THE 8 REASONS GOLDMAN SACHS SAYS BUY THE CHINESE SELL-OFF

We see a mismatch between the recent 20% share price pullback and still robust underlying real demand. We see 8 stock-picking themes emerging:

(1) Our channel checks with a low-voltage copper transformer producer indicate demand is rising, with August shipments back to 2008 peaks.

(2) Along the value chain, we do not think the market has priced in the better-than-expected speed of economic recovery, positive for upstream commodities like coal; traders indicate positive surprise on coal demand.

(3) The magnitude of demand recovery may potentially lead to tightness in commodities (such as steel) long perceived as oversupplied; this offers potential upside in undervalued stocks. Steel traders see robust demand.

(4) Economic recovery in OECD countries (which account for about 40% of global consumption) could provide an additional boost to commodity prices, which are already buoyed by strong demand from China.

(5) China’s increasing percentage of global consumption structurally boosts the sustainability of this upcycle, reducing potential OECD “double dip” risk. Our new analysis shows a 10% increase in Chinese demand now offsets OECD weakness 2-3 times as much as it did in 2002 when China first joined the WTO.

(6) Sustainability of supply-side tightness to cushion rising raw material costs; we see copper/steel/coal as favorably positioned.

(7) Consolidation leaders such as Shenhua/Angang/Baosteel could see leverage increase for the upcycle via parent asset injection, in our view.

(8) Valuations are still around/below mid-cycle, such as steel/coal names.

Source: Goldman Sachs

David Rosenberg: American consumer spending is roughly 17% of the global economy

I am in a camp which believes that economy will be an elongated U-shape, but with a very slow and gradual climb out of the trough, more like this:

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Stock market will be elongated "W" shape. It will re-test its lows, it just having topped out in a bear market rally at its resistance level. It will now come to its senses and focus on business earnings, which will be subdued for a year yet. So it will be like this:

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David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc., former chief North American economist at Bank of America-Merrill Lynch, talked with Bloomberg's Erik Schatzker. The best ranking economist questions the pace of the recovery, sees elongated U-shape recovery and market re-testing the March 2009 lows.

00:00 Outlook for economy, equities; strategy
03:48 Consumer spending; currency market
06:02 Economic recovery; state of global economy

--The Standard & Poor’s 500 Index may fall beneath the 12-year low reached on March 9 because consumer spending hasn’t recovered from the longest recession since the 1930s

--“We have to get confirmation the March lows are going to hold. The conventional view was the November lows were going to hold. As we found out in the opening weeks of March, no, those lows didn’t hold.”

--Rosenberg will “keep an open mind as to whether the lows from March will hold or not as we go into the second half of this year. I’m not sure where the buying power is going to come from.”

--The S&P 500 rallied as much as 24 percent from an 11-year low of 752.44 on Nov. 20 to Jan. 6 on speculation the economy will recover amid government efforts to rescue banks and automakers. The measure erased those gains and fell another 10 percent to a 12-year low of 676.53 on March 9 as losses at lenders mounted and unemployment continued to rise.

--The nine-week gain that began March 10, the steepest over similar spans since the 1930s, was a “gargantuan short-covering rally.” He doesn’t expect the economy to recover in the second half. “I’m seeing no revival of consumer spending in the second quarter.”

--Retail sales in the U.S. unexpectedly dropped in April for a second month, indicating that rising unemployment is prompting consumers to conserve cash. The 0.4 percent decrease followed a revised 1.3 percent drop in March that was larger than previously estimated.

--The benchmark index for U.S. stocks plunged as much as 57 percent from an October 2007 record as writedowns and credit losses stemming from the collapse of the subprime mortgage market climbed to $1.47 trillion. The measure rallied 34 percent from March 9 through yesterday as the largest banks said they were profitable, the government pledged $12.8 trillion to drag the economy out of recession and policy makers around the world cut interest rates to near zero.

WATCH VIDEO FROM BLOOMBERG
(from Bloomberg, May 21, 2009)