Weekly Bull/Bear Recap: Jan. 30 - Feb. 3, 2012

Bull

+ The U.S. economy is now in a sustainable expansion:

• The January U.S. non-farm payrolls report shines, while prior months are revised higher by 60K.   A gain of 243K marks the strongest pace of job creation since April.  Furthermore the unemployment rate falls to 8.2% from 8.5%.  Job creation was widespread.  The key cog for a sustainable recovery is now in place. 
• Improvement in the Chicago Fed Midwest Manufacturing index and Dallas Fed Manufacturing survey culminate in a strong national ISM reading of 54.1, the highest since June of 2011 (with positive backlogs to boot).  Looking ahead, a resurgence in business spending in December (Core Durable Goods orders are revised higher to 3.1% from 2.9%), within a stronger factory orders number of 1.1% signal further growth for the beacon of the U.S. recovery in the months ahead.
• The service sector, which accounts for close to 90% of the economy, is reaccelerating.  January’s print is the strongest in 11 months, led by New Orders, Production, and Employment sub-indicies.
• Consumption remains healthy, as car sales have their best January in 3 years.  On the horizon, the payroll tax credit is set to be extended, relieving the economy of excessive fiscal contraction.  Who knows, we might even get further tax cuts!
• Don’t look now, but the ECRI’s leading indicator growth rate is higher for the 3rd consecutive week and is now at its highest level since late August.  ECRI, it’s time to admit that you and the rest of the bears were wrong.
• Consumer confidence continues to recover.  While the Conference Board showed a setback, Bloomberg’s Consumer Comfort index just hit its highest monthly average in more than half a year.  

+ The global economic outlook is improving:  

• In Europe, Germany’s unemployment rate hits a record low and her economy reverts back to growth according to the Markit PMI.  For the Eurozone as a whole, Chris Williamson, Chief Economist at Markit says, “Euro area manufacturing has started 2013 surprisingly well, suggesting the region may avoid a slide back into recession.”  
• UK consumer confidence rises to the highest in 7 months on lower inflation.  
• Russia reports better than expected economic growth, with GDP rising 4.3% vs. expectations of 4.1%.  
• In Japan, industrial production surges 4%.  
• China PMIs point to a soft-landing for the most important link of the global recovery.  Premier Wen is looking to stimulate the small business sector.     

+ In Eurozone political and financial news, European nations take one step closer to integration with 25 out of 27 nations signing the new fiscal compact treaty.  Moreover, leaders signal strong resolve to save the region, as talk of initiating a €1.5 Tn bailout fund is making the rounds.  Meanwhile, the Spanish 10-yr yield breaks under 5%, the Italian 10-yr yield breaks under 6%, the Belgian 10-yr yield breaks under 3.7%, and the French 10-yr yield breaks under 3%.  Markets signal that a strong firewall is in place for a Greek and/or Portuguese default. As a hefty insurance policy, the second LTRO on February 29th will likely be more than double the size of the first one (@ ≈ €1Tn), thus reinforcing the firewall for the banking system from a Greek or Portuguese default.  Besides, the Greek default has been on investors’ radars for so long, even martians on Pluto know that Greece is defaulting.  A climax would result in a rally as uncertainty is lifted.  

Bear

- The end game is coming into view for the Eurozone:  

• Germany has demanded that Greece cede its budgetary sovereignty to the EU, a request Greece has declined.  Furthermore, stiff resistance from Greek political leaders to implement further austerity makes for another “Papandreaou referendum-like” showdown with the troika.  And for the trifecta, the Hellenic republic has warned that it may need even more bailout cash.  
• Portuguese bond yields are repeatedly hitting record highs; hard default #2 is rapidly approaching.  
• In Ireland, a solid majority demand a referendum (guaranteeing a defeat for the army of unelected technocrats in Brussels).  As Hollande eloquently stated, “Where democracy retreats and politics pulls back, the markets advance.”  
• Hollande is creating daylight between himself and Sarkozy in the French presidential election (here’s a primer on what he wants to do).   

