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Interestingly, when highlighting the risks for 2010 they often boil down to house
prices, commercial real estate defaults, mortgage foreclosures, employment,
geopolitical, sovereign credit ... but rarely, if ever, is China mentioned —
specifically as to how policymakers there would respond to a resurgence of
inflation and what the impact would be on global markets (if you don’t see the
connection, go back and see what caused the 416 point meltdown in the Dow
back on February 27, 2007). For more on this, see Prepare For Treacherous
Ride as Risks Multiply in China on page 20 of the FT. John Plender’s column on
page 20 of the FT on the China’s challenges ahead in rebalancing its economy is
also well worth a read.
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January 6, 2010 – BREAKFAST WITH DAVE
Still, it is amazing that jobs are being shed at this juncture of the cycle, then
again, contractions induced by credit collapses are completely different than It is amazing that jobs
those caused by garden-variety inflation pressures and excess inventories. are still being shed at
this juncture of the cycle
What this means for nonfarm payrolls is interesting because the ADP report has
been “worse” than the private payroll component of the NFP data for seven
months now, whereas it was reporting smaller declines with near consistency
over the prior seven months. The two data series don’t have to line up but we
did find that as December rolls around, the 12-month trailing gap is, on average
(in absolute terms) 120k.
As of November, ADP had counted 4.725 million private sector job declines for
2009; the nonfarm data counted 4.047 million. That is a gap of 678k. Let’s be
generous and assume that government adds 30k to December’s data — the
average of the past two months — and that the consensus is correct that private
payrolls will be down 30k (since the consensus for total payrolls is flat). That
would suggest that we would finish the year with a massive difference between
ADP and NFP private payrolls of 648k (this would be how much more job loss
was picked up in the ADP database) which is not only 5x as large as what is
typical but would be the largest gap to finish a year on record.
Maybe, just maybe, we will see: (i) downward revisions to October and November
since ADP job losses in those two months are still 148k larger than what the The U.S. Census hiring
payroll showed at last count; and/or (ii) that the consensus is way off base in process is in the works
calling for a flat NFP headline this Friday. There is one forecast out there calling and this “boost” is the
for down 100k. main reason why we
may start to see
Note that the U.S. Census hiring process is in the works and this “boost” is the renewed job growth in
primary reason why we may start to see renewed job growth in early 2010, but early 2010
this is already in the market (the Challenger data this morning flagged a 17,504
jump in hiring announcements which has not happened since July 2007) and
what investors will focus more on during this government hiring phase are: (i)
private payrolls, (ii) the private workweek, and (iii) the employment diffusion
index, for signs of any true underlying improvement in the labour market.
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January 6, 2010 – BREAKFAST WITH DAVE
We retain an income tilt as a core part of the investment strategy, and in large
part, this is a secular trend — even REITs, after a setback in 2008, managed to
post a +28.5% total return last year, outperforming the equity market handsomely.
We continue to view the equity market as being expensive, though technicals
could take the major averages higher near-term, as they already have.
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January 6, 2010 – BREAKFAST WITH DAVE
No doubt the economic news has been better of late, though housing is now
looking soft again, but there is now a whole lot of growth priced into equities, so
it has become a show-me situation. Perhaps this is best described in today’s
Short View on page 16 of the FT — “…the S&P is in a big rally within a bear
market, and trading momentum will likely take it further. But the S&P is not at
the start of a new bull market.” Our friends at Katana Capital expanded on a
table comparing the onset of the secular bull market in August 1982 to the
current backdrop as an illustration, and we took their efforts and extended it
even further below.
