David Rosenberg Explains What (If Anything) The Bulls Are Seeing

Tyler Durden's picture

While we have long asserted that any attempt to be bullish this market (and economy) by necessity should at least involve the thought experiment of eliminating such pro forma crutches as trillions in excess liquidity from the Fed, not to mention direct and indirect intervention by the central planners in virtually all asset classes, which in turn drives frequent periods of brief decoupling between various geographies and asset classes (which always converge) and thus economic performance (because as Bernanke will tell you gladly, the economy is the market), an exercise which would expose a hollow facade, a broken market and an economy in shambles, in never hurts to ask just what, if anything, do the bulls "see" and how do they spin a convincing case that attempts to sucker in others into the great ponzi either voluntarily, or like in China, at gun point. Alas, our imagination is lacking for an exercise such as this, but luckily David Rosenberg has dedicated his entire letter to clients from this morning precisely to answer this question. So for anyone who is wondering just what it is that those who have supposedly "climbed the wall of worry" see, here is your answer.

From David Rosenberg at Gluskin Sheff

It never hurts to keep an open mind — I say that as I debate Wells Capital's famously bullish strategist Jim Paulsen at a CFA event — and tip your hat to the other side of the argument.

When asked if there is anything — even one thing! — that I can identify that is market-positive, what would it be?

Well, it's certainly not any shift in view over the economy. The leading indicators of activity are not behaving nearly as well as the coincident or lagging indicators have been of late. Indeed, averaging out the wiggles and real GDP growth, at best, was 1.7% in 2011, far short of the 3% advance reading in 2010. And we head into 2012 with many imbalances yet to be fully addressed and a variety of headwinds, none stronger than the looming hit to exports, manufacturing activity and profits from even a mild European recession

What has changed is valuation and the high-bar regarding investor expectations.

Let me explain.

The story for 2011 was one of P/E multiple contraction as risk aversion set in. The year ended with operating EPS growth in high-single-digit terrain, which was slower than the string of double-digit gains since the profit recovery began nearly three years ago, but positive nonetheless. What held the market back was the multiple, which contracted roughly 3 points on the year — and remember: every multiple point equates to nearly a 10-point shift in the S&P 500. This often counts more than earnings do when formatting your targets for the year. In the end it is the direction and the multiple that investors were willing to pay for that caused so many pundits to be so wrong last year.

So we have a situation now where the trailing P/E ratio is sitting at 13x. That may not be a classic trough by any means, but only 20% of the time in the past quarter century has the multiple been this low. Okay — something to consider.

Now, trailing P/E is the proverbial "bird in the hand" whereas forward multiples are "hit and miss" and subject to the vagaries of analyst earnings estimates, which have been declining in dribs and drabs for the past three-to-six months. But as it now stands, on this basis, the multiple is now just a snick below 12x. In the past quarter century, we only saw one other time when it was this low on a one-year "forward" basis, and it was the first quarter of 1988. A year later, the S&P 500 rallied 15%. Not my call, but something to at least mull over and debate.

Now we must keep in mind that valuation is not a timing device. If all you did was focus on such metrics, you would have missed out on the final three years of the late-1990s tech boom. That said, a respect of valuations will also help keep you out of trouble, as we saw following the tech wreck and the bust of the housing and credit bubble seven years hence.

But we do understand that P/E ratios at current low levels do serve up a certain degree of confidence (a source of some comfort, if you will) that there is some downside protection to the overall market here. While I'm still on the cautious side, I do see the case for why the floor may be higher than it was before. Of course, that is due to valuation metrics. The key going forward will be how earnings perform — and I'm not expecting any growth this year. In fact, we could see a contraction, based on where margins are (60-year highs) and the impact of slower global growth and the stronger U.S. dollar on foreign-sourced revenues (40% of the pie).

The next question is whether the P/E multiple can expand in 2012. As was the case in 2011, in a year when profit growth was positive but the broad market flat, the multiple may yet again hang in the balance.

