Rally's End?

Yet another example of why the dollar will rise and equities sink.
(emphasis mine)

From David A. Rosenberg, "Toast with Dave"


U.S. consumer shopping habits have changed on a semi-permanent basis. Yes, the
government can step in time and again to distort human nature and try to reverse the
rising trend in the personal savings rate, but left to their own devices, households
are in a thrifty state.

This came through loud and clear in the latest Deloitte survey, which showed that
more than 25% of the 10,878 consumers polled say they have permanently altered their
shopping patterns in view of the asset and credit collapse this cycle.

And what did Wal-Mart Treasurer Charles Holley have to say yesterday in the
aftermath of its earnings report? (Wal-Mart’s sales were a puny +2.4% YoY off a
depressed YoY basis, profits were underpinned by improved productivity and inventory

Here its (can you handle the truth?): “The shopper has reset how he is spending
money and that has affected retail in demand

Moreover, getting frugal also means getting small — and in this new era, a most
amazing thing is happening.

Not only are consumers downsizing their auto purchases, but the size of the homes
that are now being built is shrinking — see the front page of today's Wall Street
Journal for evidence (Builders Downsize The Dream Home).

Pure and simple — the days of impressing your friends with the winding staircase are


The reason — there is a wave of mortgage refinancings coming in the housing market for one, and not only that, but in the commercial space, there are 2.7trillion of debt coming due through 2011 and another 1.5 trillion of leveraged loans (see page 24 of Thurday’s FT).

In other words, the default rate is going to rise even further and the Fed
tightening policy would only aggravate that situation. In other words, the Fed is
simply immobile for at least the next two years.


It is becoming increasingly obvious that the household sector, burnt twice by two
bubbles seven years apart, are simply not biting this time. Once again, equity funds suffered a $4.7 billion net outflow last week. At the same time, bond funds saw a $7.5 billion inflow (on top of $10.2 billion on the last week of October) and an additional $358 million went into hybrids.

This appears to be a conscious effort by the general public to allocate their assets
towards the fixed-income market, where they are underweight (as we have argued in
the past).

While the supply of bonds is clearly booming, guess what? So is the demand, which is why Treasuries and the like have managed to retain a constructive tone for much of the past six months.

As we have repeatedly pointed out on this blog over the past few months, the US dollar is bound to rise in the short term. The impact of fiscal conservativism is that demand for bonds has risen and equity demand has dropped. All that is required for the US dollar to rise is the appropriate scare in the market. We also note that both the Dow and the S&P have been bouncing off the 50% Fib retracement levels which we have calculated as 10,339 and 1,116 respectively. What we are uncertain about at this time is the impact a rising US dollar will have on gold. Has it disconnected its traditional relationship or will it too drop as the dollar rises? We suspect a small pullback is possible, but nothing on the scale of the likely drop in equities.