breakfast with dave 121509

8/14/2019 Breakfast With Dave 121509

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David A. Rosenberg December 15, 2009Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Latkes with DaveWHILE YOU WERE SLEEPING

IN THIS ISSUE

While you were sleeping economic data across theglobe were certainly not of

the bond-friendly variety

U.S. money velocity andthe S&P 500 there is avery tight relationshipbetween the two

Can the U.S. yield curvesteepen even more?

We dont have a biginflation view, but in caseinflation were to stage acomeback, we havehighlighted some ways toplay that scenario

Post-Christmas sales maydisappoint according toa consumer survey, only35% of consumers plan toshop after the holiday

season GDP is not everything

the data is revisedmassively in the futureand is not the bestbarometer of economichealth

Why inflation expectationsmay be creeping higher

Speculation runs amok just take a look at thelatest Commitment ofTraders report

The Empire strikes out New York Empire Statemanufacturing indexplunged in December

Light trucks exert heavyimpact on U.S. producerprices

Data overnight were certainly not of the bond-friendly variety with Frances

inflation rate joining China and swinging into positive territory for the first time in

seven months (+0.5% YoY and an expected 0.2% MoM rise). Of course, much of

this reflects depressed year-ago bases, which are exaggerating the swing. Core

CPI in France actually FELL 0.1% MoM and is running at a tepid 1.7% YoY rate.

U.K. headline inflation also ticked up 0.3% MoM (consensus was at +0.2%) and

this took the YoY rate to 1.9% in November from 1.5%. European auto sales

continue to respond to government incentives and popped 27% YoY inNovember again flattered by depressed November 2008 levels. This is a

rapid acceleration from the +11.2% pace in October and +6.3% in September.

So if momentum is your game, then the automotive sector across the pond has

its motor running.

The German ZEW investor sentiment did dip to 50.4 in December from 51.1 in

November but this is being treated as a green shoot as it did not drop to 50 as

was widely expected (though it is down now for three months in a now now in

this era of good news only, that was a tidbit that was really tough to find).

In terms of market action, the U.S. dollar is firm and the commodity currencies are

selling off in the aftermath of comments from the Reserve Bank of Australia (from

the policy meeting minutes) which have investors believing that the rate hike in theLand of Oz may be over and done with (or that at least a pause is in order). The

greenback is also now trading at over a two-month high against the Euro even

though it is the ECB that has been more vociferous over an exit strategy. Then

again, while the U.S.A. does have Illinois and California, it does not have Spain,

Portugal, Ireland and Greece to worry about in terms of default risks.

Bonds are trading quite jittery as inflation expectations are creeping in just as the

supply schedule is looking more ominous. Equities are lower too with the U.S.

stock market opening on a down note (U.S. futures were in the red and the S&P

500 is coming off a four-day winning streak that took it to a new 14-month high

yesterday). Asian equities were off 0.8% overnight with declines right across the

board (talk about a region that is more than fully priced at the current time

trading at 22x forward earnings). Commodities are trading lower today along withthe firmer dollar the DXY index just poked its nose above the 100-day moving

average on the upside; gold is testing the 50-day moving average to the downside;

oil has already sliced through its 50 and 100-day moving averages and a test of

the 200-day moving average would imply $65/bbl.

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc. is one of Canadas pre-eminent wealth management firms. Founded in 1984 and focused primarily on high networth 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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3/9

December 15, 2009 LATKES WITH DAVE

CAN THE YIELD CURVE STEEPEN EVEN MORE?

We do have the steepest

U.S. yield curve in threedecades on our hands, but

that is not to say that it

cannot get even steeper

We do have the steepest U.S. yield curve in three decades on our hands, but that

is not to say that it cannot get even steeper. For one, the Fed is going to come out

again this week, in all likelihood, and state for the record that it will be keeping

rates near zero for an extended period of time. This should help anchor the front

end of the yield curve.

As for the back end of the curve, if last weeks bad case of indigestion was any

sign in terms of the poor showings at the Treasury auctions, there is a risk that

we end the year with more of the same. There apparently is going to be a

whopping $118 billion of new Treasury supply to hit the market in the last week

of December, this at a time when liquidity conditions are not exactly going to be

that robust.

HOW TO PLAY INFLATION?

There is no sense in being dogmatic. But just in case inflation were to stage a

comeback, this is how one would prepare for it: We dont have a big

inflation view, but you

never score brownie points

by being dogmatic

Precious metals (while gold grabs the spotlight, silver has surged 52% thisyear and has far outpaced the 27% runup in gold; and the gold/silver ratio,while down from a peak of 84 to 66, is still above the average of 54 over thepast three decades).

An even steeper U.S. yield curve! TIPS (or real return bonds) the 5-year TIPS breakevens right now point to an

inflation expectation of just over 1.7%, whereas consumer expectations arecloser to 2.6%.

Short-term duration corporate bonds (and go out the credit curve). Commodity currencies Canadian Loonie, New Zealand Kiwi, Aussie dollar,Brazilian Real, and Norwegian Kroner. Basic material stocks (including energy) as well as consumer staples (tobacco,

food/beverage).

