Weekly Bull/Bear Recap: Feb. 18-22, 2013
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
+ The U.S. economy is set to continue its recovery. The Conference Board’s leading indicator increased 0.2% in January. ”The indicators point to an underlying economy that remains relatively sound but sluggish,” said Ataman Ozyildririm, economist at The Conference Board. Meanwhile the ECRI’s leading indicator growth-rate remains in solid positive territory at 7.6% for the week ending February 15th — Lakshman Achuthan has egg all over his face due to his premature recession call.
+ U.S. Manufacturing is undergoing the beginnings of another inventory build. The American Trucking Association reports that its tonnage indicator rose for the 3rd consecutive month in January, notching its highest ever reading. Meanwhile, Markit reports that its PMI registered further expansion for the sector. Chris Williamson, Chief Economist at Markit said: “U.S. manufacturers reported the largest monthly rise in production for almost two years in February, suggesting that the economy is set to rebound from the weak patch seen late last year and allying fears of a double-dip recession.”
+ While the Conference Board has reported declining confidence from the U.S. consumer, on the whole, it has stabilized. Gallup reports that its measure of consumer confidence remains near a 5-year high. Bloomberg’s Consumer Comfort Survey is carving out a bottom, as is the University of Michigan’s Consumer Sentiment survey, which last week signaled a 3rd consecutive increase.
+ Home prices continue to increase (due to falling inventory levels) and will support consumer and investment psychology. Zillow reports that their pricing index’s 15th consecutive increase was also at the largest annual rate since early 2006. Meanwhile “the number of American households behind on mortgage payments fell to the lowest level in four years at the end of 2012,” according to the Mortgage Bankers Association. In the commercial real-estate sector, the AIA announces a strong surge in its Architecture Billings Index.
+ Global trade flows have bottomed and look to pick up throughout 2013. Japanese exports for January grew for the first time in 8 months, rising 6.4% on a year over year basis. Exports to China increased for the first time in 8 months, while exports to the U.S. jumped more than 10%. Meanwhile, Markit reports that increased demand from Asia is percolating to other major economies, such as Germany.
- Things are taking a turn for the worse in Europe. Markit reports a deepening downturn in February, tempering expectations for an end to the region’s economic malaise any time soon. Moreover, Italian leading indicators point to further weakness ahead (elections are coming up this weekend!) and Euro-wide car sales slump to levels last seen in 1990. Unfortunately, bullish German business conditions (due to the country’s reluctance to rebalance its economy, which is sorely needed for a long-lasting Eurozone solution) only serve to create complacency in the country. Perhaps such good economic conditions will make German citizens feel like their economy will not suffer if it left the Eurozone. A Taylor-Rule analysis of Germany vs. France clearly demonstrates why a one-size-fits-all monetary policy is tearing the region apart. Meanwhile, financial institutions in Europe remain very vulnerable and Friday’s news that only half of the LTRO money will be repaid speaks volumes of the distrust still present in the banking system. Liquidity schemes such as the LTRO only mask the underlying fundamental problems plaguing the Eurozone. They do nothing to solve them.
- Market action this week accentuates the extent to which Fed officials have warped financial markets. After a surprising hawkish set of FOMC minutes, the S&P 500 tumbled over 2 percent. The weakest multi-year economic recovery on record has only occurred because of unprecedented monetary stimulus. Any hint of ceasing, or even reducing the dosage of Bernanke’s monetary drug will induce sharp sell offs in risk markets. The foundations of the global economy remain unhinged and pose grave long-term risks to the investment outlook. Indeed many are becoming worried with the degree to which the Fed has likely affected long-term economic growth.
- Quietly, gas prices have increased for 32 consecutive days and endanger PE-multiple expansion. Along with the expiration of the payroll tax cut and the significant possibility of sequestration, investors will be surprised by deteriorating consumer trends.
- China’s Shanghai Composite falls roughly 5% as officials signal more tightening measures for the property market. Despite a rallying U.S. equity market, China’s equity measures remain mired in a long-term downward trend, which is a red flag. Want another red flag? Copper plunges more than 5% for the week. A look at the 3-yr price chart shows us that a bearish solution to a symmetric triangle is looking increasingly probable.
- An awkward moment for U.S./Chinese relations occurs with Mandiant announcing that the Chinese military accounts for a large number of cyber-attacks on America, an accusation immediately disputed by Chinese officials who point out that the U.S. also accounts for a large number of cyber-attacks on their country as well.
Weekly Bull/Bear Recap: Jun. 25 - Jun. 29, 2012
+ EU leaders agree to use the EFSF/ESM to conduct direct bank recapitalizations. They also consent to institute a Eurozone-wide banking regulator. These are the first steps toward fiscal union. Officials are also finally focusing on a more concerted growth agenda for the Eurozone. Roughly $150 billion will be allocated to help small business and youth unemployment. Finally, the seniority issue that would have affected Spanish bailout loans from the ESM has been lifted. European leaders are resolute in their efforts to end the Eurozone crisis. Given low sentiment for any progress from the summit, this news will lift sentiment and risk markets in the weeks to come. Spanish and Italian bond yields plunged after news of the accord. Now is the time to buy as uncertainty is lifted.
+ Housing continues to improve, helping job creation, ameliorating consumer confidence, and ultimately boosting consumption. New Home Sales improve to their best reading in almost 2 years in May and inventory falls to 4.7 months, the lowest since late 2005. Pending Home Sales, a leading indicator, notches a 2-year high, increasing 5.9% in May and 13.3% YoY. MoM home prices, as per the Case-Shiller index, rise in April for the first time in 8 months the gains are broadbased; YoY rate falls at the slowest pace since 2010. Lennar posts strong growth trends in home sales.