- On the region’s economic front, austerity is biting, hard.  Italian business confidence slumps to the lowest in 2 years.  While Germany is benefiting from a weaker Euro, it’s coming at the expense of the rest of the Eurozone; the region’s unemployment rate remains near the highest since 1998.  French consumer spending dives 0.7% vs. expectations of a gain of +0.2%.  Even worse, German December retail sales tank 1.4% vs. expectations of a 0.5% gain (the 4th decline in last 5 prints); so much for a low unemployment rate.  Meanwhile, on the financial front, banks are using some of the LTRO money to buy sovereign bonds; but that’s about it.  They continue to de-leverage, cutting off credit to the Eurozone and undermining any recovery in the region.  Furthermore, post-crisis highs in FX swaps between the ECB and the Fed point to tight liquidity conditions, despite unprecedented worldwide coordinated monetary loosening.        

- The throes of stagflation are in plain view; China “unexpectedly” holds off on reducing reserve requirements for banks, opting instead for reverse-repurchase contracts.  Simultaneously, here’s what a popping housing bubble looks like.  Protests are progressively more intense.  

- On the U.S. economic front, the S&P Case-Schiller index flags a deepening double-dip for the 99%’s largest asset.  Lower home prices will anchor consumer confidence over the medium-term.  Over the short-term, rising gas prices are starting to damage confidence; the Conference Board’s survey disappoints, printing 61.1 vs. expectations of 68.0 (led by a decline in the present situation). 

- Israel/Iran continues to bubble underneath the facade of bullish sentiment.  No groundbreaking announcements were made after the UN inspection.  Instead, it’s looking increasingly clear that the U.S. is no longer in control of the situation; an Israeli unilateral attack could come in as soon as 3 months.     

Weekly Bull/Bear Recap: New Year’s ‘12 Edition

Bull

+ U.S. economic data continues to shine.  Let us count the ways:

• U.S. ISM manufacturing logs its best result since June; led by New Orders, Production, and Employment.  Auto demand remains strong and exports revert back above the 50 mark.  
• Confidence is at its best level since June, according to Gallup Poll.  It’s at its best level since July, according to the Bloomberg Consumer Comfort Index.  Why?…  
• …The labor market is markedly improving as per both the ADP and BLS job reports, which turn in readings of +325K and +200K jobs created respectively; the unemployment rate falls to the lowest in almost 3 years at 8.5%.  Both results are better than expectations.  Jobless claims plunge 15K and the 4-week average falls to the lowest in over 3 years.
• The Association of American Railroads reports that rail traffic picked up in December.  From the looks of the graph, it looks like the recovery is actually gaining steam.         

+ The European Service PMI report turns in a better than expected result (indicating stabilization), while German Unemployment falls to a record low for unified Germany.  The bears state that a major recession will cause a flareup in the debt crisis.  These data points, as well as loosening monetary policy in the quarters ahead due to falling inflation, suggest that both recession and the debt crisis will be contained and will surprise many. 

+ Any synchronized global slowdown will be shallow, surprising investors to the upside.  China’s service PMI shows continued growth in its domestic economy, producing a reading of 52.5 and unchanged from November; while the country’s official manufacturing PMI rebounds to 50.3 in December from 49.0.  Whisper numbers for inflation are 4% in December = loosening monetary policy.  Meanwhile, UK manufacturing PMI data increases to 49.6 from 47.7 and is just a smidgen below the 50 mark, the demarcation between expansion vs. contraction; demand increased from Germany and China according to the report.  UK services PMI reports its strongest result in 5 months, rising to 54.0 in December from 52.1.       

Bear

- Greece is in a depression and a debt trap.  Falling revenue, due to austerity measures, is complicating the slated EUR130 billion bailout.  It will have to be larger, which aggravates an already delicate political situation.   Spain’s government deficit may be larger than 8%; to which the government responds, “the beatings will continue until moral improves.”  Good luck slashing the size of the government in a social welfare state without serious unrest.  Hungary is on the precipice and has requested help from the IMF, again.  Italian and Spanish 10-yr yields are marching higher again, while French 10-year OATs fall in value for 8 consecutive days.  Sovereign bond markets aren’t drinking the equity hopium.    

