breakfast with dave 121609

8/14/2019 Breakfast With Dave 121609

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David A. Rosenberg December 16, 2009Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Breakfast with DavePLEASE NOTE THAT BREAKFAST WITH DAVE IS TAKING A BREAK FOR THE

HOLIDAYS AND WILL RETURN ON JANUARY 4, 2010.

HAPPY HOLIDAYS EVERYONE!

WHILE YOU WERE SLEEPING

The U.S. dollar is consolidating but the currency du jour is the Sterling in the

aftermath of its November unemployment data, which showed the first decline

since February 2008 (-6,300; consensus was +12,500). The once-hot Aussie has

had a few pegs knocked down from underneath it as Q3 GDP came in at the down-under end of expectations, at +0.2% (consensus was +0.4%) and Reserve Bank of

Australia officials are downplaying further rate hikes.

Bonds are doing very little and the action in equities is mixed to higher Europe

and U.S. futures in the green; in Asia, we did see Japan, India and Singapore

higher, while China, Hong Kong and Korea lower. Commodities, in general, are bid

with gold bouncing off its 50-day moving average. Bloomberg News runs with a

story of how global central bank buying of bullion is a sell signal because monetary

authorities were selling into bear market through the 1980s and 1990s and that

proved to be a wrong strategy. But the bottom line is that the central banks were

selling for more than 10 years until gold hit its trough, and they only recently began

to buy. So from our lens, the fact that central banks are in the early stages of their

diversification back into bullion is actually a constructive signpost.

INTERESTING MARKET MOVES

The U.S. dollar, left for dead just a few weeks ago, has staged a huge comeback

and has popped above both its 50- and 100-day moving averages. Most of the

strength has been against the Euro, which has broken down as the world now sees

that the regions fiscal and banking sector woes are even worse than they are in

the United States.

Commodities are hanging in even in the face of the U.S. dollar strength, especially

copper and we see that gold so far is successfully testing its trend lines. Be that

as it may, the renewed decline in the Baltic Dry Index bears watching for the

commodity complex.

The Treasury market has also weakened materially on the back of concerns that

the Fed may begin to boost the discount rate (its balance sheet has already shrunk

17% in the past three weeks but remains bloated nonetheless), a growth scare

under way (to the upside) and more massive government bond supply on its way.

We may at some point get some mortgage convexity selling to kick in and send

yields even higher in illiquid markets.

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

IN THIS ISSUE

While you were sleeping economic data in the U.K.and Australia came inbelow expected; bondsare doing very little andequities are mixed tohigher this morning

Interesting market moves

U.S. dollar has staged ahuge comeback, butcommodities are holdingin; U.S. treasury bondshave also weakenedmaterially on concerns

that the Fed may begin toboost the discount rate

GDP is not everything part2; as we stated yesterday,GDP is not the bestbarometer of economichealth, and we are notalone in this assessment

Still signs of softness strength in the U.S.industrial production datacame from materials andsupplies and the NAHBhousing index falls to itslowest level in six months

What the man said evenwhen he is behind closeddoors at the FOMCmeeting, Fed ChairmanBernanke still manages toget the message across

Will it be payback time in

2010? The U.S.government has a record$2.5 trillion in debt rollingover in 2010

No surprise in the U.S.housing starts data fundamental trend is stillvery weak


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December 16, 2009 BREAKFAST WITH DAVE

Keep an eye on any break above the nearby high of 3.89% on the 10-year Treasury

note yield. Moreover, it was interesting to see from yesterdays U.S. Treasury

International Capital (TIC) data that the Chinese were conspicuous by their absence

from the Treasury market in October in the lead-up to Obamas visit there.

Perhaps this was a subtle way to show whos really boss. It could well be that the

liquidity-driven phase of this bear market rally in equities is now behind us:

Keep an eye on any break

above the nearby high of3.89% on the 10-year

Treasury note yield

1. Fed balance sheet contracts; discount rate move could heightentightening expectations down the road.

2. Stronger dollar definitely an anti-liquidity development.3. Growth scare all of a sudden the real economy as opposed to the

financial economy begins to absorb part of the liquidity growth.

GDP IS NOT EVERYTHING PART 2

We mentioned two days ago, 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 (currently the Bloomberg consensus is expecting a 3.0% increase in

GDP). 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.

Yesterday, a quote from The Becker-Posner Blog (taken from the article titled:

Should We Jettison GDP as an Economic Measure?) was sent to us by a long time

reader, and friend, and it encapsulates what we believe:

But it is necessary to emphasize that it is just a starting point. I disagreewith economists who say the recession ended in the third quarter. The

depression (as I think we should call it if only because of its enormous

potential political consequences) has caused massive unemployment

with all the associated anxieties and hardships, has greatly reduced

household wealth, has caused private investment to turn negative, has

cost the government trillions of dollars in lost tax revenues and recovery

expenditures (TARP, the fiscal stimulus, the mortgage-relief programs,

the auto bailouts, etc.), has undermined belief in free markets and

altered the line between government and business in favor government,

and is threatening a future inflation while deepening our dependence on

foreign lenders. To view a change in GDP from negative to positive as

signifying the end of a depression (by which criterion the Great

Depression ended in 1933 and again in 1938) is to misunderstand theutility of GDP as a measure of economic activity.

