David A. Rosenberg January 11, 2010Chief Economist & Strategist Economic Commentary [email protected]+ 1 416 681 8919MARKET MUSINGS & DATA DECIPHERING Breakfast with Dave MARKET THOUGHTS TO START OFF THE WEEK IN THIS ISSUE • Market thoughts to st art off the week — the risk trade is back big time • From the sublime to the ridiculous — this continues to be the Houdini market; it goes up on any news, good or bad • One overvalued marke t — on a normalized Shiller P/E basis, the S&P 500 is currently overvalued by 27% • Fiscal drag? U.S. states were forced to cut spending by 5.4% last year and not even that closed the massive fiscal gap caused by a record 12.5% slide in the revenue base • An ongoing credit contraction in the U.S. — consumer credit plunged a record $17.5 billion in November • Shortage of income — as we saw in last Friday’s average hourly earnings data, there is precious little income growth to be found in the labour market • Holiday shopping in the U.S. came in better than expected • U.S. commercial real estate in a deep funk The risk trade is back big-time, despite the soft tone to the payroll data. Investors are looking ahead to earnings season, starting today with Alcoa, and see that the consensus has some nice tidings — like a +184% YoY trend in S&P earnings; +8% ex- financials. So there is excitement building, as inevitable as it has been given the depression in earnings a year ago (the base effect here is huge for Q4) that a record nine quarters of negative YoY earnings is about to be snapped. Even better, revenue growth is expected to be +7.6%, which would represent the first positive quarter since 2008 Q3 (again, helped by complimentary comparisons from a year ago) — and up from the 6.3% consensus estimate for top-line growth back in November. At the same time, the fact that total EPS consensus estimates for Q4 have actually come down in the past two months (by $1.72 per share to $15.80), as per today’s WSJ (see page C2) is reason to be bulled up because this “bodes well for another round of big earnings beats”. That is today’s sentiment — good news is good news and bad news is good news. The fact that we just saw the first bank failure of the year (Horizo n bank in Washington State) or the largest contraction of U.S. consumer credit ever recorded largely went unnoticed. The focus overnight was on the Chinese trade data, which showed a 17.7% YoYjump in exports in December — more than four times the consensus estimate and the first increase in 14 months. Imports are also booming (+55.9% YoY!) a nd China just printed auto sales for 2009 that came in at 13.6 million units, which surpassed the U.S.A. for the first time and were up 4% from a year ago (U.S. sales sagged 2% by way of compa rison). Still, after sanctioning a whopping three basis point increase in interest rates last week, China’s Finance Minister also warned against withdrawing stimulus measures “too early”. Concerns over “exit strategies” are starting to fade. So what we have on our hands are sizeable equity market gains overnight together with discernible gains in the commodity complex, notably gold and oil — West Texas Intermediate is now at a 15-month hig h. Copper is coming back after a two-day slump as reports stream out of China showing that imports of the red metal climbed for back-to-back months after a brief respite. (Warning here — all that import activity has not been translated into usage because from our lens, copper stockpiles have risen 85% since mid-2009 and now stand at a six- year high. The last time copper inventor ies were at today’s level, the price w as sitting closer to $2.00 a pound, not $3.50.) Please see important disclosures at the end of this document. Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highest level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports, visitwww.gluskinsheff.com
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8/14/2019 David a. Rosenberg Chief Economist & Strategist
David A. Rosenberg January 11, 2010 Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with DaveMARKET THOUGHTS TO START OFF THE WEEK
IN THIS ISSUE
• Market thoughts to startoff the week — the risk
trade is back big time
• From the sublime to theridiculous — this continues
to be the Houdini market;it goes up on any news,good or bad
• One overvalued market —on a normalized ShillerP/E basis, the S&P 500 iscurrently overvalued by27%
• Fiscal drag? U.S. stateswere forced to cutspending by 5.4% lastyear and not even thatclosed the massive fiscalgap caused by a record12.5% slide in therevenue base
• An ongoing creditcontraction in the U.S. —consumer credit plungeda record $17.5 billion inNovember
• Shortage of income — aswe saw in last Friday’saverage hourly earningsdata, there is preciouslittle income growth to befound in the labourmarket
• Holiday shopping in theU.S. came in better than
expected
• U.S. commercial realestate in a deep funk
The risk trade is back big-time, despite the soft tone to the payroll data. Investors are
looking ahead to earnings season, starting today with Alcoa, and see that the
consensus has some nice tidings — like a +184% YoY trend in S&P earnings; +8% ex-
financials. So there is excitement building, as inevitable as it has been given the
depression in earnings a year ago (the base effect here is huge for Q4) that a record
nine quarters of negative YoY earnings is about to be snapped.
