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.  

Bull

+ 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.

Bear

- 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

Bull

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) 

Bear

- 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: Turkey Week Edition, 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

 + Uncertainty is decreasing.  In last week’s recap, the bull’s strongest case was the “the contours of a resolution” taking shape regarding the fiscal debate in Washington.  This week, more investors bought into this bullish point, leading to the S&P 500’s best weekly performance since June.   In geopolitical news, a cease fire has been declared in Gaza.  Decreasing conflict in the region means cooler heads are prevailing.    

+ Risk markets are ripe for a tradable bullish move given that the S&P 500 is extremely cheap when looking at current P/E ratios.  In fact, it would need to rally 26% just to reach the average P/E of bull markets dating back since the 60s.  Meanwhile, trends in insider trading are hinting at a sustained rally to come.  Mainstream investors are entirely too pessimistic on longer-term earnings growth, yet sources of future growth are around us….

+ …global growth will be the recipient of a welcomed surprise in China, where a rebound is gaining strength as per HSBC’s latest PMI reading, increasing to 50.4 from 49.5 and marking the metric’s first expansionary reading in more than a year. Meanwhile, “The German economy is holding up well in face of the euro crisis” and ECB officials signal that the central bank is willing to forgo $9 billion in future profits on its Greek holdings, a sign of understanding that some relief will need to be given to periphery countries.  

+ …meanwhile, U.S. economic growth will be increasingly supported by a rebounding housing market.  The National Assocation of Homebuilder’s Housing Index rises to a 6 and a half year high.  Existing home sales for October surprise to the upside and upward pressure in home prices may be the reason for improving consumer confidence (Source: Econoday).  Rising Housing Starts indicate that the housing industry is becoming more confident in the recovery.  Meanwhile in manufacturing, Markit’s U.S. PMI report certainly doesn’t agree with the bearish claim that the sector’s is about to enter contraction.  Finally, U.S. officials understand that today’s globalized economy is about competition and are considering establishing laws to encourage the brightest minds in the world to consider the U.S. as their home.       

Bear

-Investors are like frogs in an increasingly hot investment environment.  Europe continues to show signs of disunity and infighting as EU finance ministers are unable to agree on a revised version of Greece’s fiscal consolidation plan or approve to extend the country’s public debt target.  Meanwhile France’s AAA rating is history as per Moody’s.  Increasing investor skepticism doesn’t bode well for lawmakers as eventually financial markets will force the issue.  Finally, economic and financial data is just awful.

- Confidence in the global recovery is evaporating.  U.S. Tech companies are feeling the effects of a slowing global economy.  Meanwhile, China reports that foreign investment in the country has fallen for 11 of the last 12 months.  If bulls are certain that China is poised to rebound, why has the Shanghai Index dropped to a new low?  Meanwhile, Japan reports a 6.5% plunge in October exports (exports to the EU cratered 20% YoY)

- As if critical damage due to a slowing global economy wasn’t enough, the U.S. economy is also contending with a crisis of confidence due to Fiscal cliff concerns.  Investment is falling off a cliff as companies pull back on business spending.  The consumer better step through this holiday season (early signs   aren’t promising).  Despite a higher trend in Michigan’s Consumer Sentiment index, weakening momentum is causing alarm.    

- Cooler heads may seem to be prevailing in the Middle East, but the longer trend is of more hostility.  Meanwhile tensions in Asia remain elevated and territorial claims dealing with the South China Sea are likely to exacerbate fissures in the region.

Weekly Bull/Bear Recap: October 24-28, 2011

Bull

+ The bears are furious as Europe once again, to their disbelief, unites and puts forth a €1 trillion package to backstop banks and sovereign debt markets.  Eurozone officials also negotiate a voluntary haircut of 50% with banks to put Greece on a sustainable path forward and create time for real reform to take place.  The avoidance of a credit event as well as a recapitalization fund of €106 billion ensures that there will not be a disorderly default and that infected banks will be ring-fenced thereby stemming the contagion. The effectiveness of the package results in global equity markets rallying to finish off the week and the Euro rebounding above the important 1.40 mark.  The greatest impediment to the global recovery has been lifted.  Societe Generale strategists said, “the agreement was likely to prove sufficient to ease financial stress and should be comprehensive enough to give the euro area a ‘window of opportunity’ to put its house in order”. 

+ 3Q GDP grows at its fastest pace this year in a marked rebound from the prior quarter.  The gains are lead by…. the resilient consumer.  Double-dippers are finished.  Ignore the consumer confidence surveys.  Yes, people are glum about the economy but life goes on.  People are learning to live with the current circumstances, which by the way are slowly getting better.  The holiday shopping season will pleasantly surprise judging by this news and the most recent uptick in confidence as per the University of Michigan Consumer Sentiment Survey.  Moreover, according to the Chicago Fed National Activity Index, the economy isn’t in recession, only a soft-patch.  The 3 month moving average rose to -0.21 in September from -0.28.  The improvement was centered around employment-related indicators.  And finally, the Philly Fed State Coincident Index increased in September and shows continued improvement from this summer’s soft-patch.      

