06_10 wither green shoots

8/9/2019 06_10 Wither Green Shoots

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1 Bustillo,Miguel(May19,2010)Wal-MartSame-StoreSalesFallTheWallStreetJournal.RetrievedonJuly8,2010from:

http://online.wsj.com/article/SB10001424052748703957904575252092724864622.html?KEYWORDS=wal-mart+struggles+to+to+keep+shoppers

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SPROTT ASSET MANAGEMENT LP

June 2010

With the summer now upon us, the Sell in May and Go Away adage has proven itself true once

again. The major market indexes are all turning downward, and while they havent dropped enoughyet to warrant panic, we certainly want to be positioned properly if this trend continues into the fall.The market tea leaves are no longer sending mixed signals either most of the new data is decidedlybearish. So what happened to all the green shoots? What happened to the strong recovery themarket rally was promising?

Economic data released over the past two weeks have decimated any remaining belief in a lastingeconomic recovery. Slowdowns are appearing in the US, Europe, Japan and even China. Auto sales,housing starts, employment, consumer condence, factory orders, consumer purchase intentions -

just about every aspect of the economy that can be measured, is showing decided weakness.

Of particular interest to us over the past year has been the GDP forecasts released by The ConsumerMetrics Institute in Colorado (CMI). CMI caught our attention with their real time tracking of consumer

retail sales data. Consumer spending represents 70% of GDP, and that spending can provide greatinsight into the workings of the underlying economy. CMIs retail sales data has identied a long,negative contraction in the economy based on their data set for the last 180 days. This was conrmedmost notably in Walmarts poor rst quarter sales results when CFO Tom Schoewe stated, Morethan ever, our customers are living paycheck to paycheck.1 If that sentiment applies to other largeretailers, it doesnt bode well for 2010 GDP.

CMI also predicted 2010 Q1 GDP growth at 2.62% all the way back in November 2009. It tooknearly seven months for the actual US GDP data to eventually be released, but when it nally did(after three revisions, no less) it turned out that CMIs prediction was bang on. Interestingly, whenthe real data came out, CMI founder Rick Davis noted that the inventory component underlying the2.7% Q1 GDP growth gure had moved from 1.65% up to 1.88% meaning that the bulk of GDPgrowth, almost 66%, actually came from inventory swings rather than consumer demand. No wonder

factory orders fell out of bed this past week! With the re-stocking complete, there arent enough neworders to clear the fresh inventory. And if two thirds of Q1 growth came from inventory swings (or

just plain re-stocking etc.), it makes us wonder what we can realistically expect from the next twoGDP announcements. CMI provided the following guidance for the balance of the year, stating thatWe expect GDP growth to be at for the second quarter, but with inventory adjustment reversalsabsolutely killing the reported growth number just four days before the U.S. mid-term elections. Ifthat turns out to be correct, it will be unfortunate timing for the elections.

By: Eric Sprott & David Franklin

Wither Green Shoots
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An important question to ask is whether the March 09 rally was really justied at all. Were the greenshoots real? Or was the market just looking for a way to justify the effects of government-inducedeasy money? The stock market is supposed to be an efcient, forward-looking indicator after all

and the rally that began in March 09 was supposed to signal a robust recovery. So wheres therecovery? From the time the term green shoots was rst uttered by Ben Bernanke on March 15,2009, the S&P 500 rallied 36% to June 30, 2010 and by as much as 60% to April 26, 2010. If thegreen shoots were really just the early indications of weeds, was the market wrong to appreciate sodramatically?

There is little doubt that much of the stock market action during the past 12 months has deedtraditional market rules. Nowhere is this more evident to us than in the banking stocks. Were stillscratching our heads on the whole sector. Readers may remember an article we wrote in November2009 entitled Dont Bank on the Banks in which we discussed the hazard of leverage in the bankingsystem. If you gauge our conclusions by what actually transpired in the banking sector as a whole,we were essentially correct. Of the 986 bank holding companies in the US last year, a total of 980 ofthem LOST MONEY.2 And thats even after all the government bailouts the sector received. Hmmmm.

