Thursday, April 16, 2009

Even Wily Coyote Hits The Ground At Some Point

1. Whenever the S&P 500 slices to a new low, it’s time to cover shorts. Every new low in the past 18 months was met by a vigorous bounce, especially the last two.

2. Be wary of upward spasms where financials and consumer discretionary lead the way, because they typically go into these bear market rallies with the largest short positions. Also, be skeptical when the rally is led by low-quality stocks.

3. Investors seem to be enamored with the second derivative (rate of change in the rate of change) in the economic data even though bear markets usually end just in advance of a turnaround in the first derivative (the rate of change itself).

4. There seems to be confusion between an actual improvement in the economy and an improvement relative to the post-Lehman trend, when the economic indicators began to implode at annual rates of 30%-70%. Even Wily Coyote hits the ground at some point.

5. The profits recession is two-thirds of the way through; there is another one-third to go. Equity investors pay for profits, and with one-third of the downturn still ahead of us, it is difficult for us to be excited about any sustainable rally in the stock market.

And some thoughts for lovers of tech:

Negative surprises for foreign-derived profits may be more intense

But the negative surprises for foreign-derived profits may be even more intense, because it is here – this 30% chunk of total US profits – where the downward adjustment has yet to fully run its course. Earnings derived from abroad have declined a mere 9% from the peak this cycle, whereas in prior recessions the falloff both on an average and media basis was 20%. Real GDP growth outside the US is expected to swing from +3.5% last year to -0.1% in 2009 (the first outright contraction in ex-US GDP since at least 1951), which will prove to be a huge hit to export volumes. In addition, with the trade-weighted dollar up 17% over the past year with attendant depressing effects on currency-induced profits, it stands to reason that this is where the greatest vulnerability to the earnings landscape lies: In the segments tilted most toward the global economy (including technology – one reason why Intel may have decided to refrain yet again from issuing any guidance).

Pure brilliance from Rosenberg.

PS. Can anyone explain to me why Bloomberg categories this post under Barack Obama, derivatives and GGP categories !?
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