Weekly Bull/Bear Recap: June 20-24, 2011
+ The US Gov’t is taking action and is attacking the greatest threat to consumer spending today. Falling gas prices, over the course of the summer, will positively catapult consumer confidence heading into the second half of the year. With this week’s leg lower in oil, expect their continued fall to be a growing tailwind for consumer spending.
+ Home prices are showing signs of firming as the FHFA House Price Index rises 0.8% in April. This along with lower gas prices will give life to the consumer in Q3.
+ Durable Goods Orders, ex-trans, more than made up for last month’s loss of -0.4% (revised from -1.4%), rising 0.6% for the month of May. The economy is stronger than many people think. The Japanese earthquake profoundly disrupted global supply chains, while higher gas prices somewhat deterred consumers. Those headwinds are in the rearview mirror. Improvement in economic indicators will be a theme in the next couple of months.
+ Greece’s gov’t survives the Confidence Vote. The EU and IMF approve the country’s austerity plan. This sets the stage for additional aid in the coming months. Approval of this aid will eliminate a large uncertainty from the business climate, confidence will return, and will set the stage for a second half rebound in global economic growth.
+ The Yuan continues to strengthen against the dollar and is a necessary step for the global economic re-balancing to take place. Chinese officials understand that the ball is in their court and are taking action.
- Jobless Claims show a weak labor market. As long as it’s weak, don’t count on consumer confidence making a strong comeback anytime soon. A weak labor market leading to subdued confidence = weak consumption = weak labor market. A negative feedback loop plagues the US economy.
- We’re deep into the home-buying season, but from the looks for the data, you’d think we were smack in the middle of winter. Existing home-sales fall 3.8% in May (to a 6 month low), while months supply rose to 9.3 months from 9. New home sales, which are undeniably more important to the economy, also fared poorly.
- The global recovery is stalling. According to the recently released HSBC Flash Purchasing Manager’s Index, China is only 0.1 pts from outright contraction. With another interest rate hike around the corner, the engine of the global recovery may shut down quickly. Meanwhile the Eurozone, in addition to its sovereign debt woes, is dealing with an abrupt slowing in economic growth.
- The Architectural Billings Index, a leading indicator for commercial real estate construction is turning back down and mirrors many other economic indicators over the past month. Are we really in just a soft patch? We’ll find out shortly.
- Protectionism: Coming soon to a news headline near you.
Weekly Bull/Bear Recap: June 6-10, 2011
+ Gas prices keep falling. The one major headwind towards consumption is disappearing and is setting up the stage towards a strong 2nd Half of the year from the largest sector of the US economy, the consumer.
+ The Gallup poll’s set of economic indicators do not show an economy that is falling off the cliff. Underemployment has been steadily declining since the end of April. Consumer confidence has been stable since gas prices peaked. Meanwhile, consumer spending, while choppy, has been trending higher the whole year. These are not signs of a drastic fall in economic activity.
+ …Bearish sentiment is also running wild as double-dip fears are reaching a crescendo. With lower gas prices, and the effects of the Japanese earthquake ebbing, these factors are setting the stage for a sizable rally as the economy in general recovers.
+ We may have a surprise stimulus package focused on job creation, which would be attacking the economic malaise head on. Additional stimulus packages would encourage job creation and a psychology of confidence.
- From the National Federation of Independent Businesses: “On Main Street, Job Creation is Collapsing.” Need more proof of a labor market slowdown? Jobless claims, over 400,000, are now the norm…again.
- Welcome: …to de-leveraging (it ain’t over).
- Bernanke’s speech didn’t show a solid conviction of using QE as a viable tool towards fighting ongoing economic weakness (neither did other FOMC members). And ergo the downdraft in the markets on Tuesday, and the complaining on Wednesday.
- Eurozone woes are a degree from boiling temperature as there is a clear discord between Germany and the ECB. Germany insists that investors take part in extending bond maturities (which rating agencies have stressed would amount to a technical default and trigger a credit event), while the ECB has stated it would take no part in the plan (maybe because it would result in an imploding banking sector). Meanwhile, Trichet has signaled that he will raise rates in July to fight inflationary pressures, despite economic weakness in most of the Eurozone.
