Weekly Bull/Bear Recap: Halloween Edition ‘11
+ China’s Purchasing Manufacturing Index (PMI), conducted by HSBC, points to a stabilizing economy, improving to 51.1 from 49.9. Both new orders and export orders recuperate, moving above 52. The former notches its best result since May, while the latter notches its best print since November of last year. All this is happening while the Yuan appreciates to its strongest level since 2005, meaning that the economy is able handle the pressure. The Chinese economy and the engine of global growth is undergoing a soft-landing. The Shanghai Composite Index rises to the highest in 6 weeks as Premier Wen is on the ball and will ensure that a soft-landing takes place by “fine-tuning" monetary policy to focus more on growth over inflation.
+ It’s not just in China where we are beginning to see stabilization. South Korea’s latest PMI shows symptoms of a soft-landing in the communist country as well. Meanwhile, Russia, Brazil, and India, all post PMI results indicative of stabilizing economies. Russia’s PMI rises to 50.4 from 50, India’s rises to 52 from 50.4, and Brazil posts a 46.5 from 45.5. With monetary policy now more focused on growth, lower interest rates will surely help. The time to buy is when everyone is in panic mode.
+ The National Restaurant Association’s Restaurant Performance Index rises above the break-even point and signals that the economy remains resilient and in growth mode. Let’s not forget that this indicator was an accurate harbinger of tougher times for the U.S. economy in 2007 (see the chart in the link above). Currently it’s not showing a contracting economy. The consumer remains durable and poor confidence indicators more than likely reflect frustration with government policy instead of an actual decline in economic conditions. Furthermore, Gas prices for October averaged $3.44, a drop of 8% from the prior month. This is in effect a tax break for the consumer…
+ … a key example of this stable demand can be found in the latest car sales data, which shows the highest level of annualized sales since February. Based on the chart (thanks to CalculatedRiskBlog), one can clearly observe the slowing that took place during the soft-patch in June. Given that we’re not seeing that right now, it confirms that the economy is not falling apart by any means.
+ The job market shows also shows a stout economy despite incessant headwinds. Gallup signals a drop in unemployment in October. The ADP Employment report shows a gain of 110K jobs vs. expectations of 100K, led by small businesses. Challenger Gray & Christmas reports that planned layoffs fall to 43K, the lowest since June. Jobless Claims fall to the lowest level in a month. Worker productivity rises in the 3rd quarter after falling the prior 2 quarters, while labor costs fall. Both falling costs and higher productivity will help profit margins maintain their high levels. The October BLS jobs report shows an unexpected decrease in the unemployment rate due to a strong gain in the household survey; 80,000 news jobs are created and prior months are revised up by a total of 102,000 jobs. Overall, none of these indicators are pointing to a double-dip in the economy.
+ In the U.S., the Fed meeting produces a bullish scenario for equities. With no Hawks, but instead one Dove dissenting, the stage is set for QE3 in the immediate months ahead. The economy is slowly improving and inflation has begun its decent. Lower inflation allows the Fed more flexibility for accommodative policy. In the Eurozone, Draghi delights the bulls with a surprise rate cut. The new ECB chief is brazen and proves that he is more active than Trichet. A general shift has occurred with the world’s central banks. They are united in loosening policy to promote growth. Don’t fight central banks. Having done so in the past couple of years has been a losing strategy, hands down.
+ The Texas Manufacturing Outlook and Chicago PMI surveys show that manufacturing, remains in growth mode. While it has slowed somewhat, there is little sign of contraction on the horizon. In the Chicago PMI, New Orders remain soundly above the 50 mark, at 61.3, while the Employment sub-index just hit its highest level in 6-months. Factory Orders for September were better than expected on the back of strong business investment.
