ROSENBERG: WE ARE IN A CLASSIC TOPPING FORMATION
In a note to clients this morning David Rosenberg made an interesting comparison of today’s market to 2007. He says:
“So what does the current backdrop resemble in a modern-day sense? The summer and fall of 2007. Think about it. The S&P 500 has been jerking around on either side of 1,100 for five months now. The 10-year note yield has jumped 20 basis points from the nearby low with hardly any reason outside of negative technicals.
Go back to that period between May and October of 2007, and the S&P was just above or just below the 1,500 mark for over five months. Many didn’t know it then, and we should all be taking it into consideration now, but we were in a classic topping formation. Back then, as is the case today, the bond market was getting hit hard with the 10-year note yield surging 50bps, to 5.2%, and the universe of economists and strategists completely bearish on the Treasury market at just the wrong time. What goes around comes around.”
My initial reaction is to say, “this is pure datamining” but with the reflation trade, lack of regulation, rinsing and repeating of failed Keynesian policies, and the overall non-resolution of the credit crisis causes it’s fairly safe to say that we have officially returned to the status quo. Whether this is 2007 or 1992 is unclear in my opinion. What I do know is that we have resolved none of the problems that caused the credit crisis. Whether we are walking the edge of the cliff or on the launching pad of the next bull market remains uncertain. What is certain is that the Fed’s boom/bust policies are well intact and the U.S. economy will continue along its flawed path of bubbles = prosperity.
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I just can’t imagine this is 1992. There is simply no way the consumer is facing 15 years of prosperity at the current debt levels.
I say that, yet multinationals could be facing a continued boom from the emerging middle class.
“What I do know is that we have resolved none of the problems that caused the credit crisis.”
i would agree but i would make two points. first, among all of the congressional initiatives on their plate, i see financial reform as being the most likely of actually getting done this year. you may not get exactly what you want, but there will be additional regulation. hopefully very limited otc derivative creation. i think the interjection of corker into the mix is a good sign.
second, the credit crisis was the accumulation of some five years of mispricing of credit risk. you had lbo deals getting done with high yield debt having toggle provisions, permitting accrual of interest at the option of the debtor. not a good idea for a creditor to let a debtor pay interest only at a convenient time. you had a massive amount of hedge fund money buying B pieces of cdos; well you can say goodbye to them. my point is that for a drama such as we have gone through to repeat, you need the actors to play the part. those actors are not going to play the role right now because they cant. any banker proposing pay in kind debt terms will be shot by the head of ibk. you will see smart money going into CRE now, but the dumb money that bought the B pieces of cdo-ed sub prime debt is long gone. will we repeat this debacle? of course, likely when the new generation of investment bankers who didn’t participate in this debacle arise to power.
but it is not like we need all of this regulation soon or else we will suffer another dip or credit crisis…keep your eye on what is important now…which is a market that just read there is no inflation, the fed is signalling that the economy is on the mend (although it will remain accomodative for an extended period of time) and most importantly, the market is taking the good news/bad news of the discount rate nudge quite well.
i will start to worry when the missives from rosenberg become positive
It is pure datamining, AND with a preselection of variables … what about all the other unusual events in the same time frame that are not occuring now (CP/ABCP other credit spreads, yield curve, oil, etc.)
I think we have (temporarily) solved the liquidity crisis, but the solvency crisis, and with that … confidence, is still a work in progress.
I don’t see any clear secular trend that will be increasing real GDP on average, so broad market investing is strictly for traders.
Strictly looking at price of today’s market vs 1992 they are similar. Using Shiller’s P/E 10 the S&P is priced at 19.6 today vs 19.8 Jan.
The difference lies in the earnings. In 1992 real earning were below the long-term trend of an approximate 2% real growth rate in earnings. From 1992 to the market peak in the summer of 2000 real earnings grew at an annual rate of 11.24%. That is nearly 8 years of real earnings growth at 11+%. From 1995 through the midpoint of 2008 earnings were well above trend save for the recession of 2002. It appears with the massive reduction in earnings in 2008 and 2009 and the subsequent recovery we are now back in line with the long-term trend. See chart here (http://seekingdelta.files.wordpress.com/2010/02/real-earnings-trend.jpg) Simple statistics tells us that we are less likely to experience above average growth when starting at the trend then when starting below trend. Think mean reversion.
Unless we are willing to assume a continuation of the debt driven, record profit levels of last decade a reenactment of the bull market started in 1992 does not appear likely.
This era reminds me of the Carter years both politically and economically. Rosenberg missed the 70% move in stocks so he has a lot of nerve calling a “top.”
Inflation is in the air along with terrible economic policies out of Washington.
Rosenberg gets a lot of stick for “missing the move in stocks” but he did advocate piling into commodities and corporate/high yield bonds at “the bottom”.
Yeh – he has missed the stocks and he’s still frequently calling this a bear market rally and we’ll see if he’s eventually proved correct; but I don’t think it’s fair to berate him for it.
As far as strategists go, his prudent approach is infinitely better than some of the unrepentant bulls like David Bianco at Merrill Lynch. He was the guy that wrote a week after Lehman that the S&P was 25% undervalued at that level! If he wasn’t so inconsequential he’d be as quotable as Bernanke!
If Rosenberg would at least admit he has been wrong and explain why, I have much more respect for him. He just keeps saying he is right.
Correction….first sentence should be:
Strictly looking at price of today’s market vs 1992 they are similar. Using Shiller’s P/E 10 the S&P is priced at 19.6 today vs 19.8 Jan 1992.
in 1992 we had jobs