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The Month that was: October ‘2013
Good Morning,
This report concisely summarizes the important macro events that occurred in…View Post

The Month that was: October ‘2013

Good Morning,

This report concisely summarizes the important macro events that occurred in…

View Post

Friday, October 25, 2013 Friday, September 13, 2013
Hello there,  I’ve just completed my latest Weekly Bull/Bear Recap.  You can access it below:
http://rcsinvestments.wordpress.com/2013/09/14/weekly-bullbear-recap-sept-9-13-2013/
Thanks for your continued support,
Rodrigo

Hello there,  I’ve just completed my latest Weekly Bull/Bear Recap.  You can access it below:

http://rcsinvestments.wordpress.com/2013/09/14/weekly-bullbear-recap-sept-9-13-2013/

Thanks for your continued support,

Rodrigo

Friday, February 15, 2013

Weekly Bull/Bear Recap: Feb. 11-15, 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. 

Weekly Market Performance

->) S&P 500: -0.1%

->) Dow Industrial Average: -0.2%

->) Nasdaq: -0.1%

Markets on Watch

->) FTSE MIB (Italy):  -0.8%;  ->) 10-yr BTP Yield: -3.8%

->) IBEX 35 (Spain): -0.3%;  ->) 10-yr Obligaciones Yield: -3.5%

 

Bull

+  Obama’s State of the Union Speech (SOTU) will inspire confidence throughout the middle class.  Improvements in infrastructure and education, as well as retraining the labor force to compete in today’s dynamic global economy, are sound economic policies that will reignite the American competitive spirit and consequently the economy.  Meanwhile, the U.S. energy boom quietly proceeds.  

+ The U.S. job market continues to heal as per high-frequency indicators such as Weekly Jobless Claims.  The 4-week average for New Jobless Claims is near its lowest level of the recovery.  Firms are confident in the outlook and are not cutting staff.  

+ U.S. housing data continues to look up, according to individual city figures.  Additionally, commercial real estate price trends show improvement.   

+ Consumer confidence in the U.S., which had been a growing thorn for the bulls, is finally starting to turn.  University of Michigan’s Consumer Sentiment survey rises to its highest reading in 3 months with a preliminary February reading of 76.3 vs. a final January reading of 73.8.  Bloomberg’s Consumer Comfort Index is carving out a bottom, printing its highest reading in a month.  Improving confidence is percolating to weekly sales metrics.  Redbook reports that consumption in February has started off on a strong note.  Growing confidence is also finding its way into financial markets.  

+  While January U.S. Industrial Production came in negative, the result came after two very strong months and shouldn’t heighten concern of a reversal of fortune for the sector.  Moreover, other indicators point to stabilization and possibly the beginnings of a new inventory-build.  The New York Empire Manufacturing survey, prints its first positive number in more than half a year in February.  Within the report, confidence in improving future conditions remains constructive.

+  Internationally, G-7 officials affirm their commitment to “market-determined” exchange rates.  Major governments understand that weakening their respective currencies will disadvantage their trading partners.  Cooler heads will prevail.  Meanwhile, financial conditions in the Eurozone have clearly improved.  Along with an overall pace of slower contraction in the EMU, the worse has likely passed.  Stabilization is developing.  

 

Bear

- Yes Obama’s speech had great ideas on boosting economic growth, if you believe that more government intrusion into the private sector (by picking winners and losers) and higher taxes are sound policies.  Overall, political paralysis looks set to continue; nothing will get done.   

- From a valuation and earnings perspective, U.S. risk markets are significantly overbought.  Additionally, buybacks (usually financed by debt) have in the past represented turning points in equity returns.  Furthermore, BofA’s proprietary sentiment indicator is screaming “sell."  All this is taking place, while the sequester budget cuts are close to becoming reality.

- Redbook’s report of strong February U.S. consumption growth isn’t confirmed by Walmart’s “sales disaster" in February.  Higher payroll taxes and rising gas prices will be too much for the consumer to bear in the coming months.  Furthermore, oil looks set to continue its rise (pressuring gas prices higher), when looking at recent   developments in the Middle East.

- Small Business, the engine of job creation in America, remains in a multi-year slump, notching a feeble 88.9 in January vs. 88.0.  The average during recovery/expansion is roughly 97.  Without this important cohort of the American economy, job creation will remain tepid.

- Fed officials lack confidence in implementing policy.  Large disparity of opinions among Fed Presidents is detrimental to investor confidence and implies a lack of Fed control of current economic and financial conditions.  San Fran Fed’s Janet Yellen (Bernanke’s right hand dove) and St. Louis Fed’s James Bullard further convince investors that easy monetary policy is here to stay.  Meanwhile, Esther George of the Kansas City Fed, Richmond Fed’s Jeffrey Lacker, and Philly Fed’s Charles Plosser all caution of market disruptions once the Fed is obligated to tighten monetary policy, thereby limiting the Fed’s ability to unwind monetary largesse and risking longer-term inflation.  Sandra Pianalto of the Cleveland Fed believes the FOMC should elect to reduce their scheduled purchases through year-end. 

