Via Barron’s, we learn that Merrill’s David Rosenberg has four markers that he is tracking to identify when the economy is finally making a turn and starting an extended expansion:
• Home prices.
• Personal-savings rate.
• Debt-service ratio
• Ratio of the coincident-to-lagging indicators (Conference Board).
By aggregating those four markers, Rosie calculates we are roughly 44% of the way through the “adjustment” process. While that is a tick up from last month, the improvement, he laments, has been “very modest and very slow.
“We should add that he also stresses that it’s critical for both the economy and the market that payrolls stop shrinking. All the talk about jobless claims “stabilizing” is so much poppycock, he snorts. That number of claims, he notes, is still consistent with monthly payroll losses of around 700,000. As with industrial production, which is also in a vicious slump, employment must stop falling before a recession typically ends
Call us when claims fall below 400,000,” he says, which is his estimate of “the cut-off for payroll expansion/contraction.” Until then, he warns, “the recession will remain a reality. Rallies will be brief, no matter how violent, and green shoots are a forecast with a very wide error term attached to it.”
Rosenberg also points out that the financials and consumer cyclicals have net short positions of 5 billion and 2.7 billion shares — strongly suggesting that a “not insignificant part of the rally has been provided by shorts running for cover.” The Russell 2000 small-cap index is up 36% since the March low, outperforming the S&P by almost 10%. The last time the Russell outperformed the SPX was from late November to early January. Two months later, the major averages made new lows.
One other warning sign: Over the past five weeks, Rasmussen’s investor-confidence index surged 32 points — unprecedented gains in so short a span. This suggests excessive trader optimism for a sustained equity-market rally.”
Don’t Bank on It
Barron’s, APRIL 18, 2009
UP AND DOWN WALL STREET
Does This Market Rally Have Legs?
PAUL J. LIM
NYT, April 18, 2009