FMX | Connect – www.fmxconnect.com - (Reported 7/14/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
“V” STANDS FOR VOLATILITY
Well, the S&P 500 has rallied all the way back to the 200-day moving average. This rebound went much further than I expected, but as we mentioned on Monday, the swing in the net speculative position in the past two weeks in the Chicago Mercantile Exchange reveals a sharp and snappy short-covering rally. But I recall all too well that after the market slid from the first run at the highs in August 2007 and then corrected hard in September, the S&P 500 went on for an 11% rally to the highs even as the credit contraction began and the economy showed signs of slowing — the market, thought the Fed, was coming to the rescue and there would be no double dip. Now the markets seem to believe that the stress tests in Europe will work and that sovereign debt risks are overblown and again ... no double dip. We shall see.
THE FUNDAMENTAL TRENDLINE IS STILL DOWN
Intel enjoyed its best quarter ever at the peak of the inventory cycle. Well done. What we are grappling with is this. If the consensus earnings forecast is “the market”, then the S&P 500 is de facto pricing in $96 of operating earnings next year — a new peak. Now that is a 35% increase from here and it is extremely difficult to see profits soaring that much at a time when margins are already back at cycle highs and with the prospect of slowing nominal GDP growth. It just does not add up.
NO DOUBLE DIP?
We have been on the receiving end of endless analysis suggesting that double-dip risks are either zero or completely trivial. And, the primary reasons given are the positively sloped yield curve, negative real short-term rates, no sign of inventory excess and no sign of a flattening in the trend in the leading indicators (aside from the ECRI, we would suppose). We were sent one particular Street report yesterday that began with a comment on how the analysis incorporated data from the last eight recessions in the United States.
The question we have is why these other eight recessions in the post-WWII era are relevant. This wasn’t just a blip or correction in GDP due to a manufacturing inventory-led recession. This was a traumatic asset price deflation and credit contraction of historical proportions. In essence, this was — or still is — a balance sheet recession that has absolutely nothing in common with the experience of the post-war business cycle when recessions were temporary dips in GDP in the context of a secular credit expansion. And, this wasn’t just a U.S recession and debt-deleveraging cycle — it was global in nature.
MR. ROSENGREN — MAKE IT THE 5 R’s!
By that we mean Eric Rosengren, the President of the Boston Fed, who seems to have done a mind meld with us. This is what he had to say in a WSJ interview yesterday:
“Given the amount of substantial excess capacity that we have in the economy, there is some risk of further disinflation. And I would say the risk of deflation has gone up and is more of a risk than I would like to see at this point.
If you were to look at the balance of risks and what we could do about those risks, the risk from a downside shock I would view as more of a problem than the risk of an upside shock of inflation or to the economy overall.
I was probably a little more pessimistic than some to start out with and ... Incoming data has been a little bit weaker than many had anticipated. Many private sector forecasters have been downgrading their forecasts for the second half of the year.
We're getting to the point in the recovery where we wouldn't expect as much support coming from the inventory side. If inventories start to ebb it becomes really essential for some of the other components of GDP to start to pick up at this time and there is some reason to believe that we may not get as much of a pick-up as some had been anticipating earlier this year.”
Sound familiar?
ECONOMY SLOWING
The equity market has quickly filled up the gap towards the 200-day moving average but the economy is slowing down — even with Intel’s blowout quarter. From a 5.6% annual rate in the fourth quarter of 2009, we saw real U.S. GDP growth slow to 2.7% in Q1 and now post the May trade data, it looks like we could be as low as 2.5% for the second quarter.
Meanwhile, we finished off Q2 with very soft June data on the consumer, and small business and manufacturing confidence reports. And, the early signs in July are not so good. The IBD/TIPP economic optimism index slipped to 44.7 in July from 46.2 in June and 48.7 in May — to stand at the low water-mark for the year. Double-dip deniers should note that this index is now back to the level it was when the economy entered recession in late 2007.
We also see that chain store sales slipped badly in the second week of July and the YoY trend of 3.2% is again at the low end of the monthly target band. The International Council of Shopping Centers said in its press statement that “the nominal sales data may continue to have a soft reading due to the pricing weakness ... declining prices may continue to drag down sales growth.”
Again, a whiff of deflation.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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