Even better, revenue growth is expected to be +7.6%, which would represent the
first positive quarter since 2008 Q3 (again, helped by complimentarycomparisons from a year ago) — and up from the 6.3% consensus estimate for
top-line growth back in November. At the same time, the fact that total EPS
consensus estimates for Q4 have actually come down in the past two months
(by $1.72 per share to $15.80), as per today’s WSJ (see page C2) is reason to
be bulled up because this “bodes well for another round of big earnings beats”.
That is today’s sentiment — good news is good news and bad news is good
news. The fact that we just saw the first bank failure of the year (Horizon bank
in Washington State) or the largest contraction of U.S. consumer credit ever
recorded largely went unnoticed.
The focus overnight was on the Chinese trade data, which showed a 17.7% YoY
jump in exports in December — more than four times the consensus estimate and the first increase in 14 months. Imports are also booming (+55.9% YoY!) and
China just printed auto sales for 2009 that came in at 13.6 million units, which
surpassed the U.S.A. for the first time and were up 4% from a year ago (U.S. sales
sagged 2% by way of comparison). Still, after sanctioning a whopping three basis
point increase in interest rates last week, China’s Finance Minister also warned
against withdrawing stimulus measures “too early”. Concerns over “exit
strategies” are starting to fade.
So what we have on our hands are sizeable equity market gains overnight
together with discernible gains in the commodity complex, notably gold and oil —
West Texas Intermediate is now at a 15-month high. Copper is coming back
after a two-day slump as reports stream out of China showing that imports of the
red metal climbed for back-to-back months after a brief respite. (Warning here— all that import activity has not been translated into usage because from our
lens, copper stockpiles have risen 85% since mid-2009 and now stand at a six-
year high. The last time copper inventories were at today’s level, the price was
sitting closer to $2.00 a pound, not $3.50.)
Please see important disclosures at the end of this document.
Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highest
level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports,
visit www.gluskinsheff.com
8/14/2019 David a. Rosenberg Chief Economist & Strategist
contraction, weak labourmarket and softeningincome conditions, holidayshopping did come inbetter than expectations…
As we saw on Friday in the average hourly earnings data in the U.S., there is
precious little income growth to be found in the labour market. And in the
markets, we have a combination of very low yields in the government bond arena,
and in equities we had a situation where dividend cuts caused investors to lose
$58 billion in 2009. A record 804 companies cut their payouts last year, so we
are now left with a yield on the S&P 500 of below 2% for the first time in over two
years. Short-dated, high-quality corporate paper still look quite good in this
environment, at least on a relative basis, as do utilities, which carry a 4% yield in
the U.S.A. and 5% in Canada.
HOLIDAY SHOPPING BETTER THAN EXPECTED
Despite the credit contraction, weak labour market and softening income
conditions, holiday shopping did come in better than expectations. This by no
means suggests that the U.S. consumer is coming back strong — it is more a sign that retailers this year, in contrast to last, entered the holiday shopping season
lean and mean.
Average discounts were around 25% compared with 40% last year. And there was
a wave of last-minute and post-Christmas shopping. As a result, 75% of retailers
managed to beat their targets — with breadth we last saw back in March 2007.
