3 THINGS DAVID ROSENBERG THINKS

3 things David Rosenberg thinks via Gluskin Sheff:

1)  The buyers in this market are mostly forced:

• When looking for where the buying power for U.S. equities has been coming from, there have been three primary sources.

1.  Hedge funds who have had their margin lines re-established this year.
2.  Equity portfolio managers taking cash ratios back down to late -2007 levels.
3.  And short covering, which seems to be ongoing as short funds try and reverse at least part of the average 31.5% loss suffered this year. So what we just saw — a 3.24% plunge in short interest on the Big Board through the last half of October goes a long way towards explaining this latest move in the major averages to new post-crisis highs.

2)  Gold looks good:

• Global mining output has been flat or down in seven of the past 10 years. Global fiat currency, on the other hand, has risen 130% over the past decade. Indeed, the U.S.A. is a country that is 233 years old and over half of its monetary base has been created since Helicopter Ben took over the reins in 2006. It’s all about scarcity of supply, and all of a sudden there is a new buyer on the block with deep pockets called global central banks. China has less than 2% of its FX reserves in bullion; imagine if it ever went to the world average of 10%.

3)  Earnings stink:

• So far, Q3 S&P 500 operating EPS is coming in at $15.27 — still down around 2% YoY from a year ago and well below the $21.11 consensus expectation at the start of the year. Still no evidence of a turnaround in sales — deflating 10.7% YoY for what will be the fourth decline in a row. Cost cutting and productivity gains remain the dominant theme, hence operating margins are holding at a high level of 7.23% (versus the 15-year average of 6.60%).

Source: Gluskin Sheff