Well, it may pay to assess what the factors were in 2011 that caused the P/E multiple to shrink. I can think of a few. The ECB pulled a 2008-style bonehead move and raised rates to combat inflation (surreal). China was draining liquidity as it moved to rein in a potentially destabilizing uptrend in inflation — with its stock market and the emerging market space taking it on the chin. All the while, the Fed more or less stood on the sidelines for much of the year, notwithstanding Operation Twist and the verbal pledge to keep the funds rate at the floor through to mid-2013 at the earliest.

If we look at what could possibly go right, we have the Chinese central bank now easing policy — that is a shift from a year ago. If inflation there falls further, which has already slowed from the 6.5% peak to sub-5% (we get the key December CPI data-point later this week), then the latitude for more policy stimulus will become even greater. This is why the Chinese stock market has rallied more than 6% in the past four days — it is sniffing something out here. Remember that Chinese stocks lead commodities. Furthermore, the Canadian stock market, which turned in a rare underperformance last year relative to the U.S., has about half its market capitalization in basic materials.

We also have the ECB, with a new chief, not only cutting rates but in some sense going even further than the Fed did. Perhaps not in the way of non-sterilized purchases of government bonds, but the move toward lending to the banks for three-year terms with the junkiest of collateral (one-third more products that the banks can now put up on the central bank balance sheet) has dramatically reduced tail-risks (a French bank or two would have gone down absent this ECB intervention) and we see that now in terms of Libor rates easing.

Furthermore, Eurozone politicians were completely in denial this time last year, believing that the problems would stay "contained" to Greece. Over the last few months of 2011, a view was building in the markets that either Germany was going to exit the euro area or kick Greece out. So far, neither seems likely.

Merkel and Sarkozy seem dedicated on using the crisis as a way to foster more integration — with a common fiscal policy — not less. Of course, it remains to be seen how many of the other members will opt for German-style austerity at a time of intensifying recession pressures. But this is a problem of their own making since it was their decision to load up on debt to fund their welfare states, and the move to fiscal probity is probably the lowest cost strategy for them (us too). And Merkel came right out and said earlier this week that Germany wants Greece to remain in. So...in a sea of uncertainty, at least we have more clarity now that the Eurozone experiment is about to disintegrate in a destabilizing fashion.

Finally, based on the latest comments from two Fed bank presidents (Dudley and Williams) there seems to be some momentum building for a QE3 program out of the Fed.

What is different about 2012 is that while there are many headwinds, global policy is moving into a higher gear. We have no doubts that the beta-junkies will go to town on the prospect of a "coordinated" global stimulus cycle. This is what the market has been feeding on repeatedly since the March 2009 lows. It's called government mixed juice.

What also is different is the level of expectations. We went into 2011 with everyone geared up for 3% real U.S. GDP growth and we will be lucky to get 1.7% when the final results for the year come in. Now the consensus is much closer to 2%. While growth may in fact come in softer than that, we do start the year with more realistic expectations than was the case 12 months ago. The next few weeks will be key as Q4 earnings come out. Keep in mind that the bottom-up estimates right now have penned in a sequential quarter-on-quarter contraction, which has only happened 2% in the past 25 years outside of recessions. There may still be one, but it didn't start in Q4 of 2011.

Meanwhile, the survey data continue to flash a green light. The NFIB small business sentiment index improved in December for the fourth month in a row to 93.8 from 92 in November. This is the best reading in 10 months, though the components were not universally positive.
For example, the job openings subindex dipped to 15 from 16. Hiring plans also dipped one point to 6. Moreover, the index assessing whether small businesses added jobs in the past three months edged down to 1 from 2 in November, not exactly in line with those booming results from the ADP survey.

