From the desk of David Rosenberg this morning:
1. This remains a hope-based rally (with strong technicals). I say that because during this six-month 50%+ rally in the S&P 500, the U.S. economy has shed 2.4 million jobs, which is almost as many as we lost during the entire 2001-02 tech wreck — in just six months. The market’s ability to shrug off the loss of 2.4 million jobs is either a sign that it is treating this as old news or sees the cost-cutting as good news for profits. Either way, what we are seeing transpire is without precedent — the magnitude of the employment slide versus the magnitude of the market advance. Truly fascinating stuff.
It’s remarkable to add that jobless claims were 550K this morning – a staggering number this deep into a recession. But fear not – it was “better than expected”.
2. Companies have not really been beating their earnings estimates — only the very final estimates heading into the reporting quarter. For example, the consensus view for 3Q EPS at the start of the year was $21.00, last we saw the estimates were down to just over $14.00. But there is a deeply rooted belief that earnings are coming in better than expected. This is a psychology that is difficult to break. It is completely unknown (for some reason) that corporate revenues are running at a -25% YoY rate, which compares to the -10% we saw at the worst part of the 2001-02 bear market and the -3% trend at the most negative point in 1991.
It’s also interesting to note the very real weakness in corporate revenues. The bottom line can be manipulated, but revenues never lie….
3. Valuation is a poor timing device but even on “normalized” trailing 10-year earnings, the S&P 500 is trading near 18x, which is now above the historical average of 16x.
Market value matters less to me at this juncture. If we were to get a much stronger than expected recovery you could easily argue that the market is cheap. PE ratios are a moving target based on guesses. That is what makes them poor market timing indicators.
4. All the growth we are seeing globally this year is due to fiscal stimulus; not just here in Canada and the U.S., but also in Korea, China, the U.K., and Continental Europe too. For 2010, the government’s share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring. For a Keynesian, government stimulus is necessary, but the question for an investor is the multiple one attaches to a global economy that is still relying on a defibrillator. The problem is that governments do not create income or wealth, and today’s stimulus is really a future tax liability. Curiously, that future tax liability is likely going to pose a roadblock for the return to a “normalized” $80 operating EPS estimate that strategists are now starting to pen in for 2011.
This will become a major concern in mid-2010 when the stimulus is done. Whether the U.S. consumer can carry the torch has yet to be seen.
5. While Mr. Market may be pricing in a fine future for the U.S., but when the 3-month Treasury-bill yield is 13bps north of zero, which is completely abnormal, you know that there are still substantial fundamental imbalances that need to be worked through.
I should also add that the credit markets have recovered substantially from their extremely low levels. Nonetheless, the bond market does continue to forecast a very weak recovery. Perhaps weaker than the one the equity market has priced in….
Source: Gluskin Sheff