Rosenberg Ruminates On Six Roadblocks For Stocks

Tyler Durden's picture

There is no free-lunch - especially if that lunch is liquidity-fueled - is how Gluskin-Sheff's David Rosenberg reminds us of the reality facing US markets this year and next. As (former Fed governor) Kevin Warsh noted in the WSJ "The 'fiscal cliff' in early 2013 - when government stimulus spending and tax relief are set to fall - is not misfortune. It is the inevitable result of policies that kick the can down the road." Between the jobs data and three months in a row of declining ISM orders/inventories it seems the key manufacturing sector of support for the economy may be quaking and add to that the deleveraging that is now recurring (consumer credit) and Rosenberg sees six rather sizable stumbling-blocks facing markets as we move forward.



First, there is liquidity — this major catalyst for equities since last October looks set to subside with the Fed seemingly backing off from a QE expansion, at least over the near-term. And the ECB is back talking about inflation so it doesn't even look like a rate cut is coming despite escalating recession pressures in Europe. It is now also highly doubtful that China will re-open the monetary taps following the disappointing March inflation data. The liquid lunch looks less likely.

Second, there is the U.S. economy — not just the disappointing jobs data on Friday but the reality that 70% of the releases in the past month have come in below expectations. While the chain stores did report what seemed on the surface to be a solid +3.9% YoY sales gain in March, keep in mind that yet again we had very mild weather and we also had an early Easter effect.

Third, there is the rapid slowing in corporate earnings (Alcoa kicks off the reporting season tomorrow). In Q4, we had the YoY trend in S&P 500 operating earnings slip into single-digits (+9.2%) for the first time in two years, and absent Apple, the pace would have been 6.2% (see the front page of the Investor's Business Daily). Only 62% of companies beat their estimates, which is far below average. As for Q1, the consensus is all the way down to +3.2% on a YoY basis — well off the +5.5% expectation at the turn of the year and the +12.8% forecast in the mid-part of 2011. Strip Apple out of the numbers, and you are talking about earnings growth of practically nothing— +1.8%.

Not only has earnings growth basically evaporated, but the ratio of negative to positive guidance has risen to levels we last saw two years ago, margins are poised to shrink to a two-year low as well, and only three S&P 500 sectors are actually seen raising their earnings from year-ago levels. Now the question is whether or not the market can move up with earnings contracting and the answer is — of course! We have seen that in the past, as rare as it may be. Just go back to 1998, when the Asian meltdown and strong U.S. dollar severely pinched U.S. corporate earnings, yet the S&P 500 rallied more than 20% that year. But what else happened? Well, we had the Fed cut rates three times as a super-strong antidote, and did so at a time when there was no evident slack in the labor market. Plus, we were in the early stages of an internet-led productivity spree, which underpinned profit margins. In addition, we had a Democratic president working with Congress to pass legislation that reduced red tape, labour rigidities and taxation — with no budget deficit! Please, tell me if we currently have these as antidotes for a weakening trend in corporate profits.

Fourth, there is Europe making the headlines again, and not in a positive way. Spain is back on the radar screen with a very bad bond auction last week serving up as a referendum on the government's fiscal plan — sending the 10- year yield back up close to 6%.

We have the two rounds of French elections looming (April 22nd and May 6th) and the new government is going to have precious little time or margin of error with regard to delivering a fiscal package that will pass the 'sniff test' for Mr. Market. It is very clear that, in Italy, Mario Monti's honeymoon period is over as he vacillates over parts of his economic reform package. Financial stress is highlighted by the poor performance of the euro area banks (the group that got the cyclical bounce going last November) as the group sagged 4.3% last week and is now trading near three-month lows.

On the macro front, Germany had been an economic lynchpin but no longer with industrial production sliding 1.3% in February and a downward revision to January. U.K. factory output also fell 1% — a big shock to a consensus looking for a 0.1% gain. Not just Europe, but the global economy in general is cooling off. The HSBC diffusion survey of China's service sector slipped to 53.3 in March from 53.9 in February. Russia's economy ministry just shaved its 2012 growth forecast to 3.4% from 3.7%.

Fifth, there is the poor technical picture. The large number of distribution days of late. The number of stocks making fresh 52-week highs is on the decline. At last week's highs in the major averages, divergences were popping up everywhere. One particular glaring anomaly was the surge in global equities in Q1 and the sharp rise in government bond yields at a time when the CRB index faltered — if the first two asset classes were actually prescient in the view of global reflation, wouldn't it have shown up in basic material prices given their inherent cyclical sensitivities?

Sixth, valuation support is less of a positive than it was six months ago. The cyclically-adjusted P/E at 22x for the S&P 500 is nearly 40% higher than the long-run average of 16x. The forward P/E ratio at over 13x now is about in line with the historical norm. Some nifty analysis cited on page B6 of the weekend WSJ (Why Stocks Look Too Pricey) found that when real rates are negative, as they are today, they tend to represent periods of economic turmoil and as such, the typical P/E multiple during these times is 11x — versus today's trailing multiple of 14x. On this basis, the market as a whole (keeping in mind that we don't buy the market, just the slices of it that we strongly believe are undervalued) is overpriced by more than 20%.

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dow2000's picture

First...Bernanke Blows

mayhem_korner's picture



Reasons 1, 2, 3, ... = QE withdrawal symptoms have not hit SSRI levels (yet).  The rest is noise.

derek_vineyard's picture

we haven't seen any correction since last summer............i thought the jobs report would give perfect reason for a correction that is easily explainable and acceptable to benny and barry and forgotten by election time, but i guess they won't let any air out until it explodes

i need a psychiatrist

mayhem_korner's picture



The Twist just ended.  I think they are watching the "political bad" (equities deflation) with the "political good" (oil prices receding) with some angst. 

