Posted by Joseph Y. Calhoun, III

David Rosenberg has been bearish - and wrong - for quite a while now. Rosenberg was once employed by Mother Merrill but left for the cozier confines of Gluskin Sheff, a firm that quite frankly I’d never heard of until Rosenberg popped up there, earlier this year. Anyway, back in May, Rosenberg was calling the top on the bear market rally and in this September interview in Barron’s he told the world why he likes bonds more than stocks. In May he was saying the S&P would trade in a range of 600-840, but in the Barron’s story, he says:

The rally in the U.S. equity market has been so pronounced that it is no longer just pricing in the end of the recession. It is pricing in two years of recovery. At this stage, there is a little too much risk. If the S&P 500 were to correct back to around 840 or 850, versus 1025 recently, I would be much more interested.

So, to be nice, let’s just say that Rosenberg has been bearish, wrong and contradictory. Now the Pragmatic Capitalist has a post about Rosenberg’s latest set of worries. He’s zeroed in on the Futures market commitment of traders report for some reason:

• The only areas where the speculators (non-commercial accounts) are net short are in Treasuries and in the U.S. dollar. Everything else has massive net speculative longs and hence near-term vulnerable to a reversal.
• There is still a NET speculative short position in both the 10-year Treasury note of 85,551 contacts (on the Chicago Board of Trade). There are 95,648 net short contracts on the long bond too.
• But there are 29,608 net LONG positions on the 30-day Fed funds contract —down from the highs, but it means that Fed tightening is completely off the radar screen. At the same time, there are 152,311 net longs on the 2-year Treasury note, so it would seem as though we have a crowded trade among the speculators on a bear curve steepening trade.
• There is a significant net long position on the S&P 500 to the tune of 208,448 contracts on the Chicago Mercantile Exchange (CME).
• There is also a huge net speculative short position on the U.S. dollar (the ‘carry trade’). For example, on the CME, we have 24,389 net speculative long CAD positions; 50,264 net speculative long contracts on the Australian dollar, and 28,036 net longs on the Euro. These are huge numbers. What happens if/when the U.S. dollar ever undergoes a countertrend rally?
• The largest speculative long positions are in the commodity space (this is near-term bearish) … 271,564 gold contracts (a record) on the Commodity Exchange (COMEX); 44,312 net longs on silver (near-record but not quite), West Texas Intermediate oil contracts on the New York Mercantile Exchange (also a record); 10,871 net long copper contracts (a new cycle high); 5,538 net speculative long contracts on the Goldman Sachs Commodity Index.

I’ve been reviewing the COT report since the mid 80s and while it sometimes provides interesting information, it really isn’t tradable. What I generally look for are markets where the Large Specs and the Small Traders are on the opposite side of the market. Generally in these situations it is safe to assume the Large Specs will be right more often than the Small Traders.

Rosenberg is actually wrong about Treasuries and the dollar being the only net shorts. Wheat, British Pound, Nikkei and VIX futures all show net short positions. Also on the ICE, the US Dollar index, Russell 2000 mini and Natural Gas all show net short positions. But Rosenberg is generally right; speculators are on the long side in a lot of futures contracts. Of course, when you have an administration and a Fed intent on debasing the dollar, that’s a pretty rational position. Rosenberg’s point is a good one though; what happens when the dollar reverses? It’s a good question and the answer is obvious; if the dollar reverses here, a lot of traders are on the wrong side of the market. Here’s a much better question with a much less obvious answer; what could cause the dollar to reverse now? I’ve been puzzling over this for weeks and it worries me immensely that I don’t have an answer. I doubt Rosenberg does either.

From the COT, here are the contracts where the Large Specs are one side and Small Traders are on the other:

• Corn - Large Specs net long 171606 contracts, Small Traders net short 135889 contracts.
• Live Cattle - Large Specs net long 22926 contracts, Small Traders net short 21798 contracts.
• S&P 500 - Large Specs net short 14350 contracts, Small Traders net long 72311 contracts.
• S&P 500 mini - Large Specs net long 208448 contracts, Small Traders net short 171398 contracts.
• Soybeans - Large Specs net long 91472 contracts, Small Traders net short 25356 contracts.
• Lean Hogs - Large Specs net long 3347 contracts, Small Traders net short 6033 contracts.

All Rosenberg has done is confirm that traders are positioned for an economic recovery. Rosenberg, because he’s bearish, sees this as ominous and he may be right but no one should be surprised by it. I actually agree with a lot of what he has to say about the US economy over the long term. I part company with him in the short term (defined as the next six months to a year) as I do expect to see a significant recovery in GDP activity from all the government spending in an election year. That isn’t a particularly controversial position; spending for the mid term elections is why the presidential market cycle exists.

It isn’t exactly news that Rosenberg is bearish or that he’s found data that supports his view of things. Nothing to see here, move along.