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Breakfast With Dave
Looking Ahead: 2010 and Beyond
By Dave Rosenberg, Gluskin Sheff | 5 November 2009
While You Were Sleeping
• Global semi-conductor sales surged 8.2% MoM in September
• Gold glitters
• Equities rallying, commodities firming, U.S. dollar weakening
• Auto sales rev up … but still at anemic levels
• In the U.S., commercial real estate a disaster for banks
• A bounce in bankruptcies in October
It's all good. Equities are rallying, led by the emerging market space with a hefty 1.7% advance today. China is now [on a regular tear]— the longest winning streak in two months. U.S. equity futures are bid (maybe also responding some to the recent GOP gubernatorial successes— Virginia and New Jersey).
Bonds are selling off. Credit default swaps improved 20bps. The U.S. dollar is softening again as it struggles near its 50-day moving average and the reason being cited is that the Fed press statement today will acknowledge the recovery but stop short of discussing any 'exit strategy' or removal of "extended period" when it comes to discussing how long the funds rate can be expected to scale the zero line.
With the dollar soft, commodities are firming with oil breaking above $80/bbl and on its way for a third winning session in a row; the metals are following suit. Gold has broken out yet again and is up another 1% so far today as it begins to challenge the $1,100/oz mark (according to unofficial IMF estimates, the Reserve Bank of India bought gold at $1,045/oz. With the size of the purchase— 8% of annual mined production— and at that price it certainly helps establish a floor! The fact that the yellow metal is accomplishing this with ongoing deflationary developments— Euroland PPI came out for September and showed a 0.4% MoM decline and a -7.7% YoY trend— suggests that other factors are driving bullion to new bullish heights. It's called scarcity of supply relative to fiat currency.
Auto Sales Rev Up … But Still At Anemic Levels
Wow! U.S. auto sales surge 12% MoM in October, to the grand total of 10.3 million units at an annual rate, which was in line with the 'whispered' estimate. That is not a sign of strength at all. It is a sign of how horrible September was in the aftermath of the cash-for-clunker campaign. This will undoubtedly kick-start retail sales for the month but let's get a grip. At 10.3 million units, the outstanding stock of vehicles in the driveways and freeways of American is contracting. Secular changes are afoot in terms of how U.S. consumers are approaching credit, homeownership and 'discretionary' spending. Just to provide some perspective, 10.3 million units is the eighth lowest level since October 1982.
That said, we could well see a solid retail sales report for October outside of autos too— today's Wall Street Journal reports that store executives reported improved traffic and sales up 2.0% YoY (though from depressed levels a year ago); MasterCard's spending pulse index is flagging a +3.4% tally for apparel sales, which would be a 14-month high. Retailers are headed into the holiday shopping season with a subdued forecast and thus fairly lean inventories and so if these numbers are accurate, the prospect for markdowns could be limited. In fact, this was the case in the auto sector as average incentives were 12% lower than was the case a year ago.
U.S. auto sales surged 12% in September … it looks as though consumer spending is holding on.
Consumer confidence is in the doldrums, of that there is no doubt, and the job market backdrop, while better than it was earlier this year, is still in rough shape. Yet it does appear that spending is holding in and this could well still be a lagged response to all the government stimulus in the system. What does surprise us is the savings rate— the upward trend seems to have stalled out for the time being.
Commercial Real Estate A Disaster For Banks
7,771 U.S. Companies Filed For Chapter 11 Last Month
We see an article in the Investor's Business Daily citing a startling statistic that over the next 15 months, we are going to see $2 trillion of commercial mortgage debt rolling over. Rest assured that default risk will continue to rise as will the chance that we continue to see more regional bank failures. Estimates we have seen point to anywhere between $200 and $300 billion on bank-wide losses on commercial real estate loans.
Even though the delinquency rate has hit 16%, banks have thus far only written down 4% to 7% of construction loans. Losing 2.5 million office jobs suggests that we are going to see nationwide commercial vacancy rate of 20%; rents have already deflated 17% from the highs (more like 50% in places like Manhattan) and more declines are sure to come. As banks allocate more reserves in light of more writeoffs, the pressure to raise more capital is going to be intense.
Bounce In Bankruptcies
The number of U.S. companies that filed for Chapter 11 last month totalled 7,771— a 7.0% jump from September. Obviously these firms were not canvassed in the most recent ISM survey. Clearly, what we have on our hands is a situation where there are still far too many companies and individuals reeling from the effects of the credit collapse. We can understand the need for economists to wax about a 3.5% real GDP growth rate, but let's sit back, take a deep breath and understand that this is not the only measure of economic health.
Just as the Bank of Canada stressed in its last policy statement (October 20) that "the resumption in growth is supported by monetary and fiscal stimulus" and made no attempt to convince market participants that it was about to embark on a shift in policy, one would have to think that Mr. Bernanke's head is in the same space as Mr. Carney's. We will find out at 2:15 pm today, but to play around too much with the Fed press statement, especially changing the wording of the commitment to sustain its accommodative posture for an "extended period" would be a grave mistake, in our view.
Clearly, what we have on our hands is a situation where there are still far too many companies reeling from the effects of the credit collapse. Whether we are talking about housing, jobs or consumer spending, it still looks as though government assistance is still at the cutting edge between recession and expansion
The ADP Employment Report A Tad Worse Than Expected
ADP fell 203k in October— but September was revised higher, to -227k from -254k, which helps reduce some of the negativity around the headline for October (plus the news today that layoff announcements in the U.S., according to the Challenger report, hit their lowest level in 17 months). Moreover, the consensus was at -198k for the October ADP, so this was a "modest miss".