- While the bulls focus on lagging indicators, such as the unemployment rate (btw, Eurozone’s unemployment rate stays stuck at a record 10.3%), let’s focus on some leading indicators shall we?  German factory orders plunge 4.8% MoM in November, while October’s result was revised down from +5.2% to +5.0%.  Factory orders in Germany have plunged more than 8% in the past 5 months.  This data point signals a sharp slowdown on tap in Q1.  Here’s a coincident indicator, “Confidence in Euro Region at Two-Year Low as German Orders Slide.”    Bullish news from the UK?  Ok, here’s an offset: “UK car sales fall to lowest since 1994.” 

- The key risk to China’s slow-landing thesis continues to lurk.  Chinese home prices fall for the 4th consecutive month in December.  Premier Wen Jiabao states the obvious, China’s in a stagflationary dilemma.  No substantial loosening is coming.  Furthermore, falling housing prices are morphing into a political crisis for the communist country.    

- The ECRI’s leading indicator growth rate has broken through support of a narrow 7-week range, falling to -8.2 from -7.6.  Recession is knock knock knocking on heav…the U.S.’s door.

- America’s debt to GDP ratio surpasses 100%.  Increased interest expense on this debt smothers investment in real economic growth, falling potential GDP, and a loss of confidence.  Politicians will revert to money printing, which will lead to high long-term inflation and a lower standard of living for all.

- Iran and the U.S. are a rogue’s attack away from war.    

Weekly Bull/Bear Recap: October 17-21, 2011

Bull

+ So far for the reporting season, 63.7% of S&P 500 companies have beaten consensus earnings per share estimates, which is stronger than the past 2 quarters.  Meanwhile, revenue per share has come in line with average beat rates.  This earnings season has been been positive for equity markets.  They have just broken through the top end of the roughly 3 month range.  

+ The Beige Book paints the picture of a stabilized economy after the summer slowdown.  The economy has leveled out even after all the exogenous shocks it took on: the Japanese earthquake, higher gas prices, a stock market crash, and Eurozone worries.  Once Europe gets its house in order, the economy will reaccelerate and confound the bears.  This thesis is clearly on display with the latest Conference Board Leading Indicators report, which published a positive reading of +0.2%.  Meanwhile, the 4-week average of jobless claims falls to the lowest level since April and the Gallup Poll reports that unemployment has plunged.   We’re not in recession, only a soft-patch. Here’s some more evidence…      

+ …Industrial production for September rises 0.2% and is line with projections.  Manufacturing isn’t falling out of bed, in fact, the soft-patch is ending as the Philly Fed Index surges from -17.5 to +8.7 in October (annihilating expectations of -9.4). Both New Orders and Backlogs swing into positive territory, while expectations improve from 21.4 to 27.2.  

+ It’s not only in manufacturing where we see increasing activity.  The housing market is generating more bustle as the Buildfax Residential Remodeling Index hits a new all-time high.  Housing starts rocket 15%, while the Home Builder Sentiment Index for October rises a much higher than expected 4 points.  While the break-even is 50, it shows that the housing market is healing.  It’s a step in the right direction and is good news for the sector primarily responsible for our economy’s large challenges.  Furthermore policymakers are doing their part to increase demand.  The sector is moving forward.    

+  More countries, such as the BRICS, are stating that they are willing to support the Eurozone via capital injections with the IMF.  Global leaders are realizing the gravity of the situation and are uniting to put forth the proper prescriptions to address the issues.  The path towards a solution just got easier as Fitch states that an expansion of the EFSF wouldn’t put France’s AAA rating in jeopardy.  Furthermore, Spain posted an unexpected rise in industrial production orders after an encouraging industrial production number 2 weeks ago.  The country will not enter recession, which will result in an improved fiscal situation.  Notice how Spain’s 10-yr yield has been inconspicuously absent from the latest run up in yields.  The Eurozone will achieve a solution, just when most in the investment community aren’t expecting such an outcome.  This will lead to a powerful rally as bearishness remains elevated.     

+ Consumer price inflation is beginning to subside and will give the Fed more wiggle room to renew QE in order to support the recovery in the near future.  The Fed will have the market and economy’s back soon.  The bears are frustrated that even without QE, the economy has been growing and the market has been supported.  

