Economic Commentary

From David Rosenberg Last Friday



<strong>Market Action on Sep Unemployment </strong>



We finally could be in the long-awaited corrective phase in equities that will

hopefully give us a chance to ultimately buy the market at more appropriate

valuation measures. We have said 850 on the S&P 500 would be an interesting

price point. Treasury yields out to the 30-year have broken down and the curve is

flattening which is a possible harbinger of a renewed slowing in growth following

the Q3 stimulus-led spurt. The VIX is also on the rise as the anti-risk trade moves

back to center stage. And let?s not forget that China?s stock market,

widely viewed as a bellweather, fell more than 6% in Q3 (even as the S&P and

Dow surge 15%).



Since this was a technically-driven market as opposed to a fundamentally-driven

market, maybe we should be watching the technicals here for the S&P 500:



? 1020 is the 50-day moving average and below that point we break the

uptrend line from the March low.



? 990 to make a lower low during the uptrend since July.



? Ultimate support at the July low is 869. Break that level, and ?. (well, let?s

just say it is not good).





<strong>Who Has Been Doing The Buying</strong>



We already ascertained earlier in the week that is hasn?t been Ma and Pa Kettle

? in fact, the FT quotes data from TrimTabs showing that only $2.5 billion in net

inflows has gone into U.S. equity funds and ETF?s since the March lows. Inflows

into bond funds have been ten times as strong. We know that corporate

insiders have been net sellers of size. And the buying power from short-covering

subsided months ago.



The answer, and this validated by the FT on page 16 of yesterday?s edition, are

the hedge funds. And once they begin to see signs that a V-shaped recovery is

about as real as Santa or the tooth fairy, watch out. Because there aren?t any

other buyers out there that can be identified.
 
More from Rosie



<strong>Reasons I hear why the market shrugged off the payroll Non-Farm Payroll report</strong>



1. A bad number was already priced in post-ADPs



2. Employment is a lagging indicator



3. The weaker the data, the bigger the V-shaped recovery



4. Weak data ensures more accommodative policies which will keep "excess

liquidity" conditions flush



5. The jobs data were "distorted" by 53k drop in government workers

(ostensibly civil servants don't shop).



6. Job loss is great news for cost cutting and margin expansion.



7. Quarterly earnings season is upon us and likely to far surpass

expectations.



My opinion: There is more complacency and risk in the equity market now than

there was back in January. I think the boost to output from auto production is

over. I think the ISM has peaked. <strong>I think there is a nontrivial chance we see zero

percent real GDP growth in Q4 (consensus is around 3%).</strong>
 
[quote author="BondTrader" date=1254787892]

3. The weaker the data, the bigger the V-shaped recovery</blockquote>


Okay, this made me LOL. Nice job Rosie.
 
More important than the monthly job loss number is the fact that the Labor Department announced they're going to revise their unemployment numbers up 800k for the 12 months ended 3/09. Isn't that a big red flag that the economy is in much worse shape than people are hoping? What does this say about the jobs numbers they've been feeding us since March? Are they going to have to do another huge upward revision a year from now?
 
We'll be checking into a Cali motel Wednesday afternoon, and we'll be traveling the state until sometime Saturday afternoon. This is your last warning to avoid The Nude Apocalypse? and save(1) your hard earned fiat-based savings.





BTW... the Balloon Fiesta was awesome, as long as you weren't a passenger :gulp:





<span style="color: gray;"><em>(1) Investment advice is given freely and worth exactly what you paid for it. Past performance is NOT indicative of future results, but if I'm right... you owe me money ;)</em></span>
 
<strong>A TECHNICALLY DRIVEN MARKET</strong>



Well, you know the technicals are taking over when: (i) at the July 10 interim low,

the S&P 500 bounces off the 200-day moving average, and (ii) at the October 2

interim low, the S&P 500 bounces off the 50-day moving average. The fact that

the market receives so much support at these key technical thresholds is

something we have to respect.



That said, there are some nagging charts to consider. For example, the Dow and

S&P 500 are rolling over in virtually every other currency terms, including gold, so

much of the rally is purely ?money illusion? in the sense that the U.S. markets are

being graded in devalued dollars (dollar down more than 20% YTD). Moreover,

the financials have begun to lose their relative strength ? something to keep

an eye on as this is the group that has been leading the market up and down for the last

6months and it has to sustain its outperformance in order for the bear market rally to last. And

overseas, we can see some key Asian markets, such as the Korean Kospi and the

Japan?s Topix index, have broken below their 50-day moving averages.



As the Q3 earnings season kicks off today, what investors will be looking for in

particular are signs that companies are boosting revenue growth and raising future

guidance at the same time. These will be the keys for near-term performance. Given the backdrop

of extremely weak consumer spending, I have no reason to believe there will be great

top line revenue growth; and bottom line profit will still be driven by another round of cost cutting.

I do expect companies with significant oversea business to outperform due to a weak dollar.

Expect a bumpy round ahead.
 
