Posts Tagged ‘Wsj’

Stephen Roach: “QE3 Is Not Going To Work”

Wednesday, July 25th, 2012

Is it any wonder that Stephen Roach is now ex-Morgan Stanley? Today’s brilliant truthiness in his interview on Bloomberg TV is an absolute must-watch as the veteran market practitioner notes that the Fed is forced to act next week and while consumers are telling you that they want to pay down debt – which all the monetray stimulus in the world is not going to change – that QE is nothing but crack to a ridiculously addicted market. With 70% of the US economy in a balance sheet recession, the Fed knows this (which he notes is now run by WSJ’s Jon Hilsenrath since what he prints must be adhered to by Ben for fear of market disappointment) and is “dangling QE in front of the markets like raw meat – but it has not worked and it will not work!” But critically, he believes, the euphoric response of markets will be tempered since they have become “used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be.”

Roach on whether more Fed stimulus is a good idea:

“The Fed is flailing and has been flailing for the better part of the last three years. We had QE1, which worked, and that’s it. We’ve had QE2, Twist 1, Twist 2 and now maybe QE3. The economy is in the doldrums. The biggest piece of the economy is the American consumer. 70% is in a balance sheet recession…The Fed knows this, but they are dangling this raw meat in front of the markets and the markets are salivating as they always do in that frenetic way that they try to believe in the Fed. But it has not worked and it will not work. “

On how likely it is that the Fed will issue more stimulus:

“Absolutely. They have no choice. They have gone about their usual pre-FOMC leak frenzy where they talk to this reporter and that reporter. Jon Hilsenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.”

On whether the Fed will move on stimulus next week:

“Absolutely. They will not disappoint the markets. The markets are now setting themselves up and discounting the next QE2. The Fed has just woken up to ‘oh my gosh, the economy is weak again.’ Well hello! The economy has been weak for the consumer for 18 quarters. The growth rate of consumption over the last four and a half years has averaged below 1%. 70% of the economy growing below 1% and the Fed is just figuring this out? Come on.”

“The point is, when they plant a story in the Wall Street Journal, and this story has been planted. Jon Hilsenrath is the weed that grows…the guy has a perfect track record…They’ll do some type of QE3. Twist 2 was a huge disappointment. It was a feeble flailing at the windmill and the economy is a lot weaker than when they reached the Twist 2 decision. They’ll have to do another round of quantitative easing. I don’t know exactly what securities will be involved. You could speculate it could be mortgage-backeds to try to help the housing market. There is some criticism they have been too focused on Treasuries. We’ll have to wait and see, but I think it will definitely be another round of quantitative easing as opposed to the twisting again like we did last summer.”

On whether QE3 will work:

“No, it’s crack! That’s what it is. It’s not going to work. QE1 worked because it was in the midst of wrenching crisis. QE2 failed, despite what the Fed’s research shows. Twist 1 has failed. Twist 2 is failing. When 70% of the economy is in a balance sheet recession and the growth rate for 18 quarters in row has been at less than 1% at an average annual rate, consumers are telling you something. They want to pay down debt and rebuild saving and all of the monetary stimulus in the world is not going to change what is a perfectly rational response. So the idea that the Fed is going to step in and save the day, it has not worked in the past except during the depths of the crisis and i give them credit for that. And it will not work in the future. Don’t believe the Fed PR that they put out while we have research that shows that it worked. Of course they do.”

On whether he expects futures to be higher than they are right now:

“The markets have responded positively to the leaks that came out late yesterday afternoon, but the response is small. I think the markets have gotten used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be. In terms of delivering an actionable vigorous response in the real economy.”

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David Rosenberg On A Modern Day Depression Vs Dow 20,000

Wednesday, July 25th, 2012

 
From David Rosenberg of Gluskin Sheff

The challenge ahead is one of expectations. I think we win be fortunate to see any GDP growth at all for Q3, and yet the consensus is at +2.2%. The consensus is at +97k on July non-farm payrolls whereas the claims data point to sub-80k. Among the analysts, hope springs eternal that expected revenue growth of +2.6% in Q4 will be enough to generate a +12.1% expansion in bottom-line performance.

