Weekly Bull/Bear Recap: Feb. 18-22, 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.
+ The U.S. economy is set to continue its recovery. The Conference Board’s leading indicator increased 0.2% in January. ”The indicators point to an underlying economy that remains relatively sound but sluggish,” said Ataman Ozyildririm, economist at The Conference Board. Meanwhile the ECRI’s leading indicator growth-rate remains in solid positive territory at 7.6% for the week ending February 15th — Lakshman Achuthan has egg all over his face due to his premature recession call.
+ U.S. Manufacturing is undergoing the beginnings of another inventory build. The American Trucking Association reports that its tonnage indicator rose for the 3rd consecutive month in January, notching its highest ever reading. Meanwhile, Markit reports that its PMI registered further expansion for the sector. Chris Williamson, Chief Economist at Markit said: “U.S. manufacturers reported the largest monthly rise in production for almost two years in February, suggesting that the economy is set to rebound from the weak patch seen late last year and allying fears of a double-dip recession.”
+ While the Conference Board has reported declining confidence from the U.S. consumer, on the whole, it has stabilized. Gallup reports that its measure of consumer confidence remains near a 5-year high. Bloomberg’s Consumer Comfort Survey is carving out a bottom, as is the University of Michigan’s Consumer Sentiment survey, which last week signaled a 3rd consecutive increase.
+ Home prices continue to increase (due to falling inventory levels) and will support consumer and investment psychology. Zillow reports that their pricing index’s 15th consecutive increase was also at the largest annual rate since early 2006. Meanwhile “the number of American households behind on mortgage payments fell to the lowest level in four years at the end of 2012,” according to the Mortgage Bankers Association. In the commercial real-estate sector, the AIA announces a strong surge in its Architecture Billings Index.
+ Global trade flows have bottomed and look to pick up throughout 2013. Japanese exports for January grew for the first time in 8 months, rising 6.4% on a year over year basis. Exports to China increased for the first time in 8 months, while exports to the U.S. jumped more than 10%. Meanwhile, Markit reports that increased demand from Asia is percolating to other major economies, such as Germany.
- Things are taking a turn for the worse in Europe. Markit reports a deepening downturn in February, tempering expectations for an end to the region’s economic malaise any time soon. Moreover, Italian leading indicators point to further weakness ahead (elections are coming up this weekend!) and Euro-wide car sales slump to levels last seen in 1990. Unfortunately, bullish German business conditions (due to the country’s reluctance to rebalance its economy, which is sorely needed for a long-lasting Eurozone solution) only serve to create complacency in the country. Perhaps such good economic conditions will make German citizens feel like their economy will not suffer if it left the Eurozone. A Taylor-Rule analysis of Germany vs. France clearly demonstrates why a one-size-fits-all monetary policy is tearing the region apart. Meanwhile, financial institutions in Europe remain very vulnerable and Friday’s news that only half of the LTRO money will be repaid speaks volumes of the distrust still present in the banking system. Liquidity schemes such as the LTRO only mask the underlying fundamental problems plaguing the Eurozone. They do nothing to solve them.
- Market action this week accentuates the extent to which Fed officials have warped financial markets. After a surprising hawkish set of FOMC minutes, the S&P 500 tumbled over 2 percent. The weakest multi-year economic recovery on record has only occurred because of unprecedented monetary stimulus. Any hint of ceasing, or even reducing the dosage of Bernanke’s monetary drug will induce sharp sell offs in risk markets. The foundations of the global economy remain unhinged and pose grave long-term risks to the investment outlook. Indeed many are becoming worried with the degree to which the Fed has likely affected long-term economic growth.
- Quietly, gas prices have increased for 32 consecutive days and endanger PE-multiple expansion. Along with the expiration of the payroll tax cut and the significant possibility of sequestration, investors will be surprised by deteriorating consumer trends.
- China’s Shanghai Composite falls roughly 5% as officials signal more tightening measures for the property market. Despite a rallying U.S. equity market, China’s equity measures remain mired in a long-term downward trend, which is a red flag. Want another red flag? Copper plunges more than 5% for the week. A look at the 3-yr price chart shows us that a bearish solution to a symmetric triangle is looking increasingly probable.
- An awkward moment for U.S./Chinese relations occurs with Mandiant announcing that the Chinese military accounts for a large number of cyber-attacks on America, an accusation immediately disputed by Chinese officials who point out that the U.S. also accounts for a large number of cyber-attacks on their country as well.
Weekly Bull/Bear Recap: Jan. 28-Feb. 1, 2013
U.S. Economic Activity is beginning to reaccelerate:
- Manufacturing reports this week show an improving picture. The ISM Index increases from 50.7 to 53.1 in January. New Orders and Employment subindicies are in solid positive territory. Meanwhile Markit’s PMI Index rises from 54 to 55.8. Both notch their best readings in 9 months. Regionally, the Chicago and Dallas Feds report that activity is picking up steam. Furthermore, Durable Goods Orders are pointing to a stabilization in demand with business investment increasing for the third consecutive month. Manufacturers are becoming more confident in future demand.