Weekly Bull/Bear Recap: May 16-20, 2011
+ For all the talk about how narrowing profit margins will put a crip on hiring, Gallup Poll’s Job Creation sub-index keeps showing strengthening hiring trends. It has been near the top end of its range since mid-May. Meanwhile, as expected, jobless claims plunge again from from 424,000 to 409,000. The recent spike was nothing more than a seasonal quirk. Job growth (in addition to falling gas prices) will serve to buttress consumer spending.
+ Fears of oil refineries being shut down due to the massive flooding along the Mississippi River are dissipating and gasoline futures have plunged roughly 15% since the early May peak. This is setting the stage for falling gas prices which in turn will lead to an acceleration in consumer spending in the months ahead.
+ The bond market is doing its part in helping housing with mortgage rates dropping for the 5th straight week to their lowest level this year. This is happening right in the middle of spring buying, which should help stabilize the housing market and improve consumer confidence. Meanwhile these lower rates have also set off a wave of refinancing, which will free up more disposable income for households.
+ The Wall of Worry remains high. Given how individual investors are always the last to the party, it’s bullish when they bailout at the slightest drop in the S&P 500. There’s buying power on the sidelines and once the consumer seeings falling gas prices, consumption growth will take a leg up and investors will buy once again.
+ Home Depot raised its outlook for the year as same-store sales returned to positive territory after falling in prior months due to bad weather. Having a market-leader in home improvement announce a raised outlook is a harbinger of improving investment growth in housing. (Don’t own nor am I shorting Home Depot)
+ The Linkedin IPO is a great success with the stock surging more than 110% after its debut on Thursday. Investor appetite for risk remains strong and signals improving confidence in the recovery. Market conditions, such as falling rates, oil prices, increased lending, and rising stock prices will make it easier for the recovery to progress. (Don’t own nor am I shorting Linkedin)
+ Bank lending is the life blood of the economy. So when you see reports of increased lending to businesses, it signals that confidence is increasing on the part of banks and small businesses as they believe business conditions have improved enough to take risks. The animal spirits are coming back and is a welcomed development for the recovery.
- Here are some more leading indicators for the Bulls. The Conference Board Leading Indicator fell in April for the first time in almost a year. Worse, 2 of the 4 sub-indicators that came in positive were the “interest-rate spread” (which is obviously manipulated by Bernanke’s ZIRP policy) and “stock prices” (POMO anyone?). Meanwhile, the ECRI just delivered the bear clarion call: “Global-Slowdown is coming”.
- The housing market continues to defy the optimists. Numbers for April showed no sign of increasing construction activity anytime soon as Housing Starts and Permits (which is a leading indicator) both showed declines of 10.6% and 4.0% respectably. Meanwhile, in a sign of how non-existent demand is for housing, despite the lowest mortgage rates of the year, existing home-sales still managed to drop in April (when they should be rising due to home buying season). If I was a home builder, I’d be depressed as well.
- The Japanese earthquake and subsequent nuclear disaster (which just because the news isn’t on bubblevision anymore doesn’t mean it’s gotten any better), is beginning to show up in US economic data. Industrial production for April came in flat surprising economists expectations for a slight gain. February and March data were also revised lower.
- In news not having to do with the earthquake, the Empire Manufacturing Report was quite disappointing for the bulls, coming in miles below the consensus estimate of 19.6, at 11.9 and down from 21.7 in April. Prices paid rose 12 pts to the highest since July 2008. Meanwhile, the Philly Fed manufacturing index for May showed that factories in the mid-west grew at the slowest pace in 8 months. Contrary to economist’s expectation for the gauge to rise to 20.1, it came in at 3.9. Yep I’d say that was a miss.
- As if the Eurozone needed another dumb decision by a politician. In one of the weirdest financial stories of the year, IMF chief Dominique Strauss-Kahn was just sick of dealing with the Eurozone issues and let out his frustrations on a poor 32-year-old maid (nodding head).