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STILL SIGNS OF SOFTNESS

To little fanfare, the NAHBhousing market index fell in

December, to 16 from 17 in

November the lowest

reading in six months

We still have no clue how the last U.S. nonfarm payroll report could show such a

large increase in service sector employment at a time when the ADP and ISM

reports flagged discernible declines. And, how it was that a flat raw retail sales

result in November managed to translate into a 1%-plus spike in the government

data base is again one of lifes mysteries. All we can say is that while all the

components of GDP are pointing now to 4-5% real growth in Q4, this is not

necessarily a sign that the economy is out of sickbay. Japan had nearly 60

quarters of positive GDP growth since its credit bubble burst two decades ago, and

all they represented were noise around a flat trendline.

Lets also recognize that most of the strength in the industrial production report for

November was in materials (+1.2% MoM) and supplies (+1.0%). Finished

consumer goods production was really an average +0.3% the second weakest

print since June, in fact. So, we would not exactly characterize it is at a broadly

based report.

To little fanfare, the National Association of Home Builders (NAHB) housing market

index fell back to 16 in December (consensus was at 18) from 17 in November

and the nearby high of 19 in October. This was the lowest reading in six months

and leading the decline was a two point slide in the future sales expectations.

Considering the massive amount of stimulus out there in support of the residential

real estate market, the December level is tied for the fifth weakest result in the 25-

year history of the survey. It is clear that there are secular changes afoot with

respect to household attitudes towards credit, discretionary spending and

homeownership. There is really no other way to explain a 16-print today in the

NAHB index. To put a number like this into proper perspective is still below the

troughs of the prior two recessions (20 and 46 respectively). This report is nothingless than shocking.

CHART 1: SOME HOUSING RECOVERY

United States: National Association of Home Builders Housing Market Index

(all good = 100)

050505

80

60

40

20

0

Source: Haver Analytics, Gluskin Sheff

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CHART 2: HOUSING STARTS BOTTOMED, BUT NO RECOVERY YET

United States: Housing Starts

(thousand units at an annual rate)

098765432109

2400

2000

1600

1200

800

400


Chart 3 below is much like the one we published on Monday with regards to U.S.

retail sales the monthly noise around the downward trend. Lets not lose the

big picture, the 12-month average of housing starts, at 552k, is the lowest in

recorded history. That fact that we are bouncing along this curve, in view of the

dramatic efforts by the government to sponsor housing demand, is definitely

cause for pause.

CHART 3: NOISE AROUND THE TREND-LINE

United States: Housing Starts(thousand units at an annual rate)

450

650

850

1050

1250

1450

1650

1850

2050

2250

2450

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

(12-month

moving average)

(level)


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DEFLATION REMAINS THE PRIMARY RISK IN THE U.S.

Heading consumer inflationin the U.S. did rise 0.4%

MoM in November, but it

was all in energy; excluding

energy inflation is zero

While the headline consumer price index (CPI) for the U.S. came in at +0.4% MoM

in November, the big news was it was all energy (+4.1% MoM) and that the core

(excluding food and energy) and excluding energy segments of the CPI came in at

zero. How do you spell F-L-A-T?

Consider that we have a massive $2.3 trillion Fed balance sheet, near zero rates,

the weakening in the U.S. dollar this year, all the massive fiscal stimulus, and the

best we can do on the inflation front is ZERO on the core and a three-month trend

of 1.5% at an annual rate? There are still too many pockets of deflation to be

bearish on the fixed-income market:

Apparel prices down 0.3% MoM in November Recreation down 0.2%

Rents down 0.1% Household furnishings down 0.3% Hotels rates down 1.5% Grocery stores and restaurants 0%, drugs 0% too Communications -0.3% Computers -0.2%Its a good thing we have health services (+0.4%) and education (+0.2%) because

without these two non-cyclical sectors, the core CPI would be in deflation right now.

CHART 4: NEW LOW IN CORE SERVICE SECTOR CPI INFLATION

United States: CPI Services excluding energy services

(year-over-year percent change)

050505050

20

16

12

8

4

0



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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

The minimum investment required toestablish a client relationship with theFirm is $3 million for Canadian investorsand $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 $9.7millionfor 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

levels. Our performance results are thoseof the team in place.

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

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, 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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We assemble concentrated portfolios our top ten holdings typicallyrepresent between 25% to 45% of aportfolio. In this way, clients benefitfrom the ideas in which we have thehighest conviction.

Our success has often been linked to ourlong history of investing in under-followed and under-appreciated smalland mid cap companies both in Canadaand the U.S.

PORTFOLIO CONSTRUCTION

For further information,

please contact

[email protected]

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.

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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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