Gold broke $1050, Latvia looks to be on the verge of collapse, dollar looking oh-so-shaky, and what could potentially be the 4th largest bankruptcy in US history is bearing down on us. It feels like the economic waters have sure kicked it up a notch after the relative lull of the summer months.
 
<strong>WHAT EVER HAPPENED TO THE SAYING

?THERE IS NOTHING TO FEAR BUT FEAR ITSELF?</strong>



FDR said ?there is nothing to fear but fear itself? and yet is fear that is helping

drive every asset class right now. The action in all of the markets has been very

interesting. The equity market continues to trade on light volume ? this tells you

that there is little conviction and that it does not take much in the way of buying

activity to generate whippy rallies. But to see the S&P 500 now within 15 points

from a post-collapse high, to see the yield on the 10-year Treasury note back

below 3.2%, despite the gargantuan new supply, and to see gold break out to all

time highs, is remarkable.



The only possible explanation comes from a market analyst on Bloomberg

yesterday ? it is not greed, but fear. Institutional equity investors fear missing

out on the rally. Bond investors fear deflation and the stock market is way

overdone and is ripe for a steep correction. The gold bugs fear that the fiscal

and monetary largesse globally will lead to inflation and fear that the U.S. dollar

is on the verge of collapse. Never before has fear felt so reassuring ? pick an

asset class, and it?s going up in price.
 
<strong>ONGOING CREDIT CONTRACTION</strong>

The big story yesterday, at least to me, was the further massive $12 billion

decline in outstanding consumer debt in August ? the consensus was looking for an $8 billion

contraction. This was the seventh month of debt retrenchment in a row. In other

words, the tidal wave of the credit collapse continues unabated, and this is the

primary reason why bond yields are still in a fundamental downtrend. Keep in

mind that the $12 billion (5.8% annualized decline) reduction took hold during the

peak for cash-for-clunker auto sales in August when they soared temporarily to a

14 million annual rate (and subsequently to 9.2mln in September). This held the

contraction in non-revolving credit to $2.1 billion ? based on what the pace had

been running in recent months, it seems as though the total decline outside of the

auto subsidy would have exceeded $20 billion during the month.

Over the past year, consumers have run down their debt by a record $113 billion

(and this does not include mortgages). This is an absolutely epic shift in

household attitudes towards credit and discretionary spending.
<fieldset class="gc-fieldset">
<legend> Attached files </legend> <a href="http://www.talkirvine.com/converted_files/images/forum_attachments/450_IoCuEqhjHdAda8VPEbAk.jpg"><img src="http://www.talkirvine.com/converted_files/images/forum_attachments/450_IoCuEqhjHdAda8VPEbAk.jpg" class="gc-images" title="SP32-20091008-092916.jpg" style="max-width:300px" /></a> </fieldset>
 
So, that ongoing credit contraction (since the banks are awash in cheap money) that's inflationary. Right?



<img src="http://media.ebaumsworld.com/picture/jcrew2/Denial.png" alt="" />
 
[quote author="no_vaseline" date=1255060023]So, that ongoing credit contraction (since the banks are awash in cheap money) that's inflationary. Right?



<img src="http://media.ebaumsworld.com/picture/jcrew2/Denial.png" alt="" /></blockquote>
 
[quote author="BondTrader" date=1255060677][quote author="no_vaseline" date=1255060023]So, that ongoing credit contraction (since the banks are awash in cheap money) that's inflationary. Right?



<img src="http://media.ebaumsworld.com/picture/jcrew2/Denial.png" alt="" /></blockquote>


This is what I believe



Deflation will be the story in town for at least the next 2-3yrs given huge output gap, high unemployment rate, extremely low velocity of money, Fed will not raise the rates anytime soon. Then we will have high inflation afterwards.</blockquote>
 
One very expensive market.....
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<legend> Attached files </legend> <a href="http://www.talkirvine.com/converted_files/images/forum_attachments/451_PHB2rVFZZO90IDUh2BSu.jpg"><img src="http://www.talkirvine.com/converted_files/images/forum_attachments/451_PHB2rVFZZO90IDUh2BSu.jpg" class="gc-images" title="SP32-20091009-100038.jpg" style="max-width:300px" /></a> <a href="http://www.talkirvine.com/converted_files/images/forum_attachments/452_9aLnQb5678ySsoRiOocO.jpg"><img src="http://www.talkirvine.com/converted_files/images/forum_attachments/452_9aLnQb5678ySsoRiOocO.jpg" class="gc-images" title="SP32-20091009-100023.jpg" style="max-width:300px" /></a> </fieldset>
 
1071.66, that was the closing low on the S&P 500 on September 22 ? and the

S&P managed to set a new post March 9 high of 1076.19 in yesterday?s

session. Again, it remains to be seen whether this turns into a key technical

development since the Nasdaq, the Dow Transports and the Russell 2000 have

not made new highs, so we have some critical non-confirmations here.