We dont have a big inflation view, but you never score brownie points by being

dogmatic. If (when?) the massive amounts of fiscal and monetary stimulus ever

do show through in final inflation (this will hinge on a renewed expansion in

household balance sheets and a fresh credit-creation cycle), these are the areas

that would likely garner the most investor interest.

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UTILITIES VERSUS FINANCIALS

As Chart 2 illustrates, why buy U.S. financial stocks when you can pick up a

record yield spread in the utilities sector.

CHART 2: A BIGGER PAYOUT IN THE UTILITY SECTOR

THAN IN THE FINANCIAL SECTOR

United States: Dividend Yield: S&P Utilities relative to Financials*

(ratio)

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07

As of Q4 2009, Dividend Yields:

Utilities = 4.10 and Financials = 1.51

*Prior to 1974, using Financial Money Centers as a proxy for financials. After 2001, using GICS classification for

utilities and financials

Source: Haver Analytics, Gluskin Sheff

POST-CHRISTMAS SALES MAY DISAPPOINT

A survey by Americas Research Group over the weekend showed that only 35%

of consumers intend to do any shopping the week after Christmas. This is down

from 38% a year ago and below the typical range of 48-55% over the past

decade. Moreover, and this is bound to depress January sales data, the share

of shoppers buying gift cards dropped to 49% this year from 53% at this time in

2008. A mere 24% said they shopped this year with a credit card the new era

of cash-and-carry has arrived. Apparel spending seems to have been the biggest

casualty in this new holiday frugality people would rather play Rock Band it

seems than wear a new outfit.

GDP ISNT EVERYTHING

We mentioned yesterday that there is an outside chance that we could see Q4 real

GDP approach a 4-5% range at an annual rate, well above current consensus

expectations. A good chunk of that is in inventories, not final demand, but so be it.

The point we are trying to make is that GDP is not only revised massively in the

future but it is not the best barometer of economic health, notwithstanding all the

attention it receives. Lets not forget that Japan has had nearly 60-positive GDP

quarters since its bubble burst in the early 1990s.

You want to know what is really happening beneath the veneer of the data? Go

have a look at the front page of todays NYT (Poll Reveals Depth and Trauma of

Joblessness in U.S.). More than half the ranks of the unemployed have been

forced to borrow money from friends or relatives since losing their jobs.

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WHY INFLATION EXPECTATIONS MAY BE CREEPING HIGHER

Just as the Nasdaq finallymanages to pierce the

2,200 mark, we get this

piece of downbeat tech-

related news in the form of

the New York Feds Empire

State Manufacturing

survey

It could have more to do with government mandated cost-push inflation than

anything related to consumer demand-pull inflation. But we did see in todays

Investors Business Daily an article, which stated that governments have enacted

297 protectionist trade measures in the past year. (Amazingly, it was just over a

year ago when the G-20 meeting was held in Washington when it was agreed that

no such anti-trade measures would be taken.) The number of planned measures

has risen by 50 (!) in just the past three months the pipeline keeps growing. This

is why gold is a buy on pullbacks like the one we have on our hands right now.

SPECULATION RUNS AMOK

We just sifted through the latest Commitment of Traders report from the

Commodity Futures Trading Commission (looking at both futures and options) for

the week of December 8th:

S&P 500: net speculative longs of 151,006 contracts. VIX: net speculative shorts of 18,872 contracts. Gold: net speculative longs of 264,775 contracts (still near a record high). Silver: net speculative longs of 43,069 contracts. Copper: net speculative longs of 12,626 contracts (new high for the cycle). Oil: net speculative longs of 141,550 contracts.All this has occurred even with the U.S. dollar bouncing back and the net

speculative short positions on the dollar reverting to net longs in late November

and now standing at 13,854 contracts. And, the commodity complex is hanging in

even with the Baltic Dry Index rolling over again.

THE EMPIRE STRIKES OUT!

Just as the Nasdaq finally manages to pierce the 2,200 mark, we get this piece of

downbeat tech-related news in the form of the New York Feds Empire State

Manufacturing survey this index (one proxy for the ISM index) plunged to +2.55

in December from +23.5 in November and the second decline in a row. This takes

the index down to its lowest level since last July. And the details were as soft as

the headline:

Orders fell to 2.20 in December from 16.66 in November and down from the30.82 peak level we saw back in October. At 2.20, this is the lowest level inorders since June.

Shipments also slowed in December, actually halting, to 6.30 from 12.97 inNovember and 35.08 in October. Like orders, shipments are at their lowestlevel in six months.

The manufacturing sector in the NY region continues to reduce theirinventories, at -18.42 in December versus -17.11 in November. We have notseen a positive inventory reading since August 2008.

There is some margin compression going on in the manufacturing sector inthe NY region. Prices paid rose 9.2 points to 19.74 in December highestlevel since September. Prices received dipped to a 4 month low of -9.21 inDecember from 2.63 in November.

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The employment indicators also swung back to negative terrain. The numberof employees fell to -5.23 from 1.32 in November and way off the 10.39 level

we saw back in September. And the workweek also swung from +5.26 inNovember to -5.26 in December.