To meet that profit forecast, even more cost-cutting will have to come our way (no sooner do we say that than we see this article on page 61 of the WSJ: Steelmaker Presses for 26% Pay Cut). This may be encouraging for profits, but will also come at the expense of labour income, and with that, a sluggish consumer. Concerns over the fiscal cliff have already led to a renewed uptrend in the personal savings rate. The worst drought in the U.S. in a half-century are sending food costs sharply higher, which will severely pinch discretionary outlays, and whatever respite there had been of late from relief at the gas pumps has come to an end (have a look at Price Check: Drought May Hit Grocery Tabs, also on page 61 of the weekend WSJ). Survey after survey shows a sharp turndown in hiring plans as well.

This is looking more and more like a modem-day depression. After all, last month alone, 85,000 Americans signed on for Social Security disability cheques, which exceeded the 80,000 net new jobs that were created: and a record 46 million Americans or 14.8% of the population (also a record) are in the Food Stamp program (participation averaged 7.9% from 1970 to 2000, by way of contrast) — enrollment has risen an average of over 400,000 per month over the past four years. A record share of 41% pay zero national incomes tax as well (58 million), a share that has doubled over the past two decades. Increasingly, the U.S. is following in the footsteps of Europe of becoming a nation of dependants.

Meanwhile, policy stimulus, whether traditional or non-conventional, are still falling well short of generating self-sustaining economic growth. Some investors see this deflationary trendline because it is they that have helped drive the S&P Dividend Aristocrats index (contains large-caps that have consistently raised their payouts over the past 25 years) up 10.5% in the past month and actually touched a new all-time high last week. The likes of Kraft, Wal-Mart, Verizon, Johnson & Johnson, Pfizer and Merck all managed to reach 52-week highs as well. So even in this tough macro and market environment, there are ways to put money to work — in areas of the market that generate a reliable dividend stream for investors and produce a product that people need, not what they want.

Investors must not only screen for earnings visibility, non-cyclicality, dividend payout potential, strong management and high quality balance sheets with a manageable debt maturity calendar, but also for fully-funded pension plans. The S&P 500 space, right now, contains 338 defined-benefit plans, with aggregate obligations of $1.68 trillion but assets of just $1.32 billion, for an unprecedented underfunded liability of $355 billion. So you know the record cash-stash on corporate balance sheets that are often cited as a prime reason to be bullish on Corporate America the real issue is the extent to which shoring up depleted pension funds will compete with stock buybacks and dividend growth in the future. One thing is for sure — a reversion back to the old defined-contribution pensions is clearly coming back into focus as company after company seek out ways to reduce their contribution rates.

DOW 20,000?

Well, this is perfect.

It is amazing how many pundits still believe in stocks for the long run. See The Long-Term Argument for Dow 20,000 on page 6 of the Sunday NYT Money & Business section. Shades of Jeremy Siegel.

So what are we left to conclude?

Last week, we saw the VIX index touch 15. The Investors’ Intelligence survey showed there to still be two bulls for every bear in the realm of market newsletters. The put-call ratio had fallen through 1:1 after a 20% decline since early June. The bottom-up consensus of equity analysts see global profit growth of 13.5% for 2013, which is more than a double from the 6.3% projection for this year. The S&P 500 is currently trading much closer to the top end of its year-long 1.100-1,400 band than the low end. And now we see headlines of Dow 20,000 (whatever happened to the other 15,000 points Dr. Siegel promised 13 years ago)? Where exactly is there any sign of capitulation beyond, say, the mutual fund flows data which are illustrating even to the most casual observer that what we are witnessing on this front is little more than a demographic-driven rebalancing of the baby boomer asset mix as the investment lifecycle continues along a secular shift towards capital and cash-flow preservation themes.

The bottom line is that from the spring of 2009 to the spring of 2011, the stock mark doubled, and it doubled principally because of a wild short-covering rally in the financials which were priced for insolvency at the lows. It was a classic 1933-1936 bounce that never saw a new high and never foreshadowed better times ahead. The Great Depression ended nearly a decade later and the next secular bull market did not begin until 1954. And from what history teaches us, secular bear phases do not typically end with headlines about Dow 20,000 but rather with contrarian news like The Death of Equities on the front cover of BusinessWeek back in 1979 (or Awash in Oil on the front cover of the Economist back in 1999, when crude prices were turning in their secular lows).