TABLE 1: WHY THIS IS NOT THE ONSET OF A NEW SECULAR BULL MARKET —
A COMPARISON WITH AUGUST 1982
United States 1982 2009
Fed funds rate 18% and only one way to go (down) 0% and only one way to go — up
10-year bond yield 15% and falling 3.8% and rising
Monetary base $170 billion and rising $2.2 trillion and stable to falling
Budget deficit-to-GDP ratio -3% and moving towards a surplus -10% and steady or falling from here
Household debt-to-personal
disposable income ratio 62% and rising 123% and falling
Inflation rate 10% and falling 0% and rising
Savings rate 10% and falling 4% and rising
Unemployment rate 10.8% and falling 10% and rising
Misery index At 16 and falling At 12 and rising
Labour force participation rate 64% and rising 65% and falling
Tax rates (highest marginal) 69% and falling 35% and rising
Union share of the job market 20% and falling 12% and rising
Baby boomer population Median age is 25, peak spending and Median age is 52, retirement focus
investing years ahead (capital gains) ahead (capital preservation)
Source: Haver Analytics, Gluskin Sheff
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January 6, 2010 – BREAKFAST WITH DAVE
This is more evidence of how these government programs do more to disrupt the
data inflow than actually provide any lasting stimulus. As with Cash for Clunkers
(see below), all the housing tax credits have done is lump a lot of sales into
September and October — the demand was already filled because everyone
thought the program was going to expire. Imagine what happens to the real
estate market when the tax credit measure lapses and the Fed’s mortgage
buying subsides ends at the end of the first quarter.
As Chart 1 shows, the collapse in housing values has yet to fully mean revert
towards rental rates. To do so would imply another 10-15% decline in
residential real estate prices, which we view as a major cloud over the 2010
economic outlook (the same holds true on a home price-to-wage basis). A
decline of that magnitude would take the number of households who are under
water on their mortgage from 15 million (25% of the mortgage population) to 30
million (half).
1.050
0.975
0.900
0.825
0.750
0.675
95 00 05
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January 6, 2010 – BREAKFAST WITH DAVE
This is a near 3% gain over November’s tally, but as we said before, from June
1983 to September 2008, a number as low as this was unheard of.
This is the new normal — excitement over an 11 million print on auto sales. The
old normal was 16 million, by point of reference. Then again, just how many sales
do we really need when the roads are already populated with 250 million cars and
trucks in a country whose labour force is barely over 150 million?
What is very clear is that the Cash for Clunkers program pulled forward a lot of
demand because no matter how you slice it, auto sales volumes are still running
20% below the levels that prevailed during the peak in the program last summer.
And, in terms of staying focused on the big picture as opposed to the monthly
gyrations along the trendline, the reality is that 2009 was the worst year for the
auto industry since 1982, and domestic sales still closed the year down over 20%
even with the blip we saw in November-December. As an aside, GM is forecasting
an 11-12 million range on auto sales this year; Ford is calling for 11.5-12.5 million
… levels that would still be 25% below the “old normal”.
Meanwhile, the news is mixed but certainly not horrible as it was this time last year
when it concerns the retail sector who are much leaner. According to the
International Council of Shopping Centers (ICSC) survey, same-store sales rose 2.5%
in December from a year ago, above the 2% target (actual data come out tomorrow).
It looks like the complete picture for November-December was +1.0% but that
comes off a -5.6% trend in the comparable 2008 period, which was the worst in
over 40 years. But sales in the opening days of 2010 have been less than stellar
— the daily tracking by Gallup shows daily shopping down to two-month lows; sales
at +1.6% YoY thus far (early days yet, though) are running below plan of +2.1%.
The Redbook described the first week of the year as “mixed” and “promotional”.
• Mortgage rates have backed up nearly 50 basis points over the past month, to
stand at 5.14% for the 30-year.
• Oil prices have jumped nearly $10 a barrel since that time too.
• Consumer bankruptcies finished 2009 with a 32% surge. Believe it or not,
this is one reason why housing (at least until November) appeared to be
turning the corner … 40% of all the home sales in 2009 were foreclosures or
short sales.
The latest data points on the consumer have indeed been a tad better than
expected. Part of this boils down to aggressive seasonal factors in December and
part of it boils down to the natural noise in the data. The trend is still very much
towards saving, not discretionary spending, and unless you are overweight
consumer cyclicals in the portfolio, having the once free-wheeling American
consumer live within his/her means is actually a good thing. But as we said, it is
not good news for sectors hitched to the part of the budget that is discretionary —
for a real-life example have a look at Recession Fuels Shift from Private to Public
Schools on the front page of the USA Today.
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January 6, 2010 – BREAKFAST WITH DAVE
New orders for computers were particularly strong, rising 12.8% MoM, and the YoY
trend in tech orders is pointing north at the current time. As the latest Barron’s
2010 outlook revealed, this is the most over-owned sector — the consensus is
right 20% of the time … and this may well be one of those times!
40
20
-20
-40
98 99 00 01 02 03 04 05 06 07 08 09
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January 6, 2010 – BREAKFAST WITH DAVE
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