Electronics, shoes and toys were the big winners, while apparel lagged but still did
quite well with the weather turning a tad frosty. Even luxury retailing did fine. It
seems the only laggard were the retailers that cater to the teenager crowd and
maybe this is where the 20% youth unemployment rate played a role.
… But this by no meanssuggests that the U.S.consumer is coming backstrong…
• The International Council of Shopping Centers peg the YoY sales growth rateat +2.8% (December/December).
Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms.Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to theprudent stewardship of our clients’ wealth through the delivery of strong, risk-adjustedinvestment returns together with the highest level of personalized client service. OVERVIEW
As of September 30, 2009, the Firmmanaged assets of $5.0 billion.
Gluskin Sheff became a publicly tradedcorporation on the Toronto Stock Exchange (symbol: GS) in May 2006 andremains 65% owned by its senior
management and employees. We havepublic company accountability andgovernance with a private company commitment to innovation and service.
Our investment interests are directly aligned with those of our clients, asGluskin Sheff’s management andemployees are collectively the largestclient of the Firm’s investment portfolios.
We offer a diverse platform of investmentstrategies (Canadian and U.S. equities,Alternative and Fixed Income) andinvestment styles (Value, Growth and
Income).1
The minimum investment required toestablish a client relationship with theFirm is $3 million for Canadian investors and $5 million for U.S. & Internationalinvestors.
PERFORMANCE
$1 million invested in our Canadian ValuePortfolio in 1991 (its inception date)
would have grown to $15.5 million2
onSeptember 30, 2009 versus $9.7 millionfor the S&P/TSX Total Return Index
over the same period.$1 million usd invested in our U.S.Equity Portfolio in 1986 (its inceptiondate) would have grown to $11.2 millionusd
2on September 30, 2009 versus $8.7
million usd for the S&P 500 TotalReturn Index over the same period.
INVESTMENT STRATEGY & TEAM
We have strong and stable portfoliomanagement, research and client serviceteams. Aside from recent additions, ourPortfolio Managers have been with theFirm for a minimum of ten years and wehave attracted “best in class” talent at all
levels. Our performance results are thoseof the team in place.
Our investment interests are directlyaligned with those of our clients, as Gluskin
She ff ’s management and employees are collectively the largest client of the Firm’sinvestment portfolios.
$1 million invested in our
Canadian Value Portfolio
in 1991 (its inception
date) would have grown to
$15.5 million2 on
September 30, 2009
versus $9.7 million for the
S&P/TSX Total Return
Index over the same
period.
We have a strong history of insightfulbottom-up security selection based onfundamental analysis.
For long equities, we look for companies with a history of long-term growth andstability, a proven track record,shareholder-minded management and ashare price below our estimate of intrinsic
value. We look for the opposite inequities that we sell short.
For corporate bonds, we look for issuers
with a margin of safety for the paymentof interest and principal, and yields whichare attractive relative to the assessedcredit risks involved.
We assemble concentrated portfolios —our top ten holdings typically representbetween 25% to 45% of a portfolio. In this
way, clients benefit from the ideas in which we have the highest conviction.
Our success has often been linked to ourlong history of investing in under-followed and under-appreciated smalland mid cap companies both in Canada
and the U.S.
PORTFOLIO CONSTRUCTION
For further information,
please contact
questions@gluskinshe ff .com
In terms of asset mix and portfolioconstruction, we offer a unique marriagebetween our bottom-up security-specificfundamental analysis and our top-downmacroeconomic view.
Page 8 of 9
Notes:Unless otherwise noted, all values are in Canadian dollars.
1. Not all investment strategies are available to non-Canadian investors. Please contact Gluskin Sheff for information specific to your situation.
2. Returns are based on the composite of segregated Value and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses.
8/14/2019 David a. Rosenberg Chief Economist & Strategist
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