 

* * *

Of course, for the laugh track, here again is James Altucher from June of 2011, predicting Dow 20,000 as recently as a month ago.


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U.S. Rental Market Continues to Boom

Friday, July 6th, 2012

 

We’ve mentioned the past few years how one ‘high growth’ area in the economy is the renters market. [May 24, 2011: Troubled Home Market Creates Generation of Renters] [Apr 8, 2011:  Apartment Vacancies Drop to 3 Year Low, as Rents Rise]  With many former home “owners” (I use the term sparingly since many of the 2004-2007 ilk had 100-120%+ type loan to value!) locked out of the market, and many young people with not enough money in their pocket to create a down payment, renting has come back with much vigor.  Also keep in mind this recession caused a massive drag to household formation.  [Apr 8, 2008: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces]  [Apr 9, 2010: 1.2 Million Households Lost in Great Recession - Through 2008]  One net positive in the next 4-8 quarters should be a “building boom” of sorts in apartments ….

This WSJ story takes a look at some recent data:

  • Landlords boosted apartment rents to record levels in the second quarter as demand from tenants sitting out the home-buying market pushed vacancy rates to their lowest point in more than a decade, according to a report to be released Thursday.
  • Despite the sluggish economy, average rents increased in all 82 markets tracked by Reis Inc. a real estate data firm. Average rents are now at record levels in 74 of those markets and now top $1,000 a month on average in 27 of them, including Miami, Seattle, San Diego, Chicago and Baltimore.  ”The market is in a very tight position,” Reis said in a research report. “There is a paucity of available units.”
  • The nation’s vacancy rate fell during the quarter to 4.7%, its lowest level since the end of 2001, Reis said. That’s down from 4.9% in the first quarter of this year and from 8% in 2009, when millions of would-be renters were doubling up or living with family.  [Sep 16, 2011: 7.5M More Americans Living in "Double Up" Situations versus 2007]
  • With the economy slowly recovering, more people are looking for their own places. But many are opting to rent rather than buy due to tighter lending standards—including higher down payments—and because of concerns about job security.
  • Reis said that this is only the third quarter in over three decades that the vacancy rate has been below 5%.
  • Values of apartment buildings are soaring, contrasting sharply with the single-family housing market. In some cities, investors are now surpassing peak prices for rental property buildings. Analysts point out that the apartment sector may lose steam if the economy weakens further and tenants begin doubling up again or put up more resistance to rent hikes.
  • Demand for rental apartments also may fall if some builders succeed with appeals to move renters into the market for single family homes. Another risk: construction. Developers are racing to deliver new apartment supply, particularly in hot markets including Washington, D.C, and Seattle. Zelman & Associates expects 235,000 units to be started this year, followed by 285,000 in 2013and 320,000 in 2014.

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Bernanke Doesn’t Want Another Term?

Friday, June 8th, 2012

 

One of the popular theories on the internets (sic) is that Bernanke wants to goose the market to help get Obama re-elected since he wants to keep his job.  That due to the comments continuously heard during the GOP primaries about how every candidate wanted to replace Bernanke.  There is a piece in the WSJ overnight by Fed mole Jon Hilsenrath and while it is more dovish (by a degree) than his comments just 24 hours ago on CNBC (maybes someone at the Fed yelled at him), which has a very interesting blurb on this topic:

Mindful of his own legacy and the Fed’s independence, Chairman Ben Bernanke seems unlikely to allow the political calendar to sway his decisions. He appears especially immune from politics now, with just 18 months left in his term as chairman and little indication that he wants another.

Now if the U.S. is at a weak moment economically at the end of Bernanke’s term, and Obama is re-elected maybe Bernanke will be asked to carry on, but unlike a Treasury Secretary which might stay on an extra year while an economy is in a weak spot, once Ben commits he commits for many years.  So I found this paragraph very interesting in light of the commentary about Bernanke wanting to retain his job.  It would seen doubtful a President Romeny would come in and remove someone who at that time would only have 12 months left in his Fed chairman role.  Especially if that someone did not want a new term.

