FMX | Connect – www.fmxconnect.com - (Reported 8/23/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
CONSENSUS PLAYING CATCH-UP (TO US!)
We’re not sure whether to be happy or sad over the fact that some of our long-standing views — once viewed as controversial — are now making the headlines in the popular press. Do we rejoice over the acceptance, or do we start to fade the trade?
Frugality has been a key theme of ours, and now we see How to Be Frugal and Still Be Asked on Dates on page B1 of the Saturday NYT.
Gold as a currency play as opposed to being strictly a commodity — have a look at Rethinking Gold: What If It Isn't a Commodity After All on page B7 of the weekend WSJ.
Housing is now a ball and chain to the baby boomer population as opposed to a viable retirement asset has been a critical theme of ours for the past several years. Sure enough, what do we see on the front page of today’s NYT? A column supporting this view titled Your Home as Sure Nest Egg? That Era is Over, Analysts Say.
Finally, this deliberate asset-allocation shift out of equities and into bonds by the general public (as opposed to being a classic “contrarian” move) — see In Striking Shift, Investors Flee Stock Market on the front page of the Sunday NYT.
IT’S EARNINGS ESTIMATES THAT MATTER MOST
It must be extremely frustrating for the bulls to see the market down 12% from the April peak even with 12-month trailing EPS rising 18% since then.
So what’s changed for the worse?
The answer is analyst earnings revisions. The Thomson IBES 12-month forward earnings estimates have been trimmed more than 7%, to $87.89 from $94.79 back in April. Come to think of it, the peak in earnings forecasts coincided with the peak in the market.
And guess what? The forecast peak in the last cycle was in October 2007, again right when the S&P 500 was hitting its highs. Before that, earnings estimates were starting to get cut in August 2000, just ahead of the peak in the market.
If you are just watching the earnings themselves, on average they are off six months from the time the stock market rolls off the peak. Earnings estimates seem to be a perfectly good timing device.
The same holds true at bottoms. Forward estimates hit their trough in March 2009 right at the same time the market bounced off the lows. If you waited for the actual earnings to revive, which they did in November 2009, you would have missed eight months of 65% gains in the S&P 500.
Go back to the cycle before that one and you will see that earnings forecasts only began to rise in January 2003 — right when the equity market was carving out a bottom. If you decided to jump in when actual earnings bottomed, which was much earlier at December 2001, you would have been clocked by the huge correction that occurred just under a year later.
U.S. ECONOMY IS CONTRACTING
The ECRI leading index (smoothed) came in at -10 for the August 13th week from -10.2 the week before. This is the fifth week in a row that it has been -10 or worse and so I would assume that this meets the “persistence and intensity” requirement for a recession. The Macroeconomic Advisers monthly GDP data already show two months in a row of contraction. It now looks like Q2 real growth will be around 1.2% and the Fed has cut its Q3 view twice in the past six weeks. In a nutshell, the economy is contracting again and the consensus is still behind the curve, at +2.5% annualized rate.
IS IT JAPAN ALL OVER AGAIN?
Even since St. Louis Federal Reserve Board President Bullard dared to draw the comparison a few weeks ago, everyone has been contemplating this possible reality — especially as the Treasury yield curve flattens out in sashimi-like fashion. What is interesting is that things are evolving much more quickly in the United States than in Japan.
In Japan, the move towards deflation, negative nominal GDP and 2.5% yields on 10-year bonds did not occur until 1998-99, a good nine years after the initial shock. Japan let its imbalances linger for longer, which is why the unemployment rate never did break above 5.6%, and here it sits at 9.7% today in the U.S.A. But while this suggests that markets clear more quickly in the U.S.A., this also points to a larger output gap here.
DEMOGRAPHICS MATTER
Harry Dent is one of the world’s most widely read demographers and market commentators and we saw something in one of his publications that really caught our eye. A focus on one particular part of the Baby Boom population — notably the one that really drives spending, wealth gains and income. It’s the 45-54 year old cohort.
Indeed, we back checked through the assertion by sifting through the Fed’s database (mainly the survey of consumer finances) and found that this cohort does indeed have the lowest savings propensity, the highest earnings level and the greatest increase in net worth compared to other age categories.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
-----
About FMX: FMX Connect is an information, data, and analytics portal for Commodities. The portal provides an all-in-one package including essential market data, independent third party research, industry news, and commodity trading tools. FMX Connect provides efficient, effective, and thorough data that bridges all aspects of commodities onto one screen. The Result; A user friendly application for hedge fund traders, OTC brokers, individual investors, and industry participants
-----
Note: The information presented, while from sources generally believed to be reliable, is not guaranteed and may not be complete. FMX | Connect makes no representations or warranties regarding the correctness of any opinions or information. Past results are not necessarily indicative of future results. Nothing in this report should be construed as a representation to buy or sell shares, futures or options, which contain considerable risks. For internal client distribution only. Any reproduction, re-transmission, or distribution of this report without permission is prohibited. Media correspondents or reporters may not quote any one page or section in its entirety and must attribute all quotes, ideas or concepts herein. Copyright FMX | Connect, ©2009-2010. All rights reserved.