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Interesting commentary from Brian Milner in this week's ROB about the market rally.
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The market rally is missing something big: U.S. consumers
BRIAN MILNER
E-mail Brian Milner | Read Bio | Latest Columns
May 16, 2009
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In the latest example of what qualifies as good economic news these days, we learned yesterday that U.S. industrial output fell last month by a mere 0.5 per cent, the best showing since last October. And the New York Fed's manufacturing index, a measure of how operators in the region are feeling about conditions, shot up to minus 4.6, its best reading in eight months. Wow! Break out the champagne.
Just a few days ago, these latest hints of a coming bottom - at least on the output side - would have been enough to spark another shopping spree by investors worried about being left behind at base camp while more intrepid climbers scale new equity peaks.
But the impressive rally that enabled benchmark indexes to erase all or most of their losses this year appears to have hit a snag or two.
The upswing plainly had more than one pilot steering the plane, including institutions eager to boost meagre returns on their piles of idle cash, short sellers forced to cover enormous positions and pension funds doing a little rebalancing.
But a market driven by nervous investors making their bets on slightly improved production gauges, early hints of a recovery in China, a better outlook for commodity prices and signs of government-imposed stability in the U.S. banking system does not seem like one destined to settle into a long bull run.
The jury is still out on whether those green shoots everybody is searching for amid the economic ruins will grow into hardy perennials or dandelions. In any case, the most crucial piece of the turnaround puzzle, the American consumer, is in no condition to join in the fun.
That's why David Rosenberg, the former Merrill Lynch economist who made his formidable reputation as an early and consistent bear on Wall Street, leans to the dandelions.
"The only thing holding the [U.S.] economy together, and the capital markets, for that matter, is a lot of tape and glue from the federal government," Mr. Rosenberg said this week from his new Bay Street perch as chief economist/strategist with Gluskin Sheff.
"It's very rare that you embark on a sustained bull market when the economy is extremely fragile."
The U.S. suffered three enormous shocks, starting with the housing collapse. That led directly to the other two - in credit and employment. Credit conditions have improved, thanks to unprecedented global intervention. "But the other two shocks are lingering and still very significant," Mr. Rosenberg said. And until they're fixed, the other green shoots are only so many weeds.
He has been singing from this hymn book for some time. When other economists were focused on GDP and other spending numbers, he was sifting through income stats.
For three years, Mr. Rosenberg warned of a widening gulf between income and spending data that was not sustainable.
By 2005, he was predicting a deflation in U.S. housing that would have a huge impact on the mortgage market and, with it, the heavily leveraged economy.
He forecast a 5- to 10-per-cent drop in prices, which seems modest now, but was viewed as apocalyptic.
"As bad as I thought it was going to be, it turned out to be far worse," said Mr. Rosenberg, who is more bullish on Canada's prospects, thanks to its healthier fiscal house, stronger banks and ideal position as a supplier of key commodities.
American households have taken a $20-trillion (U.S.) hit to their collective balance sheet, and the accompanying dramatic changes to their savings and consumption habits are likely to be deep and long lasting, he said.
So the only green shoots that should matter to investors are related to U.S. housing. Because until that's fixed, consumers won't spend and an economic recovery isn't going to be sustainable.
"It doesn't mean that we're not going to get the odd flashy GDP quarter," Mr. Rosenberg said. "It doesn't mean that we're not going to get the odd flashy bear market rally. But I think that what investors are ultimately going to be paying for is sustainability. You can trade these bear market rallies. You can rent them, but you can't own them."
Mr. Rosenberg claims, justifiably, to base his outlook solely on what he finds in the data, which he has always mined with considerable skill.
In one of his last missives for his former employer, he said it all.
"The data just don't square with the conventional wisdom permeating the investment landscape."
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