Breakfast With Dave 101410

David A. Rosenberg October 14, 2010 Chief Economist & Strategist Economic Commentary [email protected] + 1 416 681 8919 MARKET MUSINGS & DATA DECIPHERING Breakfast with Dave WHILE YOU WERE SLEEPING Same old, same old. Equity markets are still rocking and rolling and yesterday’s late-afternoon sell-off in the U.S. has not dented investor sentiment one iota. The Asian MSCI index surged 1.9% today to a four-month high and U.S. futures are flashing green. The general feeling is that you can’t be off the train until at least early November. This is now purely a sentiment-driven market and there w ill be a point in time where we will see the Fed’s move to cut its macro forecast three times at the last three meetings show through in corporate guidance, though in the aftermath of Alcoa and CSC, that is understandably a hard view to sell at this time. There is still a reasonable chance of a GDP contraction this quarter and a sub-50 ISM index reading by year-end. The market is priced for the economy to somehow muddle through; investors are expecting something big out of the Fed ($500 billion to $1 trillion of QE) on November 3 rd and for the GOP to at least take the House the day before the midterm elections. We could be in for a classic buy-the- rumour/sell-the-fact trade around that time, but no doubt that at the current time, momentum and speculative fervor are squarely in the bull camp. Everything right now is correlated off the U.S. dollar, which is down another 60 ticks today and despite how oversold it is and all the other blemishes on the other currencies around the world, the reality is that nobody is going to be printing as much money as Bernanke and as such the chart of the greenback continues to point south-southeast. Moreover, once the DXY breaks below 74 (now 76.5) there is only dead-air dow n to the 70 level. The U.S. dollar is now at a new 15-year low against the yen, and at ¥81, it is trading at the same level it was at the height of the Peso crisis in 19 95. The greenback is also at an eight - month low against the euro; and at a record low against the Swiss franc, which has emerged as a safe haven currency. What we know is that historically, there is a 10% inverse correlation between the U.S. dollar and the S&P 500 and in recent months, that inverse relationship has intensified to 90%. A weaker dollar brea thes global liquidity into the system an d at the same time provides the fodder for commodities to run further. Take a look at Dr. Copper — up to a 27-month high — but everything else from crude to corn to cotton is firming as well, and hence the up-move in the Canadian dollar back to par for the first time in six months. As such, there has been a radica l tightening in Canadian monetary conditions at a time when the economy is cooling off vividly and one has to wonder if the Bank of Canada could take back a rate hike or two if it had known the loonie was going to strengthen by 5% over the last three months. One last point on the FX front, it will be interesting to see how the news that China’s FX reserves soared by a record $194 billion in the past three months to $2.65 trillion (almost double the size of the Canadian economy!) is going to play-out in Washington. 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 • A reason to be cautious the U.S. equity market: The latest Investors Intelligence poll showed that bullish sentiment rose to 47.2% for the latest reporting week and the bear share dropped to 24.7% • No inflation in U.S. import prices in September IN THIS ISSUE • While you were sleeping: same old, same old, equity markets are still rockin’ and a rollin’; everything right now is correlated off the U.S. dollar; the mortgage “scandal” is growing now that all 50 states are probing the lending practices of the big banks • Who’s doing the buying in the equity market? It seems that be three principal buyers: pension funds, hedge funds and proprietary trading desks at the big commercial banks • The VIX, Alcoa and Bob Farrell: the VIX index is now below the 20 mark for three days running — could be a possible sign of complacency

Breakfast With Dave 101410

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