Capex spending plans stagnated at 24. The good news for bonds at least was the subdued inflation readings. The index measuring pricing power stayed at zero and the percent raising wages was stuck at 10. Even better were the forward-looking "planned" figures. Intentions to raise prices dipped from 15 to 14 and plans to boost wages slipped to 5 from 9 to stand at the lowest level since last January. In fact, the share of respondents citing inflation as their top worry fell from 6% to 5% (it has been sliced in half since last May) — it hasn't been this low since early last year.

A bright spot was in the credit measures; the thaw continues as the index measuring how tough it is to secure financing receded from 10 to 8 in December — the lowest since June 2008. One of the most acute concerns evident in the survey are taxes, with the share saying this is first and foremost on their minds rising to 21% from 19% in November and 16% three months ago. Just wait until the realization sets in that President Obanna is going to remain in the White House and the Bush-era tax cuts go the way of the Do-Do bird by the end of 2012 (not to mention the health care tax on "high-income" earners).

The JOLTS data (Job Opening and Labor Turnover Survey) more or less confirmed that the labour market has less pep in it than many believe (but consistent with the aforementioned NFIB employment readings). Job openings actually declined 63k in November on top of a 153k plunge the prior month. Hirings did rebound 107k but that only recouped the like-sized decline in October. Finally, firings came to 96k and belie the recent downtrend we have seen in the jobless claims numbers.

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spastic_colon's picture

I like reading David even if he is mostly wrong about the market directions, he should stop using real facts and figures since they no longer matter

DavidPierre's picture

Damned if you do...

Greece, which is a time bomb set to ignite the nuclear system itself, but seems to have been "forgotten about" where market participants are concerned. Their short term debt is trading at interest rates between 300-400%. They are flat assed broke and the market has already deemed them so.

The problem is twofold, first the market IS paying attention to because it is Euro negative which temporarily points the finger away from the U.S.

 If Greece really does "technically" default, the Eurozone is toast which it is anyway with Italy, Spain, Portugal... they will all default. The Euro was clearly not well thought out politically or financially.

Secondly and most importantly, which of course is not gatting much press are all the CDS insurance that has been sold. Greece CANNOT be allowed to technically default and trigger the "insurance" payouts. Were this to happen, there could be 5, 10, 20 defaults by "insurers" just like AIG who cannot pay.

If the CDS is not triggered ...it should have already triggered at least 10 months ago during the first bailout... then the owners of CDS, many who have "hedged" their portfolios with this bogus insurance will not be paid. Many institutions will become insolvent ...as if they are not already... by the simple fact that they own Greek debt that has dropped already 80+% in value with no compensation on the other side where they expected their CDS "insurance" to pay.


For that matter, how funny is it that the U.S. which IS the reserve currency has CDS in the $ Trillions written against debt.

Greece alone will blow the system. Look at the U.S. ... exponential overkill. The "writers" of Greek CDS do not have the capital to pay on a default and the suckers who relied on the CDS payments need them to be made whole.

Can you say "damned if you do and damned if you don't"?

This is just one more black and white example as to why "mathematically" it is over and has been since late 2008 when central banks and treasuries decided to borrow, print and "save the world" for the time being.

How long is "the time being"? 

 The only correct move is not to play the game.


kaiserhoff's picture

Fine summary.  I've been saying for a couple of years now, that some risks are simply not insurable, because if anyone has a claim, essentially everyone has a claim.  It isn't only systemic risk, it is systemic mutually assured destruction..., coming soon to banks and nations near you.

Arbitrage as a form of Russian Roulette, Go Figure.

jeff montanye's picture

one might also quibble with the seeming comprehensiveness of a 25 year chart of trailing eps.  seen in a larger context,  http://en.wikipedia.org/wiki/P/E_ratio, the period seems to have relatively high ratios and does contain the highest on record.  as well, as 2008-2009 demonstrated, ratios can go up in recessions even if prices go down.  