- The ugly European data continues: French, German, and Italian (remember that they have elections coming up) Q4 GDPs all print below expectations; meanwhile, Spanish Industrial New Orders for January print worse than expected at -3.1%.  Worse, Europe is supposed to be restructuring its economy, with Germany becoming more of an importer; the latest German Trade data is disappointing in this respect.  In the U.K. a disappointing January Retail Sales report (4th consecutive decline) fans fears of a triple-dip recession.  

Friday, January 25, 2013

Weekly Bull/Bear Recap: Jan. 21-25, 2013

Bull

+ Existing home sales may have underperformed the consensus forecast, but for good reason.  A lack of homes for sale (supply), particularly at the low-value end, was the culprit.  This development will help maintain upward momentum in home prices throughout 2013.  Moreover, New Home Sales may have printed a negative MoM growth-rate, but this was due to a huge upward revision in November and doesn’t deter the bigger picture of continued growth for the sector in 2013.  Overall, inventory levels remain very lean.  Higher home prices will result in a positive wealth effect for consumers and help support consumption.  Furthermore, low inventory levels will act as an incentive for homebuilders to hire, buttressing economic activity.

+ The U.S. job market is clearly on the mend from the looks of the jobless-claims data.  At roughly 352K, the 4-week average is now at its lowest level in almost 5 years.  This development is a harbinger for a solid January payrolls report, due in a week from today.  

+ The bears’ strongest point, a stalling manufacturing sector, isn’t confirmed at all by Markit’s latest preliminary PMI reading.  For January, the overall index rose from 54 to 56.1, a 10-month high.  Furthermore leading indicators in the report, such as New Orders, point to further expansion in the months ahead.  

+ The world’s largest economic bloc, the European Union, is clearly stabilizing.  Germany’s manufacturing PMI rises to the highest in almost a year, while consumer confidence in the European region expands for the second month in a row.  Both reports are for January.  Meanwhile, the ZEW Center for European Economic Research reports that investor confidence in Germany skyrocketed 24.6 pts, hitting a level not seen in more than 2.5 years (same story for Euro-area confidence).  Finally on the financial front, investors are giving the thumbs up at recent reforms in Spain and Portugal; both countries issue bonds to strong demand —- meanwhile, many banks that participated in the LTRO at the zenith of the crisis, are now repaying their loans quicker than expected, a sign of confidence that the worse is over.  

+ China continues to surprise to the upside.  The country’s manufacturing PMI, released by HSBC, hits a 2-year high in January.  Furthermore, Copper is about to break out of its multi-year triangle to the upside (see 3-yr view).  

+ The Conference Board’s U.S. leading indicator points to strengthening economic growth in the months ahead, rising 0.5% in December. “Housing, which has long been a drag, has turned into a positive for growth and will help improve consumer balance sheets and strengthen consumption,” says Conference Board economist Kenneth Goldstein.  


Bear

- Manufacturing has stalled and is looking to contract soon, as the Federal Reserve Bank of Richmond reports that its manufacturing index slumped to a 6-month low in January.  This report follows news of weakness in the sector from the New York and Philly Federal Reserve Banks.  Housing, which now only accounts for only 3% of U.S. GDP economy will not be able to pick up the slack (manufacturing accounts for 12% according to the National Association of Manufacturers)…  

- …furthermore consumption, which accounts for roughly 70% of the economy is set to shift down a gear as consumers hunker down as they face an expiring 2-year payroll tax holiday.  Bloomberg’s Consumer Comfort, which confirms recent falls in the University of Michigan and Conference Board consumer confidence surveys, falls to a 3-month low.   

- Complacency reigns in Euroland as Draghi states that the darkest times have passed.  Are we really out of the woods?  Investors are ignoring worrisome developments.  Spanish unemployment hits a record high while stories of corruption within the country’s government swirl about, creating political uncertainty at the flashpoint of the debt crisis.  Meanwhile in France, Europe’s second largest economy, recession is knocking on the door and could result in another flashpoint.

- From a technical perspective, stocks are very overbought at these levels.  Now is not the time to make risk-on bets as the S&P 500 also approaches multi-year resistance and many macro risks remain lurking in the background.

image  

—(Source Bespoke Investment Group)

- Common sense says that constant intervention and warping of financial markets by central banks will inevitably come back to haunt investors and the global economy.  Warnings grow of a credit bubble as rampant central bank intervention has masked the true cost of money.  The subsequent adjustment will undoubtably be painful. 

