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Notes to myself, possibly of interest to others.
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Wednesday, January 29, 2014

David Rosenberg: No Bear Market Now; Green Light for One-Two Years

Rosenberg, 1/24:

The historical record is crystal clear: Go back to what happens at the peak of every bull market and you will see a yield Curve that is either flat or inverted...lofty multiples are not the metrics that bring on the bear market when it comes. What causes that to happen, with near certainty based on past experience, is the Fed tightening the liquidity spigots to such an extent that short-term rates rise above the level of long-term rates.


Answer: Amber on a one-to-three-month horizon as valuation and sentiment extremes hopefully recede and open up a better buying opportunity at more attractive re-entry price point. Green on a one-to-two year basis as everything from the Leading Indicators index to the yield curve to the gap between nominal growth and long-term interest rates to the ISM are signaling a constructive fundamental backdrop which will transcend the near-term hurdles associated with market positioning, P/E multiples and technicals. In other words, stay the course until one or more of the fundamental factors illustrated below begin to Change!

One is the Conference Board's Leading Economic index, and not just the level, but the rate of change. The LEI rose 01% in December to 99.4 - the highest since February 2008. This was the ninth consecutive increase, so we have more information here about the durability of the expansion. Not just that, but the key YoY trend for the LEI improved notably to 5.41% in December from 1.95% a year ago. This is a critical momentum indicator and in and of itself contains some interesting forward-looking properties...

On average, how many months before a recession are we typically with the YoY trend where it is now? Historically. the YoY trend stands between 5.0% and 5.5% (currently it is 5.4%) 28 months before a recession (min: 15 months and max: 58 months)­ That is comforting because it means that recession risks for 2014 should be close to nil...

Another critical barometer is the yield curve. Only once in the past 60 years did it invert without foreshadowing a recession (back in the mid1960's). But every recession did indeed follow a period of curve inversion, including the last one, and the reason why Alan Greenspan developed the reputation as being a Maestro was because he flattened the yield curve in 1994 but did not invert it, and as such we experienced a ‘soft landing’ the following year that helped extend the Cycle at the time for another half-decade. And while corrections will come and go (October 1987 was a severe correction but not a bear market, August 1998 was a correction but nota bear market, the summer of 2011 was a correction but nota bear market), the reason they were not bear markets. which one measures in time, not just in magnitude. is because there was no recession.

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