- Upward revisions in November, from 161K to 247K, and December, from 155K to 196K, together totaling +127K, accompany a positive BLS jobs report for January (+157K). Meanwhile ADP reports that companies hired at the fastest pace in almost a year. Challenger, Gray, & Christmas announces that job cuts for January are the third lowest since 1993. Firms do not see deteriorating conditions in the months ahead and are maintaining their headcount. The job market continues to heal.
- Light Motor Vehicle Sales start off strong in 2013. Consumption growth continues and will support the economy.
- Overall, Consumer confidence is stabilizing. While we’ve seen some indicators point to souring prospects, other surveys, such as Gallup’s Poll of Consumer Confidence and University of Michigan’s Survey of Consumer Sentiment point to reduced concern over upcoming negotiations in Congress.
- Rising home prices remain a positive for consumer psychology. Prices are set to climb throughout 2013, partly counterbalancing worries over higher taxes. Meanwhile Detroit is seeing a revival —(told you so!).
+ The global economy is set to reaccelerate in the coming months according to JP Morgan’s Global Manufacturing PMI, led by a reacceleration in China (due to domestic demand) and firming U.S. activity. Improvement in these countries is spilling over into Europe…
+ …Germany’s Markit Manufacturing PMI is now just a smidgen below 50, which delineates between contraction and expansion, at 49.8 (an 11-month high). Furthermore, Consumer climate, reported by the Gesellschaft für Konsumforschung (Gfk) group, reveals an improving state of confidence. Perhaps this is due to a recovering job market. Meanwhile, while still contracting, the majority of country-specific PMIs (Spain, Italy, Hungary, and Czech Republic) indicate the worse is over of the region’s recession. The improvement in the global economy can also be seen in Brazil, where the unemployment rate has fallen to a record low.
(Source: Markit Economics)
- Investors have piled into bullish bets (but earnings have flatlined since Q2 2011), economists all agree that the economy is poised to expand, the VIX is at 2007 levels before the crisis struck, and the bears are capitulating. All are signs of extreme complacency in the face of festering bearish macro trends……
(Weekly Readings —— Solid Line = 32-week average)
- …..and why are investors giddy? Because stocks keep on rising. But smart investors know to use REAL, not Nominal gains to correctly value wealth. "Zimbabwe’s stock market was the best performer this decade — but your entire portfolio now buys you 3 eggs." — Kyle Bass
- The U.S. Economy is extremely vulnerable and is on the cusp of recession:
- Bull are doused with a bucket of cold water as 4th quarter U.S. GDP prints negative for the first time since Q2 2009. The negative print is a crystal clear indication of how weak and vulnerable this recovery is. Curtailing government expenditures, higher taxes, and rising gas prices as the summer approaches will be too much for the economy to bear.
- U.S. Consumer confidence, as per the Conference Board Consumer Confidence survey, plunges again in January, erasing all of 2012’s gains. Furthermore, the Bloomberg Consumer Comfort Index falls for the fourth straight week. Weekly sales metrics, such as Goldman ICSC and Redbook, reveal weakening consumption trends. This ongoing trend casts a cloud over the direction of consumer spending as worries over reduced incomes due to the expiring 2-yr payroll tax holiday ferment.
- The Household Survey, embedded beneath the widely touted headline jobs number this morning, has not confirmed the improving job market for the third successive month.
- The FOMC meeting reveals that Fed officials are worried about a stalling economy (confirmed by Q4 numbers) as well as creeping disinflation. Monetary policy is powerless to arrest continued sluggish in the economy; worse, as investors appreciate the negative impact of reduced consumer incomes, there will be a crisis of confidence. ”Don’t Fight the Fed” will be a maxim of the past.
- Europe’s troubles lurk in the background, receiving very little press. The budget scandal in Spain is quietly picking steam and Retail Sales in the country fell for the 30th consecutive month in December. Spanish 10-yr borrowing costs advance roughly 5% this week. Looking at a 3-month view, we now see a higher high. Meanwhile, car sales throughout the periphery remain in a distinguishable downtrend and retail sales throughout the region signal consumer retrenchment. Moreover, Italian Consumer Confidence slumps to a 17-yr low and Business Confidence unexpectedly falls.
- If China has really bottomed and is on the brink of a sustainable recovery, try telling that to the Australians. Straya’s mining-based economy is signaling a red flag for global recovery enthusiasts.
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)
Fed Result and Some Thoughts
So, as expected, the Fed meeting was a non-event in terms of initiating some form of QE3.
What was interesting was the shift in dissent as well as the inclusion of “significant downside risks” even as there was a mentioning of economic strength. Overall yes, the economy did strengthen and the statement was updated to reflect this. However, I believe that they still included the “significant downside risk” due to the Eurozone issues. Keeping this language tells me that they will do QE3 should the situation in the region spiral out of control.
If it gets resolved, then market strength (and therefore higher commodity prices) will probably keep the Fed at bay for a while (not sure how long)….unless Charlie Evans gets his way. I wonder if he’s speaking for the other doves.
Targeting the unemployment rate or nominal GDP would be a grave long-term error in my view. Evans is crazy, I’m ashamed he represents Chicago.