5 REASONS THE RALLY IS BUILT ON QUICKSAND
From the desk of David Rosenberg this morning:
1. This remains a hope-based rally (with strong technicals). I say that because during this six-month 50%+ rally in the S&P 500, the U.S. economy has shed 2.4 million jobs, which is almost as many as we lost during the entire 2001-02 tech wreck — in just six months. The market’s ability to shrug off the loss of 2.4 million jobs is either a sign that it is treating this as old news or sees the cost-cutting as good news for profits. Either way, what we are seeing transpire is without precedent — the magnitude of the employment slide versus the magnitude of the market advance. Truly fascinating stuff.
It’s remarkable to add that jobless claims were 550K this morning – a staggering number this deep into a recession. But fear not – it was “better than expected”.
2. Companies have not really been beating their earnings estimates — only the very final estimates heading into the reporting quarter. For example, the consensus view for 3Q EPS at the start of the year was $21.00, last we saw the estimates were down to just over $14.00. But there is a deeply rooted belief that earnings are coming in better than expected. This is a psychology that is difficult to break. It is completely unknown (for some reason) that corporate revenues are running at a -25% YoY rate, which compares to the -10% we saw at the worst part of the 2001-02 bear market and the -3% trend at the most negative point in 1991.
It’s also interesting to note the very real weakness in corporate revenues. The bottom line can be manipulated, but revenues never lie….
3. Valuation is a poor timing device but even on “normalized” trailing 10-year earnings, the S&P 500 is trading near 18x, which is now above the historical average of 16x.
Market value matters less to me at this juncture. If we were to get a much stronger than expected recovery you could easily argue that the market is cheap. PE ratios are a moving target based on guesses. That is what makes them poor market timing indicators.
4. All the growth we are seeing globally this year is due to fiscal stimulus; not just here in Canada and the U.S., but also in Korea, China, the U.K., and Continental Europe too. For 2010, the government’s share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring. For a Keynesian, government stimulus is necessary, but the question for an investor is the multiple one attaches to a global economy that is still relying on a defibrillator. The problem is that governments do not create income or wealth, and today’s stimulus is really a future tax liability. Curiously, that future tax liability is likely going to pose a roadblock for the return to a “normalized” $80 operating EPS estimate that strategists are now starting to pen in for 2011.
This will become a major concern in mid-2010 when the stimulus is done. Whether the U.S. consumer can carry the torch has yet to be seen.
5. While Mr. Market may be pricing in a fine future for the U.S., but when the 3-month Treasury-bill yield is 13bps north of zero, which is completely abnormal, you know that there are still substantial fundamental imbalances that need to be worked through.
I should also add that the credit markets have recovered substantially from their extremely low levels. Nonetheless, the bond market does continue to forecast a very weak recovery. Perhaps weaker than the one the equity market has priced in….
Source: Gluskin Sheff
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZbN1QAcwOQo
Bank of China Ltd., which led the nation’s $1.1 trillion lending spree in the first half, said ample liquidity has caused “bubbles” in stocks, commodities and real estate.
James,
I think that is why the dislocation between oil and natural gas is so important. It seems that natural gas is pricing based on fundamentals (it signals deflation) whereas oil is pricing based on increased liquidity. Liquidity will disappear, most likely violently. I think that a market spasm is entirely warranted followed by another leg downward toward the March lows. There is no end demand for goods right now which keeps businesses from hiring and it keeps incomes from growing. There is no catalyst for a return of the consumer, especially when credit is contracting at a 10.5% annualized rate right now.
I agree with all of this, but when will it end? Who will be that greatest fool holding the bag when the music stops (to mix metaphors)?
So how has your portfolio done of late
those few days the market was down you were mentioned how you were up
certainly your pseudo shorts cannot be doing well the past 6 sessions
The model portfolio is down about 2% over the last 6 weeks. The 65% cash position is leaving it pretty well protected despite a bearish tilt. Can’t say that I feel great about my bearish position though. Definitely feel like I am swimming against a tide that is destined to take us to SP 1060….
