Stocks clearly broken out to the upside

Posted by David Rosenberg - Gluskin Sheff

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Ed Note: the following is a summary of today’s 9 page letter that includes 9 interesting charts. You can register for the full comment HERE. or go directly HERE.


Perhaps the best leading indicator of global equities is China — it peaked in 2007 ahead of the pack and then bottomed in late 2008 a full four months ahead of the U.S. trough.  In addition, the Shanghai index leads the CRB by two months and with an 80%+ historical correlation.  There is no doubt that China’s fiscal stimulus is percolating and that the economy has turned higher, but the equity market there has surged 85% so far this year, so how much is priced in at this point is a concern.  It looks like speculative fervor is back — the volume of credit that has flowed into the economy this year has amounted to one-third of GDP.  Not only that, individual investors opened 484,799 accounts in China last week — the most since January 2008 and five times as many that were opened last January.  This may be one sign of …irrational exuberance.


The DXY is starting to break down, and the moving averages are moving down across the board.  Meanwhile, the commodity complex and the commodity- based currencies are on fire.  The Kiwi is at a nine-month high; the Rand at an 11-month high and the Loonie at a seven-week high.  Meanwhile we saw sugar, wheat, corn, cotton and gold all rally significantly yesterday.  As we said before, the last policy shoe to drop, which may be dropping already, is the dollar.

What we are still witnessing in the equity markets is a trading opportunity rather than a fundamental shift on the outlook.  We must take into account what the risks are going to be once the buying momentum is lost.  Over the near-term, it is obviously prudent to tighten stops and at the same time have a very careful eye on entry levels, but themedium-term and longer-term trends still suggest that we are in cyclical spurt in what remains a secular bear market.

Moreover, it is extremely difficult to get overly excited about a sustained inventory bounce when (i) containerboard and paper box prices are deflating; (ii) the Dow transports index is sputtering in relative strength terms; (iii) UPS package volumes in June were down 4.7% YoY, compared with -3.9% in March and -2.1% in December; (iv) total railway carloadings, as of July 18th, were 18.8% below last year’s levels andthose levels represented an economy that was already eight months in recession.  That said, the Bank of Canada declared the end of the recession yesterday and changed its real GDP growth forecast to a +1.3% annual rate for 2Q from its  -1.0% forecast before.  And that’s with an 87 cent dollar assumption too!  We are left supposing that inventories are going to be the story, perhaps coupled with pent-up housing demand and fiscal stimulus, but weak employment trends are bound to hold down the consumer and an overvalued exchange rate, along with moribund domestic demand south of the border, are not going to do very much for the export sector.

It has become fashionable to treat the jobless claims data as ‘green shoots’ since they are no longer making new peaks.  That much is true.  But at 554,000 (the level for the July 18th week), claims are consistent with nonfarm payroll losses of between 300,000 and 400,000, which are huge whether assessed straight-up or as a share of the population.  Now, there is much being made of the fact that continuing claims are starting to come down — down 88k to 6.225k in the July 11th week and this followed the 591k plunge the week before.  But in reality, what is happening is that people have been on unemployment insurance for so long that their benefits have expired.  Check out the benefit exhaustion rate, which just hit a record 50%.  What people are doing is rolling onto the various extended benefit programs, which surge by over 170k in the latest week.

Oh yes, and the home sales data, which certainly did put some oomph into the homebuilding stocks.  So the bottom has been put in with regard to resales.  Well, one would expect that outcome eventually given how attractive affordability is.  But the upturn is so lackluster that it is really difficult to get excited.  Since bottoming in November 2008, sales are now up 7.7% (and keep in mind that nearly 1-in-3 of these sales are foreclosure activity).  Go back to all the other cycles and check out, by this time, what the ‘normal’ rebound is from the trough.  Try 20%.  This is what you would otherwise call a slow-motion recovery.  The fact that the unsold inventory receded to 9.4 months’ supply in June from 9.8 months’ was indeed good news, but keep in mind that the home price deflation story only ends once this metric dips below 8 months’ supply.