+ As the global economic restructuring continues, we are starting to see its benefits.  The Chinese are working to expand their consumer economy.  With sky-high savings rate and further development, we will have end-demand from that country for decades.  Their economy is on sound footing.  As wages begin to equalize between China and the U.S., more companies are “re-shoring” back to America.  This migration back to the U.S. will result in a wave of investment and job creation.  The best part is that this restructuring is taking place without a slowdown in global trade!  

+  In what will surely help oil supply issues with Libya, reports proclaim Gaddafi has been fatally injured.  Libya is finally liberated and will result in a speedy recovery of its people as well as oil production.  Oil prices will further decline sending Gas prices, which have dropped 13% since peaking in May, lower and help consumer spending.  

Bear

- Sure Bulls, the economy is getting better because surveys and metrics are increasing.  Sure….now open your eyes and see the bigger picture; see reality.  The Occupy Wall Street protests have metastasized throughout the world.  The more bailout packages are implemented, the more ardent and violent the remonstrances will become.  The end of the road for the infamous policy of bailouts is at hand.  Banksters nor the Fed are helping their case.  It has become politically (not to mention morally) unacceptable for investors and the wealthy to get bailed out at the expense of billions of taxpayers and the poor.  

- It’s funny how the bulls/vacuum tubes keep getting fooled by European officials.  Merkel says that “dreams” of this package solving all the Eurozone’s problems are misplaced, while a second summit is scheduled for Wednesday.  Meanwhile, the negative omens are becoming hard to ignore (but they still are!):  Greece is dangerously close to descending into anarchy.  Utility of the EFSF changes every couple of hours not to mention the amount of guarantees.  Words of warning for France, this time from both Moody’s and S&P.  A cut in the country’s 2012 growth forecast won’t help matters.  Moody’s wasn’t as nice to Spain, cutting their rating on Spanish “Bonos” citing falling growth and a budding banking crisis.  S&P was even meaner to Italian banks (24 got the ax).  Germany axes 2012 growth forecasts, while Greece is making it hard to justify throwing good money after bad.  Officials in the region ban CDS outright; here’s the beginning result of that great idea.  Next up, a banning of ratings of sovereign debt from rating agencies (Period)  Europe is on the precipice.  Will next week be “Black Week”?           

- Manufacturing data is still showing a faltering recovery.  The Empire Manufacturing index for October shows a larger than expected contraction in the NY area.  Looking ahead 6 months, expectations are dimming as well.

- On the global economy front (sans-Europe), the Chinese are ticked with the U.S. Senate after they passed currency legislation to further pressure them to allow the Yuan to appreciate.  Beijing and Washington are playing a dangerous game of chicken in what could be a plunge into protectionism, which would absolutely be disastrous for the global economy.  Brazil lowers its key interest rate less than 2 months after the last cut (so the global economy is recovering eh?).  The UK economy is slowing down, while prices continue to rise (stagflation).   

- China’s GDP growth falls to the lowest since the dark days of 2009 and underperforms expectations.  Bulls say that the performance is good and the market is overreacting.  The signs of a poor and deteriorating banking system, a property market slowdown, high inflation, and a weakening export sector (the reason why the Yuan doesn’t appreciate faster) have not deterred their view.  Meanwhile, copper sinks more than 5% for the week.  The Shanghai Index hits lows last seen since…(drum roll)…..March ‘09.  The bulls are frogs in 95 degree Celsius water and getting hotter.  Many still believe that their economy will withstand a Europe shock and result in a soft-landing.  Few expect China to wither.  This is exactly the environment that leads to market downdrafts. 

- Bullish hopium for a housing comeback is premature.  ”The seasonally adjusted Purchase Index decreased 8.8% from one week earlier and is at the lowest level in the survey since December 1996”.  Remember “Foreclosure-gate”?  Ready for a possible comeback?  Existing Home Sales keep scraping the bottom.  Positive seasonal effects on housing prices have come to an end.  On the commercial side, the Architecture Billings Index declined in September and is back in contraction.  ”It appears the conditions seen last month were more of an aberration.”     

