Most Recent Stories


Excellent thoughts here courtesy of David Rosenberg and Gluskin Sheff:

The real enemy for the equity market is Mr. Bond — that pesky Treasury market that just won’t sell off and validate the great reflation trade. Indeed, if we were seeing a real asset allocation move on the part of investors, as opposed to massive and ongoing short covering, then the 10-year Treasury note yield would be trading close to 5.0% — especially with these freshly minted Obama debt forecasts. But instead, the 10-year note is now getting perilously close to the July 10 low of 3.32%.

We’ve been saying that based on some of our statistical research, the corporate bond market is pricing in 2.0% real GDP growth, whereas the equity market, after this latest power surge since the first week of July, is discounting 4.0% real growth for the coming year. From our lens, the fixed-income market has more downside protection, and even if we do see a 4.0% or better GDP expansion, so much the better. Equities can still rally if in fact the economy does better than 4.0% growth, but frankly, we have decided this year to express whatever cyclical view we had in the corporate bond market rather than in the equity market. Now it may well be that 2.0% could be too high considering the fragility that follows a post-bubble credit collapse, but an 8.5% real Baa yield is still very juicy.

A question we often get is what turns us bullish on equities? It’s simple. Either we have to be convinced at this point that the U.S. economy grows more than 4.0% or we have to see the S&P 500 correct to a point that, like the investment-grade corporate bond market, is pricing in no better than 2.0% GDP growth for the coming year. We really feel, with all deference to the green shoots, which are little more than government-administered steroids, the economy will do little better than average 2.0% growth in the year ahead, and may possibly fall short of that mark as it did under eerily similar circumstances in 2002. But at 842 on the S&P 500, the stock market would be priced for 2.0% real GDP growth. Believe it or not, the market is not always in some magical equilibrium but often deviates from reality — if the S&P 500 were in a 700-800 range right now, priced for sub-2.0% growth, we would be growing horns — we’d be so bullish. But this market has gone far beyond that and has gone to levels that would be consistent with an economy in the second year of recovery, and here we are still debating what month the recession ended … if indeed it has.

Source: Gluskin Sheff

Comments are closed.