Chart 3 below shows what this data could mean for the Nasdaq near-term.

CHART 3: WHAT THE EMPIRE MANUFACTURING INDEX

COULD MEAN FOR THE NASDAQ NEAR TERM

United States

(percent)

-40

-30

-20

-10

0

10

20

30

40

05 06 07 08 09

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000Empire State Manufacturing Diffusion

Index (net percent: left hand scale)

Nasdaq Composite

(right hand scale)

r = 0.71

Source: Haver Analytics, Gluskin Sheff

LIGHT TRUCKS EXERT HEAVY PPI IMPACT

The U.S. producer price index (PPI) offered up a huge upside surprise today the headline came in at +1.8% (market was at +0.9% MoM) and the core

(excluding the effects of food and energy) was +0.6% (market was at +0.2%

MoM). The story was almost exclusively in light trucks where prices soared 4.2%

outside of that, the core PPI was a tame +0.2%. Remember that light truck

prices sank 5.2% in October and that was the only reason why the core PPI was

down 0.6% that month.

Best to look at the broad trends total PPI negative 0.7% at an annual rate on a

three-month basis, +0.7% on a six-month basis, and +1.2% on a YoY basis. Not

much of an inflation story here, to tell you the truth.

The pipeline measures were well behaved too the core intermediate PPI was

+0.3%, but that followed a 0.2% decline in October and the YoY trend isensconced in negative terrain, at -1.2%. And the core crude PPI the very back

end of the production process posted a 0.8% decline, the first falloff in eight

months. So in a nutshell, less inflation here than really meets the eye.

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STRONG PRODUCTION NUMBER OUT OF THE U.S.A.

The one thing we can takeaway from the November

U.S. industrial production

report is the limitations of

the ISM index

The one thing we can take away from the November industrial production (IP)

data is the limitations of the ISM index. The diffusion index jumped to 55.7 in

October from 52.6 and IP was flat; then we see ISM roll over in November, to

53.6, and IP spikes 0.8% MoM.

The gains were broadly based too mining +2.1%, automotive +1.8%,

machinery +0.6%, computers/electronics +0.4%, materials +1.3%, even

construction supplies were +1.6% (government infrastructure kicking in?).

With October and November results in, industrial production is running at a 5.4%

annual rate for Q4. As Ive been saying since last week, watch consensus GDP

expectations continue to ratchet up. Problem for equities is that this was priced in

before the economists figured it out (ahem) and bond yields are ratcheting up.


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Gluskin Sheffat a Glance

Gluskin Sheff+ Associates Inc. is one of Canadas 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 September30, 2009, the Firmmanaged assets of$5.0 billion.

Gluskin Sheff became a publicly tradedcorporation on the Toronto StockExchange (symbol: GS) in May2006 andremains 65% owned by its senior

management and employees. We havepublic company accountability andgovernance with a private companycommitment to innovation and service.

Our investment interests are directlyaligned with those of our clients, asGluskin Sheffs management andemployees are collectively the largestclient of the Firms 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

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PERFORMANCE

$1 million invested in our Canadian ValuePortfolio in 1991 (its inception date)

would have grown to $15.5 million2

onSeptember 30, 2009 versus $9.7millionfor 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&P500TotalReturn 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

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Our investmentinterests are directlyaligned with those ofour clients, as Gluskin

Sheffs management andemployees arecollectively the largestclient of the Firmsinvestment 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

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We have a strong history of insightfulbottom-up security selection based onfundamental analysis. For long equities, welook for companies with a history of long-term growth and stability, a proven trackrecord, shareholder-minded managementand a share price below our estimate ofintrinsic value. We look for the opposite inequities that we sell short. For corporatebonds, we look for issuers with a margin ofsafety for the payment of interest andprincipal, and yields which are attractive

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In terms of asset mix and portfolioconstruction, we offer a unique marriagebetween our bottom-up security-specificfundamental analysis and our top-downmacroeconomic view, with the notedaddition of David Rosenberg as ChiefEconomist & Strategist.

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.


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IMPORTANT DISCLOSURES

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that could affect the objectivity of this report. This report should not beregarded by recipients as a substitute for the exercise of their own judgmentand readers are encouraged to seek independent, third-party research onany companies covered in or impacted by this report.

Individuals identified as economists do not function as research analystsunder U.S. law and reports prepared by them are not research reports underapplicable U.S. rules and regulations. Macroeconomic analysis isconsidered investment research for purposes of distribution in the U.K.

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Neither the information nor any opinion expressed constitutes an offer or aninvitation to make an offer, to buy or sell any securities or other financialinstrument or any derivative related to such securities or instruments (e.g.,options, futures, warrants, and contracts for differences). This report is notintended to provide personal investment advice and it does not take intoaccount the specific investment objectives, financial situation and theparticular needs of any specific person. Investors should seek financialadvice regarding the appropriateness of investing in financial instrumentsand implementing investment strategies discussed or recommended in thisreport and should understand that statements regarding future prospectsmay not be realized. Any decision to purchase or subscribe for securities inany offering must be based solely on existing public information on suchsecurity or the information in the prospectus or other offering documentissued in connection with such offering, and not on this report.

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