‘Era of the Green Shoots is Over’, Rosenberg

According to Dave Rosenberg the ‘era of the green shoots is over.’

It was fun while it lasted but if the latest set of data couldn’t kybosh the ‘green shoot’ theory, then FedEx sure did when it posted earnings results that fell well short of target and the CEO announcing that the economic backdrop was “extremely difficult”. On top of that, UAL stated that its 2Q traffic is expected to drop as much as 10.5% YoY on a 9.0% decline in available seats. Not only have the transports rolled over but so have the banks — the group that led the rally since early March — with a huge 3.3% loss yesterday (and now the group is down 20% for the year). Due to mounting concerns over commercial real estate exposure, S&P cut the ratings and/or outlooks on 22 banks yesterday (the regional banks of course — the ones that the Fed, Treasury and White House don’t believe are too big to fail. As an aside, to see how the U.S. government’s behaviour is dramatically altering private sector incentives, see Too Big to Fail, or Succeed in today’s op-ed section of the WSJ.) We also see in today’s FT (page 28) that Moody’s is considering a wave of bank downgrades of its own premised on its concerns surrounding the quality of subordinated debt on bank balance sheets.

Screening for the CPI

The consumer price index rose by a much lower than expected 0.1% in May and this, like the PPI, took the YoY trend to a five-decade low, of -1.0%. We are going to see some larger monthly prints due to higher gasoline prices but because of the huge base effects of a year ago, when oil hit $150/bbl, we could still very likely see the YoY headline inflation rate sink to as low as -2.0% by the end of the summer. It is very clear that we are either in an extremely benign inflation environment or on the precipice of a deflationary environment. Either way, pricing power is confined to relatively few sectors.

Who has Good Pricing Trends at a time of -5.0% PPI?

We also ran sector screens on actual pricing power using the PPI, which is deflating at a 5.0% YoY pace, the most pronounced deflation rate in 50 years. The key is to identify the sectors whose pricing is not deflating, let along making new 50-year lows. So what is hanging in well? Soft drinks, alcoholic beverages, chicken producers, confectionary products, pet food/pet products and toys/games all look good. [VP]

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