Friday, February 8, 2013

Weekly Bull/Bear Recap: Feb. 4-8, 2013

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 service sector, which accounts for almost 80% of the U.S. economy, remains in growth mode.  The Institute of Supply Management’s Non-Manufacturing survey reports a healthy 55.2 composite reading and an extremely bullish Employment subindicator of 57.5, its strongest reading since February 2006.  Furthermore, Export New Orders crossed into expansion territory and imply improving global trade conditions.  Indeed, today’s U.S. International Trade report “suggests exports — a key engine of the U.S. recovery — are finding their footing after stalling last year…

+ The global expansion thesis is further boosted by Singaporean manufacturing ending its spell of contraction, German Factory Orders showing signs of bottoming (mirroring improvement in recent Ifo surveys), and Japanese Machinery Orders increasing for the 3rd consecutive month

+ The bears have severely erred on their assumption that China wouldn’t be able to execute a soft landing.  In addition to improving manufacturing surveys, HSBC’s Services PMI survey is now solidly in expansion territory, notching a reading of 54 from 51.7 in December.  China is in position to lead the global recovery again.

+ The U.S. consumer remains quite resilient.  Chain Store sales surge the most since September 2011 and are much better than expected, while Gallup’s Consumer Spending report shows a 4-week average YoY gain of almost 30%.

+ Fed officials are optimistic that a positive wealth effect has taken hold and Q4 GDP numbers reflect only a transitory blip (due to weather-related events) towards continued recovery (Q4 GDP will be positive when the second revision is published).  Rising home values as well as gains in U.S. stock markets have improved consumer psychology.  Furthermore, investors can take solace that the FOMC won’t be backtracking on its promise to continue providing monetary stimulus even in the face of improving economic conditions.

+  The U.K. has seen a string of improving economic numbers this week: the Services Purchasing Manager’s Index swings into expansion in January; Same Store Sales improve 1.9% as well; and Industrial Production for December prints better than expected.  In addition, investors are nodding at recent economic improvement in Europe.      

Bear:

The European political and economic storm looks to pick up strength in the months ahead: 

Inter-market trends are deteriorating.  A look at the XLF/XLU ratio indicates that deflation fears may resurface soon and would be a negative for equity markets and bullish for Treasury bonds.  In fact, 10-yr Treasury yields are showing a negative divergence vs. equity markets and is a red flag.  Furthermore, equity markets are at long-term resistance, all the while investor sentiment is very bullish.  The stage is set for a correction over the coming weeks. 

- U.S. Weekly sales metrics (Goldman ICSC and Redbook) show continued weakening consumption trends.  Tepid growth readings over the course of January, in addition to a third consecutive weak reading from Discover’s U.S. Spending Monitor, are a shot across the bow for a subpar January Retail Sales report, due on Feb. 13.  Perhaps this is because job creation has stalled according to Gallup’s Job Creation indicator, which just slumped to an 11-month low.  Or perhaps it’s because the nation’s average gas price has risen 17 cents from a week ago.  

- Q4’s Productivity and Unit Labor Cost report portends deteriorating earnings trends for corporations.  Productivity (output per worker) declined  2.0% and was more than expected; meanwhile, unit labor costs surged 4.5% vs. market expectations of a 3.1% increase.  Real wages, vs. nominal, continue to shrink.  ”Hourly pay for American workers fell for the second straight year after factoring out inflation, marking the worst two-year stretch in the U.S. since World War Two."  

- Does Canada have a popping housing bubble?  Canadian building permits in December plunged 11.2%, after a 17.9% drubbing the month before.  Meanwhile housing starts crater 18.5%.