Friday, July 20, 2012

Weekly Bull/Bear Recap: Jul. 16-20, 2012 

Bull

+ Housing continues to show signs that the worst is finally over and that the recovery is slowly gaining strength.  Improvement on the margin is becoming clear.  The NAHB Housing index rises by the most since 2002 to its highest reading since 2007. Housing starts rise to their highest since October 2008 and are up 40% over the past 18 months (permits remain in an uptrend).  Higher starts than completions signal that job creation is coming soon as the latter catches up.  Meanwhile, refinancing through the HARP program is gaining momentum, leading to improved income streams for many consumers.

+  Manufacturing remains a sturdy sector for the U.S. recovery.  Despite a negative reading in the ISM’s latest survey, the hard data tells a different story.  Total output rises 0.4% in June, led by a 0.7% rebound in manufacturing, to a new post-recovery high and more than reversing a decline of 0.2% in the prior period.  Output has expanded for 29 consecutive months.  YoY rates for Industrial and Manufacturing Production are 4.7% and 5.6% respectably, still reasonably healthy.  Production of business equipment remains in solid growth territory.

+ Global economic activity is stabilizing and growth is set to resume in the coming months.  China has begun preparations for additional spending/stimulus and copper is starting to sniff this strengthening development (3-Mth chart view is best).  The country’s housing market is already heating up.  Meanwhile, Italian Industrial Orders are stabilizing, rising by 1.7% in May, offsetting a 1.8% drop in the prior month.  Moreover, Spanish Industrial New Orders also came in better than expected; the country’s OECD leading indicator shows stabilization in the coming months.      

+ The U.S. economy is dynamic and is transforming before our very eyes.  Exports, shale gas/oil investments, and oil discoveries are new fountains of growth.  Consumer deleveraging has come far and home prices are enticing for long-term investment.  Furthermore, China is finally embarking on the path towards becoming the next world’s consumer.  This is undoubtably bullish.   

+ Risk assets are holding up well, even as investors are concluding that QE3 may not be forthcoming.  Furthermore, short-interest is at levels preceding powerful bullish moves, such as in Q3 2011: “To the extent people have gone short U.S. domestic equities, I think they’re kind of wasting their time” — Michael Shaoul.  Continued bearishness means there’s a wall of worry to climb…   

+ …Furthermore, earnings reports from international  companies have surpass expectations.  Continued signs of stabilization in global economic conditions will lead to higher stock prices.  Tech has been buoyant even in the face of all the sour macro news.  The market’s reaction to the news is more telling than the news itself.         

Bear

-  In Spain, home prices are absolutely imploding, bad loans are mushrooming, and bank deposits are dwindling.  Valencia signals distress and taps assistance from the government.  The results?  A Spanish Treasury official says there’s “no money left to pay services" and sovereign bond prices collapse (so much for the summit); 100 billion euros will not be enough to shore up Spain’s banking system.  Meanwhile the ECB reverses its position and now advocates imposing losses on senior bondholders of slumping financial companies.  The threat of losses is the pin to pop the “Moral Hazard Bubble.”  Meantime, Germany says sovereigns will still be responsible for bailout money; the country’s economic sentiment report falls for the 3rd consecutive month; and Deutsche-marks are making a comeback.  Moreover, 13 Italian banks are downgraded by Moody’s.  The Eurozone has already split according to intra-bank capital flows.       

- The U.S. economy is entering a recession.  The consumer is faltering, evident by the third consecutive drop in headline and core retail sales, both falling for the third consecutive month, the first time that’s happened since the dark days of 2008 (weekly consumer metrics don’t point to a rebound in the immediate term).  Meanwhile, the job market looks to be headed south as per a plunging employment sub-index in the Philly Fed’s manufacturing report as well as the National Association’s for Business Economic report on hiring trends.  These trends are confirmed by both the Gallup Poll’s U.S. Economic Confidence Indicator and the Conference Board’s U.S. Leading Indicator.  Continued suffering in the middle to lower-class is slowly creeping to its breaking point.    

- Bernanke warns on the assumption that funny money will cure all ills (in fact, the “unintended consequences" of ZIRP are clearly making things worse).  The looming fiscal cliff as well as weakness in Europe are together critically damaging confidence.  Both must be resolved he says.  Unfortunately, “it’s out of our hands,” which means that the Fed would be powerless to stop the oncoming contagion from a Eurozone implosion or a crisis of confidence from continued political bickering —likely to lead right up to the final hours.  Meanwhile, how on earth can the bulls say there’s high bearishness out there when the VIX just recently leaked under 16?  This sticks of complacency — there’s continued misplaced hope that Europe will get things done and that China will stimulate the global economy back into recovery.       

- Continued uncertainty in Europe is negatively affecting global business sentiment.  The IMF slashes its global growth forecast, while foreign investment in China falls almost 7% YoY in June.  Premier Wen sure sounds more worried than bullish analysts banking on a second-half rebound.  Global bellwethers are sounding the alarm of a slowing business environment.   

- Geopolitics continues to cast its shadow over the faltering global economy.  Syria is now officially in a "non-international armed conflict," or civil war; Russia reaffirms its support for al-Assad.  Meanwhile, the Middle East is fast turning into a proxy war among the mightiest.  Israel vows a response against “a global campaign of terror carried out by Iran and Hezbollah" after 5 Israelis are killed in a bus explosion in Bulgaria.  Finally, the thinly covered South China Sea dispute isn’t going away.     

- Housing prices have not bottomed, not when you have rising shadow inventorystagnant purchase applications, and an unclogging foreclosure pipeline.  But keep on building those houses </sarcasm>.

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Tons of info.  Want to know how I see things?  Check out my macro and market outlooks.          

Notes

  1. rationalcapitalistspeculator posted this