David Rosenberg, former Chief Economist at Merrill Lynch is leaving the firm (good news for B of A shareholders now that B of A owns Merrill). Here was his parting outlook and my comments are below the shaded sections.
|Market likely to peak the end of the week [Friday]. Just as the clock is winding down on my tenure at Merrill Lynch, the equity market is winding up with an impressive near-40% rally in just nine weeks. For those that were still long the equity market back at the March 9 lows, a good ‘devil’s advocate’ exercise would be to ask yourself the question whether you would have taken the opportunity, if the offer had been presented, to have sold out your position with a 40% premium at the time. What do you think you would have said back then, as fears of financial Armageddon were setting in? We haven’t conducted a poll, but we are sure at least 90% of the longs at that point would have screamed “hit the bid!”|
Operative stateent: He "hasn't" conducted a poll. So it's just his opinion what investor sentiment is. According to my poll on Mikenormaneconomics.com, most people are still negative.
|Are we at risk of missing the turn? Fast forward to today, and within two months optimism seems to have yet again replaced fear. Are we at risk of missing the turn? What if this is the real deal — a new bull market? This is the question that economists, strategists and market analysts must answer.|
Optimism "seems" to have replaced fear. Again, not a scientific analysis. Has he read any of the articles on Seeking Alpha recently?
|Risk is much higher now than it was 18 weeks ago.|
Yes, according to his "feelings."
|The nine-week S&P 500 surge from 666 at the March lows to 920 as of yesterday has all but retraced the prior nine-week decline from the 2009 peak of 945 on January 6 to the lows on March 9. We believe it is appropriate to put the last nine weeks in the perspective of the previous nine weeks.|
No mention of massive global stimulus. You have to go back to WWII to see these kind of deficits.
|To the casual observer, it really looks like nothing at all has happened this year, with the market relatively unchanged.|
He just said everyone was now optimistic!
|But something very big has happened because the risk in the market, in our view, is much higher than it was the last time we were close to current market prices back in early January, for the simple reason that we believe professional investors have covered their shorts, lifted their hedges and lowered their cash positions in favor of being long the market.|
Yes, that almost too simplistic an explanation. This guy was chief economist at Merrill. Professional traders are very short-term oriented. Ask yourself, is Warren Buffett selling out his stocks? NO!!
|Employment, output, income, sales still in a downtrend.|
But moderating on the downside, clearly. And some things are turning up. He is "talking his book," here.
|Considering what transpired from an economic standpoint, the decline in the first nine weeks of the year was rather appropriate in the midst of the worst three-quarter performance the economy has turned in roughly 70 years. The rally of the past nine weeks appears to be rooted in green shoots.|
Again, no mention of fiscal stimulus on a massive scale and globally!
|While it may be the case that the pace of economic decline is no longer as negative as it was at the peak of the post-Lehman credit contraction, the reality is that employment, output, organic personal income and retail sales are still in a fundamental downtrend.|
Once again, not giving any credence to either a slowing in the rate of decline or, outright improvement in many data series. Moreover, the economic data are inherently lagging. He should know that. Pleading his selfish interest!
|Need to see an improvement in the first derivative.|
What do you suppose he'll say if Q2 GDP comes in positive? He'll rationalize it away. Cognitive dissonance!!
|We have evidence that the consumer, after a first-quarter up-tick that was front- loaded into January, is relapsing in the current quarter despite the tax relief (didn’t we see this movie last year?).|
Last year the consumer was not sitting on a record savings hoard. We're at $455 billion! Meanwhile, consumer confidence data has been picking up!!
|Not until improvement in the second derivative morphs into improvement in the first derivative with respect to the important economic data will it really be safe to declare what we are seeing as something more than a bear market rally, as impressive as it has been.|
"Second derivative," "first derivative," wanting to impress you with his calculus. Sheesh, what nonsense.
|This is a bear market rally that may have run its course.|
States this emphatically, as if it is a known fact. It's merely his opinion.
|The investing public is still holding tightly to their long-term resolve, but much of the buying power at the institutional level seems to have largely run its course, in our view.|
At least this time he says, "In his view."
|That leaves us with the opinion, as tenuous as it seems in the face of this market melt-up, that this is indeed a bear market rally and one that may well have run its course.|
Now he seems to hedge a bit on that, "run its course," statement. He's not as sure as before. (Perhaps he's short, and hoping!)
|We have “round-tripped&r... from the beginning of the year and there is real excitement in the air about how these last nine weeks represent evidence that the economy will begin expanding sometime in the second half of the year.|
No mention of fiscal and its undeniable impact. He's "wishing" his forecast and talking too much like a trader. (e.g. "round-tripped&qu...
|Growth pickup will likely prove transitory.|
|While it is likely that headline GDP will improve as inventory withdrawal subsides and fiscal policy stimulus kicks in, our view is that whatever growth pickup we will see will prove to be as transitory as it was in 2002, when under similar conditions the market ultimately succumbed to a very disappointing limping post-recession recovery.|
Finally mentions the stimulus, however, he compares it to 2002. It is soooo much larger that there is no comparison! In 2003 the deficit hit 4.8% of GDP and we took off. In 1983 the deficit under Reagan hit 6.8% of GDP. We're about to hit 14% this year. That's like 1942, not 2002!!!
|So yes, there may well be some improvement in the GDP data, but it is based largely on transitory factors.|
Grudgingly accepts that an uptick in GDP is coming, but why transitory? Is the government suddenly going to take it all back?
|We strongly believe it is premature to totally rule out the end of the vicious cycle of real estate deflation – residential and now commercial – that we have been experiencing since 2007.|
But can we rule out some of it? Most of it? After all, markets tend to look ahead.
|Balance sheet compression in the household sector will continue to pressure the personal savings rate higher at the expense of discretionary consumer spending. This is a secular development, meaning that we expect it will last several more years.|
Again, seeking to impress with fancy, flowery terms. (Balance sheet compression.) Has he looked at private savings recently? Historic high! Does he understand that the deficit equals, exactly, the amount of new assets that households will own? That's $1.8 trillion this year alone. Not too shabby.
|Chances of a re-test of the March lows are non-trivial.|
|To reiterate, it seems to us likely that the risk in the market is actually higher today than it was back at the same price points in early January...|
Because professional traders have covered their shorts?
|...and we say that with all deference to the stress tests (which given the less-than-dire economic scenarios, along with the changes to mark-to-market accounting, were destined to reveal healthy results).|
Cynically pleading his selfish interest. "Talking his book."
|While the consensus seems gripped with the burden of trying to decide if there is too much risk to be out of the market, we actually still believe that the chances of a re-test of the March lows are non-trivial, especially if the widely touted second-half economic rebound fails to materialize...|
There's that "non-trivial" again!
|The data flow is less relevant this cycle than in the past.|
Is he saying that if the data improves investors and the market won't react? Nonsense!! Is he advising people to just ignore the data? I detect an acute case of cognitive dissonance!
|This was not a manufacturing inventory cycle, which makes the data flow less relevant than in the past. Real estate values are still deflating and the unemployment rate is still climbing; these are critical variables in determining the willingness of lenders to extend credit. And as we just saw in the Fed’s Senior Loan Officer Survey, while there may be a ‘thaw’ in the financial markets, banks are still maintaining tight guidelines. In fact, the weekly Fed data are now flagging the most intense declines in bank lending to households and businesses ever recorded.|
Yes, and the Fed was telling us in August and September 2007 that the subprime "problem" would not spread. You read this and you understand why Merrill has so much problems.