That said, if Romney wins it seems to kill the chances for the heir apparent Janet Yellen if indeed Ben wants out.  Yellen makes Bernanke look like a hawk.  Anyhow, thought I’d pass it along as it was news to me.

p.s. The last angle of course is someone who has no aspirations past 18 months certainly carries a lot more freedom in his/her actions than someone who does!

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IMF’s Lagarde: World Economy Highly Unstable

Friday, June 1st, 2012

The IMF is raising its forecasts for global growth from levels it expected in January, but there is still a “high degree of instability” in the world economy, Managing Director Christine Lagarde says in an interview with the WSJ’s David Wessel.

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Thackray Market Letter: Know Your Buys and Sells a Month in Advance

Tuesday, May 22nd, 2012

 

by Brooke Thackray, Research Analyst along with Don Vialoux and Jon Vialoux for the Horizons Seasonal Rotation ETF that trades under the symbol HAC on the Toronto Stock Exchange.

Surprise….European countries are slowing down as more countries enter into a recession: eleven countries are now offi cially in a recession (WSJ May 1, 2012). Actually, it is not a surprise at all. Europe was already slowing down before austerity measures were put in place and now with government cutbacks economic contraction is taking place. Even the EU has even been surprised at the depth of the slowdowns underway (they tend to have a very positive outlook). The situation in Europe is looking bleak.

To complicate the situation further, Europeans are voting against the fiscal rescue packages and the resulting austerity measures. France has elected a socialist President who is promising to examine how the Euro-zone is dealing with the debt crisis. Greece has changed the political landscape with its election that has created big gains for the Coalition of the Radical Left at the expense of the mainstream New Democracy and Pasok parties, which had both agreed to major spending cuts in order to stabilize the country’s finances.

Holding the European countries together in the current state of mandated austerity measures for money is simply not going to work over the long-term. The “contract” between the countries that are giving the funds and the countries that are receiving the funds will not be able to stand the test of time. Solving the debt crisis will take a long time, one way or another. Either the “giving countries” will stop giving money, or the receiving countries will no longer put up with imposed austerity measures necessary to receive the funds.

The current politicians of the receiving and giving countries have shown a strong resolve to take action as they did not want to be seen standing on the sidelines and watching the EU crumble. The politicians have taken the stance that it is better to be doing something, rather than nothing. The citizens of both the giving and receiving countries do not share the same political resolve of their leaders.

The social fabric of the receiving countries is disintegrating: job losses, government cutbacks, pay cuts, pension reductions are contracting economies faster than even the EU had expected. Unemployment is skyrocketing in European nations, particularly with the youth. The most notable country with high youth unemployment is Spain with an eye-popping rate sitting just under 50%. The situation looks dire and populations across Europe are looking for someone to blame. They are just starting to turn on their political leaders. Rising opposition to austerity measures will bring forward more and more politicians that are willing to run on a platform that removes their countries out of the austerity contract.

Historically, social changes are often brought about during periods when the masses have too much idle time. The Romans knew of this danger. As a result, they developed the gladiator “sport” of sacrificing people for the purpose of entertaining their unemployed so they would not rebel against their emperor.

Read the complete letter in the slidedeck below – Fullscreen for the better read:

Thackray Market Letter 2012 May

Brooke Thackray is a Research Analyst along with Don Vialoux and Jon Vialoux for the Horizons Seasonal Rotation ETF that trades under the symbol HAC on the Toronto Stock Exchange.

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Last Month a Disaster for Commodities

Tuesday, May 15th, 2012

I went to circle back today to look at what has been among the weakest areas of the market, and chart after chart came up in the commodity space.   Here is a chart of the performance of the futures in various markets (mostly commodities) over the past month (via Finviz) and it’s a mess.  Ironically, natural gas – the most hated commodity of most of the first quarter, was the standout.  Reversion to mean trade.   Coal is not listed, but that group looks as bad as solar stocks… ironic since the latter was supposed to supplant the former at some point.

 

There is an in depth story on the sector in the WSJ today as well.