- Don’t you think it’s odd when you have analysts, money managers, and bubble vision all chanting about how we are in the midst of a recovery and that conditions are setting up for a major rally to end the year while you have insiders dumping their stock to the tune of 350x sellers to buyers? Putting my common sense cap on, something just doesn’t make sense here!
- The Middle East is still a hotbed of Cold Wars, rising tensions, and sectarian violence. Obama just upped the ante on the Syrian president, while laying down a controversial plan for Israel to return to pre-1967 (ex. Gaza and West Bank) borders in its peace process with the Palestinian state. Israel has bluntly rejected the proposal.
- The Eurozone made headlines late this week with S&P downgrading Greece sovereign debt due to a possible “soft-restructuring”, tensions are erupting between Eurozone officials (the wind speed on the house of cards is increasing). Meanwhile, it’s not only the Finnish or Greek populace getting sick of the austerity (in order to bailout investors), Spain is now in the spotlight as Zapatero’s “Socialist” party is set to suffer major losses in the days ahead. Spanish 10-yr yields are at the top of their multi-month range. Things may be taking a turn for the worse.
Weekly Bull/Bear Recap: May 2-6, 2011
+ The Jobs recovery continues as the granddaddy of all US economic reports, the BLS “Employment Situation”, showed a solid increase of 244K jobs with an upwards revision of 46,000 in the previous 2 months. The charge was lead by the private sector, which notched its largest gain in almost 5 years. The Gallup Poll announced that its "Job Creation" metric notched its best monthly reading of the recovery, while the unemployment rate fell. Meanwhile, leading employment indicators point to continued improvement. Jobs are the final piece of the puzzle for the bullish thesis and it’s falling into place…
+ …These new jobs are igniting a “shadow demand” for housing, where recent graduates move out of their parent’s home and form new households. Multi-family housing supply is getting mopped up by increased household formation, which will result in housing-related employment bottoming this year. The housing market continues to heal.
+ The US economic recovery is sustainable and lead by strong growth in the manufacturing sector. April’s ISM report showed that New Orders, Production, and Employment all notched very healthy growth rates. Meanwhile Backlogs jumped from 52.5 to 61.0 and ensures that the sector will continue to grow in the months ahead. This is further confirmed by March Factory Orders which climbed for the 5th consecutive month while last month was revised higher.
+ Car Sales came in better than expected and are up 17% from April 2010. The consumer is getting back on its feet (the plunge in oil may help), while business are expanding. End demand will accelerate in the months ahead as the job market, the final piece of the bullish thesis, falls into place.
+ As per the Senior Loan Officer Opinion Survey, released by the Fed, credit is becoming available again and adds a key ingredient to the recovery. Commercial and Industrial loan demand is increasing, a sign of expansion (=jobs). Easing credit standards will facilitate the progression of the recovery.
+ Global growth is certainly present. The world economy is on a sustainable recovery, led by Asia, which will lead the world into a new era of growth as demand for goods sparks an export-led recovery in the US and Europe. Manufacturing at home has been strengthening and shows that this transition is occurring before our eyes. Meanwhile, contrary to the bear’s sentiment, China is clearly showing signs of a soft-landing as their PMI shows slowing, but not crashing growth.
- This isn’t your garden-variety recession, it’s a balance-sheet recession. Consumer psyche has been scarred for a long time (think Great Depression scarred) as households are reluctant to take on debt despite bank’s increasing willingness to extend credit.
- ISM Non-Manufacturing index which tracks the service sector of the economy plunged from 57.3 to 52.8 in the largest drop since late 2008 and the slowest growth in 8 months. New Orders led the fall while employment growth weakened as well. This all-important sector, representing 80% of job growth and close to 90% of business in the US economy, is showing signs of a serious slowdown in growth.
- Consumption will likely take a hit as millions are set to lose their unemployment benefits in the coming weeks. Along with spiking gas prices, stagnant real wages, a double-dipping housing market, and declining confidence, consumption growth may come to a grinding halt.
