It’s Not “Liquidity” Driving the Market
What’s that? You need more cowbell David Rosenberg? Here’s Rosie in his daily letter explaining how it’s not liquidity that’s driving the market:
You can always rest assured that a peak is at hand when you read and hear about how “liquidity” is driving the market. For one, nobody even has a clue as to how “liquidity” is even defined. It’s basically a catch-all term for “I don’t know”. But what we do know is that short covering remains an important source of buying power for equities as the bears bail out — short interest on the NYSE, for example, shrunk 2.4% in the second half of August, and was down 2.9% on the Nasdaq. Just in case you were wondering how it was that the S&P 500 managed to advance 20 points in the second half of the month.
The truth of the matter is that investment grade corporate bonds have outperformed the S&P 500 by 70 basis points so far this year — income at a reasonable price remains a primary theme. The problem with the equity market is that dividends no longer comprise a critical part of the total return pie as it used to. The reliance now is almost purely on capital appreciation, which can be secured when unit labour costs are falling at annual rate of at least 5%, as has been the case over the last two quarters. However, that rate of decline cannot possibly be sustained. But what can be sustained, and likely will be, is the deflationary backdrop in private sector demand, which influences the revenue line. Take note that 250 S&P 500 companies cut their dividends in 2Q, the highest number in over 50 years (and as per the WSJ, stock buybacks have declined now for six quarters in a row).
Take note that the Fed is now pumping reserves aggressively into the banking system again, with the monetary base accelerating at a 141% annual rate over the past four weeks. But the money multiplier is still contracting — over this time frame, M1 has contracted at a 28.7% annual rate; M2 has fallen at a 4.9% annual rate; and MZM has shrunk at a 6.2% annual rate. In other words, and with all deference to the excitement that a 50%+ bear market rally can engender in the media, the credit system is still … broken. When the investment community eventually figures out that the economy is not in, or even is it entering, a V-shaped recovery there will undoubtedly be a new round of deflated price discovery, followed by years of anemic economic growth, persistently high unemployment, ongoing consumer frugality, rising savings rates, and a prolonged period in which portfolios will move further towards strategies that provide income and preservations of capital rather than a focus on aggressive capital appreciation potential.
Tags: david rosenberg, deflation, economy
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By Miles Saunders, Tuesday, September 15, 2009 @ 8:21 pm
We need more cowbell!
By Angie Cahell, Tuesday, September 15, 2009 @ 8:35 pm
I second that notion! Rosie is always a good read.
By Mike P, Tuesday, September 15, 2009 @ 9:03 pm
I’ve been buying corporate bonds recently. I don’t usually buy bonds, but I am now.
Oh, and keep posting Rosenberg!