  • Commodities fell to nearly two-year lows last week, measured by a widely used benchmark, prompting investors to ponder whether the massive rally that began in 1999 may be faltering.
  • China is cooling down at the same time the U.S. is struggling to heat up, clouding the outlook for the world’s two biggest consumers. And producers of some raw materials have ramped up supplies enough to create at least temporary gluts, particularly if appetites falter.
  • For more than a decade, investing in commodities was practically a sure thing. Prices rose in nine of the 12 years starting in 1999. Even down years had explanations, such as the Sept. 11 attacks in 2001 and the global financial crisis in 2008.
  • On Friday, the Dow Jones-UBS Commodity Index, which tracks futures contracts for 20 basic goods, fell 1% to the lowest level since September 2010. U.S. crude oil, gold and cotton—all components of the index—helped lead the way down, as each hit fresh lows for 2012. The index is down 4% this year after a 13% drop last year, putting it on track for the first consecutive declines since 1997 and 1998.

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WSJ’s Hilsenrath: Fed Will Stay Pat

Tuesday, April 24th, 2012

Before we get to Fed talk in the early action we’ve obviously seen the S&P 500 break through 1370 (with vigor), and last week’s lows of 1365s. The previous week’s surge down to 1357 is the next key level. Now of course with sharp selloffs there can be large reflexive bounces along the way – we saw that last Tuesday when the market skyrocketed on the back of Apple, but all that led to was more choppy action the rest of the week and then today’s smack to the face. So unless one’s timetable is measured in hours it’s a market complexion one does not want to be dealing with much.

Off to Fed speak… as long time readers know the Fed has its special little birdies in the media that it likes to speak to us through, and Jon Hilsenrath is among the most prominent. Not surprisingly Jon says the Fed will stay pat at this meeting – I believe the key one shall be mid June as Operation Twist finishes up, and they need a replacement program. Any good correction in the market will also help as the Fed now believes their transmission policy for Fed can largely come through the transitory “wealth effect” of the stock market – even if that benefit accrues to a relatively small portion of society. [Nov 10, 2010: Who Will Any Form of Intermediate Term Wealth Effect Really Help? Not the Masses] On that end, we’re probably half way to the point Ben will feel he must step in to make sure the “free” market goes up. ;)

  • If the Fed expects economic growth to slow, inflation to fall, or unemployment to stall at high levels or rise, it will be inclined to do more to support growth with new programs to reduce interest rates. If it sees the opposite, the conversation turns toward reining in credit. The changing forecast will be one of the most important topics of discussion at the central bank’s policy meeting Tuesday and Wednesday, when officials will update their quarterly economic projections.
  • It’s possible to handicap the Fed’s changing forecast in part because officials are becoming open about it. And the outlook doesn’t look like it’s shifting in a way that would support new initiatives to boost economic growth. The new forecasts could project a little more inflation in 2012 than the Fed forecast in January, thanks in part to a recent rise in gasoline prices. It could also project a little less unemployment for 2012, thanks to recent declines in the jobless rate.
  • But with many officials still doubtful about the durability of the recovery and expecting inflation to recede, the broader view at the Fed seems likely to favor sticking to their plan to keep rates low until late 2014.
  • Taken altogether, the economy doesn’t seem to be breaking in a way right now that would cause the Fed to shift the stance it laid out in January. Investors expecting a signal of an early rise in rates are likely to be disappointed. And those expecting a new bond buying program are likely to be disappointed too. The Fed is on hold until its forecast shifts more clearly.

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News Digest: April 24, 2012

Tuesday, April 24th, 2012

 

* China’s Biggest Banks Are Squeezed for Capital (NYT)
* Greeks detect hypocrisy as Dutch coalition stumbles (Reuters)
* Hollande Blames Europe’s Austerity Plan for Le Pen’s Rise (Bloomberg)
* In a Change, Mexico Reins In Its Oil Monopoly (NYT)
* China Tire Demand Slows as Economy Decelerates, Bridgestone Says (Bloomberg)
* Social Security’s financial forecast gets darker; Medicare’s outlook unchanged (WaPo)
* Fed’s 17 Rate Forecasts May Confuse More Than Clarify (Bloomberg)
* Senate to vote on array of Postal Service overhaul proposals (WaPo)
* Weidmann Says Bundesbank Is Preserving Euro Stability (Bloomberg)
* Hungary Pledges Cuts Aimed at EU Demands (WSJ)
* Immigration from Mexico to US at standstill (FT)
* Orbán stands firm in central bank dispute (FT)

Overnight Media Digest via Reuters

WSJ

* In what is likely to be the last snapshot of its financial condition before an expected May IPO, Facebook disclosed that its first-quarter profit and revenue declined from the final quarter of 2011.

