Friday, August 19, 2011

Weekly Bull/Bear Recap: August 15-19, 2011

Bull

+ The Conference Board’s Index of Leading Indicators shows a surprise rise of 0.5% after increases of 0.3% and 0.7% in June and May respectively.  These readings refute the bears’ claims that the economy is headed into recession.  If we’re going back into recession, then why hasn’t this LEI fallen six to 12 months prior to this recession as it has in every instance in the past 50 years?

+ Industrial Production for July clearly shows that the worst is passed with regards to the supply chain disruptions.  The metric notched its best reading in over half a year (while June was revised 0.2% higher).  Auto production is coming back online and was reflected in this data, surging 5.2% from a 0.9% decline the month prior.  Bullish data will be coming down the pipe as this major shock is successfully digested by the resilient economy.  The spring/early summer soft-patch close to ending.

+ The EU is feeling the heat from the market and will ultimately come through as legislation for Eurobonds is now in the offing.  While Merkel may reject Eurobonds (for now), her country has more to lose if the Eurozone breaks down.  The value of the resulting German currency would skyrocket and upend their export sector.  So if they choose to reject Eurobonds, Germany would be screwed.  Meanwhile Sarkozy and Merkel’s meeting on Tuesday produces the first steps towards a “true European economic government”, starting with balanced budget amendments for all countries in the Eurozone.  While the prospect of a Eurobond has been delayed, most investors didn’t expect such a step at this meeting.  Slowly but surely the road towards unification is underway.  Meanwhile, the ECB is having remarkable success in taming rising yields in Italy and Spain.  Yields in those two countries suggest that the situation is actually under control.  The prospects of a Eurozone blow up remains remote (just look at the Euro’s performance in the past week).

+ Fitch declares the US’s ability to pay as rock-solid, affirming their AAA rating with a stable outlook.  The monopoly issuer of currency will never default on its debt.  This issue is now laid to rest.  It will not be the source of another surprise negative shock.

+ China’s economy is stronger than many believe.  Officials there are increasingly comfortable on the letting the Yuan appreciate to temper inflation.  They are confident that their export sector can take the heat.  Lower inflation will give way to an ending to the monetary tightening cycle.  A stronger Yuan will make imports cheaper for Chinese consumers.  They will increase their demand for products made in the US and Europe.  The policy move is setting up a resumption of record imports from the communist country translating to higher exports for the US and Europe.  

+ The weekly consumer metric, Redbook, shows that the consumer is holding up well in spite of the recent plunge in equity markets.  Consumption growth continues despite what the bears tell you.  The consumer hasn’t fallen out of bed and will provide a floor for equity markets very soon, especially with falling gas prices.  

Bear

- The Philly Fed Index turned into a sinkhole falling to a “macabre" -30.7 vs. expectations of +2.0 and down from a reading of +3.2 the month prior.  All (except Prices Paid) sub-indicies plummeted in what is clearly the US economy undergoing a cliff dive.  This reading confirmed the Empire Manufacturing survey, which turned in a 3rd month of contraction in the NY manufacturing area (-7.72 vs. 0 expected).  Of particular note, views of future conditions materially fell indicating that hope for a recovery is damaged (perhaps due to the plunging markets beginning in August).   

- The Housing Market Index and Housing Starts point to more of the same underperformance that has characterized this sector for half a decade.  Good news isn’t forthcoming either as Purchase Applications, a leading indicator of housing demand, almost hit double digits to the downside @ -9.1%.  Note that this sector has had an intricate part in recoveries past.     

- The Global Economy is slowing   quicker than the Bulls expect.  No soft-landing for China.  No soft-landing for Europe as the German economy finds itself without a paddle approaching Angel Falls.  Both core-countries (Ger.& Fra.) in the world’s largest economy have effectively stalled.  Financial market performance there is a mirror image of the USs’ in Late 2008.  Worse yet, now the bailout to Greece is in jeopardy as other Eurozone countries demand the same terms as Finland.  If the Greece bailout fails, the whole bailout strategy up to this point would be upended — goodbye Eurozone.  UK reports some disappointing data (you can suppress riots all you want, but they won’t go away as long as your have an unemployment problem).  Japan’s export data also reflects a weakening global recovery.     

- As discussed in the prior Weekly Bull/Bear Recap, global markets plunging roughly 17%+ is the final straw that breaks the back of the US economy.  Consumer metrics such as the ICSC just notched its third weekly decline with this latest reading registering a fall of 1.5%.

- So what happened to deflation?  PPI and CPI metrics come in hotter than expected.  These readings will make it difficult for the Fed to justify another round of quantitative easing.  For equity investors basing their hopes on the upcoming Jackson Hole meeting, the data points to a negative result.  

- Jobless Claims poke back up 400K while last week’s reading was revised higher.  The job market is still too weak to carry any sustainable recovery.  With recent economic performance, can we realistically say that job growth will resume in the near-term?  The answer doesn’t require a degree in rocket science.