Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Strategy Overview: Asia Equity
US: Recession over (David Carbon, davidcarbon@dbs.com, extracted from “Economics – Markets – Strategy, 4Q09”
dated 17 September 2009)
• Fed Chairman Bernanke thinks recession is over.
Central bank heads never say this kind of thing
until they have been sure for several months
• Recession is indeed over. The NBER will likely
declare June to have been the trough
• Consumption, investment, exports and housing
are all rising. The manufacturing sector is staging a
sharp V-shaped recovery
• We continue to think 2Q10 is the best target for
when the Fed will begin to hike rates.
Normalization will be brisk
• The real recession began with the collapse of
Lehman Brothers and lasted 9 months. That’s short
given the financial crisis was the worst in 100 years.
Don’t take home the wrong lesson from this:
bailing out banks is not the way forward. Reform
is needed
Strong data have pushed equity markets to new 2009 highs
and led Fed Chairman Bernanke to declare that “recession is
very likely over”. Although he hedged / prefaced his
statement with “from a technical perspective” it’s still a big
deal: central bank heads don’t say things like this until they
have been sure for months. There’s nothing to gain and lots
to lose.
But the supply side data is telling a pretty compelling story.
The V-shaped recovery in the manufacturing sector (chart
top right) is perhaps the sharpest on record and industrial
production has been rising since June. That’s big too, to the
folks at the NBER who are charged with the official dating
of US recessions. In 5 of the past 5 downturns, the NBER
has declared recession over once IP starts to rise. That would
put the bottom of the current recession in June and it’s very
likely that six months hence it will be officially declared so.
And it’s not all that technical either. On the demand side,
retail sales have been rising strongly since Dec08. This
underwrote a bottom in total consumption a couple of
months later. Durable goods orders and investment are
rising too. Ditto for exports. Even housing – the sector that
started it all – is headed north again. Sales have been rising
for six months, prices have been rising for three months and
housing starts are up 25% from their April bottom. The rise
on the supply side merely reflects / corroborates the rise
seen on the demand side. “Technical” or otherwise, it’s a
full-compass view.
US - ISM survey (prod'n and orders)
Index, 50="neutral" (no accel / decel)
65
Prod
60
55
50
45
Prod & orders
More than
40 sub-indices
a V-shaped
35 (55% of total)
recovery
30
Orders
25
20
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
US - retail sales (control group)
295
290
285
280
275
270
265
260
255
( g p)
US$bn/mth, sa, total less auto dealers and bldg mtrls
5.2% (saar)
trend growth since
2004
1H08 tax-rebate
upward distortion
Fin mkt
crash
Oct08
Nov08
Dec08
rebate
unwinds
Feb09
250
Jan-06 Jan-07 Jan-08 Jan-09
US – home sales
thous, saar
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
existing
(RHS)
new
(LHS)
Sep09(f)
Grinding north
again at a 6%
saar pace
July09
mn, saar
3
05 06 07 08 09 10
The broadest economic compass out there is GDP and it
looks set to grow by about 4.5% (QoQ, saar) in the third
quarter, data for which will be released in another 5 weeks.
That’s far above potential (widely judged to be 2.75% to
3%) and it will likely remain that fast in Q4 too, as
underlying final demand growth triggers a release in pent
up inventory restocking. The inventory surge should not be
belittled as “technical” either. That’s the way all recoveries
start and, more importantly, inventory surges only occur
when businesses see and feel that the underlying final
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Page 26
“This report has been re-printed with permission from DBS Group Research
(Regional Equity Strategy) of DBS Bank Limited” disclosures on page 37 of this report