* Government trustees are projecting Social Security will exhaust its trust fund three years sooner than previously thought.

* New York law firm Dewey & LeBoeuf is more deeply in debt than previously thought. It owes about $75 million to a syndicate of bank lenders.

* Unilever is negotiating to build a $100 million palm-oil processing plant in Indonesia, an attempt to accelerate its commitment to sourcing the oil in ways that don’t destroy the environment.

* Planetary Resources will outline a plan to send an unmanned spacecraft to an asteroid and mine it for valuable metals and water that could be used in further space exploration or returned to earth.

* The union representing American Airlines’ mechanics agreed to send the airline’s latest contract proposal to members for a vote.

* A U.S. trade panel Monday voted against imposing retaliatory duties on galvanized steel wire from China and Mexico, determining that U.S. producers aren’t being hurt by the rise in imports.

* Spain’s economy contracted 0.4 percent in the first quarter from the fourth, the country’s central bank said Monday, the latest evidence that Spain’s efforts to rein in government spending could be feeding a downward economic spiral.

FT

MEXICO BRIBERY CLAIMS HIT WALMART SHARES

Walmart shares tumbled nearly 5 percent and shares in its Mexican business dropped even further as allegations of bribery and a cover-up shook the U.S. retailer.

FACEBOOK GROWTH SLOWS AHEAD OF IPO

Facebook’s revenue and profit growth are slowing, marking a turning point for the high-growth social networking company just weeks before its initial public offering.

CABLE AND WIRELESS NAME TO DISAPPEAR IN UK

The Cable & Wireless name is set to disappear from the UK telecoms market after almost 80 years following Vodafone’s agreement of a 1 billion pound ($1.61 billion) cash acquisition of the group.

INVESTORS LAUNCH DEUTSCHE BANK PROTEST

Deutsche Bank’s non-executive board is facing a protest from an influential activist investor over its pay policies and turbulent succession planning in another sign of how global investors are challenging bank directors.

COBHAM HIRES AMERICAN CHIEF

Cobham, the UK defence and aerospace group, has completed its five-month-long search for a chief executive by hiring Robert Murphy from the U.S. subsidiary of BAE Systems .

EX-CALPERS CHIEF ACCUSED OF FRAUD

The former head of the California Public Employees’ Retirement System, the largest U.S. pension fund, has been slapped with civil charges accusing him of defrauding Apollo Global, the private equity group.

VENTURE CAPITAL FIRM DEFENDS INSTAGRAM HOLDING

Andreessen Horowitz has been forced to defend its early stake in Instagram, the photo-sharing app acquired by Facebook this month for about $1 billion, despite the venture capital firm receiving a more than 300-fold return in two years.

VOLVO TO EXPAND OFFERING IN CHINA

Volvo Cars will launch 10 models in China over the next five years as it seeks to make up for lost time in the world’s largest car market, its chief executive said.

NYT

* A commission of energy specialists formed by Mexico’s Congress has begun to question where and how Pemex, Mexico’s state-owned oil monopoly, drills for oil.

* Wal-Mart’s stock slipped as investors reacted to a bribery scandal at the retailer’s Mexican subsidiary and a report that an internal investigation was quashed at corporate headquarters.

* MetLife on Monday became the third big life insurer to settle regulatory accusations of failing to keep track of policyholder deaths, trapping money that should have gone promptly to the beneficiaries.

* A euro zone strategy to cut deficits has come under increasing strain from slowing economies, gyrating financial markets and electoral setbacks.

* Mainland Chinese banks are turning to markets to raise funds, even as they report strong profits and say their balance sheets are solid.