Robust banking recovery? Not a chance. However, the remaining six banks, all of which are too bigto fail, did manage to earn a combined $51 billion in 2009, sending their stocks soaring as a result.So despite 980 out of 986 bank holding companies returning nothing but red, the sector actually faredpretty well from a market perspective. Does this make any sense to you? Here we have an entiresector that is essentially broken; where a mere handful have maintained protability not from theirown strength but thanks to the taxpayers bailouts; and where the government is now aiming the mostpowerful of their regulatory reforms and the market decides to pile into their respective equities?

June 2010

2 Lenzner,Robert(June3,2010)SixGiantBanksMade$51BillionLastYear;TheOther980LostMoneyForbes.RetrievedonJuly8,2010from:

http://www.forbes.com/2010/06/03/goldman-sachs-citigroup-markets-lenzner-morgan-stanley_print.html

Chart A

Source: Sprott Asset Management LP

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16/03/09 16/05/09 16/07/09 16/09/09 16/11/09 16/01/10 16/03/10 16/05/10 16/07/10

Returns on Homebuilder Index vs. New Homes Sold

Indexed from 'Green Shoots' to June 30, 2010

The Dow Jones U.S. Select Home Construction Index

New One-Family Houses Sold (SAAR)
http://www.forbes.com/2010/06/03/goldman-sachs-citigroup-markets-lenzner-morgan-stanley_print.htmlhttp://www.forbes.com/2010/06/03/goldman-sachs-citigroup-markets-lenzner-morgan-stanley_print.html


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3 USNewOneFamilyHousesSoldAnnualTotalSAAR(Bloomberg:NHSLTOT)4 AsmeasuredbytheDowJonesU.S.SelectHomeConstructionIndex(Bloomberg:DJSHMB)

June 2010

The banking sector isnt the only equity space that confounds us the housing stocks are as equallyabsurd. Despite what you may have heard from your local real estate agent, the fundamentals forUS housing are looking dismal. Ever since the tax credits have rolled off, new home sales are now

running at 300,000 on a seasonally-adjusted annual rate (SAAR), representing a new all time lowthis past May. For comparison, this is down from an all time high of 1,389,000 new home sales madein July of 2004.3 Reading this, you may expect the home builder stocks to have performed poorly.But no, not in this market! As you can see in Chart A, from the day that Bernanke rst saw his greenshoots, the home builders index appreciated by 47% to June 30, 2010, peaking at 104% on April23rd all while new home sales were down 14% over the same time period on a SAAR basis.4 TheMarket is Always Right, as they say, but it simply cant be with regard to these stocks. The housinggreen shoots were the product of government initiative, rather than true fundamental improvement,and were thus short term in nature. Now that the government program has ended, the whole sectorlooks poised to fall apart.

At the end of the day, nobody should be surprised by the recent economic data. The stock market rallythat began in March 09 was driven by monetary phenomena rather than anything fundamental, and

based on data from CMI for 2010 it appears that we have already entered an economic contractionphase. The market is now beginning to reect the fact that the green shoots were actually just theearly signs of weeds, and it would sufce to say that virtually all the major world governments havesome serious gardening to do. The recent contractions dont necessarily mean that well experience arepeat of 2008s stock market performance in 2010, but it does suggest that investors should questionthe real fundamentals underlying their investments, lest the market begins to trade on them again.


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The opinions, estimates and projections (information) contained within this report are solely those of Sprott AssetManagement LP (SAM LP) and are subject to change without notice. SAM LP makes every effort to ensure that theinformation has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibilityfor any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is notunder any obligation to update or keep current the information contained herein. The information should not be regardedby recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on yourparticular circumstances.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indicationof trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be consideredas investment advice nor should they be considered a recommendation to buy or sell.

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06_10 wither green shoots

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