BadKiTTy's picture

Good one Jeff. Picking 25 years is too small a window to look at where things could go. After the 29 crash PE's got to about 5. Huntsman had to review his model to include data from the depression in order to give him a better data set. Recency and availability effects mean we tend to only look at what is 'near' and memorable. I bet most of the BSD's on wall street are in their 30's and 40's so their whole world is bubble land.


economics1996's picture

Excellent.  Impressive.  The comments on ZH are incredibly insightful.  Thanks David.

s2man's picture

I'm the only +1?  David just eloquently described the dominoes falling.  Maybe it was too long for most to read...

economics1996's picture

I was negative 30 yesterday.

hettygreen's picture

'The only correct move is not to play the game.'

This is the best advice I have read in a very long time. Eventually there will be a tipping point when a critical mass of people accept this, pick up their marbles (if they have any left), and go home. I joined the exodus of the rational (or broke) in the first week of October last and I won't be coming back. 

AldousHuxley's picture

Iran decided to not to play the petrodollar game anymore. You will see what happens....

disabledvet's picture

this is a "fine summary" indeed. of course the USA did pay the CDS...back in 2008. Just ask Hank Greenberg. The US taxpayer had to spend tens of billions just so his company could be made whole with Goldman Sachs. In Europe we're talking an actual country...and Europe will not pay??!! I know if i were a holder i'd be apoplectic! Anywho..."they're sovereigns for a reason"...and one of those reasons? "they don't have to pay." C'est la vie. I would not hold my breath that this will change...we are told "we will know" of course.

DavidPierre's picture

Gerald Celente...


...Ranting ... Frothing at the mouth for 20 minutes.

No eye strain like I got from reading Rosie.


Oh regional Indian's picture

The only correct move is not to play the game.

Sage advice for the times DP.


DavidPierre's picture


An old Chilcoton rancher I knew up in the high country told me a long time ago...

"Mess with the bull and you get the horn."

A sign on the dirt road into the valley that you would like...



Reese Bobby's picture

I declare you a "Full-Retard."  Rosie called the Treasury rally duration play when ZH was mocking him on the topic.  And he has still been consistently bullish on PM's.  I bet you choke on Theta for a living Sparky.  Because you obviously know nothing about financial markets or David Rosenberg.  And no need to thank me for being more gentle than necessary.


"Man, just cause it's a theme song don't make it not true"

philipat's picture

"even if he is mostly wrong about the market directions"

In fairness, I dispute that. He guided clients into Treasuries over the past 2 years which was not a bad place to be.

Comay Mierda's picture

two words - dollar destruction.  SPX will only crash if priced in gold.

GMadScientist's picture

And fiat (ya know, the stuff they give you when you sell your equities) will only be worth having when the SPX crashes.

It's like trying to piss with morning wood.


SimpleandConfused's picture

The secret is to master the hand stand!  Then, no problems with bladder depletion when the urethra is a bit stiff.

Maybe that is the secret to making money these days; learn to stand on one's head while knee deep in fecal matter?

MillionDollarBonus_'s picture

It’s time for downtrodden equity investors to get organized. The sluggish pace of this economic recovery is very concerning, and I personally believe that there is the very real possibility of a double dip recession. It is out of deep concern for the health of the American economy and its loyal investors that I propose the creation “The American Union of Equity Investors”. This union will be open to any and all investors in US and global equities, from analysts at top tier investment banks to independent value investors. The Union will be focused primarily on lobbying for more fiscal and monetary easing but it will also work to promote public awareness of the need for monetary and fiscal stimulus.  Don’t forget, this is YOUR Federal Reserve and it is up to everyone to make sure that Bernanke is serving YOU.

SMG's picture

 "Don’t forget, this is YOUR Federal Reserve"

If by that you mean the Rockefeller's and the Rothschild's Federal Reserve?  Then you're finally right for a change.

LawsofPhysics's picture

Don't forget the Windsors.  Besides we do we need to pay the Fed at all when the treasury can coin our own money?  Seems rather stupid.

