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S&P 500 3-month T-bills Real Estate High Grade Commodities Long-term Gold
Corp. Treasuries
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September 15, 2010 – BREAKFAST WITH DAVE
S.I.R.P., by the way, does not preclude a core position in dividend-paying equities
There are always things to
(or preferreds for that matter). While we are “underweight” equities as an asset
buy and S.I.R.P. does involve
class, we aren’t exactly zero-weight. There are always things to buy and S.I.R.P.
a dividend theme, and as
does involve a dividend theme, and as such it is encouraging to see company
such it is encouraging to see
after company, even in the once-growthy tech space, catch on to the insatiable company after company
baby boomer appetite for income. Hence, we now see Cisco join the likes of catch on to the insatiable
Microsoft and Oracle in generating cash payments to their investors. According baby boomer appetite for
to S&P, so far this year, there have been 179 dividend increases and just three income
cuts — in 2009, there were 110 increases and 72 cuts! The S&P 500 dividend
yield is now 2.0% and if you look at the historical data, 45% of the stock market
return is derived from reinvested dividends. So, do the math and “expected
returns” should really be no higher than 5%. This is exactly what a sub 3% yield
on the 10-year T-note is telling you, as well as, a 5% yield on a generic BBB-rated
corporate bond. Five percent today is what 10% was two-decades ago and 15%
three-decades ago, and if you can achieve that or even do better than that
consistently, consider yourself a hero.
The S&P 500 continues to trade in a very narrow range as 1,040 acts as support
on the downside and 1,130 resistance on the upside. The 4.5% surge in short
interest in August has been squeezed out as the relief rally in September took
hold on the view that the economy was not about to double-dip. Be that as it
may, fragility is still in place and far too many market watchers gaze at shipping
rates, which are supply related, or transport volumes, which are coincident
indicators, and at this point, are telling us that the inventory cycle is continuing
even as sales are lagging behind. This could well set up a disappointing fourth
quarter of little better than 1% growth in real GDP after what now looks to be
1.5% for Q3. So yes, the economy is not yet contracting, but it’s not exactly
expanding that much either, certainly not enough to absorb the excess
deflationary slack in the labour, product and housing markets.
In fact, a just published report by Moody’s showed that there is so much excess Indeed, according to S&P, so
housing inventory that it will take another three years for U.S. home prices to far this year, there have been
find a true bottom. That will be problematic for banks, as well as for consumer 179 dividend increases and
discretionary spending. Yesterday’s retail sales data were telling as consumer just three cuts — in 2009,
spending were concentrated on the bare necessities — food, gas, drugs and there were 110 increases
clothes collectively up 2% for the second month in a row. But electronics, and 72 reductions
building materials, autos, restaurants, appliances and furniture, combined, fell
0.4% and are now down three of the past four months, which would lend
credence to the view that consumer staple stocks should be outperforming
consumer discretionary. However, over the past month, consumer discretionary
stocks are up over 6% and staples by only 3%, so if there is a pint of contrary
blood in you and you are looking for a possible anomaly to take advantage of in
the equity market … there you go.
Page 2 of 8
September 15, 2010 – BREAKFAST WITH DAVE
If there was a hint of good news, the IBD/TIPP economic optimism index ticked
The yield on 10-year TIPS, at
up in September, but this came off a two-year low, and at 45.3, is still at a
0.9%, is back to where it was
recessionary level. In fact, 42% of respondents don’t think the recession has
at the depths of the
ended yet. The 3.9% gain in the index (first increase in four months) was led by
recession
the “personal finances” component (maybe these folks were all short in August
and hence felt good coming into the fall). However, the six-month economic
outlook component slipped 2%, to 44.2. This may seem at odds with what the
stock market is saying these days — look at what a three-week rally has done to
investor sentiment (all of a sudden the economic data seem boom-like when the
S&P 500 has rallied 7% from a nearby low!).
But the bond market usually gets it right and the 0.9% yield on the 10-year TIPS
security is back to where it was at the depths of the recession. Something is
going to have to give. If we recall correctly, bonds led both the stock market and
the economy in 1990, 2000 and again in 2007. The mixed message that the
bond market is giving us, vis-à-vis the recent technical bounce in equities,
comes down more to lags than anything else. The 0.9% “real yield” and the
2.7% “nominal yield” are sending off a non-ratification signal for the equity
market bull. But they are ignoring it at their peril; as they likely did in those three
other periods just mentioned — bonds are very good at inflection points and in
the next few months we may well look back at the 130 basis point rally this
spring in the 10-year T-note as important an event as the similar rally we saw in
the summer and fall of 2007.
3.2
2.8
2.4
2.0
1.6
1.2
0.8
07 08 09 10
As we said before, there has been about $1 trillion of debt deleveraging that has
occurred in the U.S. household sector over the past two years and to normalize
debt/asset and debt/income ratios, there is another $6 trillion to go, and likely
to last another five years if the historical record is any indication.
