David Rosenberg has some bearish words in his latest investment letter. “Before you uncork the champagne,” he writes, take a look at how few holiday shoppers are spending with credit cards.
And before you get excited about consumer confidence, note that we’re down several points from June and still miles away from the 90’s era consumer confidence.
His outlook for 2011 has big reservations too.
#1 People are overbullish on U.S. equity
Consensus views of 1,350 on the S&P 500 and 4% real GDP growth are far too high. Not one strategist polled by Bloomberg is bearish on equities. So we have a complacency problem on our hands, the exact opposite of what we experienced at the March 2009 and the July 2010 lows. For that reason, the outlook for at least the first half of 2011 is less than positive.Moreover, equities are at the high end of the range and are priced for good news on earnings and economic growth. Valuations are not at extremes (however, according to the Shiller normalized P/E ratio the market is still on the expensive side) but sentiment is. Negative divergences are increasingly apparent and momentum is actually subsiding.
We see better buying opportunities ahead but continue to favour companies that are “special situations” — consistent dividend growth, undervalued, strong balance sheets, and non-cyclical in the sense that they have low correlations with the direction of North American growth. Negative divergences are increasingly apparent and momentum is actually subsiding.
#2 Two percent growth or lower
Image: tiearescott via flickr
In my view, real GDP growth in the U.S.A. is set to slow from around 3% in 2010 to 2% in 2011, or possibly even lower. This is not a double-dip but it is a slower growth profile. We went to 3% in 2010 from -2.6% in 2009 so the second derivative was positive. But for the coming year, the second derivative is likely going to decline. This augurs for a non-cyclical exposure; more defensive and still yield-oriented. As the Bank of Canada strongly suggested, global growth is going to slow and hence a sense of caution over global multinational cyclicals is warranted.
#3 More problems in Europe, China and munis
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The fiscal and sovereign credit problems in Europe are not going away. Neither is the instability in the U.S. state and local government sector. Policy tightening in China is also a source of uncertainty. Volatility is likely to intensify with this outlook.
#4 A stronger dollar
The U.S. dollar is likely to strengthen, particularly versus the yen (the Bank of Japan and Ministry of Finance want the overvalued yen to weaken) and the euro (they need it since Eurozone is tightening fiscal policy more dramatically).
#5 Emerging markets will struggle
Emerging markets will struggle as central banks move more forcefully to curb accelerating inflationary pressure. The Chinese stock market may have already signaled that a major top in the region has been achieved.
#6 Flattening yield curve
Image: Lachlan Hardy via flickr
The U.S. fiscal borrowing need for 2011 is no higher than it was for 2010. As such, fiscal concerns in terms of what it means for lower long-term rates are misguided. The yield curve is too steep and will flatten, led by lower bond yields. The recent increase in long-term rates is very similar to what we saw happen in December 2009 and helped ensure that bonds would enjoy a year of positive returns in 2010.
#7 Canada is overvalued
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The Canadian dollar is overvalued by at least five cents and is likely to succumb to a softer profile for commodity prices. Basic materials appear over-owned in the short-term and bullish sentiment is at a high. The policy tightening effect out of emerging Asia is an obstacle, especially at current price levels. There is likely an election in Canada and the U.S.A. will not be beset by political uncertainty until 2012. Hence some caution as it pertains to the outlook for the loonie (though I would look to get more positive at 93 cents).
#8 Deflation worries
Image: jefield via flickr
Deflation remains the primary intermediate risk for the U.S., notwithstanding the prospect of a near-term follow-through from the recent surge in many commodity prices. Money velocity remains dormant despite the Fed’s reflation efforts. There remains far too much excess capacity in the labour market. This requires an ongoing focus on SIRP (safety and income at a reasonable price) strategies for investors.
#9 Some good picks in bonds
Corporate bonds are no longer inexpensive but within this space, financials and utilities screen best for value in terms of sectors, the 5-7 year part of the curve in terms of duration, and the BBB-BB area in terms of ratings.
#10 More housing pain
Image: Christian Haugan via flickr
One of the most pronounced macro risks is another leg down in U.S. home prices, which actually seems to be underway but is currently receiving very little attention.
Bonus: A few things Rosenberg is bullish on
Our preferred “buy list” are out-of-favour groups that are not priced for accelerating growth: Utilities, pipelines, oil income, pharmaceuticals (dividend focus as well as being out of favour), food products, and grocery stores.