- Reality bites for the Eurozone. The first sale of EFSF bonds is cancelled due to “market conditions”—(a euphemism for no confidence?). Italian yields spike over 6.3% and is also a vote of no confidence from markets (will margins get hiked soon?). Berlusconi arrives at the G-20 meeting empty handed; Merkozy/EU mandated reforms are met with stiff resistance with Umberto Bossi stating that raising the retirement age from 65 to 67 would spark a revolution in the country. As a result, Italy is disgraced at the G-20 with a "closer monitoring" of the country’s deficit-cutting plan by the IMF in addition to the EU —that didn’t sit well with Berlusconi. The Italian government is close to collapsing. In France, 10-yr OAT/Bund spreads hit a Euro-era high. Draghi states that ECB support is “temporary and limited”; don’t count on the ECB stepping in and saving the day (here’s my crazy hunch on what would happen if the ECB were to print…and here’s a good reason why). Democracy dies in its birthplace and is to be replaced with a technocracy (no referendum, austerity will continue until morale improves). Papa I is likely out and could be replaced with Papa II (“yes” confidence vote pending). If a “no” results, snap elections would take place (ie. the entire bailout will be in jeopardy again). Meanwhile the German Constitutional Court is back, playing the “evil” enforcer of actual democratic principles. The next default is knocking on the door as Portugal’s 10-yr yield is flirting with 12%. Spain throws some more ice cold water with its announcement that GDP stalled in the 3rd quarter, calling into question the viability of achieving their deficit targets. There’s a good possibility that the country is already in recession and that the coming months will be worse. The G-20 meeting fails to provide a breakthrough to propitiate investors; even worse, hardly any countries from the G-20 have said that they’ll participate in EFSF.
- Eurozone Economic data was pitiful as well: German Retail Sales in September increase less than expected, coming in at 0.4% vs. expectations of 1.1% and follows a 2.7% plunge in August; meanwhile October Unemployment rises for the first time in 18 months; the country’s October Manufacturing PMI shows a contraction for the first time in 2 years; and finally, September Factory Orders implode 4.3%, falling for the 3rd consecutive month vs. expectations of a 0.1% increase. Italian Unemployment spikes up to 8.3% vs. expectations of 7.9%; its October Manufacturing PMI comes in at 43.3, while Services PMI prints an ugly 43.9, a 28 month low; at the same time CPI rises more than expected 0.6% vs. 0.2%. Eurozone Manufacturing PMI for October drops more than initial estimates to 47.1 from 48.5 in September and below the initial estimate of 47.3. Eurozone unemployment rises to 10.2% vs. expectations of 10% (highest since mid-98), all the while CPI rises 3%. Draghi cuts rates (the Bundesbank must be thrilled) and states the obvious: Europe is headed towards recession. Mild may be putting it….mildly though.
- Japan moves forward with QE. The U.S. might do QE. The U.K. is doing QE. And now the ECB must print in order to stem contagion in the region (or Germany proposes a fiscal union — referendum time for Germany in that case). Should the ECB act, expect oil at $100 in short order and a global stagflationary scenario to develop in the months ahead. Savers and those on fixed income are getting royally screwed with “funny money” printing.
- The global economy is screeching to a halt. China’s Official Manufacturing PMI (yes there are two) falls to 50.4 in October from 51.2 and the lowest since February ‘09. Taiwan’s PMI is mired in contraction. South Korea’s exports to Europe plunge 20+% YoY. The Reserve Bank of Australia cuts interest rates to 4.5%, citing signs of slower global trade along with lower commodity prices. You can throw a popping housing bubble into the explanation as well. The disquietude in Latin American markets increases as Brazilian Industrial Production disappoints. Canada reports its worst jobs report since 2009. OECD cuts its rosy outlooks for the U.S. and Europe released in May down by 42% and 85% respectively (D’oh!!).
- The investment community is thunderstruck on reports of missing capital (lastest figure = $633 Million) from MF Global. The firm made leveraged (there’s that word again) bets on risky European sovereign debt markets. Commingling occurred in one of the largest commodity brokers as well as a big player in the futures market. Investor confidence, during a very fragile period for financial markets, will erode further. Bill Gross —”(investors are) more concerned about the return of their money than the return on their money”.
- The U.S. economy continues to deteriorate. A Leading indicator for the job market, the Conference Board’s Online Labor Demand Index, is flagging a slowdown in the coming months. The Manufacturing recovery is stalling as per the Institute of Supply Management (ISM), as its manufacturing index falls more than expected to just above the 50 mark. While new orders did indeed cross into positive territory, the even more important “backlogs” component remains in contraction. Without growing backlogs, the sustainability of this tepid pop in new orders remains in question. The American Staffing Association reports that labor demand is trailing the prior year. Chain Store sales disappoint as the Savings Rate is at 2007 lows (1.8% YoY in avg hr earnings doesn’t keep up with 3.9% YoY CPI — where’s the spending power going to come from?). And finally, we have the Bloomberg Consumer Comfort Survey falling last week to the lowest level since the the dark days of 2009. From Econoday: “the index fell to minus 53.2 in the week ended October 30, the second-lowest reading in almost 26 years of data, from minus 51.1. The gauge has held below minus 50 for six of the past seven weeks, a period unmatched even during the 2008-2009 economic slump.”
…and for a little humor to end this wild week, courtesy of CNN (via Zero Hedge)