+ The S&P 500 has broken through its 200-day moving average.  It has also penetrated the neckline resistance.  The Dow Theory is also back into effect as both the industrials and transportation averages have broken through their prior highs.  How was the breadth in the latest rally?  I would say healthy.  Credit has also participated in the rally.  These are signs that the technical picture has improved substantially.  The index is poised to challenge the bull market highs.  Shorts are getting decimated.  Money managers are hopping on board as seasonality is supportive of positive returns to finish the year (Santa Claus rally!), they don’t want to miss the boat! —(S&P 500 below)

+ Yet more signs that the global economy remains on firm footing: Caterpillar (CAT) scores an A+ in its earnings release, reporting a net income/share of $1.71 vs. estimates of $1.57, while guiding higher in its forecast.  Order backlogs remain at an all-time high;  China’s always salient flash PMI moves back into expansion territory, rising to 51.1 from 49.9.  Even better, more signs surface that inflation has indeed peaked and Mr. Wen has signaled a in shift in policy, geared more towards growth.  No hard-landing in China = supported global growth picture.  Copper rockets over 11% this week.  Even Japan gives investors good news with September exports rising by 2.4% YoY vs. estimates of 0.4%, while household spending came in better than expected and the unemployment-rate fell.    

+ While the headline was negative, Durable Goods Orders showed broad strength under the hood.  Orders excluding transportation were up 1.7%, better than the 0.4% expected by analysts, while business capital investment rose 2.4% (this data series just hit a new all-time high).  Furthermore, we have the American Trucking Association (ATA) announcing that September’s tonnage index rose 1.6% after a revised -0.5% reading (was -0.2%).  Chief Economist Bob Costello believes that the economy will skirt another recession.  None of these data points are pointing to a double-dipping economy.  The manufacturing sector is hanging in and remains very resilient.      

+ There are more signs that the Fed is close to stepping up to support market sentiment and the economy.  William Dudley, Fed Vice Chairman, is echoing earlier speeches by Fed members Tarullo and Yellen last week on a possible QE3.  It’s a fantastic time to go long the market and commodities in particular (due to China’s soft-landing).  When will the bears understand that you “don’t fight the Fed”?  

+  New Home Sales popped 5.7% and inventory fell to the lowest in over 6 months as supply continues to whittle down.  Lower supply will eventually lead to stabilized prices and consumer confidence.  Additionally,  changes to the Home Affordable Modification Program (HAMP) will help make refinancing more accessible and streamlined.  Other programs to unclog the financial arteries related to the housing market are being discussed.  Slowly but surely the housing market is healing.  Have you seen homebuilding stocks lately?!      

Bear

- Consumer confidence as per the Conference Board plunges in October to the lowest since….(drum roll)…. March ‘09.  Both current nor future conditions are spared; the former dropping from 33.3 to 26.3, while the latter falls from 55.1 to 48.7.  Job-related measures also show deterioration with “jobs not so plentiful” rising to 49.5% from 45%.  Meanwhile, the Bloomberg Consumer Comfort survey corroborates.  Not the results you want to see headed into the holiday shopping season.

- The bull’s thesis that the global economy remains on firm footing belies the true nature of the recovery’s condition (or lack there of), especially when looking at the latest Eurozone Services PMI data.  October’s measure shows contraction for the sector at the broadest pace in more than 2 years (47.2 from 49.1). More austerity coming down the pipe doesn’t bode well in the months ahead.  While “CAT” may have scored an A+ in its earnings and outlook, a slew of other companies (one of them being 3M) don’t see the same scenario in the coming quarters.  Officials in Hong Kong report the country’s first drop in exports in almost 2 years and see the outlook as “bleak”.  India is dangerously approaching stagflationary conditions, evidenced by their recent rate increase coupled with a downgrade of their GDP forecast.  Japan downgrades its growth forecast as well.  