- Ireland slashed its growth projections in half for 2011 and 12. Austerity doesn’t seem to be working there and it looks like Portugal is headed in the same direction. Meanwhile, rumors are surfacing that Greece may end up leaving the Euro which would be a tremendous blow to the Euro experiment and would signal a default on its sovereign obligations. How long would it take for other countries to follow? Europe continues to experience its slow-motion train wreck with austerity beating up on economies in that region and now a strong currency negatively affecting its most important one.
- Global growth is running into some serious headwinds. Asian countries may be confronting a stagflationary type of scenario as they raise rates in an effort to cool down inflation; unfortunately slower growth is a bi-product of most rate-tightening cycles. Higher rates risk possibly popping a Real Estate bubble for the linchpin of the global recovery.
- This week was actually rather disappointing on the jobs front. While the BLS jobs report showed strength on the headline, details under the hood were not all healthy. Furthermore, Initial jobless claims surged again marking the 3rd straight increase up to 474K while last week was revised………guess. The ADP employment report reported a less than expected increase of 179,000 (consensus was 195,000). So for the bulls stating that the final piece of their thesis is in place, the data shows a more muddled picture. The labor market remains very weak.
Weekly Bull/Bear Recap: Apr 25-29, 2011
+ Earnings and revenues for various bell-weathers portray improvement in corporate performance. Revenue-beat rates are the highest since the bull market began (there’s your top line growth bears). A steady trend of share buybacks and increased dividends will keep the bull market trend in place since March 2009 intact as companies return profits to investors.
+ The Bull Market rolls on as the Dow Theory is confirmed with both DJ Transportation & Industrials averages breaking through their prior bull market highs. The S&P 500 and Nasdaq have finally confirmed as well by breaking their previous bull market highs set in Feb. Even better, there’s a good bit of skepticism out there in regards to this latest breakout, the wall of worry remains.
+The Chicago Fed National Activity Index points to above-trend economic growth and refutes claims that economic activity has fallen. Manufacturing continues to lead the way and the report points to strong contributions from the Job market. Small businesses are slowing recovering and hiring is increasing in breadth.
+ Durable Good Orders rise a healthy 2.5%, while core-capital goods rise a strong 3.7%. Orders have now risen for 3 straight months. Shipments climb for the 5th straight month as well. Meanwhile, Chicago’s Midwest Manufacturing Output index increases 1.9% led by strong auto-related production. Finally, ATA truck tonnage levels and recent railroad data point to continued expansion in the manufacturing sector.
+ Consumers continue to spend as evidenced by recently released weekly sales metrics and the Restaurant Index. Easter demand has been solid thus far. Consumers have become accustomed to higher gas prices and continued improvement in the job market will ensure that spending growth continues.
+ The Conference Board reports that consumer confidence for April continued to stabilize as the “current conditions” component rose for a 7th straight month. The recovery continues. Plans to buy a house, an auto, or an appliance rose in renewed confidence that incomes will improve in the months ahead. This confirms recent improvement from the University of Michigan sentiment survey.
+ Despite all the bearish chatter, manufacturing orders continue to pile up for the Eurozone and confirms that the recovery continues in that region. Strong demand from Asia confirms that the global restructuring is taking place.
- Jobless claims disappoint again surging to 429K, marking the highest level since January while last weeks’ claims were revised….guess. Job growth has effectively stalled as more companies find it better to seek cheap labor outside of the US and heightens the risk for protectionist sentiment coming from Washington in the months ahead if things don’t improve.
- The housing double-dip is knocking at the door as Case-Schiller Home-Price Index reports the 7th straight month of lower prices. What led us into the Great Recession has just recommenced its second dip. The banks are sweating as well. They have clearly failed to participate in the latest run up in equity prices (XLF, BKX). Bank balance sheets are not prepared for a double-dip in home prices.
- Manufacturing around the nation is showing signs of a considerable slowdown in growth as Dallas, Richmond, and Kansas manufacturing surveys come in way below expectations. Manufacturers in Richmond signal that Inflationary pressures will be hitting the consumer very soon and bodes ill for an already fragile consumer confidence…
- …and speaking of consumer confidence, we got more bad news on that front as well as the Gallup Poll reports yet more deterioration. The Bloomberg Consumer Comfort survey has followed suit as well. Meanwhile, UK consumer confidence is probing the 2009 depths of despair (austerity is a sharp double-edged sword).
