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MYTHS & REALITIES

David Rosenberg has some excellent thoughts on everything from Warren Buffett to the boom in M&A:

Myth: Warren Buffett is making a big wager on the U.S. economy.

Reality: The Oracle believes that with oil prices where they are and likely to go higher, rails will grab transport share from the truckers. This may also be a back-door bullish call on coal. Or maybe it’s a constructive sign on buying of U.S. made goods out of Canada where local domestic demand is hanging in just fine, thank you very much.

Myth: There are signs of life in the retail sector.

Reality: October auto sales in the U.S. did pick up from September’s abyss, but this was still the eighth worst month in the last 27 years. And yes, it does look like U.S. chain store sales are going to come in somewhere between +1.0-2.0% year-over-year. But beware. This actually says more about the detonation that took place a year ago — the “base” for the year-over-year calculations — than anything truly robust at the present time.

Also, don’t forget that these are YoY same store sales from surviving retailers. Thousands have gone bankrupt in the last year, for example Circuit City, which for sure has helped BestBuy’s activity, and there are countless other examples. So the data, for lack of a better term, are distorted and tell you very little about what consumers are doing in the aggregate.

Myth: The low end consumer is adjusting to the new frugality more than the high end.

Reality: If only it were only so. Unfortunately, a gap has opened between employment-dependant spending and wealth-dependant spending. After all, the investor class is giddy after a 60% rally from the March lows in equities, a rally in which 2.7 million jobs in the U.S. have been lost. Epic. So in October, luxury goods sales came in at +6.5% YoY and jewellry at +7.2%! Meanwhile, department stores who cater to the guy (and gal) on the street posted a 1.5% sales decline (as per MasterCard’s SpendingPulse survey).

Also keep an eye on where people are buying their food and what food they are buying (good article in yesterday’s Wall Street Journal on this) — Cheesecake Factory is all of a sudden seeing a burst of sales activity (Starbucks too from what we are hearing and reading) that is eluding the fast-food chains at the moment.

Myth: We have financial and tech leadership.

Reality: We did. But not any longer. Not after UBS reported its larger-than-expected Q4 loss, and not after Lloyds and RBS announced their need to raise capital (can they really be the only ones?).
As for tech, well, Morgan Stanley researchers laid down the guantlet with its downgrade of semiconductor stocks to “cautious” from “attractive” (we love Wall Street lingo, having been there and done that. Why not shout “sell, Mortimer, sell!”?) And what about that downgrade to Intel?

Myth: The boom in mergers and acquisitions (M&A) activity says that corporate America is feeling good about recovery prospects.

Reality: While this is what we hear from many strategists, there may be other factors at play that are more strategic and micro in nature.

Keep in mind that companies are sitting on a record cash hoard ($702 billion in the S&P 500 universe). If they were truly optimistic, they would be moving to expand their business organically. Instead, most of the M&A activity has been driven by companies buying out their competitors to grow a part of their operations that they were lagging in.

As for the “boom” part — let’s get a grip. So far this year, there have been 5,786 deals worth $620 billion (Dealogic data — for the U.S.). That is down 37% from a year ago (the level) and down 55% from where we were two-years ago.

Source: Gluskin Sheff

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