DEEP THOUGHTS BY DAVID ROSENBERG
Deep thoughts by David Rosenberg:
A good friend, and long-time reader, was kind enough to pass along these thoughts yesterday. Basically, the stars are starting to align for something really big to happen.
First, the Shanghai index peaked in August 2009 and had a secondary top in December 2009 (global demand slowing?). Many emerging markets are all negative year to date.
Second, gold peaked in the first week of December 2009 (and now breaking down) while the U.S. dollar index (the DXY) is breaking higher (Greece has not been resolved).
Third, TIPs (ETF) peaked the first week of December 2009 (and just broke to a new four month low).
Fourth, commodity prices peaked in the first week of January and appear to be rolling over. Head-and-shoulders top from October 2009 peak?
Fifth, could we be in for a March peak in equities? The NYSE new high list peaked six trading days ago. Recall that a market correction followed in October of last year and January of 2010 following similar peak in new highs.
Sixth, despite signs of economic cooling in Q1 (around 2.5% growth and half the Q4 pace) and lower inflation expectations, the 10-year Treasury note yield is ratcheting up (in a destabilizing fashion) and devoid of any bearish economic data (for a range of technical/fund flow reasons as was the case in the summer of 2007 — we never said at the Grant’s conference in New York that it was going to be a straight line down). But in technical lingo, it does look as though the yield is breaking out from a triangle since the December 31, 2009 yield peak — go back to that period in December and January, 3.85% on the 10-year Treasury- note served at least three times to be major technical support — a break of that this time around would mean some serious near-term trouble (the nearby high closing level was 3.98% back on June 10,2009).
Source: Gluskin Sheff
This qualifies as deep thoughts? Head-and-shoulders? Bring me a coherent analysis – not stream of consciousness (I can always read Virginia Woolf or James Joyce).
You can throw in the Utility Index which peaked in December. Although I have seen the lead time on this one range from three months to six months+ it’s still worth noting.
dow theory (industrials and transports reaching highs) was recently confirmed; i’ll give you one dow theory for all of your other tells.
By no means am I implying that a nonconfirm in the Utilities is reason to run for the hills but it isn’t exactly an arrow in the bulls quiver either. I guess some of us old timers who have been in the market for a lot of years like to pay attention to stuff like the Utility average.
The Dec68 high was preceded by a peak in the DJUA in
Nov67
The Jan73 high was preceded by a peak in the DJUA in Nov72.
The May81 high was preceded by a peak in the DJUA in Nov80.
The Aug87 high was preceded by a peak in thr DJUA in Jan87
The July90 high was preceded by a peak in the DJUA in Dec90
The July98 high was preceded by a peak in the DJUA by
a couple weeks
BTW I believe all of these DOW peaks happened while on a Dow Theory buy signal.
typo
The July90 high was preceded by a peak in the DJUA in Dec90 Shoud have said The July90 high was preceded by a peak in the DJUA in Dec89
i would agree with mr. beck (and would choose joyce over woolf). rosenberg is starting with a thesis and looking for confirmatory evidence. one can always find confirmatory evidence in a very big market economy to support all points of view…that’s what makes a market.
now, i’ll tell you what makes me worry. congressman getting powder envelopes…only emboldens some cretin to take the next step…haven’t we had a presidential assassination in this country about every 50 years?
companies taking huge healthcare charges. they may be noncash and clearing the decks for better numbers in the future, but i still don’t like it.
south korea shooting missiles at a flock of birds and the market dives 75 points. north korea may just be stupid enough to have the flock of birds shoot back.
a mortgage principal reduction program aimed to benefit the most egregious mortgages. makes those who played by the rules want to send their congressman powder envelopes.
and i have only had one cup of joe this morning.
tpc, this blog post from scott grannis shows a different (more bullish) relationship between corporate profits and gdp than the post you put up a couple of days ago (hence, my request for source data is reiterated)…
in any event, grannis points out, among other bullish indications, that corporate profits have doubled in the past 10 years while the S&P500 has been flat.
http://scottgrannis.blogspot.com/2010/03/equities-remain-very-cheap-based-on.html
Will profitability remain in the 8-9% range or fall back to a more normal 6% over the medium to long-term? If corporate profits have reached a permanently higher plateau (excluding a crisis like we just had) then maybe there is something to the idea that equities are undervalued. The same goes with interest rates. If interest rates have reached a permanently low level (max 5% on 30year treasuries) and much lower on shorter terms, then higher equity market valuations are likewise supported. However, if corporate profits start to fall back to 6% or lower and treasury rates 10 and 30 year rise to 6 or 7% or higher then there is a strong argument that equities are wildly overvalued.
Hold a diversified portfolio of equities, bonds, real estate (leveraged with a fixed rate long-term low interest loan), cash and maybe a few alternative investments and ultimately you will come out just fine. If the economy booms equities will shine, if inflation takes hold equities will do ok, maybe not so much at first, and real estate will do well as the value of your loan slowly evaporates as the value of your real estate rises, if deflation takes hold for a Japan style two decades your bonds will shine and you will have a steady income stream. With enough cash on hand you can buy lots of what falls in value (as you maybe sell a bit of what has risen the most) and you can make sure that you will never starve.
good time proven theories….
i fear the next 10 years will look nothing like the last 100 tho…..that changes things alot
Chris:
The “Fed Model” breaks down when you have a skewed 10yr rate.
A Negative swap spread ( has never happened) on the 10yr indicates one of 2 things.
“Default risk”–not likely –or
“Mispriced rate” — “skewed” –The negative spread indicates a 10yr rate north of 4% in my view — way north.
Off Hand–The last few days of March tend to be weak for stocks
But April “Fools” day (aptly named) should be good for Stocks.
April and May and early June will be good for Stocks with the S&P500 challenging 1275 in the next 3 months. Note: I posted 1275 before all the “Johnny come lately’s”
Treasuries tend to be weakest in the Summer.
This Forecast is Sunday 03/27/2010
No telling–but
B Rock O is planning on giving us all a free house next weak!
grannis did say that equities were undervalued even if you pumped up the treasury yield…can’t used the model when treasuries reflect a flight to safety premium, but the analysis still holds when you remove that premium
Chris:
The Corporate profit stat from the BEA has problems. It is an estimate only–with liberal reporting rules–It is NOT based on TAX data. Only once a year is this stat revised to Actual tax data.
–consequently using the “Fed Model” as a guideline might be OK as a second tier check to determine valuations.
The uptrend since March 2009 is a (weakening) bear market rally contained within a much larger downtrend that started in 2000.
The USD weekly chart remains bullish and I still expect a good dollar rally this year.
The uptrend since March 2009 is a (weakening) bear market rally contained within a much larger downtrend that started in 2000.