- The Eurozone continues to simmer. Portugal, for the second time now, revises its deficit upwards from 8.6% to 9.1%. Same deal with Greece (restructuring seems inevitable here). Next victim for the bond vigilantes? Spain would be a too big to bail out economy if it came under stress and it has been lately.
- Signs continue to come from China that things are getting pretty hairy over there. While the S&P 500 broke through to bull market highs, the Shanghai Composite just broke below its 50-day moving average. Inflation is getting worse in China as officials haven’t done enough to quell sticky wage-fueled inflation. Growth is slowing as well. All these signs point to a stagflationary scenario in the upcoming quarters.
- Q1 GDP comes in a mediocre 1.75% (less than expectations), with the all important Real Final Sales metric (=end-demand) registering a pitiful 0.8%, the lowest since Q3 ‘09 and much lower than the 6.7% rate in Q4. Cuts at the state and local gov’t level are being felt as well. While Consumption did rise higher than expectations, let’s not forget that oil prices averaged under $100 a barrel.
(I don’t own nor am I shorting any companies mentioned here)
Bull/Bear Weekly Recap: Apr 18-22, 2011
+ The Conference Board’s Index of Leading Indicators showed a larger than expected increase of +0.4%. Last month’s reading was also revised higher from 0.8% to 1.0%. The results point to strengthening economic activity and a sustained growth trajectory throughout the year.
+The Job market continues its recovery as the JOLT Survey shows increased job openings. Meanwhile, the Gallup Poll is signaling a decreasing unemployment rate. Its “Job Creation” survey notched its highest reading of the recovery this past week. Job gains will add cash to the economy and keep consumption growth sustainable.
+ Improving confidence shows that US consumers are more comfortable in dealing with higher oil prices. Falling home values won’t have much of an effect anymore given that the bulk of the shock has already been taken. Consumer’s have come to expect that home values will remain low for sometime to come.
+ Eurozone economic numbers show that the region is recovering despite recent headwinds such as the Japanese earthquakes and higher oil prices. Continued steady growth will offset recent austerity measures on the periphery.
+ Intel results shine (a triple play!) and confirm continued growth in the global economy as businesses expand and require new equipment. Intel is a global bell weather so a positive report from the company is a harbinger of continued business spending. Guess who else tripled? IBM. (I don’t own any Intel or IBM nor am I shorting them).
+ If you look objectively, you can see signs that the manufacturing recovery is for real. A manufacturing renaissance is occurring in America fed by large emerging market demand. Jobs will be created and the virtuous cycle of jobs feeding consumption will help the recovery gain strength in the months ahead. (I don’t own nor am I shorting United Tech, or Eaton)
- So the job market is getting better eh? Not from the looks of Jobless Claims reports. We have our second consecutive reading above 400,000. This hasn’t happened in over 2, close to 3 months. Job growth has effectively stalled and a major thesis point for the bulls is under increased scrutiny. Last week’s report was revised…(guess: up or down?).
-US “AAA” outlook is downgraded from stable to negative as per S&P. Politicians still haven’t put together a credible debt-reduction plan. It’s only a matter of time before investors seriously question the payment ability of the US. While the US is the monopoly issuer of its currency and will definitely pay back its obligations, rising commodity and precious metals prices signal that investors question whether they’ll be paid back with worthy dollars or just pieces of paper that can be burned for heat Weimar style.
- You’d figure the large plunge in the April reading of the Philly Fed Manufacturing Index was due to the disruptions in Japan, yet 80% of respondents said that recent developments in Japan had no affect on them or their customers, 10% said that there were “Possible Future Effects”, and 10% said there were “Some Current Effects”.
- The higher the markets go, the “stronger the recovery gets”, the tighter the noose of higher oil prices becomes. Eventually, the headwind will be too much for the US consumer to bear. Consumer Confidence according to the Gallup Poll continues its downward trend, not confirming the Bloomberg survey. It’s only a matter of when, not if.
