Wednesday, March 21, 2012

UPDATED--Société Générale's Albert Edwards: "This is as good as it gets" (Mar. 21, 2012)

Update below.
Original post:
From FT Alphaville:
We retain our heavy overweight in 10y+ government bonds
…the stronger US economic data have shifted the market further away from our vision of sub-1% US bond yields. This does not concern us. We have been here many, many times before
This is as good as it gets
The recent US bond sell-off is overdue and nothing to get excited about
This [rising unit labour costs] is a normal part of the cycle and traditionally leaves the bond market a little vulnerable before the next cyclical slowdown
Bond yields will move back down to new cycle lows and the equity market rally will dissolve into dust just as it did in 2011
Yes, it’s Societe Generale strategist, Albert Edwards. All above quotes from his latest note, published on Wednesday....MORE

ZeroHedge has more of the charts:
Treja Vu: Albert Edwards Expects New Lows On Bond Yields, Equity Rally Turning To Dust, "Just As It Did In 2011"

Nothing that we haven't said already many times, but always good to hear someone, in this case SocGen's Albert Edwards, observe what is patently obvious - namely that the start of every year now sends a consistently wrong signal that the economy is improving due to seasonal adjustments that no longer are applicable in the New Normal.

This coupled with the liquidity boost that takes places just prior to each and every run up completely explains why 2012 is not only deja vu, as it continues to be a carbon copy replica of 2011 (when the market peaked in late April), but is really a treja vu, mimicking the action of 2010. After all it was none other than Reuters who in its puff spin piece tried to caution readers that we have been here before: "This time last year, the U.S. economy was adding jobs at a similar pace of more than 200,000 a month between February and April...Growth was nipped in the bud by the Arab uprising, which sent oil prices soaring. In 2010, prospects had looked even stronger.

Between March and May, companies were adding a net 309,000 new jobs each month, and first-quarter growth came in at a 2.7 percent. The rebound proved temporary." And yet here we are, wondering if this time it's different.

 It isn't. Albert Edwards explains: 'With bond yields breaking out to the upside and the equity bull run continuing, investors are back to their same old hopeful habits. Many are thinking that if we have seen the all-time lows on bond yields investors will be forced into equities. We already can observe leading indicators rolling downwards in exactly the same way as they did in 2011." And here is why Edwards will once again be unpopular with the permabull, momentum chasing crowd: "Expect new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011."
He adds:
The Chinese data have been weaker than expected and the authorities there have shifted their stance on the currency in response. That call has been going our way. But the stronger US economic data have shifted the market further away from our vision of sub-1% US bond yields. This does not concern us. We have been here many, many times before.

It is clear to us that despite the economic data looking a bit perkier, the underlying profits situation is deteriorating significantly. This earnings season has produced its usual burst of manipulation, but as my Quant colleague Andrew Lapthorne points out, the Q4 EPS outturn looks decidedly weak - perhaps not being subjected to the same faulty seasonal adjustment as the economic data. And, as our erstwhile college James (or Jim as Zero Hedge now call him) Montier has pointed out, US margins have already begun to turn downwards - link.
Those suffering from treja vu are forgiven - just look at the chart.