Canaduh's picture

No, the fed is owned by shareholders, who have never been disclosed (though it is pretty easy to guess)

LawsofPhysics's picture

"who have never been disclosed"  - So unless anyone can buy those shares, you have no fucking point.

Canaduh's picture

No, my point is that no one can claim to know who owns the fed, and if they did, there would be no way to verify it.

I don't know how that was not clear to you, unless you're a fucking moron.

baby_BLYTHE's picture

repost, but relevant: Who owns the Federal Reserve?


It reveals the linear connection between the Rothschilds and the Bank of England, and the London banking houseswhich ultimately control the Federal Reserve Banks through their stockholdings of bank stock and their subsidiary firms in New York. The two principal Rothschild representatives in New York, J. P. Morgan Co., and Kuhn,Loeb & Co. were the firms which set up the Jekyll Island Conference at which the Federal Reserve Act was drafted, who directed the subsequent successful campaign to have the plan enacted into law by Congress, and who purchased the controlling amounts of stock in the Federal Reserve Bank of New York in 1914. These firms had their principal officers appointed to the Federal Reserve Board of Governors and the Federal Advisory Council in 1914. In 1914 a few families (blood or business related) owning controlling stock in existing banks (such as in New York City) caused those banks to purchase controlling shares in the Federal Reserve regional banks. Examination of the charts and text in the House Banking Committee Staff Report of August, 1976 and the current stockholders list of the 12 regional Federal Reserve Banks show this same family control.

WonderDawg's picture

You are a fucking idiot. Just because YOU don't know who owns the Fed, doesn't mean other people don't know. Check out BB's link, it spells it out quite clearly.

Do a little research before you open your mouth and you'll be less likely to get bitch slapped with the truth.

Non Passaran's picture

Haha, excellent, thanks for replying on behalf of many a reader here!

Calmyourself's picture

Thanks MDB big green for ya!  Much better effort than your last couple, satire but not too much.

bankonthebust's picture

I hit the green arrow for ya. That made me laugh. I like to laugh.


NotApplicable's picture

Why, he's even proposing solutions now.

Serious troll, ftw!

SheepDog-One's picture

'Bernanke is serving YOU!'....a big shit sandwich.

francis_sawyer's picture

The BULLS see exactly what the doctor that does your colonoscopy sees...

Nothing much else to see when your head is buried that far up your a55

euphoria's picture

MDB: You sure are one dedicated troll

ArgentoFisico's picture

Little Panic in half of the EU: The german bullion sellers (the best ones, as VAT is much lower there) have already finished their "quotas" of silver, platinum and palladium they can ship to other EU countries... as of january 10 !?!!!!!

Take a look of the type of message they mail you when you try to buy from their online shops:


Sudden Debt's picture

If I close my eyes and press my eyes with my thumbs, I see breasts surrounded by stars!

Cpl Hicks's picture

I'm going to try that but with breasts pressed against my eyes.

Wonder what I'll see, or feel?

SilverIsKing's picture

What do you see when you don't close your eyes and you press your eyes with your thumbs?


moonman's picture

Leprechauns riding skittle shitting unicorns

GMadScientist's picture

I'd rather open em and surround myself with stars' breasts.


Yen Cross's picture

" DANTES INFERNO " , comes to mind. These ass hat traders are tying to " out perform" , yesterdays PONZI guidance, that get's lowered on a whim! 

  What about debt /GDP? What about swaps > LTRO EFSF IMF OIS? This picnic Just gets more " MUS- TURD" / lack of  " KET-SUP"!!!

SheepDog-One's picture

Everyone is now 'bullish' simply based upon the assumption the FED will step in and bail out their bets! And thats ALL!

snowbaall's picture

The bulls are bullish because they know Ben Bernanke will bail them out.

Fortunately, Bernanke's ass smells like roses.

Without QE, the markets would be at zero.

Plus we'd be paying less than a buck for a gallon of gas.

The deflationary pressures are that extreme.