Weekly Bull/Bear Recap: Dec. 3-7, 2012
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 U.S. economy is showing resiliency and leading indicators are pointing to continued growth:
- The Institute of Supply Management’s Non-manufacturing survey indicates that the service sector, which accounts were roughly 80% of the U.S. economy, is starting to pick up steam. New orders, a leading indicator, rise from 54.8 to 58.1. (50 demarcates expansion/contraction). Furthermore, order backlogs cross the 50 mark into positive territory.
- The US consumer continues to defy bearish forecasts. Car sales rise to a five-year high in November, despite fiscal cliff fears. A clear uptrend has been reestablished.
(Source: Motor Intelligence)
- Corelogic announces that prices in October rose 6.3% year-over-year, the largest increase since 2006. Plunging inventory will lead to firming prices over the coming year.
- The BLS Payrolls November report today shows a decrease in the unemployment rate to 7.7% (the lowest since December 2008) as well as a better than expected 146,000 jobs created. Averting the fiscal cliff (lawmakers will come to an agreement; Republicans will relent) will result in a release of pent up business investment, resulting in accelerated growth this coming spring. Stock markets are sniffing out this strengthening tailwind.
- Finally, resilient economic growth in the U.S. is spilling into Mexico, evident by rising consumer confidence and improving business conditions.
+ There are more signs of a bottom in China’s economic growth. The National Bureau of Statistics releases its Non-manufacturing Purchasing Managers Index, which increased to a 3-month high of 55.6 and doing its best to emulate a 13-month high mark in HSBC’s manufacturing PMI as well as a 7-month high in the country’s official Manufacturing PMI. Meanwhile, the property market has clearly stabilized; there is no housing bubble. Bellwether companies, such as Dow Chemical, see signs of reacceleration. Stabilization in China and resiliency in the U.S. is translating to a healing global economy.
+ In Europe, periphery sovereign paper has been quietly rallying. The Italian 10-year yield is now in a clear downtrend (3-yr view); a major potential bearish catalyst is falling by the wayside. Europe continues to muddle towards a resolution. Furthermore, when looking at Germany’s DAX, it sure doesn’t look like the wheels are falling off the engine of European growth.
+ Longer-term, rising wages in China, increased flexibility of U.S. labor unions, and rising transportation costs are various factors resulting in a wave of “onshoring.” Meanwhile, the Department of Energy announces that oil production is now the highest in almost 15 years, while a highly anticipated report on natural gas exports sets the stage for a significant increase in investment. These factors will act as steady secular tailwinds for economic growth in the years ahead.
Bear
- Investors are ignoring a growing divide between Democrats and Republicans on how to resolve the Fiscal Cliff and growing uncertainty is resulting in a precipitous drop in business investment, eerily similar to 2008.
— (Source: Briefing)
- Bullish investors’ hopes that the worse has passed in Europe is pure poppycock. Eurozone retail sales sink 1.2% in October, while a slew of PMIs continue to show deep contraction; worse, austerity looks to proceed. Moreover Germany, the locomotive of European growth, presents a terrible batch of economic data this week: industrial production is now cliff diving, retail sales plunge 2.8%, and the Bundesbank chops its growth forecast for 2013 (but the weakness is temporary…..riiight <sarcasm>). Contagion hits Finland, a country already skeptical of continued bailouts to the South, while in the UK, dreadful factory data raises fears of a triple-dip recession. In Greece, more than 1 out of every 4 people are unemployed, while France’s unemployment rate hits its highest level in 13 years (youth unemployment hits a record high). Finally, political uncertainty is remerging in Italy, with Monti’s government seeing ever-thinning support for continued austerity. Continued weakness in Europe is infecting other major economies, such as Brazil and India.
- While the bulls may celebrate today’s better than expected jobs report, behind the scenes, the job market is actually weakening. The unemployment rate fell because less people are in the work force (a decline in the participation rate). In addition, a net revision downwards of 49,000 over the prior two months points to a much weaker job market than many believe. Meanwhile, buried in the ISM’s Non-Manufacturing Index, the employment sub-index is on the precipice of contraction, at 50.3, while in the Manufacturing Index, the sub-index is now contracting for the first time in 3 years. What’s more, Gallup reports that its measure of unemployment has risen significantly, and job creation has stalled. Challenger Gray & Christmas, an important consulting firm, reports that job cuts are coming down the pipe over the coming months.
