Q&A With David Rosenberg: The Bearish Outlook

The WSJ's Greg Zuckerman has published a Q&A with one of the world's biggest deflationists (who nonetheless admits that once QE 2 begins all bets are off): David Rosenberg. Here is how Rosie sees the world of finance over next 2 years, and provdes more color on his currently favorite investment strategy (aside from bonds): SIRP (Safety and Income at a Reasonable Price... and in keeping with acronyms RIP GARP).

Rosenberg On The Specifics Of The ECRI Leading Index As An Investment Tool

We have been observing the recent collapse of the ECRI index in all its glory over the past several months. As we have discussed previously, this is one of David Rosenberg's preferred leading indicators. Below we present some of his summary observations on the four distinct cycle in the ECRI index, with an emphasis on the current one, which as Rosie highlights is Phase IV - Recession (Zero to Trough), in which the S&P drops by 6.4%, and the worst performing assets are consumer discretionary, industrials and tech, contrary to what has been performing the best over the past six months. Time for some sector rotation.

The Next Leg Of Eurocrisis 2010? The Hungary Wolfpack Cometh As IMF, EU Cancel $25 Billion Rescue Loan Access

In the most surprising news of the weekend (so far), the IMF and the EU effectively suspended Hungary's access to the remaining funds in a $25 billion rescue loan package created in 2008 to prevent a financial meltdown of the country. The timing of this development is most extraordinary, as only a month ago Hungary served as ground zero for yet another scare that pushed European sovereign bond spreads to new records. The reason given for this dramatic, and very destabilizing action is that the nation must "take tough action to meet targets for cutting its budget deficit." Ostensibly Greece continuing to lie about its own economic deterioration is a necessary and sufficient condition for escalating IMF lauding. Yet, with Europe set to announce results of its Stress Test kabuki next week, the last thing the continent needs is a real liquidity crisis (or the threat thereof) to counteract the smooth talking bureaucrats dead set into hypnotizing the union into "all is well" submission ("and when I snap my fingers, the debt-to-GDP ratio will be back to 10%"). To quote "Brace yourself for Monday, folks!"

ECRI Plunges At 9.8% Rate, Double Dip Recession Virtually Assured

The ECRI Leading Economic Index just dropped to a fresh reading of 120.6 (flat from a previously revised 121.5 as the Columbia profs scramble to create at least a neutral inflection point): this is now a -9.8 drop, and based on empirical evidence presented previously by David Rosenberg, and also confirming all the macro economic data seen in the past two months, virtually assures that the US economy is now fully in a double dip recession scenario."It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data)." We are there.

Dick Bove Says Chance Of Double Dip Is Now 40-60%, Butchers JPM Earnings And Jamie Dimon

Something is rotten in the state of Rochdale. One of the most bullish banking analysts ever, Dick Bove, just crucified not only JP Morgan's earnings report, but also said Jamie Dimon "missed it completely on housing", and lastly, has turned extremely bearish on the overall economy, saying there is a 40-60% chance for a double dip, which at last check is probably more bearish than David Rosenberg. Bove throws up all over JPM "good" results, stating it is all a function of loan loss reductions, which the bank is in no way entitled to take at this point, when there is so much negative macro data piling up. As NPLs are likely to continue deteriorating in the future, should the economy weaken further, JPM would have to not only replenish existing accounting gimmicks such as boosting Net Income via balance sheet trickery, but to put even more cash to preserve a viable capitalization ratio. As Bove is the quintessential contrarian indicator, we are preparing for a month long sabbatical to a Buddhist monastery in Tibet to thoroughly reevaluate our perspectives on the universe.

For Those Still Clinging To Hope, Here Is David Rosenberg: "This Is The Weakest Post-Recession Recovery On Record"

To all those fewer and fewer optimists who believe the economy may avoid a double dip (or alternatively suffer the realization it never really got out of the depression in the first place), David Rosenberg provides a glimpse just how tenuous the so-called recovery has been, even despite the unprecedented attempts by everyone at the top to shepherd the economy into growth at any cost, and the daily reminder from Ben Bernanke that risk is dead and the Fed will never let capital markets drop again. As for the future, Rosie asks the logical question: how is it that earnings are expected to grow by 20% in 2011, when it is becoming increasingly obvious that GDP growth next year will be negative?

