Weekly Bull/Bear Recap: Apr. 1-5, 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.
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Bull
+ A healthy trend in U.S. truck sales signals underlying strength in heavy equipment industries:
- Manufacturing remains a strong source of growth as per Markit’s PMI, which printed 54.6 for March. New export orders surprised to the upside, signaling expansion in foreign orders, while order backlogs potend further strength ahead for the sector. The report mirrors strength in the February Factory Orders (ex-defense) indicator, which rose a strong 2.4%, reestablishing a strong uptrend.
- The housing recovery continues to show traction, evident by a strong construction spending report for February. YoY, overall construction rebounded to 7.9% vs. 6.1% in January.
+ Global economic activity is stabilizing:
- German factory orders over the past 3 months show a distinctive carving of a bottom and confirm improving data out of the Ifo survey. Furthermore, Italian and Spanish 10-yr yields quietly plunged (higher bond prices) over the week (see 3-month view), a sign that market participants have clearly overreacted with the Cyprus bailout. European credit markets are signaling that the coast is clear.
- Chinese Official and HSBC Manufacturing PMIs rose in March, the former rising to an 11-month high. Moreover, Non-manfacturing PMIs surge from 54.50 to 55.60 (official gauge) and from 52.1 to 54.3 (HSBC gauge). These results signal a stronger expansion taking place.
+ Stocks largely recover from triple-digit losses today despite a sub-par jobs report. The Fed is “Full Steam Ahead” with QE. The Fed will continue to aid the the recovery. Furthermore, today’s job report actually has some bright spots. Leading indicators of employment, such as temporary help employment and construction jobs, are indicating a strengthening job market and economy. “‘Jobs day’ chatter is irresistible but almost without content. Monthly jobs numbers provide imperfect portraits of the recent past, and they are very poor predictors of the labor market’s future.”
Bear
- Job creation slowed substantially in March (slowest in 9-months; Labor-force participation at 1979 levels), while corporate layoffs are 30% above year ago levels according to the Bureau of Labor Statistics and Challenger, Gray, & Christmas respectively. Moreover, an additional spike in Jobless Claims, now at 385K, and a 3rd consecutive decline in the Rasmussen Employment Index further confirms that rose-shaded glasses worn by economists need to be put away quickly. The U.S. economy is extremely vulnerable to further fiscal contraction and a weakening global economy.
- Markit’s rosy view of U.S. manufacturing isn’t confirmed by the Institute of Supply Management, which reported a significant weakening in growth in March. The index fell from 54.3 to 51.3.
- On the global front,
- The BOJ goes all in on money printing, promising to double the size of its monetary base by 2015, in order to defeat deflation. The action has immediately drawn warnings from a number of prominent investors of a potential avalanche of Yen selling.
- Canada prints its worst job number since February 2009.
- Brazilian industrial production disappoints, forcing its central bank to keep rates on hold despite hot inflation. The country has become an unfortunate victim of rampant central bank printing.
- In Europe, unemployment hit another record high in February. Spain plans to revise its growth forecast lower (surprise surprise) and will ask for more time to reduce its budget deficit. And, while many are pointing at no signs of a bank run in Cyprus, the numbers may be telling a different story.
- The situation in North Korea continues to escalate and U.S. seems to be taking matters pretty seriously.
Plosser Says Fed Should Taper QE as Costs Exceed Benefits - Bloomberg
Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank should slow the pace of its bond purchases because the potential costs from more stimulus outweigh the benefits.
“We should begin to taper our asset purchases with an aim of ending them before year-end,” Plosser said today in a speech in Lancaster, Pennsylvania. “With interest rates already extremely low and the Fed’s balance sheet large and growing, monetary policy is posing risks to the economy in terms of financial stability, market functioning and price stability.” — Bloomberg
![First things first: The Federal Reserve is not going to end QE3 any time soon.
If there were any lingering doubts about the central bank’s commitment to its $85-billion-dollar-a-month bond-buying program, Fed Vice Chair Janet Yellen attempted to lay them to rest in a speech Monday morning at the spring conference of the National Association for Business Economics.
“I do not see any [costs] that would cause me to advocate a curtailment of our purchase program.”
“We would not consider selling assets off until after the federal funds rate is increased.”
“I view the balance of risks as still calling for a highly accommodative monetary policy.”
For Fedspeak, this is as straightforward as it’s going to get.
(via Ben Bernanke and Janet Yellen are sounding awfully dovish)](http://25.media.tumblr.com/84c3273a5b95330f8af9af1f9a4a9d87/tumblr_mjd5inSmMB1qcqktno1_500.jpg)
First things first: The Federal Reserve is not going to end QE3 any time soon.
If there were any lingering doubts about the central bank’s commitment to its $85-billion-dollar-a-month bond-buying program, Fed Vice Chair Janet Yellen attempted to lay them to rest in a speech Monday morning at the spring conference of the National Association for Business Economics.
“I do not see any [costs] that would cause me to advocate a curtailment of our purchase program.”
“We would not consider selling assets off until after the federal funds rate is increased.”
“I view the balance of risks as still calling for a highly accommodative monetary policy.”
For Fedspeak, this is as straightforward as it’s going to get.
