WHAT WE KNOW AND HOW TO PLAY IT

While David Rosenberg often gives the impression that he permanently hates US equities he does have some bullish ideas for the current environment.  In this morning’s note he provided 10 thinks we know and 9 ways to play the environment:

THERE ARE STILL SO MANY UNKNOWNS

There are still many unknowns with regard to the global macro picture, but what we do know is the following:

1. Despite the success of the Allied air raids, Libyan oil production is not coming back for at least six months and the situation in Bahrain could hit an acute stage; there are more upside than downside risks to the oil price.

2. Japan was already the number-one importer of liquefied natural gas (LNG) and this status will be accentuated as replacements for a damaged nuclear grid is sought.

3. Nuclear energy development takes a near-term hit here by the politics of the Japanese crisis but not a permanent hit (weekend FT editorial was spot on with this file), but in the interim natural gas and coal should really benefit.

4. The aftershock in Japan will be related to contaminated food supply so we can expect to see more inflation on this score too. Looking at the U.S. PPI data, the producers have been successful in passing on the increases to the food retailers.

5. With Mizuho shuttering 38,000 ATMs due to the crisis, one has to wonder the extent of any fallout on the country’s banking system. That said, the Nikkei is the only major market trading at book value, so the market itself would seem to have little downside from here.

6. The gold market has a new buyer — Iran, as it reduces its exposure to U.S. dollars and lifts its bullion reserves (to over 300 tons).

7. Whether QE2 morphs into QE3 will be making the headlines more and more. A CNBC poll showed one-third of portfolio managers positioned bullishly for this. I just cannot see how the Fed can justify doing this as early as June when we will likely be seeing headline CPI inflation in the U.S. at 4.5% and PPI inflation near 8%. Remember, there is an 86% correlation between the movements in the Fed balance sheet and the direction of the S&P 500 over the past two years.

8. U.S. real average weekly earnings are down in each of the past four months (and five of the past six), and at a -4% annual rate. So the problem is that even though the labour market is getting marginally better, wages are not keeping up with prices, which means a big squeeze on real income and spending. The incremental stimulus for the U.S. consumer ends this quarter. Big problem for the consumer discretionary group. Also consider that in the past six months, 90% of the wage gains incurred by the household sector has been absorbed by the food and energy bill.

9. For the first time since last November, we are starting to see real GDP and earnings downgrades in the U.S.A. — this is a sign to be favouring defensive paper over domestic cyclical securities.

10. The Canadian dollar is quietly emerging as a safe-haven currency and yesterday’s budget will likely solidify the country’s status as a fiscally stable jurisdiction. Meanwhile, the G7 countries’ efforts to weaken the yen will likely persist … so the cross rate here is going to be highly in the Canadian dollars’ favour — we could see a 5 -10% rally in coming weeks/months in this relationship. There have been only two days that the Canadian dollar has closed below “par” so far in 2011; at this same stage last year, that number was 55.

INVESTMENT THEMES
• Gold and silver
• Energy exposure, especially oil and the drillers
• Canadian dollar denominated corporate bonds
• Hybrids with oil/gas paper content and a running yield that exceeds U.S. Treasuries
• Hedge funds that hedge — relative value trades
• Emerging debt and equity markets, selectively — value has opened up recently
• Japanese equities for value too … recession is already priced in
• Staples over cyclicals; strong balance sheets over weak; large caps over small caps
• Various muni bonds — states in areas where the economic base is linked to energy and food such as Texas, Kansas, Iowa, and Missouri — what Meredith Whitney dubs “the emerging markets of the U.S.A.”

Source: Gluskin Sheff

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. “Remember, there is an 86% correlation between the movements in the Fed balance sheet and the direction of the S&P 500 over the past two years”.

    That is interesting.

  2. That is actually market manipulation and that correlation proves it.

    Ben bernanke needs to be horse whipped.

  3. Various muni bonds — in emerging usa markets–
    Texas will have a new housing boom– Brazilians and Carnival with Willie Nelson
    No Place Like Texas !

  4. Cullen,

    Can you please share your thoughts on this comment – “we will likely be seeing headline CPI inflation in the U.S. at 4.5% and PPI inflation near 8%”?

    I just dont see it happening due to high unemployment and wages not increasing. What am I missing here? I thought Rosenberg was or is in deflationary camp.

  5. Who knows. Every day he writes about his deflation worries and now he’s forecasting 4.5% CPI? I don’t know how he justifies such commentary….