ROSENBERG’S 10 THEMES FOR 2011
David Rosenberg takes the other side of his former Merrill colleague, Richard Bernstein, and makes the bearish case for 2011:
1. Consensus views of 1,350 on the S&P 500 and 4% real GDP growth are far too high. Not one strategist polled by Bloomberg is bearish on equities. So we have a complacency problem on our hands, the exact opposite of what we experienced at the March 2009 and the July 2010 lows. For that reason, the outlook for at least the first half of 2011 is less than positive.
Moreover, equities are at the high end of the range and are priced for good news on earnings and economic growth. Valuations are not at extremes (however, according to the Shiller normalized P/E ratio the market is still on the expensive side) but sentiment is. Negative divergences are increasingly apparent and momentum is actually subsiding. We see better buying opportunities ahead but continue to favour companies that are “special situations” — consistent dividend growth, undervalued, strong balance sheets, and non-cyclical in the sense that they have low correlations with the direction of North American growth.
2. In my view, real GDP growth in the U.S.A. is set to slow from around 3% in 2010 to 2% in 2011, or possibly even lower. This is not a double-dip but it is a slower growth profile. We went to 3% in 2010 from -2.6% in 2009 so the second derivative was positive. But for the coming year, the second derivative is likely going to decline. This augurs for a non-cyclical exposure; more defensive and still yield-oriented. As the Bank of Canada strongly suggested, global growth is going to slow and hence a sense of caution over global multinational cyclicals is warranted.
3. The fiscal and sovereign credit problems in Europe are not going away. Neither is the instability in the U.S. state and local government sector. Policy tightening in China is also a source of uncertainty. Volatility is likely to intensify with this outlook.
4. The U.S. dollar is likely to strengthen, particularly versus the yen (the Bank of Japan and Ministry of Finance want the overvalued yen to weaken) and the euro (they need it since Eurozone is tightening fiscal policy more dramatically).
5. Emerging markets will struggle as central banks move more forcefully to curb accelerating inflationary pressure. The Chinese stock market may have already signalled that a major top in the region has been achieved.
6. The U.S. fiscal borrowing need for 2011 is no higher than it was for 2010. As such, fiscal concerns in terms of what it means for lower long-term rates are misguided. The yield curve is too steep and will flatten, led by lower bond yields. The recent increase in long-term rates is very similar to what we saw happen in December 2009 and helped ensure that bonds would enjoy a year of positive returns in 2010.
7. The Canadian dollar is overvalued by at least five cents and is likely to succumb to a softer profile for commodity prices. Basic materials appear over-owned in the short-term and bullish sentiment is at a high. The policy tightening effect out of emerging Asia is an obstacle, especially at current price levels. There is likely an election in Canada and the U.S.A. will not be beset by political uncertainty until 2012. Hence some caution as it pertains to the outlook for the loonie (though I would look to get more positive at 93 cents).
8. Deflation remains the primary intermediate risk for the U.S., notwithstanding the prospect of a near-term follow-through from the recent surge in many commodity prices. Money velocity remains dormant despite the Fed’s reflation efforts. There remains far too much excess capacity in the labour market. This requires an ongoing focus on SIRP (safety and income at a reasonable price) strategies for investors.
9. Corporate bonds are no longer inexpensive but within this space, financials and utilities screen best for value in terms of sectors, the 5-7 year part of the curve in terms of duration, and the BBB-BB area in terms of ratings.
10. One of the most pronounced macro risks is another leg down in U.S. home prices, which actually seems to be underway but is currently receiving very little attention.
Our preferred “buy list” are out-of-favour groups that are not priced for accelerating growth: Utilities, pipelines, oil income, pharmaceuticals (dividend focus as well as being out of favour), food products, and grocery stores.
Source: Gluskin Sheff
Geez the govt just created 1% of gdp with their 450B tax and stimulus plan per every major house. 0.5% on the low side. Yet he says gdp will drop? When we’re throwing multiple kitchen sinks in?
I agree on housing and europe and need for brakes in EM
Brazil is flat for 10 and china down. So part of inflation brakes might have already played out in market.
When Rosenberg’s criteria for turning bullish arrives, the markets will already have priced it in.
David Rosernberg is becoming ever more clueless. He is a rear view mirror looking guy.
By the way, how is that QE to lower interest rate call? Was Bernanke’s real intention to lower interest rate? Naaah. Pumping up the equity market was his intention. I hope you admit you were completely wrong.
Non,
Not sure if you’re referring to me or Rosenberg, but my point was to show that QE would fail miserably in keeping rates down and generating inflation. If you’re blaming the stock market rally entirely on QE I think you’re mistaken. In fact, most of the QE trades have reversed as I thought they would – the USD and int rates in particular. The market has rallied because everyone and their mother thought a double dip was around the corner in August and the August ISM sparked a rally on better than expected economic news that has continued until today. This rally is mostly due to good economic news.
Rosenberg makes good points but the market could still go up from here. As long as the majority of investors believe that the Fed reserve can fix everything nothing else will much matter. The herd rules!! I still think next year will be interesting— a good year for trading the ups and downs. The negatives seem to be increasing (China in the news this weekend with surging food prices) and I guess that keeping the tax cuts that are already in place as well as extending unemployment at least is better than the hit in having them expire. Any upside from the tax package could easily be offset by higher gasoline and food prices, state and local governments increasing need to find new streams of revenue and a congress that is increasingly convinced that the USA is going broke. With the run up in stock prices, the risk going forward is higher that it has been for a while. I am still net long this market. Betting against this trend has not put much food on the table