Deja 2011 All Over Again

From the first day of 2012 we predicted, and have done so until we were blue in the face, that 2012 would be a carbon copy of 2011... and thus 2010. Unfortunately when setting the screenplay, the central planners of the world really don't have that much imagination and recycling scripts is the best they can do. And while this forecast will not be glaringly obvious until the debt ceiling fiasco is repeated at almost the same time in 2012 as it was in 2011, we are happy that more and more people are starting to, as quite often happens, see things our way. We present David Rosenberg who summarizes why 2012 is Deja 2011 all over again.

From Gluskin Sheff


It is incredible how things are playing out so similarly to this time last year. We closed the books on 2010 at 1,257 on the S&P 500, then hit an interim high of 1,343 on February 18th of 2011 and then corrected to 1,256 on March 16th. We later had a nice bounce off that low to 1,363 on April 29th (a higher high). Who knew then that by October 3rd, the index would roll all the way back to 1,099 and was in dire need yet again for more central bank intervention?

This time around, the S&P 500 kicked off the year at 1,257 to hit an interim high of 1,374 on March 1st. We then corrected down to 1,343 as of March 6th and then rallied our way back to 1,419 on April 2nd (again, a higher high). Only time will tell if the 1,419 close on April 2nd proves to be the peak for the year as the 1,363 high as back on April 29th of last year.

In fact, the exact same pattern occurred in 2010. Out of the gates, the S&P 500 shot up from 1,115 to a brief peak of 1,150 by January 19th. After a brief correction (as we had in early March of this year) to 1,056 by February 8th, the market soared to 1,217 by April 23rd — literally, a straight line up —just as we saw happening two weeks ago. Again, who knew then that we would be at 1,047 by August 26th? Once again, it took aggressive action by the Fed to revive the bull. This is an incredible seasonal pattern. It works for bonds too. Has anyone recognized how the yield on the 10-year T-note surged in the winter-spring of 2008, 2009, 2010 and 2011? In each of the past three years, 4% was either pierced, tested or approached. These were the peaks of the year each time. This time, the seasonal high was 2.4%. Are you kidding me? Our pal Gary Shilling may well be onto something when he says the ultimate low may be somewhere close to 1.5%.

To some extent, the bounce we are seeing reflects how deeply oversold the market was with the Dow losing 550 points over a five-day span. The AAII sentiment poll showed the bull camp shrinking 10 points in the past week to 28.1% and the bear share expanding 13.8 points to 41.6% so quite the shift here. It does not take much at all in these nerve-racking times to get investors to switch their views on a dime. So much of the move has been technical. Sentiment perhaps in some cases washed out — very quickly. It is still too early in the earnings reporting season to make a call here on the fundamentals — Alcoa is not the canary in the coalmine for the overall economy. And the economic data are still broadly mixed. Much of this rally actually is based on quite a bit of fluff like renewed expectations that the Fed is actually going to embark on more stimulus after all, following comments yesterday from two senior Fed officials:


Based on such analysis, I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information. In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates.


Vice Chair Janet L. Yellen, The Economic Outlook and Monetary Policy


Remarks at the Money Marketeers of New York University


Also, we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks. In the headwinds department, I would include the run-up in gasoline prices mentioned earlier because that will sap purchasing power, the continued Impediments to a strong recovery from ongoing weakness in the housing sector, and fiscal drag at the federal and state and local levels. In terms of downside risks, these include the risk that growth abroad disappoints and the risk of further disruptions to the supply of oil and higher oil prices.


On the inflation front, the overall rate of increase of consumer prices, as measured by the 12-month change of the price index for personal consumption expenditures slowed to 2.3 percent in February from a recent peak of 2.9 percent last September. Even though the recent rise of gasoline prices mentioned above could interrupt this pattern, we expect this moderation of overall inflation to resume later this year.


William C. Dudley, President of the New York Federal Reserve Bank


Remarks at the Center for Economic Development, Syracuse, New York

Beyond a brief jolt to investor risk appetite, it is debatable as to what these rounds of Fed balance sheet expansion really accomplished in terms of helping the economy out. Three years of near-0% policy rates and a tripling in the size of the Fed's balance sheet hasn't changed the fact that this goes down as the weakest recovery ever — we've never gone this long without seeing a quarter of 4% GDP growth or better — or that the economy remains extremely fragile.

One thing seems sure. If the stock market were truly telling us anything meaningful about the economic outlook, then we wouldn't be having the yield on the 10-year T-note at 2.05% and barely budging as the S&P 500 nudged even higher to close at the highs of the session in yesterday's impressive positive price action.