Friday, November 30, 2012

Weekly Bull/Bear Recap: Nov. 26-30, 2012

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.  

Bull

+  China continues to show signs of stabilization and will surprise investors with resilient growth next year.  Improving growth propects are already percolating throughout the region.     

+ Contrary to bearish pessimism of disunity in Europe, it’s important to understand that actions speak louder than words.  Bickering amongst Europe’s leaders is how things get done there.  An agreement to ease the terms on emergency aid to Greece as well as stated commitments to apply “further measures and assistance” signals that Europe is slowly taking care of business.  Steps are being taken to unite the region.  Sovereign yields in Spain and Italy are falling as a result, indicating financial and economic stabilization.  

+  The bears point at weakening consumer confidence has a harbinger of weak holiday sales.  Not so says weekly sales metrics from Redbook and the International Council of Shopping Centers, which show a successful start to the holiday shopping season.  The National Retail Federation says that this year’s Black Friday weekend was the busiest ever.  Meanwhile, Cyber Monday sales rise 30% from a year ago.    

+ Resilient consumers are buoyed by the positive wealth effect of rising home prices.  They have bottomed and falling inventory levels (due to increased buying activity) will ensure that positive trends in prices will continue.  Housing is now a major driver of the recovery.

+ The U.S. understands that it cannot rock the boat with regards to China’s economic restructuring.  Patience will be practiced and the U.S.’s strategy will focus on continued diplomatic pressure, instead of myopically labeling China a currency manipulator thereby raising the risk of protectionism.  As the global economy restructures, companies will increasingly find the U.S. as a great place to establish manufacturing operations.  

Bear

- Words mean little in Washington.  After weeks of announcing their embrace of cooperation in the face of the fiscal cliff, both Democrats and Republicans are starting to play a game of chicken as it approaches.  Business investment has drastically slowed, manifesting itself in stalling economic growth along with falling revenue growth.  The 3-month average reading for the Chicago Fed’s National Activity Index has fallen to the lowest since 2009 and is negatively affecting the job market.  Increasing downside risks are clearly being ignored; complacency is the order of the day.  

- The Shanghai Composite in China closes under 2,000 for the first time since the dark days of 2009, clearly not a bullish signal for those forecasting a pick up in growth.  Check out the country’s most popular “nail house" .  

- Economic activity in Europe remains in the doldrums and is a clear threat to global growth.  Italian consumer confidence sinks from 86.2 to 84.8 in November.  Continued weakness in the country’s economy will be a consistent tailwind for anti-austerity/anti-Europe Beppe Grillo’s 5-Star movement, creating political uncertainty in a country currently off of investors’ radars.  In Spain, an overhaul of the country’s financial system will lead to even more job loss.  In France, political meddling in the economy will lead to inefficiencies.  Greece is turning into a “slummy country" before our eyes.  And finally, rumblings from Britain may indicate a desire to exit the EU.      

Geopolitics will be a consistent wildcard in the coming months, resulting in continued uncertainty and reduced investment/growth.  Ehud Barak’s retirement could open the door to a more aggressive defense minister, which is particularly concerning given Israel’s current predicament with Iran.  Meanwhile, Turkey has requested NATO involvement, which could create a flashpoint between UN Security Council members. Meanwhile, tensions are simmering in Egypt.  And finally in North Korea, rumors of another missile test are disseminating.   

- The U.S. housing market is not poised for a rebound.  At best, it will be a very slow recovery, contributing a feeble tailwind for the economy.  New Home Sales for October fell and last month’s result was revised sharply lower.  Meanwhile, mortgage applications are signaling further tepid growth at best.