SheepDog-One's picture

I think theyre stuck, they cant let any air out, too much pressure and it would just totaly rip apart and deflate. Cant pump much higher either or equities will go bananas from all the printing. Theyre cornered here I believe, and will have to face just keeping it level until it does just explode one day.

dow2000's picture

But Corzine swallows

derek_vineyard's picture

6th rule of fight club ---      have some class

michigan independant's picture

 6th RULE: No shirts, no shoes.

Get it right or TD will mash your face

PontifexMaximus's picture

QE's ad infinitum and LTRO's , that's the name of the game. Anything else is just por la gallerie!

Boilermaker's picture

I think I'll make some rather large 'investment' decisions on this astutue evaluation of potential equity movements.

Jason T's picture

Margin collapse, more dire effects of peak oil = beginning of a dark age for those not creative.

SheepDog-One's picture

But....we CANT let equities fall, then the sheeple won't be 'fooled' anymore! Or something.

insanelysane's picture

First the economy was bad and all of the dead weight was thrown overboard.  Those rowing beneath decks were hanging on and trying to keep things going as the economy reset.  But QE 1....infinity, caused massive inflation, so those rowing could not afford to eat, and the whole thing stops.

Oquities's picture

seventh, there is a capital gains tax increase in 8 mos., making strategic sales imminent.

jo6pac's picture

Off topic does anyone have the link that shows what navy ships are were? Thanks in advance.

JW n FL's picture



Rosie is pushing that 20% number!!

Rosie wants QE 3 BABY!!

Give us that 20% drop so that QE can rain down on the Top 0.00000001%


like McTwist did for the 7 - 15's! & 15 TIPS & 25's!!


who wants 50% +++ Returns compliments of the Federal Resereve?

PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund (Based on Net Asset Value) 60.98% 59.77% 23.42%

 PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund (At Market Price) (1)  61.36% 59.95% 23.51%

 BofA Merrill Lynch Long U.S. Treasury Principal STRIPS Index  SM±  60.26% 59.18% 23.29%


Come on!! ALL THE KOOL KIDS ARE DOING IT!! You want to be Kool dont You??


You see.. there is this Club.. its a Big Club.. But YOU AINT IN THE CLUB!! Sorry!

 and please.. keep protesting! it is so entertaining to see the Help get all flustered!


JW n FL's picture



are you a girl?

cause all you do is Bitch and you NEVER offer anything other than BITCHING!

Huffington Post Sheepeoples Club is over there.. NOT! HERE!!

vegas's picture

Here are my roadblocks: 1) no customers who have any money, 2) shitty products with worse customer service, 3) highest federal tax rate in the industrialized world, 4) out-of-control government bureaucracies like the EPA, 5) health care costs that will drive them bankrupt, and 6) Amerikans who work for them who are dumber than a bag of carrots [thank you Amerikan education sytem]. Other than that I don't see why the ES isn't at 2,500 now.

q99x2's picture

'U.K. factory output also fell 1%'

causing a surge in safety

TooBearish's picture

Rosie and that other old guy with Trim Tabs just don't get it...QE3 and BTFD...

SheepDog-One's picture

Great, let them bring on their precious little QE then we can have $5 gas for summer and fall....everyone should be real happy.

CrashisOptimistic's picture

Bernanke watched as QE2 got him precisely 0.4% GDP in Q1 2011.

0.4%.  Look it up.

I remember his speeches in that time frame.  He dismissed the earthquake because it was in mid to late March and there was no time for it to hit Q1.  He dismissed Libya, because oil's price had started up before Libya.

In fact, he mused extensively on the chances his QE was driving oil prices, but he dismissed that as well, blaming them eventually (correctly) on spiking Asian demand.

When he was done it was pretty clear he had lost some measure of commitment to QE.  Twist was not QE, it was a rebalance of maturities and the Fed balance sheet did not grow from Operation Twist.

At most, he may buy some more MBS, but they are not Treasuries.  I suspect strongly he has lost his commitment to QE in general.

francis_sawyer's picture

You're still thinking of QE as a 'policy tool'... It may have started out that way (to an egotistical ivory tower fucktard like Bernanke)... But now it's simply a time loop...

He's become Curly (3 Stooges) in the row boat with a hand crank drill... "Ooh... a water letter outer"...

magpie's picture

QE 3, then the Obamatron 2012 Hope&Change SPR trickle down extravaganza

TooBearish's picture

THe SPR release, and intervention by JPM with a couple of margin increases from CME will take care of those evil speculators!!!

Quinvarius's picture

Giving money to banks doesn't fix the economy.  If we don't give money to banks they will not survive a bad economy.

Money must serve the economy, not the banks.  If you print it, it must reach the general population.  Printing causes inflation no matter what.  You might as well get some benefit from it. 

non_anon's picture

I just recieved this in an e-mail.

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*Terms and yields are subject to change.

WTf is next?

insanelysane's picture

Governments need muppets too.

Mary Wilbur's picture

California is a very bad bet. You'll never get your money back.

I should be working's picture

Bullish, Bullish, Bullish, Priced in, Bullish, Bullish...

GS said it was a generational buying opportunity, shut up and buy already.

skepticCarl's picture

Rosie's roadblocks look only like speed bumps.

Bartanist's picture

There is in fact a free lunch when a country's military bullies the rest of the kids to give them their lunch money. But the free lunch only exists for the US and its handlers.

bobbydelgreco's picture

rosie 2 thru 6 right but any real pressure on stocks and ben qe's