- PPI runs hotter than expected, coming in with a headline reading of 6.9% YoY in September.  When paired with an increase in import prices of +13.4%, inflation at the the producer and importer level will buoy the CPI, or decimate company margins if consumer’s wages can’t keep up.  Many bulls viewed the tamer CPI readings as a signal for more wiggle room for QE3.  Sure, go ahead bulls, let’s break that 23-yr high in the Misery Index.  We are one QE away from stagflation.  

- 11 consecutive declines in the ECRI.  ’nough said.

Weekly Bull/Bear Recap: July 4-8, 2011

Bull

+ Here’s more proof that the weakness in the economy is transitory. Consumption metrics show renewed consumer appetite for spending, while same-store-sales signal improvement in consumer sentiment. The stage is set for a successful back-to-school season.

+ The Dow Transports have just notched a new bull market high. Lower gas prices will lead to better margins for companies and will lead to higher disposable income for the consumer.

+ The job market continues its recovery.  ADP shows a resurgence in hiring activity with a greater than expected gain of 157K, while Jobless claims plunge 14K to 418K.  The Monster Employment Index shows that demand for labor is increasing.  The bears keep thinking that the economy’s stalled, it hasn’t. 

+ Factory Orders for May indicate that the Japanese earthquake was a transitory event.  Unfilled orders also increased, implying increased demand —-> a recovery in the months ahead.  This will increase the vitality of the recovery. 

+ Copper is signaling that the soft-patch is effectively over, surging more than 11% since mid-May, despite continued Eurozone worries.  It sits only 5 % from its highs in April.  The same can be said for Lumber which is less than 2% off its highs.   

Bear

- What was that bulls?  In what is the most important economic report every month, the June BLS jobs report disappointed with a dismal 18,000 jobs created and large downward revisions for April and May totaling 44,000.  The unemployment rate rose as well to 9.2% from 9.1%.  The workweek also fell and wages were flat.  A pretty dismal report by all standards.  The job market is pointing to a stalled economy.   

- ISM-Non Manufacturing Survey dipped more than expected and signals that the largest component of the US Economy is losing momentum. Among the areas of interest within the report: backlogs are now contracting (from 55.0 to 48.5) and new orders lost momentum (from 56.8 to 53.6).  Furthermore, inventories are starting to pile up signaling lacking demand. 

- The Eurozone is quietly festering.  Portugal’s credit rating gets slashed by 4 notches to junk status.  Italian bonds are beaten down due to political troubles in that country.  Despite the approval of further bailout funds for Greece, the Euro has effectively rolled over. 

- China raises interest rates due to rampant inflation and increases the probabilty of a hard-landing in the communist nation.  Whisper numbers for June inflation may be 6.0%+.  Meanwhile, most investors keep whistling past the graveyard and believe that the situation there will take care of itself.  We’ll see. 

- It may be time to keep a closer eye on the ECRI leading indicator. 

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Happy Birthday America! 

Bull/Bear Weekly Recap: May 9 - May 13, 2011

Bull

+ Remember the ECRI leading indicator? It was widely used by the bears last year as slam-dunk evidence to support their double-dip recession forecasts. Why don’t we take a quick look at what it’s showing? At 6.7%, the week ending April 29; it sure doesn’t seem like a double dip recession is coming anytime soon.  Need more proof?  Check out the OECD Leading indicators, which show the US recovery speeding up, while China undergoes a soft-landing.  Equity indexes agree as well.  S&P 500 Breadth is right back at new highs.  The Bull Market keeps on climbing that wall of worry.  

+ The plunge in commodities could not have come at a better moment for the consumer.  A 14% dive in oil in since the beginning of May will translate to lower gas prices just in time for Memorial Day.  Lower gas prices will ensure that consumption growth continues. Consumer spending is poised to surprise to the upside for the rest of the second quarter.

+ Osama bin Laden’s death has led to a spike in US consumer confidence. This, along with lower gas prices, will aid in an unexpected acceleration of consumption growth for the rest of Q2.

