A Bubble in Complacency
by ilene - January 30th, 2011 10:13 pm
Courtesy of John Mauldin, Thoughts From The Frontline
The Recent GDP Numbers – A Real Statistical Recovery
Consumer Spending Rose? Where Was the Income?
A Bubble in Complacency
Egypt
Rosie, Las Vegas, Phuket, and Bangkok
This week I had the privilege of being on the same panel with former Comptroller General David Walker and former Majority Leader (and presidential candidate) Richard Gephardt. A Democrat to the left of me and a self-declared nonpartisan to the right, stuck in the middle and not knowing where the unrehearsed conversation would take us. As it turned out, to a very interesting conclusion, which is the topic of this week’s letter. By way of introduction to those not familiar with them, David M. Walker (born 1951) served as United States Comptroller General from 1998 to 2008, and is now the Founder and CEO of the Comeback America Initiative. Gephardt served in Congress for 28 years, was House Majority Leader from 1989 to 1995 and Minority Leader from 1995 to 2003, running for president in 1988 and 2004.
Some housekeeping first. We have posted my recent conversation with George Friedman on the Conversations with John Mauldin web site. And on Saturday we will post the Conversation and transcript I just did with David Rosenberg and Lacy Hunt, which I think is one of the more interesting (and informative!) ones I have done. You can learn more about how to get your copy and the rest of the year’s Conversations (I have some really powerful ones lined up) by going to www.johnmauldin.com/conversations. Use the code “conv” to get a discount to $149 from the regular price of $199. (If you recently subscribed at $199 we will extend your subscription proportionately. Fair is fair.)
The Recent GDP Numbers – A Real Statistical Recovery
Now, before we get into our panel discussion (and the meeting afterward), let me comment on the GDP number that came in yesterday. This is what Moody’s Analytics told us:
“Real GDP grew 3.2% at an annualized pace in the fourth quarter of 2010. This was below the consensus estimate for 3.6% growth and was an improvement from the 2.6% pace in the third quarter. Private inventories were an enormous drag on growth, subtracting 3.7 percentage points; this bodes very well for the near-term outlook and means that current demand is very strong. Consumer spending, investment and…
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The Unsustainable Meets the Irresistible
by ilene - January 23rd, 2011 8:30 pm
Courtesy of John Mauldin at Thoughts from the Frontline
This week’s letter is a result of two lengthy conversations I had today, which have me in a reflective mode. Plus, I finished the last, final edits of my book, all of which is causing me to mull over the unsustainability of the US fiscal situation. There is a true Endgame here, and it may happen before we are ready.
The first conversation was with Kyle Bass, Richard Howard, and Peter Mauthe, over lunch (more on Peter, who has come to work with me, below). Kyle is the head of Hayman Advisors, a very successful macro hedge fund based here in Dallas. Then I recorded a Conversation with David Rosenberg and Lacy Hunt, which is one of the best we have ever done. Subscribers will be very happy. The new Conversation with George Friedman is now online, too. You can learn more about Conversations with John Mauldin at www.johnmauldin.com/conversations/ . And please comment on this and future letters in the readers’ forums of my new website. Now, to this week’s letter. My goal is to make this one a little shorter than normal. We’ll see how I do.
The Unsustainable Meets the Irresistible
Kyle, Lacy, and David are typically pushed into the bearish category, but (not surprisingly to me) their forecast for the next few quarters is rather strong. None of us would be surprised by a high-3% number for GDP this quarter, and 4% is not out of the question. And we all see GDP tailing off as the year winds down. Inventory builds begin to slow, and in 2012 the 2% payroll holiday goes away. Plus, as I have written and David has noted, the pressure on state and local spending is getting larger with every passing day.
State and local spending is the second biggest component of the economy. The chart below, from David’s letter this week, gives us a visual image of just how large it is. Note…
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Why this market rally will end in tears
by ilene - January 20th, 2011 9:30 pm
By David Rosenberg, The Globe and Mail
Most investors see only the recent returns; they do not see the nearly invisible risks. But the risks are there. I recall all too well the 2003-07 bear market rally – yes, that is what it was. It was no long-term bull run such as 1949-1966 or 1982-2000. It was a classic bear market rally, and it ended in tears because what drove the market upward was phony wealth generated by a non-productive asset called housing alongside widespread financial engineering, which triggered a wave of artificial paper profits.