Canada

THE GLOBE AND MAIL

* Less than a year after he asked Canadian voters to make him prime minister, ex-Liberal leader and academic Michael Ignatieff warned that the country is drifting towards a breakup.

r.reuters.com/jav77s

* One of Canada’s leading polling firms says it has found strong evidence of a targeted program of voter suppression aimed at non-Conservative voters during last May’s federal-election campaign.

r.reuters.com/nav77s

Reports in the business section:

* Swapping out engines is costly, but natural gas has grown so much cheaper than diesel that, according to a new analysis conducted by the Conference Board of Canada, a long-distance trucker could save nearly $160,000 over a decade by making the change.

r.reuters.com/tav77s

* Shoppers Drug Mart Corp has been hit with yet another round of Ontario cuts in generic prescription drug prices while still grappling with earlier profit-pinching drug reforms.

r.reuters.com/cev77s

NATIONAL POST

* Defying the odds of pollsters and naysayers, Alberta’s long-ruling Progressive Conservatives won their 12th straight majority government Monday night.

r.reuters.com/dev77s

Reports in the business section:

* Ontario’s minority Liberal government is set to survive a budget vote after Premier Dalton McGuinty said he will introduce a 2 percent tax on people with incomes greater than $500,000, meeting a key demand from the New Democrat Party.

r.reuters.com/kev77s

* Three weeks after Baja Mining Corp narrowly won a proxy fight with its largest shareholder, the company revealed on Monday that three directors have resigned and that it is facing a big funding shortfall at its flagship copper project.

r.reuters.com/hev77s

European economic highlights:

* Finland PPI for March 0.40% m/m 1.4% y/y – lower than expected. Consensus 0.80% m/m 1.80% y/y. Previous 1.20% m/m 2.20% y/y.
* Finland Unemployment Rate for March 8.50% * higher than expected. Consensus 8.20%. Previous 7.70%.
* Switzerland Trade Balance for March 1.69B – lower than expected. Consensus 3.00B. Previous 2.68B. Revised 2.61B.
* Switzerland Exports real s.a. for March -2.50% m/m – lower than expected. Consensus 1.00%. Previous 9.20%. Revised 12.00%.
* Switzerland Imports real s.a. for March 4.60% m/m. Previous -12.30% m/m. Revised -12.20% m/m.
* Switzerland UBS Consumption Indicator for March 1.22. Previous 0.87. Revised 0.9.
* Sweden Unemployment Rate for March 7.70% * lower than expected. Consensus 8.00%. Previous 7.80%.
* France Consumer Confidence Indicator for April 88 – higher than expected. Consensus 87. Previous 87.
* France Business Survey Overall Demand for April 3 – higher than expected. Previous -12. Revised -8.
* Spain Mortgages-capital loaned for February -49.60% y/y. Previous -34.00% y/y.
* Spain Mortgages on Houses for February -47.10% y/y. Previous -41.30% y/y.
* Italy Hourly Wages for March 1.20% y/y. Previous 1.40% y/y.
* UK Public Finances (PSNCR) for March 16.5B – higher than expected. Consensus 13.0B. Previous -7.8B. Revised -8.2B.
* UK PSNB ex Interventions for March 18.2B – higher than expected. Consensus 16.0B. Previous 15.2B. Revised 12.2B.
* UK Public Sector Net Borrowing for March 15.9B – higher than expected. Consensus 14.2B. Previous 12.9B. Revised 9.9B

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David Rosenberg: Six Roadblocks For Stocks

Tuesday, April 10th, 2012

There is no free-lunch – especially if that lunch is liquidity-fueled – is how Gluskin-Sheff’s David Rosenberg reminds us of the reality facing US markets this year and next. As (former Fed governor) Kevin Warsh noted in the WSJ “The ‘fiscal cliff’ in early 2013 – when government stimulus spending and tax relief are set to fall – is not misfortune. It is the inevitable result of policies that kick the can down the road.” Between the jobs data and three months in a row of declining ISM orders/inventories it seems the key manufacturing sector of support for the economy may be quaking and add to that the deleveraging that is now recurring (consumer credit) and Rosenberg sees six rather sizable stumbling-blocks facing markets as we move forward.

 

CHALLENGES FOR THE MARKET

First, there is liquidity — this major catalyst for equities since last October looks set to subside with the Fed seemingly backing off from a QE expansion, at least over the near-term. And the ECB is back talking about inflation so it doesn’t even look like a rate cut is coming despite escalating recession pressures in Europe. It is now also highly doubtful that China will re-open the monetary taps following the disappointing March inflation data. The liquid lunch looks less likely.