Page 3 of 8
September 15, 2010 – BREAKFAST WITH DAVE
For the time being, the government will continue to try to cushion the blow; The era of shared sacrifice in
however, the best of the fiscal stimulus is behind us, and for the demographic dealing with this crisis is
reasons why that is the case, look no further than the front page of today’s WSJ now upon us, and with this
(Obstacle to Deficit Cutting: A Nation on Entitlements”). But there is hope as far comes an acknowledgment
as the political landscape is concerned — go to the op-ed section on page A19 — that, sorry, there are no
Union Power and the Christie Effect. The era of shared sacrifice in dealing with quick fixes or magic bullets
this crisis is now upon us, and with this comes an acknowledgment that there to deal with the aftermath of
are no quick fixes or magic bullets to deal with the aftermath of a deflated asset a deflated asset and credit
and credit bubble. It will mean sacrifice and return to living within our means, it bubble
can be done, and it will brighten the future as opposed to complicate it as the
plethora of current polices have already done; establishing artificial floors under
home prices, distorting the spending picture through demand-side gimmicks,
clouding financial transparency via kick-the-can-down-the-road accounting
measures for the bank assets, not to mention paying people to stay out of work
for nearly two years, which risks turning a sizeable potion of the labour market
into a welfare state.
Let’s take a feather out of emerging Asia’s cap — who would have guessed that
it would have emerged the way it did as it rose from the ashes 12 years
ago. But the region did go though a real depression, a real transformation and
radical restructuring of the economic, banking and political landscape. Kicking
the can may ease the pain, as it did in Japan, but at a cost in terms of the length
of time it takes to transition to the next sustainable growth cycle. Emerging Asia
took its medicine up front and look where it is today. It’s emerged.
GOLDILOCKS
Well, at least we know we can use yesterday’s action as a microcosm to what is
actually driving the gold price higher (up $22.55/oz, +1.8%, yesterday to $1,268
an ounce) — and it isn’t inflation. How do we know that? Because 10-year TIPS
breakeven levels — the market proxy for inflation expectations — fell seven basis
points. The correlation would seem to be more with the U.S. dollar as the DXY
sank 1.0% to 81.080 yesterday. And, what ailed the U.S. dollar were hints out of
Goldman Sachs that the Fed was indeed planning another round of Quantitative
Easing. So once again, gold has asserted itself as a monetary metal — a
currency that is no government’s liability and a hedge against these recurring
concerns over the integrity of the global monetary system.
You don’t even need to look at the TIPS market to see the disinflation
momentum is at play. All you really have to do is read these two Wall Street
Journal articles to see how the frugality theme is wreaking havoc on pricing
power, even at the high end of the U.S. consumer space: Luxury-Goods Firms
Turn Up Volume on Value on page B5, and Ritz Carlton Bows to Recession, Adds
Rewards on page B4 (price per room is down 19% over the past three years!).
Page 4 of 8
September 15, 2010 – BREAKFAST WITH DAVE
Clothing did well too (+1.2%) but outside of these three “soft” non-durable
items, retail sales were actually flat. Drugstores gained 0.6% as well, so this
was about “necessities” and not about big-ticket items, which would be a sign of
the consumer making a commitment to the economy.
Meanwhile, virtually all of the cyclical segments were weak. Autos, electronics,
furniture were all down and building materials were flat after two horrendous
months. Restaurants were also little changed.
In a word, uninspiring and with fewer tailwinds, I’d be expecting a pullback this
month.
Labour Market: “There is no life in the jobs market.” The percentage of firms
reporting one or more job openings rose a point, to 11 in August; however, when The U.S. labour market
looking at the chart, this level is still hovering near historical lows. And, the landscape through the eyes
percentage of firms planning to increase employment in the next three months
of the small business owner:
“There is no life in the jobs
fell back to 1% — in other words, no one is planning to hire.
market.”
Capex: “The environment for capital spending is not good.” Only 16% in August
of respondents said that they plan on capex in the next 3 to 6 months, down
from 18% in July and is at the same level during the depths of the recession in
March 2009.
Page 5 of 8
September 15, 2010 – BREAKFAST WITH DAVE
Inflation: “The weak economy continues to put downward pressure on prices.” What small businesses in
… Widespread price cutting contributes to the high percentage reporting the U.S. need are sales, not
declining sales revenues.” just low rates
Profits and wages: “Labor costs are still under control, good news for those
worried about inflation but bad news for workers.”
Credit markets: “Those looking for loans predominately are looking for cash
flow support, not funds to expand or hire.” … What businesses need are
customers, giving them a reason to hire and make capital expenditures and
borrow to support those activities. … Sales are needed, not just low rates.”
Page 6 of 8
September 15, 2010 – BREAKFAST WITH DAVE
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