FMX | Connect – www.fmxconnect.com - (Reported 8/25/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
The Nikkei index lost even more ground — off 149 points, or 1.7%, to 8,845 — the lowest level in 16 months and confirming that a bear market, not just a correction, is at hand (critical support levels for the Japanese stock market have been breached). Bond bears would do well to respect the 80% correlation between the direction of the Nikkei and that of the yield on the U.S. 10-year Treasury note.
In the FX market, flight to safety is seen in the strength in the DXY, which is about to face a big test as it approaches the 200-day moving average — after already piercing the 50- and 100-day moving averages. In Germany, despite a decent Ifo survey (at a three-year high of 106.7 in August — see Led by Germany, Manufacturing in Europe is Stronger Than Expected on page B7 of the NYT), the euro is being hit by S&P’s move to cut Ireland’s credit rating to AA- on heightened fiscal concerns now that the government has to step in to assist its banks in their recapitalization efforts (S&P raised its estimate to €50 billion from €35 billion). The rating agency also left a “negative outlook” intact, suggesting that another downgrade is a good bet.
As a result, the Irish bond market is getting smoked today — up an unlucky 31bps at the 2-year part of the curve, to 3.13%. Bond yield spreads off the German bunds — not just with Ireland but Portugal and Spain as well — have widened back to the stratospheric levels they attained during the peak of the Club Med debt crisis in early spring (330bps for 10-year Irish bonds, almost 900bps for Greece).
Look, we can understand the need to be optimistic, but it is essential that we recognize the type of market and economic backdrop were are in. The markets are telling us something valuable when, after a period of unprecedented government bailouts, incursions and stimulus programs, we have a 2-year note auction that sees the yield dragged to new record lows of 0.46%. Instead of lamenting over how attractively priced equities must be in this environment, market strategists and commentators would bring a lot more to the table if they tried to decipher what the macro message is from this price action in the Treasury market.
Conducting stock market valuation analysis based on unrealistic consensus earnings assumptions does nobody any good, especially when these estimates are in the process of being cut. If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $60 or $65 in the coming year as opposed to the current consensus view of almost $90. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 12x was actually buying the market with a 17x multiple — it’s happened before, folks.
HOUSING IN THE DUMPSTER
So let’s get this straight. Mortgage rates have tumbled nearly 100 basis points in the past year to a record low of 4.42% for the 30-year rate, yet existing home sales collapse a record 27% MoM to an all time low (data only back to 1999 for total sales) of 3.83 million units at an annual rate? Are you kidding me?
Not only that, but the government has implemented no fewer than eight programs to put a floor under the housing market. We suppose that someone in Washington could always argue that things would be much worse without all these incursions, but when is enough going to be enough? Let the housing market find its own equilibrium. Stop wasting taxpayers’ money on trying to influence what structure people would like to live in — there’s nothing wrong with renting and saving up for the down-payment (a word that has found its way back into the housing lexicon in the U.S.). Focus on the real crisis: job creation, or the lack thereof. It is absolutely a secular bear market when the government can expend so many resources to one sector and generate so little in the way of results.
Home listings actually rose 2.5% MoM in July so with sales sagging at a record rate, the inventory backlog surged to 12.5 months’ supply from 8.9 months in June and 8.3 months in May (and 7.8 months at the turn of the year). That is a record but there is only a limited history since the data include condos where the inventory backlog has soared to an all-time high of 16.5 months’ supply from 10.7 in June. For single-family housing, housing inventory skyrocketed to a 27-year high of 11.9 months’ supply, breaking above the prior 2008 peak of 11 months. Unless the laws of supply and demand have been repealed as they pertain to the residential real estate market, one would have to be of the view that more house price deflation is coming our way.
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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