The Dow made it to a new interim high yesterday, with the 4% gain last week (best since July 24)

taking the basket of 30 stocks to 9865.80. But if there were some bad omens, or certainly

what can be classified as cautionary signposts, they were ?



? Volume fell sharply to close out the week. In fact, three of last week?s five up sessions

were on lower volume which calls for caution.



? Leading stocks are not breaking out, according to the Investor?s Business

Daily (IBD) list.



? The only buying seems to be short covering (in the last two weeks of

September, short interest on the NYSE plunged 3.4%).



? CEOs are not as pessimistic as they were earlier in the year, but they

certainly do not see the V-shaped economic recovery now apparent in equity

market valuation. According to a Duke University/CFO Magazine poll conducted

in September, more than half of businesses say they will not return to prerecession

staffing levels until 2012; fully 43% still plan to cut payrolls in the next

12 months.
 
Agreed. It is tough to play at levels 25% higher than one believes it should be.



<em>?The market can stay irrational longer than you can stay solvent.? - somewhere on the web.</em>



[quote author="BondTrader" date=1255133004]One very expensive market.....</blockquote>
 
Apparently, driving into California from Las Vegas negates the bad juju created when Nude vacations in SoCal. Sorry to get anyone's hopes up.



We have tentative plans to be back next spring, and Las Vegas is not on the itinerary. Until then, I predict no crash, correction, or retracements. Yes, I am aware of how silly this sounds but it's not much sillier than what the market is doing right now.
 
<strong>REVENUE-LESS RECOVERY</strong>

To date, an amazing 78% of the S&P 500 companies have thus far beaten

consensus estimates. Then again, maybe this is less amazing than meets the eye

since the consensus of street analysts have taken such a knife to their estimates

that Q3 operating EPS is seen declining 25% from what were already depressed

recession profits of a year ago.



The WSJ ran with an article stating that because companies are being rewarded by

the marketplace to such a great extent for beating their EPS estimates via relentless

cost-cutting moves, executives are saying that ?they are hesitant to reinvest such

profits into their businesses.? This strategy is being deployed by so many firms

that it is having a broad based dampening impact on private aggregate demand and

hence corporate revenues ? enticing firms to take even more costs out of the system.

All we know is that this process is not sustainable ? either pricing power/revenues

improve, and there was certainly no sign of this in the just-released National

Federation of Independent Business (NFIB) survey, or the $80+ of earnings

currently embedded in equity market valuation will have to be revisited, revised

and reduced. It will be at that point ? and the timing is next to impossible, but it is

a ?when?, not an ?if? ? that the stock market embarks on its true corrective phase.



<strong>U.S. SMALL BUSINESSES NOT OPTIMISTIC</strong>

The September NFIB survey came out and the overall index rose a measly two tenths

of a point to 88.8 ? this didn?t even beat the 88.9 level we saw back in

May. Six out of the 10 components that make up the index were either flat or

down on the month, so the breadth of the increase was narrow. It seems that

the optimism that is hitting Wall Street, with regards to GDP growth, has not hit

Main Street.
 
[quote author="BondTrader" date=1255560626]<strong>REVENUE-LESS RECOVERY</strong>

To date, an amazing 78% of the S&P 500 companies have thus far beaten

consensus estimates. Then again, maybe this is less amazing than meets the eye

since the consensus of street analysts have taken such a knife to their estimates

that Q3 operating EPS is seen declining 25% from what were already depressed

recession profits of a year ago.



The WSJ ran with an article stating that because companies are being rewarded by

the marketplace to such a great extent for beating their EPS estimates via relentless

cost-cutting moves, executives are saying that ?they are hesitant to reinvest such

profits into their businesses.? This strategy is being deployed by so many firms

that it is having a broad based dampening impact on private aggregate demand and

hence corporate revenues ? enticing firms to take even more costs out of the system.

All we know is that this process is not sustainable ? either pricing power/revenues

improve, and there was certainly no sign of this in the just-released National

Federation of Independent Business (NFIB) survey, or the $80+ of earnings

currently embedded in equity market valuation will have to be revisited, revised

and reduced. It will be at that point ? and the timing is next to impossible, but it is

a ?when?, not an ?if? ? that the stock market embarks on its true corrective phase.



<strong>U.S. SMALL BUSINESSES NOT OPTIMISTIC</strong>

The September NFIB survey came out and the overall index rose a measly two tenths

of a point to 88.8 ? this didn?t even beat the 88.9 level we saw back in

May. Six out of the 10 components that make up the index were either flat or

down on the month, so the breadth of the increase was narrow. It seems that

the optimism that is hitting Wall Street, with regards to GDP growth, has not hit

Main Street.</blockquote>


So we have a revenue less and and a job less recovery. But the equity markets are soaring, so we have a recovery?
 
[quote author="freedomCM" date=1255565885]hey baby, no revenue, no jobs, and the DOW breaks 10k!



we don't need no stinkin' fundamentals!</blockquote>
FCBs are into stocks too!
 
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