Friday, December 7, 2012

Weekly Bull/Bear Recap: Dec. 3-7, 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

+ The U.S. economy is showing resiliency and leading indicators are pointing to continued growth:

  • The Institute of Supply Management’s Non-manufacturing survey indicates that the service sector, which accounts were roughly 80% of the U.S. economy, is starting to pick up steam. New orders, a leading indicator, rise from 54.8 to 58.1. (50 demarcates expansion/contraction).  Furthermore, order backlogs cross the 50 mark into positive territory.   
  • The US consumer continues to defy bearish forecasts.  Car sales rise to a five-year high in November, despite fiscal cliff fears. A clear uptrend has been reestablished.

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(Source: Motor Intelligence

+ There are more signs of a bottom in China’s economic growth.  The National Bureau of Statistics releases its Non-manufacturing Purchasing Managers Index, which increased to a 3-month high of 55.6 and doing its best to emulate a 13-month high mark in HSBC’s manufacturing PMI as well as a 7-month high in the country’s official Manufacturing PMI.  Meanwhile, the property market has clearly stabilized; there is no housing bubble.  Bellwether companies, such as Dow Chemical, see signs of reacceleration.  Stabilization in China and resiliency in the U.S. is translating to a healing global economy.

+ In Europe, periphery sovereign paper has been quietly rallying.  The Italian 10-year yield is now in a clear downtrend (3-yr view); a major potential bearish catalyst is falling by the wayside.  Europe continues to muddle towards a resolution.  Furthermore, when looking at Germany’s DAX, it sure doesn’t look like the wheels are falling off the engine of European growth.     

+ Longer-term, rising wages in China, increased flexibility of U.S. labor unions, and rising transportation costs are various factors resulting in a wave of “onshoring.”  Meanwhile, the Department of Energy announces that oil production is now the highest in almost 15 years, while a highly anticipated report on natural gas exports sets the stage for a significant increase in investment.  These factors will act as steady secular tailwinds for economic growth in the years ahead.  

Bear

- Investors are ignoring a growing divide between Democrats and Republicans on how to resolve the Fiscal Cliff and growing uncertainty is resulting in a precipitous drop in business investment, eerily similar to 2008. 

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— (Source: Briefing)

- Bullish investors’ hopes that the worse has passed in Europe is pure poppycock.  Eurozone retail sales sink 1.2% in October, while a slew of PMIs continue to show deep contraction; worse,  austerity   looks  to proceed.  Moreover Germany, the locomotive of European growth, presents a terrible batch of economic data this week: industrial production is now cliff diving, retail sales plunge 2.8%, and the Bundesbank chops its growth forecast for 2013 (but the weakness is temporary…..riiight <sarcasm>).  Contagion hits Finland, a country already skeptical of continued bailouts to the South, while in the UK, dreadful factory data raises fears of a triple-dip recession.  In Greece, more than 1 out of every 4 people are unemployed, while France’s unemployment rate hits its highest level in 13 years (youth unemployment hits a record high).  Finally, political uncertainty is remerging in Italy, with Monti’s government seeing ever-thinning support for continued austerity.  Continued weakness in Europe is infecting other major economies, such as Brazil and India.    

- Tensions are close to boiling in the Middle East.  In Syria, rumors of an imminent wielding of chemical weapons by Assad on rebel forces marks a perilous escalation of violence.  NATO approves Turkey’s request for missile installations, to the chagrin of Russia and China.  Morsi plans to slay democracy in Egypt by calling for a referendum and a new Islamist-backed constitution; protestors are marching toward the presidential palace as this article is posted.  Finally, while out of the spotlight, the Iran/Israel standoff continues to regress.


- While the bulls may celebrate today’s better than expected jobs report, behind the scenes, the job market is actually weakening.  The unemployment rate fell because less people are in the work force (a decline in the participation rate).  In addition, a net revision downwards of 49,000 over the prior two months points to a much weaker job market than many believe.  Meanwhile, buried in the ISM’s Non-Manufacturing Index, the employment sub-index is on the precipice of contraction, at 50.3, while in the Manufacturing Index, the sub-index is now contracting for the first time in 3 years.  What’s more, Gallup reports that its measure of unemployment has risen significantly, and job creation has stalled.  Challenger Gray & Christmas, an important consulting firm, reports that job cuts are coming down the pipe over the coming months.