Thursday, March 25, 2010

"The Stars Are Starting to Align for Something Big"

David Rosenberg at Gluskin Sheff writes:

First, the Shanghai index peaked in August 2009 and had a secondary top in December 2009 (global demand slowing?). Many emerging markets are all negative year to date.

Second, gold peaked in the first week of December 2009 (and now breaking down) while the U.S. dollar index (the DXY) is breaking higher (Greece has not been resolved).

Third, TIPs (ETF) peaked the first week of December 2009 (and just broke to a new four month low).
Fourth, commodity prices peaked in the first week of January and appear to be rolling over. Head-and-shoulders top from October 2009 peak?

Fifth, could we be in for a March peak in equities? The NYSE new high list peaked six trading days ago. Recall that a market correction followed in October of last year and January of 2010 following similar peak in new highs.
None of this should come as a surprise to EPJ readers. We have been adamant bears on gold, bullish on the dollar and, only with a lesser degree of intensity, we warned that even a slowdown in China's money printing would cause problems for China's stock market and economy. Everything has fallen into place, except for our call on the stock market.

The peak in the new high list is not the kind of indicator that would cause us to form an aggressive opinion on the overall stock market. However, the decline in gold and strength in the dollar support our contention that the money supply is tight, and thus we continue our view that the stock market will not continue its uptrend and a severe break is in the offing.

The fact that interest rates are ticking higher is a further sign of the problems with the current capital structure of the economy.

Rosenberg recognizes the climbing rates:
Sixth, despite signs of economic cooling in Q1 (around 2.5% growth and half the Q4 pace) and lower inflation expectations, the 10-year Treasury note yield is ratcheting up (in a destabilizing fashion) and devoid of any bearish economic data (for a range of technical/fund flow reasons as was the case in the summer of 2007 — we never said at the Grant’s conference in New York that it was going to be a straight line down). But in technical lingo, it does look as though the yield is breaking out from a triangle since the December 31, 2009 yield peak —go back to that period in December and January, 3.85% on the 10-year Treasury-note served at least three times to be major technical support — a break of that this time around would mean some serious near-term trouble (the nearby high closing level was 3.98% back on June 10, 2009).
But he fails to pin it down to the Federal Reserve manipulated capital structure, and is searching for an answer to climbing rates that can, really, only be explained by a distorted capital structure. But, here is Rosenberg's search among popular thoughts as to why rates are climbing:

Rates may be rising because:
•Of added supply concerns from Obamacare
•Heightened fears over a looming trade spat with China (if the Treasury accuses China of being a ‘currency manipulator’ next month);
•Hedging related to the most recent huge wave of corporate bond issuance;
•Swap rates have also become unhinged (they traded at an unprecedented 8bp discount to 10-year Treasuries yesterday) ….
He is correct that rates aren't rising because of inflation and that it is a climb in real rates:
… but yields are NOT rising from inflation (in fact deflation signs are re-appearing again). Hence, real yields are on the rise ... not typically what an equity bull would like to see with real growth now softening. Rising real rates as real growth slows means it is time to get more defensive, not more cyclical (especially with small-cap stocks up nearly 10% year-to-date, doubling the performance of the large-caps. This will not be sustained as the global and domestic economies cool off through the balance of the year.)
And, it appears that he senses that this is going to be a problem for the stock market, without coming outright and saying so:
Bottom line: Stronger U.S. dollar. Rising bond yields. Lower commodity prices. Slower growth. And the stock market is flirting at post-crisis highs.
From my perspective, I don't see how we miss a major stock market decline. I have to agree with Rosenberg's final conclusion, the stars are starting to align for something big.

(Rosenberg report via ZH)

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