TPC,
Will this market ever trade on fundamentals again? G20 pledged endless stimulus. Would be nowhere to go but up from here. China this morning said they cannot and will not stop the stimulus.
Gray, it will have to. Stimulus was a great contributor to many of our problems. I find it hard to believe that this stimulus won’t cause significant problems down the line. Rewarding bad behavior with free money and money printing is not the solution. Of course, we could just be entering one more big bubble before the next downturn. Who knows?
Horrifying and unbelievable as it is, why can’t it keep going forever – need a reminder. Everything intelligent I read and reprint at http://www.philstockworld.com is dismal, but yet the market keeps rising… ???
Can they set it up to they can short the market? Very possible. If the velocity of money is low, m1, m2 is decreasing. Why are gold going up? Anyone has bloomberg terminal to look up who is buying puts for GLD? or short gold futures for that matter
December contract..
100.00 GLDXV.X 6.50 Down 0.70 6.50 6.80 16,705 1,936
‘Of course, we could just be entering one more big bubble before the next downturn. Who knows?’
Priceless. We may very well move up to 1200 on the S&P and then move down OR not. I don’t know either. But if this earnings’ season is good, I do think we move up on the S&P for the next 12 months. I am staying out of the market though. Too much of a gamble at this point.
I’m loving a long dollar position here against the yen tpc.
Mish has a great article on this. Direct correlation between gold rising is
oK, CONTINUED FROM ABOVE.
Direct correlation is NOT with inflation but rather credit risk. Big credits risks out there, thus gold rises.
I like the dollar too, but I am down on it since I bought it. Not much, but…..
Henry,
I think the puts in gold are purely for protection.
TPC, do you really think that Japanese auto manufacturers are going to stand for such a weak yen. They run that damn country and they are already screaming the yen is too strong at 95. I bet they’re loving it at 91. New government may try the good old beggar thy neighbor once in a while.
Crazy as it might seem, it will be 1,100 or 65% since March with another 5 or 6 more days like the last 5. I said several days ago it could repeat 8/17 so far it has come true….. amazing mkt….
TPC — if your are truly long the dollar–you are holding a weak
hand.
Anyone can see -The dollar has broken support on the chart not good for those long the dollar.
If you have to be long– be long metals
tpc
whats your outlook on 3q reports?
you made outstanding call with 2q, so thats why i am asking.
i promised myself not to short before 3q, but didnt held my rules and feeling a big pain now…
Hey can someone ask Geitner at the town hall meeting coming up, what his target is for the SP? While they’re using my tax dollars to boost his stock portfolio, the least he can do is tell me when I should sell. I mean if he’s really looking out for the avg American citizen, a little “now would be a good sell” statement from President Transparency would be a huge help just like it was in March when he told us to Buy.
PS. IMHO, this is not a hope based rally, this is a government-controlled rally. Fundamentals don’t matter. Technicals don’t matter except long-only signals. The US economy is not getting better from where we were 12 months ago. Very little has changed except for the worse (albeit perhaps at a slower rate). The market will not crash because the gvmnt won’t let it. There will be bumps along the way but if the gvmnt has taken it this far the way they’ve taken it then 1100 and 1200 should seem like a chip shot. Perhaps sell-side guys like this fellow make money telling others to be careful but baring that they are seriously risking their credibility and the accounts of people who believe them.
Brian, I remember back in February, a lot of ‘pumpers’ of bank stocks said, don’t fight the fed. Of course, people really did pay much attention because, they’re, you know, pumpers. They were pumping from the highs of banks stocks. But what I have noticed is that when pumpers or bashers are in a very small minority group…then you usually see them turn out to be right.
I just remember that statement on ‘don’t fight the fed’. I guess that statement couldn’t be more true than now. We all have to sit back with awe and discouragement at the government’s powers over the markets. Awe because it is amazing what they’ve done, discouragement because it can’t be called a market anymore.
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