Second, there is the U.S. economy — not just the disappointing jobs data on Friday but the reality that 70% of the releases in the past month have come in below expectations. While the chain stores did report what seemed on the surface to be a solid +3.9% YoY sales gain in March, keep in mind that yet again we had very mild weather and we also had an early Easter effect.

Third, there is the rapid slowing in corporate earnings (Alcoa kicks off the reporting season tomorrow). In Q4, we had the YoY trend in S&P 500 operating earnings slip into single-digits (+9.2%) for the first time in two years, and absent Apple, the pace would have been 6.2% (see the front page of the Investor’s Business Daily). Only 62% of companies beat their estimates, which is far below average. As for Q1, the consensus is all the way down to +3.2% on a YoY basis — well off the +5.5% expectation at the turn of the year and the +12.8% forecast in the mid-part of 2011. Strip Apple out of the numbers, and you are talking about earnings growth of practically nothing— +1.8%.

Not only has earnings growth basically evaporated, but the ratio of negative to positive guidance has risen to levels we last saw two years ago, margins are poised to shrink to a two-year low as well, and only three S&P 500 sectors are actually seen raising their earnings from year-ago levels. Now the question is whether or not the market can move up with earnings contracting and the answer is — of course! We have seen that in the past, as rare as it may be. Just go back to 1998, when the Asian meltdown and strong U.S. dollar severely pinched U.S. corporate earnings, yet the S&P 500 rallied more than 20% that year. But what else happened? Well, we had the Fed cut rates three times as a super-strong antidote, and did so at a time when there was no evident slack in the labor market. Plus, we were in the early stages of an internet-led productivity spree, which underpinned profit margins. In addition, we had a Democratic president working with Congress to pass legislation that reduced red tape, labour rigidities and taxation — with no budget deficit! Please, tell me if we currently have these as antidotes for a weakening trend in corporate profits.

Fourth, there is Europe making the headlines again, and not in a positive way. Spain is back on the radar screen with a very bad bond auction last week serving up as a referendum on the government’s fiscal plan — sending the 10- year yield back up close to 6%.

We have the two rounds of French elections looming (April 22nd and May 6th) and the new government is going to have precious little time or margin of error with regard to delivering a fiscal package that will pass the ‘sniff test’ for Mr. Market. It is very clear that, in Italy, Mario Monti’s honeymoon period is over as he vacillates over parts of his economic reform package. Financial stress is highlighted by the poor performance of the euro area banks (the group that got the cyclical bounce going last November) as the group sagged 4.3% last week and is now trading near three-month lows.

On the macro front, Germany had been an economic lynchpin but no longer with industrial production sliding 1.3% in February and a downward revision to January. U.K. factory output also fell 1% — a big shock to a consensus looking for a 0.1% gain. Not just Europe, but the global economy in general is cooling off. The HSBC diffusion survey of China’s service sector slipped to 53.3 in March from 53.9 in February. Russia’s economy ministry just shaved its 2012 growth forecast to 3.4% from 3.7%.

Fifth, there is the poor technical picture. The large number of distribution days of late. The number of stocks making fresh 52-week highs is on the decline. At last week’s highs in the major averages, divergences were popping up everywhere. One particular glaring anomaly was the surge in global equities in Q1 and the sharp rise in government bond yields at a time when the CRB index faltered — if the first two asset classes were actually prescient in the view of global reflation, wouldn’t it have shown up in basic material prices given their inherent cyclical sensitivities?

Sixth, valuation support is less of a positive than it was six months ago. The cyclically-adjusted P/E at 22x for the S&P 500 is nearly 40% higher than the long-run average of 16x. The forward P/E ratio at over 13x now is about in line with the historical norm. Some nifty analysis cited on page B6 of the weekend WSJ (Why Stocks Look Too Pricey) found that when real rates are negative, as they are today, they tend to represent periods of economic turmoil and as such, the typical P/E multiple during these times is 11x — versus today’s trailing multiple of 14x. On this basis, the market as a whole (keeping in mind that we don’t buy the market, just the slices of it that we strongly believe are undervalued) is overpriced by more than 20%.

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