Greek Debt Plan Relies on Rosy Outlook - WSJ.com
In a bid to garner enough support to pass the spending cuts, Mr. Samaras has gone out on a limb saying that no further austerity is needed. However, if Greece misses promised budget targets to international creditors it may be forced to impose additional painful cuts in an economy that has been shrinking for five years. — WSJ
Euro zone, IMF agree to Greek debt deal - MarketWatch
Euro-zone finance ministers, the European Central Bank and the International Monetary Fund agreed early Tuesday on a plan to cut Greece’s government debt to 124% of gross domestic product by 2020 and to less than 110% of GDP by 2022, paving the way for the country to receive its next tranche of financial aid. —Marketwatch.com
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While this agreement may avert the short-term issue of financial aid to Greece, the newly agreed debt levels would still be huge (Rogoff and Reinhart cite levels close to 90% of GDP as becoming detrimental to growth). Furthermore, it would mean many more months of recession/depression-like conditions for the country.
At what point does the populace snap? Keep an eye out for political events that may throw sentiment quickly into panic as investors rush for the exits.
Weekly Bull/Bear Recap: Nov. 12-16, 2012
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
+ Weak economic data and fiscal cliff concerns have produced a buying opportunity for risk assets. Firstly, weakness in this week’s economic data is due to Hurricane Sandy. Data will revert to trend growth soon and surprise investors to the upside. Finally, we are beginning to see the contours of a resolution as per recent remarks from Obama and Boehner. Democrats will pile the pressure on Republicans to relent. Lawmakers understand the consequences of non-action and will naturally act in time to avoid the bearish scenario.
+ Long-term U.S. economic bullish tailwinds are forming before our eyes. Shale oil and “fracking” look to make the U.S. an energy powerhouse, spawning a wave of manufacturing investment and job creation. The U.S. is forecast to be an oil exporter by 2030. Furthermore, the housing market is on the mend with housing bellwethers reporting improved earnings trends, economic data showing falling inventory levels, evidence of an improving trend in delinquencies, and leading indicators such as the S&P Homebuilders index and lumber prices signaling increased vigor ahead. Finally, China continues to show stabilization; a rebound will ensue in 2013. Longer-term, new leadership will ensure that the country’s important 5-year plan is properly executed. These bullish tailwinds will grow stronger in the coming months and will cause a further uptrend in Citi’s Surprise Index (a measure of investor sentiment)…
+ …In fact, sentiment on Main Street continues to improve and U.S. economic growth quietly surprises to the upside in the 3rd quarter.
+ Athens will likely be given additional time to digest austerity cuts. European leaders understand that they must give Greece time to adjust. This is a positive step and shows that political will for a unified Europe remains resilient. Furthermore, GDP data for France, Germany, and Italy print better than expected.
Bear
- U.S. companies fear the fiscal cliff and government gridlock is set to continue, all the while bailouts persist. Falling core capital goods orders (affecting manufacturing), souring small business sentiment, and weakening consumer spending are ingredients for a self-fulfilling prophecy of recession. Promises of further monetary easing are met with risk markets shrugging. Monetary policy has become powerless to stop continued economic weakness.
- Germany will be entering recession soon. The important ZEW survey implodes in November, falling 4.2 points to -15.7. A negative balance indicates that more experts expect the economy to contract over the next 6 months. A political crisis in the Eurozone is increasing in probability. How can Germany bailout other countries when it now needs stimulus of its own? That will be a major question on November 20th when the Bundestag votes on the next tranche of aid to Greece.
- Meanwhile, things are taking a turn for the worse in most if not all of Europe. For September, Spanish industrial orders collapse almost 6%, while Eurozone industrial production falls the most in 3 years. In France, recession is knocking on the door and Germany is pondering critiquing the country’s economy (good luck with that). Meanwhile, most periphery nations are plagued with increasingly violent strikes and protests; the Greek government is beginning to lose control as a GDP print of -7.2% in the 3rd quarter has prompted the Prime Minster to announce that a “Great Depression” has descended on the country. The IMF and EU continue to spar over the details of a new aid package —wavering IMF support is further fuel for uncertainty.
- Weakness in Europe is spilling into Asia, with Japan on the cusp of another recession and Taiwan experiencing some intense market declines. Meanwhile, geopolitics is further clouding the outlook. Israeli airstrikes kill the leader of Hamas’s militant wing. This is occurring within the backdrop of already high tensions in the region; a report from an U.N. agency fuels further fear of military conflict between Israel and Iran.
