David Rosenberg is of the opinion the days when it only took “less negative” news to take the market higher, are over.
According to him, 2010 will not be another year when the rising tide lifts all the boats.
Gluskin Sheff: “Once again, the fact the stock market finished the day lower – including below Friday’s close – despite the GOP Senate victory in the Massachusetts election, and that the decline would be on higher volume (+1.9% on the NYSE), attests to the view that equities have a whole lot of good news already priced in; probably too much. This is a stark contrast to a year ago when it only took “less negative” sequential data and earnings performances to take the market higher. Those days are gone.
Mr. Market has sent out an early message this year that he is going to be far more discriminating – this will not be another year when the rising tide lifts all the boats. The shorts have long been covered, the hedge funds have reached their high-water marks, mutual fund manager cash ratios are back at the lows, and the VIX index is half the level it was a year ago in a show of how the market has shifted from being completely catatonic to completely complacent.
While there have been some upside surprises in the likes of Intel and Starbucks, as we saw yesterday in Morgan Stanley’s results, it remains a tough slog for the financials, which have generated very disappointing results when it comes to top-line performance – evidence that a new credit cycle is somewhere off in the distance but certainly not a present-day reality. The Fed has a tough choice ahead and it’s not about raising rates – it’s about whether it will have to end up expanding its Quantitative Easing program and to do so, would be a gross acknowledgment to the prevailing bullish consensus that organic economic growth is just around the corner (if not here already based on the plethora of economic commentaries that come across our desk).
As for the bond market, we continue to see an overwhelming consensus that interest rates must move higher because of large-scale fiscal deficits. Yet, here we are, and the 10-year note has made numerous attempts to take out the 4% threshold in the past year and each attempt failed – despite a surging stock market, surging credit market, surging commodities and green shoots galore.
This may sound a touch heretical, but the reality is that there is a very loose connection between fiscal deficits and the direction of bond yields. In 1999, the U.S. government ran an unprecedented budgetary surplus of $155 billion. What did the yield on the 10-year note yield do that year? It surged from 4.65% to 6.45%. Why? Because the economy was humming, unemployment was dwindling, capacity was being used up at a rapid rate, private sector credit demands were surging, consumer confidence was high and rising, and inflation pressures were brewing.
Fast forward to 2002, and all of a sudden we have the fiscal situation swinging to a deficit of $230 billion. What did the bond market have the absolute temerity to do that year? It posted a huge drop in 10-year yields to 3.8% from 5.1%. So the yield at the end of the 2002 was actually 265bps lower than it was at the beginning of 2000 despite a massive $385 billion swing in the fiscal backdrop from surplus to deficit.”