- Things are apparently getting icky in China with increasing protests regarding inflation. Chinese officials are in a very tight spot and the situation closely resembles what I though would eventually happen when I wrote this article a little over a year ago. Worse even is that inflation will probably remain sticky in the months ahead. Will protests begin to have an effect on economic productivity? Very likely. It’s already causing some serious margin squeezes.
- The Finnish elections along with further rumblings of a Greek restructuring have sparked another scare for the Eurozone (saw that one coming as soon as the election results were being disseminated). While the news regarding Greece was bad, it was even worse for Spain as yield spreads are under upward pressure again after a substandard debt issue.
- While some housing reports may have come in better than expected recently, looking at the forest instead of the trees shows us that the housing market still flat out stinks. We officially have an “L-shaped recovery" in this sector. Sales remain depressed and there are no "move-up buyers", only cash-deals by investors. Home Prices (the commoner’s largest asset) keeps on falling.
Weekly Bull/Bear Recap: Apr 11-15
+ The Meridian-UCLA Pulse of Commerce shows a rebound for the month of March and confirms that the manufacturing recovery will continue in the months ahead. There is little danger of a sudden fall in manufacturing activity. This belief is further reinforced by March Industrial Production and Empire Manufacturing reports.
+ OECD leading indicators point to an acceleration in growth for the US and Europe. China’s leading indicator is showing that a “soft-landing” is in store for them. The stable outlook for the big three global economic powerhouses will insure that we will not have a global double-dip.
+ Consumer confidence as per the Bloomberg Consumer Comfort Index rises for the 3rd week in a row, confirmed by the University of Michigan Consumer Sentiment report. While oil prices have risen recently, the consumer is getting used to higher prices. Consumer confidence is stabilizing.
+In the face of the Japanese earthquake and rising oil prices, China’s economy is rumbling along with larger than expected growth in exports for the month of March. This reading gives the government room to let the Yuan appreciate in order to curb inflation. The economy is strong enough to endure rate increases as well as Yuan appreciation. The global re-balancing is occurring.
+ Despite what the bears keep saying, Eurozone conditions continue to improve and the region may be undervalued. Irish 10-yr yield spreads have come down markedly now that all the dirty laundry is exposed and sentiment is improving. China announces that it’s investing in Spain (signaling confidence that the country will get its finances under control — the market is beginning to think so!).
- Alcoa’s quarterly report stokes investor concern that its quarterly results may be a harbinger of reports to come as the earnings season continues. If so, then the market may undergo selling pressure. (I don’t own nor am I shorting Alcoa). The dynamic of higher energy prices and raw materials can also be seen in this week’s PPI report, which shows that crude and intermediate inflation are nestled in the pipeline. If companies lack pricing power (I believe many lack it — especially discretionary companies), margins will get squeezed throughout the summer.
- A key ingredient in the bullish thesis, improvement in the job market, has been extremely lackluster and in fact went into reverse this week. Jobless claims popped over 400K for the first time in 2 months while last week’s reading was revised higher (surprise surprise).
- NFIB shows a recessionary reading. “It looks like everyone became more pessimistic in March,” said NFIB chief economist Bill Dunkelberg. “Or, perhaps, this is a ‘new normal’ and we are unlikely to see the surges usually experienced at the start of a recovery.” Bill, that “new normal” you speak about is called a “depression”.
- Economists are revising their Q1 GDP estimates downward as weaker than expected end-demand and shoddy trade data force them to acknowledge what the bears have been saying for months, economic growth is almost non-existent. When will the bulls open their eyes to what’s really going on?
- Has China’s property bubble popped? A MoM decline of +26% made me do a double-take (transaction volumes have plunged as well). Furthermore, Xia Bin, a monetary policy adviser to the PBOC, states that more interest rate increases are coming in order to tame inflation. A stagflationary scenario seems to be at hand.
Keeping An Eye Out: Mid April ‘11
So how’s my thesis doing? Are things coming together as I had forecast in my most recent outlook? See here for the answers.
Thanks for your continued support.