(via Ben Bernanke and Janet Yellen are sounding awfully dovish)
Fed's Williams: Fed Not Near Limit on Bond Buying - WSJ.com
John Williams, president of the San Francisco Federal Reserve Bank and one of the Fed’s stronger advocates for continuing to use monetary policy to bolster the economy, said the central bank’s securities portfolio hasn’t grown “anywhere near” the kind of limits that might impede the Fed from carrying on with its bond-buying programs. — Bloomberg
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Buried in page 6 of the WSJ. Has the fed become irrelevant?
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.
It has been a little over a month since the Fed announced QE3; investors are already looking for an expansion to the program. It’s becoming clear that monetary easing has lost much of its effectiveness. Could we soon witness the popping of the moral hazard bubble, as investors realize that the Fed doesn’t always win?
Caution is warranted. The parallels between the U.S. and Japan are uncanny.
Food Prices Jump to Six-Month High as Dairy Costs Rise - Bloomberg
World food prices rose in September to the highest in six months as dairy and meat producers passed on higher feed costs to consumers, the United Nations’ Food & Agriculture Organization said.
An index of 55 food items tracked by the FAO rose to 215.8 points from a restated 212.8 points in August, the Rome-based agency reported on its website today. Dairy costs jumped the most in more than two years.
Livestock breeders and dairy farmers are passing on the higher cost of feed, after grain prices jumped in June and July, according to Abdolreza Abbassian, an economist at the FAO in the Italian capital. Higher prices don’t mean a food crisis is imminent, he said today by phone.
“Despite a very difficult market, the fundamentals that suggest a food crisis are just not there,” Abbassian said. “Market sentiment is now accepting high prices more as a rule than as an exception.” — Bloomberg
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Sure it’s not a food crisis, for those who can afford higher prices.
Fed Recovery Doubts Spur Investor Bid for Treasuries - Bloomberg
In the past, Treasuries would have a prolonged period of selling after a QE announcement. Not this time around. Growth concerns have quickly come to the fore again, despite pledges of open-ended QE. This is a red flag for equity investors in my view. It’s a sign that investors are clearly losing faith in the Fed engineering a recovery via monetary easing.
As always, it’s prudent to pay attention to the technicals for signs of a weakening of the current rally. It feels like sentiment is turning bearish. I’d be snatching profits from the strong run up since the June lows.
Asia Ex-Japan Stocks Swing Between Gains, Losses on QE3 - Bloomberg
“We think Fed’s action could aversely impact China’s bias to ease, at the margin,” Citigroup Global Markets Asia-Pacific Chief Economist Johanna Chua wrote in a report dated today. “We think this has marginally reduced the odds of easing for a number of countries largely due to rising inflation expectations, especially among central banks that have been somewhat neutral to hawkish.”
China’s former banking chief called the Fed’s third round of quantitative easing “irresponsible,” while an official at the regulator said the stimulus won’t provide sustained support to the U.S. economy.
“It’s irresponsible to the U.S., and also irresponsible to us,” Liu Mingkang, former chairman of the China Banking Regulatory Commission, told Bloomberg News at a conference in Beijing on Sept. 15. He declined to elaborate. The measures are more likely to boost growth “for a period” of time than provide longer-term support, Yan Qingmin, assistant chairman of the CBRC, said Sept. 15. — Bloomberg
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And thus begins the unintended consequences.
Is the U.S. using QE as an economic/military weapon to keep China’s restlessness in the South China Sea under control? The more money the Fed prints, the higher inflation expectations become, which could result in instability in the communist nation due to stagflation.
Stocks rally as Fed signals another round -- Marketwatch.com
I wrote good deal about my thoughts on this…but for some reason the computer did not post them. I don’t have time to rewrite them….instead I’ll include a link of an article I wrote a while back and that continues to be an increasing risk to the long-term direction of the global economy.
Eitherway, it’s a bullish short-term catalyst and I’ll be increasing positions in commodities and precious metals in the coming days….though I’m not jumping in with both feet. The global economy remains built on faulty foundations.
In 2010, the last time the Fed launched a bond-buying spree in an attempt to boost the flagging U.S. economy, many of the hundreds of billions in excess dollars went in search of better-paying returns in other currencies. This prompted an international backlash against the U.S. while foreign governments tried various tricks to anchor their ascending currencies and restore their exporters’ lost competitiveness. Brazilian Finance Minister Guido Mantega characterized it as a “currency war.”
Bernanke responded to his foreign critics by declaring that the dollar’s weakness was a byproduct, not the intent, of Fed policy. Interventionist central banks should stop meddling with their currencies and instead worry about domestic inflation, he would say. That was all very well in theory, but developing countries weren’t buying it. Here they were, earnestly pursuing U.S.-recommended free-market policies, and now it seemed the Fed itself was deliberately flooding the world with dollars to lower the greenback’s value. They felt they had no choice but to fight back. (via QE3 and the looming currency war - Michael Casey’s FX Horizons - MarketWatch)
CARPE DIEM: Thursday Energy Links
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If this is true, and there’s every reason to believe it is, the Fed needs to stop monetary loosening, or risk a long-term error in policy.