+ “Beautiful Deleveraging" is in its latter stages. Furthermore, government officials understand that fiscal accommodation must continue. There will be no fiscal cliff, but instead a gradual and delicate withdrawal. Gas prices are plunging as is inflation in general; the PCE price deflator notches its slowest rate of gain since Jan ‘11. This is a direct help to consumer finances. Bloomberg’s Consumer Comfort survey just hit a 2-month high. Bullish economic tailwinds are strengthening.
+ The global economy is proving more resilient than the bears expect. In Asia, China’s trade ministry indicates that trade is beginning to stabilize after a rough patch earlier in the year. Also, the housing crash that the bears relentlessly warned about looks to be delayed, keep waiting bears. Taiwanese Industrial Production falls much less than expected in May, while Singaporean’s metric rises a higher than expected 6.6% YoY.
+ Weakness in manufacturing is only a soft-patch, not pervasive, and is stabilizing. Durable Goods Orders rise more than expected, while the Dallas and Chicago Fed both report improvement. Seasonally adjusted jobless claims may be elevated, but unadjusted claims are actually 9.4% lower than a year ago, “suggesting that the trend is still one of gradual improvement in the economic fundamentals.”
+ Even Europe had pockets of good economic news. German and French consumers remain resilient in the face of Eurozone issues. Reports surface that capital is returning to Greek banks after the election reinforces Greece’s commitment to stay in the Euro.
- The Eurozone is imploding in front of our eyes.
- Confidence is vanishing. With declining confidence, the crisis is becoming a self-fulfilling prophecy.
- Cyprus is downgraded to junk by Fitch and becomes the 5th Eurozone member to request a bailout (ironically, they assume the EU rotating presidency this coming Sunday).
- More mass downgrades for Spanish banks as the country requests a bailout from the Eurozone, all the while capital controls are surreptitiously set up and rumors of Junk status for Spanish bonds swirl about.
- 4 days on the job and the Greek finance minister quits.
- Merkel and finance minister Schaeuble say “nein” to shared liabilities “as long as they live.” Meanwhile, Egan-Jones does its best to add even more pressure on Merkel to not succumb to the government troika of beggers in Italy, France, and Spain and damage the county’s credit profile. Meanwhile, the crisis creeps into Germany’s economy as unemployment climbs more than expected in June.
- Italian retail sales plunge the most in “at least 8 years,” cratering 1.6% MoM and 6.8% YoY in April vs. expectations of -0.6% and -0.2% respectively. The LTRO, implemented last year, is beginning to “yield” negative consequences, by accelerating bank insolvency due to dangerous concentrations of toxic sovereign debt.
- The cause of the Eurozone crisis is the ongoing policy of austerity aimed to correct trade and budget imbalances. Today’s announcement solves nothing to this end and is just another band-aid (slated to be ready by 2013, subject to German conditions, and not even big enough). European leaders are moving at a snail’s pace; Eurobonds are still a ways off. It is clear that this strategy is fraught with implementation risk. Finally, a $150 billion stimulus package isn’t going to restore growth for a roughly $16.2 trillion dollar economic bloc with a strong downward growth trajectory. Economic data will get worse and it will be obvious that European officials won’t have 4 months to take another baby step.
- Tensions are really heating up in the Middle East. Nuclear talks in Russia between the West and Iran yield no resolution, leading Netanyahu to remind us that a military strike may occur in the near future. Meanwhile, Syria downed one (almost another?) of Turkey’s reconnaissance jets last week in international waters leading Turkey to seek a response from NATO and warn Syrian forces to back off its borders or else. Psst, check out what’s going on in the South China Sea.
- More indications point to more than just a soft-patch for the U.S. economy. The Chicago Fed National Activity Index’s 3-month average falls to the lowest in almost 1 year and marks the third consecutive reading below zero. The Richmond and Kansas City Fed both report weakening manufacturing conditions. Conference Board’s Consumer confidence index slumps to a 5-month low (confirmed by both the Gallup Poll and UMich = 6-month low). Jobless claims remain elevated.
- Earnings are starting to feel the effects of the global slump and economically important companies (not to mention the government) are sounding the alarm, yet investors remain convinced that monetary policy can cure all ills. Is it really a wall of worry as the bulls claim?
U.S. Economic Data 5/17/2012
+ Housing recovery continues.
- Case and point: While the Empire Manufacturing gauge remains in solid positive territory, Philly Manufacturing gauge is negative for April.
- Bloomberg’s Consumer Comfort falls to nearly 4 month low.
Obama Stimulus….the Bear Case
I’m not very bullish on the package, but if markets keep falling and bearish sentiment increases, the package may result in “better than expected” growth.
In the long run, it’s only more of the same.
Bulls to Challenge Bull Market Highs
It seems like a done deal at this point that the highs of the bull market will be challenged. I wrote in my outlook that I believed we were in a topping process and that we would get a rally like this if the Eurozone issues were taken care of. I still think this is the case, however, if pessimism remains high and disbelief in the recovery remains entrenched, who am I to say that we can’t break through the highs? The economy went through a turbulent soft patch but didn’t fall out of bed. Many were speaking of double-dip recession at this point. The fact is that the economy continues to move forward.
Now I’m not saying that the coast is clear, not by a long shot. The risks I pointed out remain and should worsen over the course of the year. The economy remains very vulnerable to any exogenous shock. I remain a short to medium-term bear. However, in the following week/weeks, we most likely will retest the highs. If the Eurozone doesn’t tip over during this time frame, then we may break into new bull market highs. The Dow Transports have already broken to new highs as has the consumer discretionary sector (XLY). Keep those stops tight though. I firmly believe that serious risks are prevalent in today’s environment. Any exogenous shock could tip the economy back into recession. There are plenty out there.