Rosenberg – getting more worried, not less

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The paragraphs below come from David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates. Yes, he has been bearish too early during the cyclical bull, but that should not preclude one from paying close attention to his very thoughtful comments below.

“For the first time in this year-long bear market rally, the S&P 500 has not endured a daily decline of at least 1% over a one-month time frame. January was no more than a hiccup and has seemed to have emboldened the view that any decline is a blip and a buying opportunity. The mantra is that after breaking technical threshold over technical threshold in what can only be described as a classic 1930-style bounce off a depressed low, we will now see a 61.8% retracement of the October 2007–to–March 2009 plunge, which would put 1,230 as the next key resistance point for the S&P 500. Interestingly enough, that would take the market back to where it was when Lehman collapsed. Of course, back then:

• The dividend yield was 2.4%, not 2.0%
• The unemployment rate was 6.2%, not 9.7%
• Industry operating rates were 73%, not 69%
• Housing starts were 822k annual rate, not 575k
• New home sales were running at a 436k annual rate, not 308k
• The Case-Shiller home price index was 162, not 146
• The level of retails sales was $366 billion, not $356 billion
• Auto sales were running at a 12.5 million annual rate, not 10.3 million
• The level of employment was 136.3 million, not 129.5 million
• Real personal income excluding government transfers was $9.5 trillion, not $9 trillion
• The level of manufacturing shipments was $429 million, not $384 million
• Consumer confidence levels were at 61, not 46
• Credit card delinquency rates were 4.6%, not 5.8%
• Bank-wide residential loan default rates were 5.3%, not 10.1%
• Commercial bank credit was $7.3 trillion, not $6.6 trillion
• The fiscal deficit was $500bln, not $1.5 trillion

“It makes absolutely perfect sense for the market to head back to those 2008 levels if and only if the broad array of macro indicators can manage to head back to the levels prevailing at that time as well. The jury, shall we say, is still out on that one; with deference to the impressive surge the market has managed to turn in and the wall of worries it has either been able to climb or merely dismiss out of hand.

“For just a couple of examples of how extreme things have become, the S&P 500 retail sector has surged to levels not seen since October 2007 even though the overall level of retail sales is still down 5% from that time and down 7% on a per capita basis. The homebuilding group must be operating on a whole different set of principles than anything to do with the economic backdrop because it has also moved up to September 2008 levels despite the fact that both housing starts and sales are down 30% from that time.

“But that is the nature of the markets – to move to either oversold (as in March 2009) or overbought extremes (like today). It is vital that investors who are not momentum players understand that expected returns should be very low coming off a Shiller P/E of over 21x [PduP: see my post “US stock market returns – what is in store?”], a Market Vane sentiment reading of 57, an Investors Intelligence survey showing more than double the number of bulls than there are bears and a portfolio manager cash ratio that is close to historical lows of barely over 3½%.”

Source: David Rosenberg, Gluskin Sheff & Associates – Breakfast with Dave, March 26, 2010.

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