. So actually there is nothing in this flashy move off the lows in the S&P 500 that is inconsistent with a pattern of a bear market rally — this is not the onset of a whole new sustainable bull market, in our view. These are rallies than can only be rented — not owned, and are purely technically-motivated and momentum-driven. They are not premised on improved fundamentals, despite economic data that are skewed to the upside by rampant government intervention. Just remember — nobody ever built more bridges or paved more river beds to skew the economic data than the LDP did in Japan for much of the 1990s.