Thursday, September 10, 2009

Markets march on...

I'll admit to being more than a bit surprised by the slow, steady grind upward in the past week. I was in the camp that said once people got back from vacation we'd see some substantial volatility and the markets seemed primed for a pullback, but every bit of bad news this week has been met with more buying so I don't think anyone has a clear idea of our direction right now.

The best observation I read today though came from Dave Rosenberg:

1. This remains a hope-based rally (with strong technicals). I say that because during this six-month 50%+ rally in the S&P 500, the U.S. economy has shed 2.4 million jobs, which is almost as many as we lost during the entire 2001-02 tech wreck — in just six months. The market’s ability to shrug off the loss of 2.4 million jobs is either a sign that it is treating this as old news or sees the cost-cutting as good news for profits. Either way, what we are seeing transpire is without precedent — the magnitude of the employment slide versus the magnitude of the market advance. Truly fascinating stuff.

I'll echo that the anecdotal evidence is that there are waves of more layoffs coming. Corporations realize that their revenues continue to shrink and cutting payroll is the only way to stay profitable. This is a short-sighted approach that will delay any recovery when it comes, but it is the new "normal". Think about that number - we've lost 2.4 million jobs in six months while the stock market has soared - something is wrong with that picture.

2. Companies have not really been beating their earnings estimates — only the very final estimates heading into the reporting quarter. For example, the consensus view for 3Q EPS at the start of the year was $21.00, last we saw the estimates were down to just over $14.00. But there is a deeply rooted belief that earnings are coming in better than expected. This is a psychology that is difficult to break. It is completely unknown (for some reason) that corporate revenues are running at a -25% YoY rate, which compares to the -10% we saw at the worst part of the 2001-02 bear market and the -3% trend at the most negative point in 1991.

Again this speaks to the severity of the decline in corporate operations. Revenues are down sharply and you can't cut fast enough to offset these declines.

3. All the growth we are seeing globally this year is due to fiscal stimulus; not just here in Canada and the U.S., but also in Korea, China, the U.K., and Continental Europe too. For 2010, the government’s share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring. Today’s stimulus is really a future tax liability.

When I look at any entity to gauge the quality of its growth the first question I ask is always --- Is the growth organic or inorganic? Organic growth is growth due to increase volumes or pricing because your product is in demand. Inorganic growth is growth through acquisition or adding more locations, etc. Obviously organic growth is much higher quality than inorganic growth. All of the stimulus is inorganic growth.


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