Remember, returns only count if they aren’t ultimately reversed by excessive greed. Right now, I believe clients are well served by equity strategies that focus on stocks of high quality companies and by investments in both hard assets and income-producing securities. Also good are long-short strategies (vital in controlling risk in the portfolio) and a concentration on fixed-income products (outside of commodities, deflation in the developed world remains the primary trend – against such a backdrop, searching for yield makes perfect sense).
As far as equities are concerned, the current bear market rally is likely at the very late stage. Few people will know to get out at the peak and as we saw in late 2007 and into 2008, many investors will be trapped in a falling market. Bear market rallies are not the same as secular, or long-term, bull markets – the former are to be rented, the latter are to be owned.
Pic credit: Benjamin Miller at FreeStockPhotos.biz
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Rosie’s Must Read On A Hope-Based Rally Now, Followed By Shock Therapy Later
by ilene - December 3rd, 2010 3:56 pm
Tyler Durden presents Rosie’s Must Read On A Hope-Based Rally Now, Followed By Shock Therapy Later. This is practically in answer to Joshua Brown’s depiction of a lonely, frustrated bear searching the world for negative data. Frustrated, perhaps; lonely, not so fast. – Ilene
Courtesy of Zero Hedge
Now that his relentless skepticism, following today’s abysmal data release (orchestrated or not), has been fully validated, much to the chagrin of top ticking flippers such as Goldman and other sundry blog sites, Rosenberg comes out with a must read essay on the state of the economy now versus later, entitled very appropriately "Hope-Based Rally Now, Shock Therapy Later." This is certainly one Rosie’s better pieces out there and a must read for those who refuse to be led by the propaganda machine into believing lies and manipulation: "This has become such a hope-based market that the Dow jumped over 100 points earlier this week on a Reuters news story in Brussels, which reported that the U.S.A. would back an even greater financial commitment to Europe! Quick — get Sarah Palin on the line." Incidentally, if there is any confusion where Zero Hedge stands, we suggest rereading our post from last night which made it all too clear that we still refuse to drink the hopium (and self-aggrandizement) that seems to have gotten straight to the head of such a broad (literally and metaphorically) cross-section of the financial punditry.
HOPE-BASED RALLY NOW, SHOCK THERAPY LATER
I’m on the way back from a two-day business trip in London, U.K. with a few of my Gluskin Sheff colleagues. It’s been a good year-and-a-half since I was last there (the next best thing to old New York), and the first time I can remember it snowing this early — a few centimetres almost shut down the city (enough to make a Torontonian chuckle).
While we continue to refrain from hyperventilating as others throw in the towel, it is completely understandable that investor sentiment has improved. Moreover, the incoming economic data, at least when benchmarked against the double-dip fears that prevailed in July and August, currently look “green shooty” in nature. But is the U.S. economy really out of the woods? Hardly.
The recovery is obviously still so fragile that the Fed felt the need to expand its balance sheet by an additional…
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DEEP THOUGHTS FROM DAVID ROSENBERG
by ilene - November 27th, 2010 9:11 pm
Courtesy of The Pragmatic Capitalist
Via WealthTrack:
“On this week’s Consuelo Mack WealthTrack, a Financial Thought Leader who called the credit and housing bubbles way ahead of the pack. Gluskin Sheff’s prescient Chief Economist, David Rosenberg shares his economic and market outlook, plus advice on how to invest in it.”
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RISKS TO THE OUTLOOK
by ilene - November 22nd, 2010 4:49 pm
The Pragmatic Capitalist discusses RISKS TO THE OUTLOOK. In addtition to listing David Rosenberg’s concerns, Pragcap adds one of his own — a double dip in housing. – Ilene
Courtesy of The Pragmatic Capitalist
David Rosenberg provided a nice list of risk in this morning’s client letter. The one major risk that Rosenberg and the market is largely overlooking at this juncture is the housing double dip. This has the potential to be THE most important story of 2011. As I’ve previously explained, declining asset values are highly destructive during a balance sheet recession. If the housing double dip surprises to the downside the problems that we’ve swept under the rug will quickly reemerge and this time there won’t be any political will for government intervention.