- Let’s simplify the opprobrium with regards to the Eurozone’s latest bailout (nitty gritty can be seen here).  1st) it fails to respect the laws of mathematics, such as factoring out pre-existing commitments and guarantees that won’t be paid (“stepping-out guarantors”: Greece, Ireland, Portugal, Spain, and Italy); 2nd) it fails to account for historical first-loss rates of 50% for sovereign defaults, not the 20% agreed; 3rd) it fully eliminates the possibility of Belgium getting its rating slashed, which would eliminate their contribution to the bailout fund—-we’re not even considering France yet, even though the OAT/Bund spreads are close to record highs; and finally 4) It decimates the Sovereign CDS market, which has its own unintended consequences.  The best method of protection now is simply not to buy/provide credit, or outright selling/shorting of sovereign bonds.   On a side note, this bailout result for Greece becomes an incentive for other countries who have fallen on hard economic times to demand the same treatment.  ”Why should we suffer when they got rewarded for not fulfilling their austerity promises?”.  The circular nature of this plan, the faulty math, and its the rosy assumptions make it unequipped to handle even a slight deterioration in the economic landscape; for instance, a recession in Europe (which would jeopardize France’s AAA rating), or a highly probable downgrade in Belgium.  The Chinese aren’t confident and are prevaricating in their commitment to fund the rescue.  To drive this whole point home, there was little follow-through from Thursday’s rally and doubts are already resurfacing.  

• On the subject of Italy, do the bulls really think that officials are serious about implementing the “required” austerity?  One of the “famed” proposals is to increase its retirement age from 65 to 67 by the year 2026.  And to achieve that, a fight broke out in the legislative chamber; imagine what actual near-term austerity would do.  Most importantly, the Italian sovereign debt market didn’t bite on the solution.  An acute sovereign risk remains.  

- Governments are incapable of allocating a nation’s resources.  These are the results of their actions.  And now they just doubled down by leveraging up to save a failed Euro experiment.  Europe, you are not defeating the speculators, you are making them stronger.  The specious plan of leveraging the EFSF is only working to infect the core of Europe and more importantly is beginning to seed a dangerous sense of nationalism as continued demanded austerity is slowly being seen as a (il)legal act of war.  The more hardship there is (Spain Unemployment just hit the highest in 15 yrs), the more fervid this sentiment it will become.  

-  Do you want to put stock in some PMI survey gauging peoples’ perceptions of the Chinese economy, or do you want to see hard evidence of a slowdown?  Here’s some disturbing activity in the property market.  The bubble is popping.  Time to choose one of two fatal poisons for the Communist party, Mr. Wen.  Clamp down on credit and you get increased protests as people’s life savings vanish as the property bubble pops leading to a subsequent collapse of the economy; or stimulate, leading to wage/panic-induced inflation spiraling out of control.  Material Yuan appreciation seems to be out of the question, to the chagrin of Congress.  Clock’s ticking Mr. Wen.  One thing you might want to remember is that the Fed is pondering another QE experiment (ie. exporting inflation).  Just thought you’d like to know. 

- A dangerous escalation took place between government authorities and “Occupy (You name the city)” movement.  The trend of this campaign is moving toward violence, not compromise. The country’s politics fell into disrepute long ago, but this may take it to a whole new level.  Politicians better start doing something and soon.          

Today’s Economic Indicators and Observations

+Improving economic results show that the recovery is on firmer footing.

ADP Employment report for November shows a gain of 93K, 23K above expectations, while October was revised higher to 82K from 43K.  The breadth of the gain was improved from the prior months. 

Strong UK PMI and German Retail Sales

Strong China PMI = the economy continues to cruise.

Mortgage Application for purchase inch up 1.1% after that large 14.4% increase and marks a new post-stimulus high. 

ISM Manufacturing gauge comes in at a healthy 56.6 in November from 56.9; Employment sub-index points to additional employment gains in the sector; Supply chains are working as delivery times slowed, however, backlogs continue to contract. 

-Some coals in the stocking as well though:

Challenger Job-Cut report shows a rise in the announced layoffs and is up the highest level since March/April.  While it isn’t cause for alarm just yet, it’s worth keeping an eye on as retailers begin shedding their “holiday workforce”.

The Productivity and Costs report points to employers continuing to squeeze work out of its existing workforce as productivity jumped 2.3% for the 3rd quarter, while labor costs continued to decline, though slightly, down 0.1%.  Overall this helps corporate profits, but at the expense of hiring and inflation (which is what the Fed is desperately attempting to foster).

Strong China PMI may mean more tightening as price gauges are near 2008 highs… with a possible property bubble, the probability of a hard-landing is increasing

——————————————————

Overall the contradicting economic indicators continue, which is representative of a muddle through economy that is growing, but not at a strong enough pace to bring down the massive labor slack. 

Is the Santa Claus Rally about to begin?  Perhaps, however, I stand by my cautiousness as the name of the game is forecasting what may come in the future, not what’s going on now.  The market has priced this economic improvement already and many headwinds will be getting stronger.

   Housing prices continue to double-dip thus eventually affecting consumption

   Unemployment benefits expiring, affecting consumption as well..will they be extended?

   China applying the breaks via price controls and increasing interest rates

   Eurozone Sovereign debt issues just won’t go away

   State & Local government reigning in spending (see Cisco’s recent earnings report)

   Bush-tax cuts not getting extended…the stakes were raised today by Mitch McConnell