(via RCS Investments: Europe & the Future of International Relations)
Der Spiegel Report On Greek Fate Being Decided At EU Summit In October - Business Insider
Grexit? Greece to get more time, but not more money (at least for now). PM Samaras’ was given two clear messages from European leaders in a series of meetings that concluded in Paris on Saturday; (1) Greece must deliver on austerity, structural reform and privatisation and (2) no decision pending the next Troika review end- September. On an eventual extension on the Greek programme targets, the leaders were non-committal.
Over the weekend, however, German Finance Minister Schaueble reaffirmed his opposition to giving Greece more time and Mr. Dobrindt - a CSU member – voiced the opinion that Grexit would come next year. Mr. Laschet, a CDU member cautioned Saturday that Grexit could trigger instability in a NATO member state with Russia standing ready to help Greece and Chancellor Merkel Sunday warned German politicians to weigh their words “very carefully” in discussing Grexit. — SocGen’s Michala Macussen
Samaras Secures Greek Budget Plan as Coalition Discord Grows - Bloomberg
“We should have avoided this new wave of wage and pension cuts, some 6 billion euros, which will keep the country in recession in 2013 and 2014,” Venizelos said. More time “would have allowed for a milder implementation of the measures.” — Bloomberg
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Bottom line: Austerity continues to be implemented in the face of a debt trap and increasing social tensions. It’s time to take a look at my blog’s motto:
“Common sense, why don’t our leaders have any?”
Weekly Bull/Bear Recap: Jul. 2-6, 2012
Bull
+ The U.S. economy continues to grow; recent data is only a pause that refreshens.
- The consumer is resilient in the face of slowing economic conditions abroad. The National Restaurant Association reports that performance and expectations for May are near 2006 levels. Meanwhile, auto sales rebound, surprising most analysts.
- U.S. Rail Traffic continues to show an expanding economy and two key sectors of the economy, autos and housing, are poised to lead a re-acceleration of growth.
- Construction spending for May surges the most in 5 months, signaling that activity has finally bottomed and will be a job creator in the quarters to come.
- Speaking of job creation, ADP reports a stronger pace. Meanwhile, jobless claims fall under 380K for the first time since mid-May, planned job cuts plunge to a 13-month low, and the Monster Employment shows growing labor demand. While the BLS job report is below expectations, wage growth firms up and the average workweek ticks higher.
+ Gas prices have plunged over the past 3 months, while ISM Prices-Paid subcomponents are in deep contraction territory. Conditions are ripe for the Fed to initiate another QE and confirm that central banks are coordinating policy, causing a turn in sentiment and a powerful rally.
+ Meanwhile, China has plenty of ammunition for additional stimulus. However, the economy is stabilizing on its own as per China’s non-manufacturing index, which rises to a 3-month high of 56.7. There will be no hardlanding in China. Monetary officials are loosening monetary policy, setting the stage for a strengthening recovery over the 2nd half of the year.
+ German factory orders come in better than expected and is good news for the exporting powerhouse. Global growth has weakened but will stabilize soon.
Bear
- Investors are giving the thumbs down towards solutions presented at the latest European summit . Spanish yields are back within striking distance of 7%, while Italian bonds are above 6%. Core-countries are reneging on providing unconditional help to the periphery. A crisis of confidence is set to fragment the Eurozone. We are at most weeks away from a negative worldwide financial shock, leading to a global recession.
- Merkel is under increasing pressure from officials in her native Germany. The CSU, the Constitutional Court, and now the President of the Bundesbank are making it clear that political will in Germany has been exhausted. A referendum must take place. Meanwhile, the Greek government is set to collapse again soon. The ECB cut interest rates, but it isn’t enough for the QE-addicted market. Finland says the “unthinkable.”
- U.S. economic data continues to point to increasing sluggishness and ultimately a recession. The ISM June’s manufacturing index turns in its first contraction print in 35 months; important leading indicators — New Orders and Backlogs — are in solid negative territory. While ADP shows an improved labor market, the BLS has a different account of its health. Weekly consumer metrics are showing significant weakness and outlooks in the retail sector are getting slashed.
- Global economic data continues to disappoint. Euro-area unemployment climbs to a record 11.1% in May. The bulls were wrong, Germany did not decouple from the rest of Europe, as May’s PMI fell to a 3-year low and weighted on a gloomy Eurozone PMI. Slumping New-Orders for most PMIs signal global recession has arrived. Globally coordinated interest-rate cuts smell of panic.
