Weekly Bull/Bear Recap: Jan. 30 - Feb. 3, 2012

Bull

+ The U.S. economy is now in a sustainable expansion:

• The January U.S. non-farm payrolls report shines, while prior months are revised higher by 60K.   A gain of 243K marks the strongest pace of job creation since April.  Furthermore the unemployment rate falls to 8.2% from 8.5%.  Job creation was widespread.  The key cog for a sustainable recovery is now in place. 
• Improvement in the Chicago Fed Midwest Manufacturing index and Dallas Fed Manufacturing survey culminate in a strong national ISM reading of 54.1, the highest since June of 2011 (with positive backlogs to boot).  Looking ahead, a resurgence in business spending in December (Core Durable Goods orders are revised higher to 3.1% from 2.9%), within a stronger factory orders number of 1.1% signal further growth for the beacon of the U.S. recovery in the months ahead.
• The service sector, which accounts for close to 90% of the economy, is reaccelerating.  January’s print is the strongest in 11 months, led by New Orders, Production, and Employment sub-indicies.
• Consumption remains healthy, as car sales have their best January in 3 years.  On the horizon, the payroll tax credit is set to be extended, relieving the economy of excessive fiscal contraction.  Who knows, we might even get further tax cuts!
• Don’t look now, but the ECRI’s leading indicator growth rate is higher for the 3rd consecutive week and is now at its highest level since late August.  ECRI, it’s time to admit that you and the rest of the bears were wrong.
• Consumer confidence continues to recover.  While the Conference Board showed a setback, Bloomberg’s Consumer Comfort index just hit its highest monthly average in more than half a year.  

+ The global economic outlook is improving:  

• In Europe, Germany’s unemployment rate hits a record low and her economy reverts back to growth according to the Markit PMI.  For the Eurozone as a whole, Chris Williamson, Chief Economist at Markit says, “Euro area manufacturing has started 2013 surprisingly well, suggesting the region may avoid a slide back into recession.”  
• UK consumer confidence rises to the highest in 7 months on lower inflation.  
• Russia reports better than expected economic growth, with GDP rising 4.3% vs. expectations of 4.1%.  
• In Japan, industrial production surges 4%.  
• China PMIs point to a soft-landing for the most important link of the global recovery.  Premier Wen is looking to stimulate the small business sector.     

+ In Eurozone political and financial news, European nations take one step closer to integration with 25 out of 27 nations signing the new fiscal compact treaty.  Moreover, leaders signal strong resolve to save the region, as talk of initiating a €1.5 Tn bailout fund is making the rounds.  Meanwhile, the Spanish 10-yr yield breaks under 5%, the Italian 10-yr yield breaks under 6%, the Belgian 10-yr yield breaks under 3.7%, and the French 10-yr yield breaks under 3%.  Markets signal that a strong firewall is in place for a Greek and/or Portuguese default. As a hefty insurance policy, the second LTRO on February 29th will likely be more than double the size of the first one (@ ≈ €1Tn), thus reinforcing the firewall for the banking system from a Greek or Portuguese default.  Besides, the Greek default has been on investors’ radars for so long, even martians on Pluto know that Greece is defaulting.  A climax would result in a rally as uncertainty is lifted.  

Bear

- The end game is coming into view for the Eurozone:  

• Germany has demanded that Greece cede its budgetary sovereignty to the EU, a request Greece has declined.  Furthermore, stiff resistance from Greek political leaders to implement further austerity makes for another “Papandreaou referendum-like” showdown with the troika.  And for the trifecta, the Hellenic republic has warned that it may need even more bailout cash.  
• Portuguese bond yields are repeatedly hitting record highs; hard default #2 is rapidly approaching.  
• In Ireland, a solid majority demand a referendum (guaranteeing a defeat for the army of unelected technocrats in Brussels).  As Hollande eloquently stated, “Where democracy retreats and politics pulls back, the markets advance.”  
• Hollande is creating daylight between himself and Sarkozy in the French presidential election (here’s a primer on what he wants to do).   

- On the region’s economic front, austerity is biting, hard.  Italian business confidence slumps to the lowest in 2 years.  While Germany is benefiting from a weaker Euro, it’s coming at the expense of the rest of the Eurozone; the region’s unemployment rate remains near the highest since 1998.  French consumer spending dives 0.7% vs. expectations of a gain of +0.2%.  Even worse, German December retail sales tank 1.4% vs. expectations of a 0.5% gain (the 4th decline in last 5 prints); so much for a low unemployment rate.  Meanwhile, on the financial front, banks are using some of the LTRO money to buy sovereign bonds; but that’s about it.  They continue to de-leverage, cutting off credit to the Eurozone and undermining any recovery in the region.  Furthermore, post-crisis highs in FX swaps between the ECB and the Fed point to tight liquidity conditions, despite unprecedented worldwide coordinated monetary loosening.        

- The throes of stagflation are in plain view; China “unexpectedly” holds off on reducing reserve requirements for banks, opting instead for reverse-repurchase contracts.  Simultaneously, here’s what a popping housing bubble looks like.  Protests are progressively more intense.  

- On the U.S. economic front, the S&P Case-Schiller index flags a deepening double-dip for the 99%’s largest asset.  Lower home prices will anchor consumer confidence over the medium-term.  Over the short-term, rising gas prices are starting to damage confidence; the Conference Board’s survey disappoints, printing 61.1 vs. expectations of 68.0 (led by a decline in the present situation). 

- Israel/Iran continues to bubble underneath the facade of bullish sentiment.  No groundbreaking announcements were made after the UN inspection.  Instead, it’s looking increasingly clear that the U.S. is no longer in control of the situation; an Israeli unilateral attack could come in as soon as 3 months.