The ISM employment index had seemed to hint of stability at the very least in factory payrolls, but manufacturing employment actually fell by 65k in this report. The bright spot: it was the 'least negative' number since July 2008. (Come on, bring on those green shoots again!)
ADP has been overstating the weakness in private payrolls in the nonfarm payroll report survey in each of the past five months, so it would be a mistake to extrapolate from the ADP number (the consensus on payrolls this Friday is -175k). This could be because the ADP has a small-company "bias" to it— many large companies do their own payroll and as such do not use the payroll agency— and right now it is small businesses that are having the most trouble accessing credit for working capital (ie, staffing) purposes.
All that said, a -203k print on ADP is pretty horrible as a stand alone figure. The worst it ever got in the 2001 recession, post 9/11 terrorist attacks aside, was -212k.
No Reason For The Homebuilders To Like This Except
…it will accelerate talk of the need for even more pronounced housing tax credits (where the money is going to come from to pay for all this is ostensibly something that must have been going through the minds of India's central bank officials over the past few days). This morning we received the data for the past week on mortgage applications. While the overall index rose 8.2%, it was due to the spike in the volatile refinancing component, which rebounded 14.5%.
What is key for economic activity in a more direct sense is what the index of new home purchases is doing— and it fell 1.8% and is now down four weeks in a row. Not good news. In fact, two months of gains were aborted, again in a sign of how the economy really looks once the medicine is removed by Uncle Sam (or perceptions of such— in this case, the first-time buyer tax credit). In October, mortgage applications for new purchases plunged at a 34% annual rate and are now down to levels last seen in February— when the word "depression" was being bandied about. Whether we are talking about housing, jobs or consumer spending, it still looks as though government assistance is still at the cutting edge between recession and expansion.
Gold Glitters
Gold is in bull mode because of many factors, one being that the U.S. will continue to promote 'short-term' solutions to ensure that the economy embarks on an uptrend.
While the gold purchase by India's central bank is widely viewed as the trigger point for the latest jump in the gold price, there are good reasons why bullion is in bull mode. It comes down to a fiscal policy in the U.S.A. that will stop at nothing to ensure that the economy embarks on an uptrend. Even with a fiscal deficit north of 10% of GDP, the article from yesterday's WSJ that was titled Job-Creation Panel Leery of Spending really resonated. To wit:
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So the strategy remains on "short-term" tactics as opposed to any long-run measures to improve the capital stock, enhance skills and training, bolster education and enhance productivity growth. If Milton Friedman taught us anything from the permanent income hypothesis, it was that changes to income or wealth that are perceived to be permanent have a much more beneficial and enduring effect than measures that are only transitory. But of course the other problem is who will pay for this fiscal largesse, and the answer is nobody— the Fed will simply monetize the debt [[so, in the end, we all wind up paying— largely for the greed, hubris, and other excesses of those "too big to fail!" But, at least those bonuses seem safe…: normxxx]]. More dollars will be printed and that is bullish for gold whose production is in secular decline.
Then we saw this article on the WSJ yesterday too, titled Labor Gets Boost In Skies, on Rails. Anyone involved in the markets, has to read this article and understand the differences between what is happening now and when the secular bull market began under Reagan administration in the early 1980s. To wit:
"Organized labor appears to be gaining the upper hand in the skies and on the rails, as labor and business battle for influence under the Obama administration.
Another reason for our bullish stance on gold is that we are not seeing the onset of a secular bull market in equities like the one we saw in the early 1980s
The National Mediation Board wants to make it easier for thousands of airline and railway workers to unionize under the Railway Labor Act by seeking to junk a 75-year old election rule, according to a proposal published Monday in the Federal register. The move comes after a White House appointment shifted the balance of the government agency's three-person board. Linda Puchala, a former flight attendant union leader, was selected to replace Read Van de Water, a former Northwest Airlines lobbyist, earlier this year."
To reiterate, this is not the onset of a sustainable secular bull market in equities as we had coming off the fundamental lows of prior bear phases, such as August 1982, when:
• Dividend yields were 6%, not sub 2% (currently)
• Price-to-earnings multiples were 8x, not 26x
• The market traded at book value, not OVER two times book
• Inflation and bond yields were in double digits and headed down in the future, not near-zero and only headed higher
• The stock market competed with 18% cash rates, not zero, and as such had a much higher hurdle to clear
• Sentiment was universally bearish [[after more than a decade of bad stock market performance: normxxx]]; hardly the case today
• Global trade flows were in the process of accelerating as barriers were taken down; today, we are seeing trade flows recede as frictions, disputes and tariffs become the order of the day
• Unionization rates were on a secular decline; today labor power is clearly on the rise
• A Reagan-led movement was afoot to reduce the role of government with attendant productivity gains in the future; as opposed to the infiltration by the public sector into the capital markets, union sector, economy and of course, the realm of CEO compensation.
Final Word On Gold
Gold broke out to a new high yesterday of $1,084/oz (and continues to rally today). It did this despite the S&P 500 managing to tick up two points and despite the DXY index actually eking out an 8bps rise to 76.3. This is NOT just a U.S. dollar story— have a look at what bullion is doing in Euro terms. Very impressive. This is a broadly based breakout and that means a durable secular bull market.
Looking at the growth rates in fiat currency that central banks are creating to stimulate their economies and the amount of bullion that would be necessary to back up this massive global monetary infusion suggests that gold can at least double if not triple from here. If you missed the first 4x runup from the $250/oz lows a decade ago, don't worry about it. It's like worrying about how you would have missed the first half of the rally in the S&P 500 from 1982 to 1992 when the index was at 400 and still had 300% to go before finally peaking out and sputtering at the 1500+ highs eight years later. In other words, the cup is still half full— and still can be filled with gold eagle coins.
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Normxxx
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