I still believe we are mired in a balance sheet recession that will result in below trend growth, deflationary risks and leaves us extremely vulnerable to exogenous risks that could exacerbate the current malaise. Rosenberg’s excellent list follows:
1. China is getting more active in its policy tightening moves as inflation pressures intensify. It’s not just food but wages too. Headline inflation, at 4.4%, is at a 25-month high. The People’s Bank of China (PBOC) just hiked banking sector reserve ratios by 50 basis points to 18.5% — the second such increase in the past two weeks and the fifth for the year. This could well keep commodity prices under wraps over the near-term.
2. European debt concerns will not be fully alleviated just because a rescue plan has been cobbled together for Ireland as it deals with its banking crisis. The focus will now likely shift to other basket cases such as Portugal and Spain. Greece has a two-year lifeline before it defaults. This saga is going to continue for some time yet.
3. Massive tightening in U.S. fiscal policy coming via spending cuts and tax hikes. This is the part of the macro forecast that is not given enough attention. See States Raise Payroll Taxes to Repay Loans on page A5 of the weekend WSJ.
4. Gasoline prices are about six cents shy of re-testing the $3-a-gallon threshold for the first time since mid October 2008. On a national average basis, prices at the pump are up 26 cents from a year ago — effectively draining about $25 billion out of household cash flow. Tack on the coming
…
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A SPECULATIVE FERVOR IN THE COMMODITY SPACE
by ilene - November 9th, 2010 6:56 pm
A SPECULATIVE FERVOR IN THE COMMODITY SPACE
Courtesy of The Pragmatic Capitalist
Via David Rosenberg at Gluskin Sheff:
Moreover, look at the latest Commitment of
Traders report at what has happened to the commodity complex.
- The speculative long interest in gold has risen since late August to a near-record 253,638 contracts;
- The speculative longs in oil have doubled to 208,726 contracts;
- For copper, the net non-commercial longs has tripled to 25,139 contracts;
- Meanwhile, there is a huge net short position in Treasury
bonds on the Chicago Board of Trade of 25,240 contracts, and;- The net longs on the euro has swelled on the Mercantile Exchange, to 35,879 contracts.
Lord help us if the U.S. dollar ever embarks on a countertrend rally — everything from credit, to stocks, to volatility, to commodities have become abnormally correlated to the greenback.
Source: Gluskin Sheff
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DISINFLATION WITH A HIGHER RISK OF DEFLATION THAN INFLATION
by ilene - November 1st, 2010 6:53 pm
DISINFLATION WITH A HIGHER RISK OF DEFLATION THAN INFLATION
Courtesy of The Pragmatic Capitalist
David Rosenberg had some succinct thoughts on the continuing
There is no more significant source of inflation than the U.S. labour market and we found out on Friday that total employment costs slowed to just +0.4% in Q3 and the YoY trend is extremely tame, at +1.9%. Wages came in at +0.3% sequentially and just +1.5% on a YoY basis.
We can understand the temptation to believe in the inflation story because of what the CRB index has been doing, but our advice is to resist that temptation and remember what we were talking about, quite unexpectedly by the way, six months after oil hit $140/bbl back in 2008. Deflation.
In many cases, pricing power is hard to achieve and so the bump in commodity costs serves as a margin squeeze as opposed to a sustained source of final stage inflation. For real-life examples as opposed to the data, what did the NYT have to say about Colgate’s profit results? This — “Colgate’s revenues in the United
States , which produces 19% of its sales, grew 2%, while the company sold 3% more products. Price cuts reduced earnings in the United States by 1.5%.”