- “But trust is shattered at the very top of the financial system.”
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Be sure to check out my newly minted macro and market outlooks. Happy Independence day to all of America. I love my country and look forward to better times ahead.
(via Greek Finance Minister Quits Days Into the Job After Illness - Bloomberg)
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This is in addition to news that Greek leaders will not be present for the all-important Eurozone summit due to the same reason.
Weekly Bull/Bear Recap: Jun. 18 - Jun. 22, 2012
Bull
+ The Conference Board’s Leading Indicator increases 0.3% after a small 0.1% decline in April. “The index’s 6-month growth rate remains in expansionary territory and well above its growth rate at the end of 2011, pointing to a relatively low risk of a downturn in the second half of 2012.” — Conference Board Economist
+ Housing is clearly turning the corner. The NAHB/Wells Fargo Housing Market Index rises to a 5-year high, while lumber prices just hit levels last seen in 2006. Meanwhile Housing Permits, a leading indicator of housing construction, rise to their highest reading since 2008, while Starts show a YoY reading of close to +30%. Continued momentum will create jobs.
+ Pro-bailout parties are able to form a government in Greece, adding legitimacy to imposed austerity. Moreover, policymakers are slowly moving towards using the EFSF to purchase sovereign bonds, relieving periphery countries of their high funding costs. Germany has left the door open to this course of action. Spanish and Italian bond markets have begun to sniff out use of the EFSF.
+ The crisis is uniting world leaders, leading to a more coordinated response to global events. The G20 backs growth measures alongside more prudent budget management and decries protectionism. Meanwhile emerging markets show solidarity with Europe, almost doubling the IMF’s firepower. Finally, central banks stand ready to act to relieve market stress.
Bear
- The global recovery is being upended in front of our eyes. China’s PMI (HSBC) slumps to a 7-month low, matching the length of contraction seen during the 2008 crisis. Meanwhile, both the Ifo and ZEW confidence surveys in Germany show a deep recession for the Eurozone is in the offing. June Eurozone PMIs confirm this as well.
- The market doesn’t believe the Greek elections have solved the underlying problem of lack of political will amongst the people of Europe to share their debt burdens. Downside risk for equities will remain high as long as Spanish 10-yr bond yields remain elevated. The end game for the Eurozone is at our door and few believe this to be the case. And no bulls, Germany is not using the EFSF nor the ESM to bailout the periphery until budgetary sovereignty is handed to the European Commission.
- The U.S. economy is coming perilously close to stalling. Labor market conditions have deteriorated as job openings fall to the lowest in more than a year, while the downtrend in jobless claims has vanished. Meanwhile growth in the manufacturing sector, the beacon of the U.S. recovery, is fizzling out.
- While it may seem that the G20 is united against the Eurozone crisis, behind the scenes is a different story.
Consumer sentiment lowest since December - Economic Report - MarketWatch
See two posts down. More confusion to an already uncertain outlook.
Coupled with a weak Empire Manufacturing Index and falling industrial production, the economy is particularly vulnerable to any further deteriorating conditions in Europe and China.
On the bullish side, investors increasingly believe that a pro-bailout party will win the election and that the moment of reckoning isn’t this weekend. Furthermore, all central banks are ready to pounce with QE should Greece begin to exit the Eurozone. Technically the S&P 500 has completed a reverse head and shoulders on strong volume and good breadth.
A long straddle option strategy on the S&P 500 would be an interesting proposition. It’s anyone’s guess what Monday will look like, though the bulls may be on to something here. It all depends on the Greek elections.
Greek Opinion Poll Shows Majority Want Revised Terms - Bloomberg
Most Greeks want to see the terms of an international financial rescue revised even as they acknowledge that not abiding by austerity measures required for the funds may lead to the country leaving the single currency, according to an opinion poll conducted weeks before a second general election on June 17.
Almost eight in 10, or 77 percent, of the 1,600 Greeks surveyed by GPO SA pollsters for the survey broadcast on Athens- based Mega TV today said the terms of the bailout should be revised. More than half, or 52.4 percent, said they should stay in the euro if they were forced to accept the current austerity measures accompanying the bailout while 44.5 percent said they shouldn’t. Most Greeks, or 81 percent, said they wanted to remain in the single currency.
— Bloomberg