+ The bears can growl all they want, but they refuse to see the facts for what they are.  German exports surge 7.3% vs. 1.1% expected.  GDP also came in stronger than expected at 1.5% and officially is above pre-crisis levels.  France also surprised to the upside with its strongest rate of growth since 2006.  Meanwhile, despite all the talk about a Greece restructuring and its contagion effects, it seems that the market is already prepared for such an outcome.  If the market has priced it in, what the bears think could be fireworks in the region, may end up being a complete dud. 

+ The Job Openings & Labor Turnover summary showed an increase in the number of job openings in March, up to 3.1 million from 3 million in February. From the BLS: “This marks the first time since November 2008 that job openings have been at or above 3 million for two consecutive months.”

+ Initial jobless claims plunge by 44,000 down to 434,000 and points to noisy seasonal adjustment factors as the main cause of the recent spike. If you look at the raw, unadjusted data, you can see that no such increase has taken place in reality. Jobless claims will continue to fall in the weeks ahead as this seasonal noisiness passes.

+ The housing market is stabilizing as per the Mortgage Purchase Application index, which hit its highest level since the week ending March 18, 2011.  Meanwhile, 30-yr mortgage rates have declined for 4 straight weeks making housing the most affordable in years.  Properties are being snapped up from Phoenix to Las Vegas to Miami.  Go Heat! 

+ US Exports are powering higher, reaching an all-time record in March and was the largest monthly increase since early 1994.  As per James Paulsen, “The shift has helped set the stage for a potential ‘manufacturing renaissance’.” (have you been reading my stuff Paulsen?).  The Boston Consulting Group may have as well! 

Bear

- So the bulls want to mention leading indicators?  Ok.  First up is the Conference Board Employment Trends Index which just posted its largest monthly drop since the dark days of 2009.  Claims that job growth will save the day are a bunch of poppycock.  Second up, the UCLA Pulse of Commerce Index, falls 0.5% in April and signals that manufacturing alone won’t be able to pull the economy out of the current rut on its own. 

- …tying in with the UCLA Pulse of Commerce Index, we see that April Railroad Traffic saw a monthly decline for the first time in more than a year.  Only 9 of 20 commodity categories saw carload gains on a year-over-year basis.

- … and tying in with the Employment Trends Index, the NFIB Small Business Index posts a drop in April and dashes hope for a jobs recovery coming from the small business sector.  The engine of job creation is still stuck in the mud.

- How much can the consumer take?  Import prices are rising, while food and gas prices are making up a bigger portion of the consumer spending pie.  Will gas prices really plunge when you have massive flooding near important refineries and gasoline inventories that are below average for this time of the year?  They haven’t yet.  More signs point to prices rising for many consumables later this year.  

- Between the plunge in oil, the floods in Mississippi and Louisiana, and Eurozone events, not much has been mentioned regarding this latest earnings season, which thus far has seen its weakest beat rate of any quarter during the current bull market.  Margin Squeezes will be a term you hear plenty of in next couple of quarters. 

- Recent China data continues to point to a stagflation scenario in the coming months.  Growth in consumer prices edged higher to 5.3% from a year earlier and was higher than the consensus estimate (which will lead to more tightening measures and Yuan appreciation). Meanwhile, industrial production growth fell more than expected while a spike in China’s trade surplus was due to significant slowing in import growth.  The Chinese consumer is wilting.  A hard-landing in China would unwind the global recovery.   

- The best kept secret in what would be a complete unwind of the global recovery continues to lurk in the background.  Greece is once again front and center, this time with the possibility of restructuring looming. Austerity has not only NOT worked, it has subjected Greek citizens, most who had no part in the financial crisis to begin with, to a continued nightmare of riots and recession.  Slowly but surely, the people of Europe are voicing their displeasure at the polls. Continued bailouts have only worked to tear the region apart. It’s only a matter of time before a seemingly routine passage of more bailout funds is struck down and the whole house of cards comes tumbling down.

- Gov’t spending continues to fall.  We can clearly see this dynamic by the stock performance of Cisco, considered by many to be a bell-weather for gov’t spending.  It’s fast approaching the 2009 lows.  (Note: I don’t own nor am I shorting any shares of this company).