This is important because a lot of investors prefer to just look at commodities as evidence of impending U.S. inflation. This is partly misguided for several reasons. First of all, there are many variables influencing commodity prices at any given time. Currently, I would attribute the move in commodities to Asian strength (there is very real inflation in much of Asia ex-Japan), fears of U.S. “money printing” and the rise of the commodity investment class. Except for the case of “money printing” (which I believe is largely the result of misunderstanding how our monetary system works) there remains little worry of these variables influencing U.S. consumer inflation. As Mr. Rosenberg highlighted, there is only so much commodity price inflation that a weak U.S. consumer will allow (reference 2008).
The rise of the commodity investment class has largely created a hedging mechanism for investors and this component of the commodity price increase represents a “bet” that inflation is coming. Gold…
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Double Dip Delayed, Not Derailed; Understanding Consumer Spending
by ilene - October 29th, 2010 3:08 pm
Double Dip Delayed, Not Derailed; Understanding Consumer Spending
Courtesy of Mish
The BEA Advance GDP for Third Quarter 2010 came in at +2.0%. However, Table 2. Contributions to Percent Change in Real Gross Domestic Product shows that Change in private inventories contributed +1.44 while real final sales contributed a mere .6.
How sustainable is that?
The answer is not very. This is likely the last hurrah for inventory replenishment even without factoring in upcoming cutbacks at the state level.
Not a V-Shaped Recovery
In terms of real final sales, this "recovery", is the weakest on record. Dave Rosenberg has some thoughts on that in Lunch with Dave.
U.S. REAL FINAL SALES 60 BASIS POINTS SHY OF DOUBLE-DIPPING
The major problem in the third quarter report was the split between inventories and real final sales. Nonfarm business inventories soared to a $115.5 billion at an annual rate from the already strong $68.8 billion build in the second quarter — this alone contributed 70% to the headline growth rate last quarter. If we do get a slowdown in inventory investment in Q4, as we anticipate, it would really not take much to get GDP into negative terrain. We estimate that if the change in inventories slowed to about $94.0 billion in Q4 (about $22 billion below Q3 levels), GDP would contract fractionally. In other words, it won’t take much for GDP to slip into negative terrain.
The recession may have technically ended, but outside of inventories, and the best days of the re-stocking process look to be behind us, this has been a listless recovery. At 60 basis points above zero, real final sales are just a shock away from double-dipping — a shock like looming tax hikes, accelerating fiscal cutbacks at the state/local government level or the millions of “99ers” about to fall off the extended jobless benefit rolls at the end of November.
In terms of components, the good news was that consumer spending did accelerate to a 2.6% annual rate from 2.2% in the second quarter — the best performance since Q4 2006. Non-residential construction eked out a 3.8% annualized gain, the first advance since Q2 2008. But the good news pretty well stopped there.
It is also no surprise to see imports bulge when inventories did the same, but what caught our eye in the external trade portion of the GDP report was
…
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A NARROW MARKET IS A DANGEROUS MARKET
by ilene - October 21st, 2010 8:19 pm
A NARROW MARKET IS A DANGEROUS MARKET
Courtesy of The Pragmatic Capitalist
The melt-up continues today as “buy the dip” has turned into “buy the rip”. David Rosenberg is dusting off Bob Farrell’s 10 rules as the market soars:
Not only have sentiment indicators flagged a high level of investor complacency but also the equity market looks highly overbought right now. Looking at the internals, there is much less buoyancy than there is on the surface. As an example, back in April there were at least 600 stocks on the Big Board making new highs versus around 180 right now. Moreover, back at the April highs, we had well over 90% of the S&P 500 universe trading above their 200-day moving average and currently that share is barely above 70%. Keep these metrics in mind when judging the health and breadth of the overall market, and be sure to dust off Bob Farrell’s Rule 7: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”
But let’s not forget Farrell’s first rule either:
1. Markets tend to return to the mean over time
The Nasdaq 100 has rallied 21% in 7 weeks. The Russell 2,000 has rallied 20% in 7 weeks. These are your greed indices. The ones where the pigs go to die at
The risks just strike me as being extraordinary at these levels. Complacency is high, everyone is bullish, everyone buys every dip, all the news is good, etc. The pool of greater fools has gotten mighty crowded and my hands are starting to get pruny. I wouldn’t buy this market with my worst enemy’s nest egg.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
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