Trading Stocks? Pack Your Dramamine

A few days ago we discussed that the market no longer responds to any fundamentals but merely gravitates toward various chaotic "strange attractors" now that HFT-driven stock trading patterns are merely Mandelbrotian fractals, with no rhyme or reason behind self-similar trading patterns and unprecedented record daily volatility. Today, David Rosenberg provides the following chart best capturing the minimum RDA of dramamine required to trade stocks: with 6% average swings in 12 distinct periods in 2010 alone, even with the market virtually flat for the year, it is no wonder retail investors have decided to say goodbye to stocks for ever. This is not a market in which anyone, including retail and institutional investors, with the possible exception a few momentum inducing algos, can generate any alpha. Period. And leveraged beta trades are a recipe for suicide for anyone except those with discount window access. Which is why very soon the only ones trading stocks will be the primary dealers and those who pay multimillion monthly collocation fees to the NYSE in hopes they can frontrun a trade here or there (oh and SEC, your inability to halt flashing a year after saying you would do so, continue to inspire confidence that you are on top of your corruption game).

Rosenberg's Explanation For Recent Market Surge: Liquidity Pump And Short Covering

It seems everyone is perplexed by the most recent irrational bout of July market action. Like clockwork, once July rolls in, the market surges, no questions asked. This year, the ramp is particularly blatant because as the attached chart demonstrates, bonds, which are a far more credible barometer of market (in)sanity, indicate the S&P is rich by at about 50 points. As this spread will most certainly converge eventually as we discussed previously, a short stock, short bond position would generate some much needed P&L in this world of deranged fractal algorithms. As to what may have caused the most recent bout of irrational exuberance, David Rosenberg has the most logical, and generic solution: excess liquidity and a short covering spree, and "nothing fundamental here."

Retail Sales Plunge In Italy On Surging Unemployment And Lack Of Confidence: Example Of What US Looks Like Absent Stimulus

The traditional hot bed of haute couture and fashion retail is experiencing an unprecedented plunge in end demand as Italy, absent trillions in fiscal and monetary stimulus boosts, has become a prime example of what US retail would look like absent the generosity of the government and the Fed. According to this Bloomberg TV report, "sales are worse than last year and business is getting worse and worse. The situation is not good." Summer sales revenues are expected to be down 5% across the board. Another factor blamed for poor sales: the weak performance by the Italian football team, and the resultant glut of jerseys. And when Prada and Gucci are seen offering extra discounts just to get shoppers into the stores, the whole concept of ultrapremium retail goes out of the window, putting the "aspirational shopper" paradigm on hold.

Stocks Expected To See 12% Increase In Revenues In Q2, 41% Increase In EPS, And A Summary Outlook From Rosenberg

With the imminent launch of the Q2 earnings season, below is a summary of consensus for year-over-year top and bottom line performance. In summary, the outlook is for a 12% pick up in top line YoY (ex fins), and pretty much staying flat at that level of outperformance for the next 2 quarters, and for a 41% rise in EPS compared to Q2 of 2009 per Bloomberg consensus estimates. For those looking for further granularity, David Rosenberg presents a detailed break down sector by sector, and warns of the risks to betting it all on the earnings parade, even as analysts are once again at near all time record bullishness on stocks.As a reminder, the consensus view is for a 2010 absolute EPS of 82, and for a simply ridiculous all time record 96 in 2011, higher than the 88 seen all the all time high three years ago, when the economy had the benefit of a multi-trillion shadow credit system. Who knows, maybe the Fed can take over that full responsibility as well.

Guest Post: EXTEND & PRETEND: Stage I Comes to an End! The Dog Ate my Report Card

Both came to an end at the same time: the administration’s policy to Extend & Pretend has run out of time as has the patience of the US electorate with the government’s Keynesian economic policy responses. Desperate last gasp attempts are to be fully expected, but any chance of success is rapidly diminishing. Whether an unimpressed and insufficiently loyal army general, a fleeing cabinet budget chief or G20 peers going the austerity route, all are non-confidence votes for the Obama administration’s present policies. A day after the courts slapped down President Obama’s six month gulf drilling moratorium, the markets were unpatriotically signaling a classic head and shoulders topping pattern. With an employment rebound still a non-starter, President Obama as expected was found to be asking for yet another $50B in unemployment extensions and state budget assistance to avoid teacher layoffs. However, the gig is up: the policy of Extend and Pretend has no time left on the shot clock nor for another round of unemployment benefit extensions. A congress that is now clearly frightened of what it sees looming in the fall midterm elections is running for cover on any further spending initiatives. The US electorate has been sending an unmistakable message in all elections nationwide. White House policies are unmistakably in shambles. We are rudderless with terribly outdated Keynesian zealots at the helm as the storm continues to worsen. Stage I of Extend & Pretend is over – RIP!