Friday, December 7, 2012

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.

image

(Source: Motor Intelligence

+ 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. 

image

— (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.    

- Tensions are close to boiling in the Middle East.  In Syria, rumors of an imminent wielding of chemical weapons by Assad on rebel forces marks a perilous escalation of violence.  NATO approves Turkey’s request for missile installations, to the chagrin of Russia and China.  Morsi plans to slay democracy in Egypt by calling for a referendum and a new Islamist-backed constitution; protestors are marching toward the presidential palace as this article is posted.  Finally, while out of the spotlight, the Iran/Israel standoff continues to regress.


- 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.
Friday, November 30, 2012

Weekly Bull/Bear Recap: Nov. 26-30, 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

+  China continues to show signs of stabilization and will surprise investors with resilient growth next year.  Improving growth propects are already percolating throughout the region.     

+ Contrary to bearish pessimism of disunity in Europe, it’s important to understand that actions speak louder than words.  Bickering amongst Europe’s leaders is how things get done there.  An agreement to ease the terms on emergency aid to Greece as well as stated commitments to apply “further measures and assistance” signals that Europe is slowly taking care of business.  Steps are being taken to unite the region.  Sovereign yields in Spain and Italy are falling as a result, indicating financial and economic stabilization.  

+  The bears point at weakening consumer confidence has a harbinger of weak holiday sales.  Not so says weekly sales metrics from Redbook and the International Council of Shopping Centers, which show a successful start to the holiday shopping season.  The National Retail Federation says that this year’s Black Friday weekend was the busiest ever.  Meanwhile, Cyber Monday sales rise 30% from a year ago.    

+ Resilient consumers are buoyed by the positive wealth effect of rising home prices.  They have bottomed and falling inventory levels (due to increased buying activity) will ensure that positive trends in prices will continue.  Housing is now a major driver of the recovery.

+ The U.S. understands that it cannot rock the boat with regards to China’s economic restructuring.  Patience will be practiced and the U.S.’s strategy will focus on continued diplomatic pressure, instead of myopically labeling China a currency manipulator thereby raising the risk of protectionism.  As the global economy restructures, companies will increasingly find the U.S. as a great place to establish manufacturing operations.  

Bear

- Words mean little in Washington.  After weeks of announcing their embrace of cooperation in the face of the fiscal cliff, both Democrats and Republicans are starting to play a game of chicken as it approaches.  Business investment has drastically slowed, manifesting itself in stalling economic growth along with falling revenue growth.  The 3-month average reading for the Chicago Fed’s National Activity Index has fallen to the lowest since 2009 and is negatively affecting the job market.  Increasing downside risks are clearly being ignored; complacency is the order of the day.  

- The Shanghai Composite in China closes under 2,000 for the first time since the dark days of 2009, clearly not a bullish signal for those forecasting a pick up in growth.  Check out the country’s most popular “nail house" .  

- Economic activity in Europe remains in the doldrums and is a clear threat to global growth.  Italian consumer confidence sinks from 86.2 to 84.8 in November.  Continued weakness in the country’s economy will be a consistent tailwind for anti-austerity/anti-Europe Beppe Grillo’s 5-Star movement, creating political uncertainty in a country currently off of investors’ radars.  In Spain, an overhaul of the country’s financial system will lead to even more job loss.  In France, political meddling in the economy will lead to inefficiencies.  Greece is turning into a “slummy country" before our eyes.  And finally, rumblings from Britain may indicate a desire to exit the EU.      

Geopolitics will be a consistent wildcard in the coming months, resulting in continued uncertainty and reduced investment/growth.  Ehud Barak’s retirement could open the door to a more aggressive defense minister, which is particularly concerning given Israel’s current predicament with Iran.  Meanwhile, Turkey has requested NATO involvement, which could create a flashpoint between UN Security Council members. Meanwhile, tensions are simmering in Egypt.  And finally in North Korea, rumors of another missile test are disseminating.   

- The U.S. housing market is not poised for a rebound.  At best, it will be a very slow recovery, contributing a feeble tailwind for the economy.  New Home Sales for October fell and last month’s result was revised sharply lower.  Meanwhile, mortgage applications are signaling further tepid growth at best.   

Friday, November 23, 2012

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.

Saturday, November 17, 2012

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.  

Saturday, November 10, 2012

Most Asian markets are facing considerable resistance.  It’s very important that these economies show that they can replace European demand,  if they can’t then the world would slip into recession.  These charts are particularly important to watch right now.  

Saturday, August 4, 2012

Weekly Bull/Bear Recap: Jul. 30 - Aug. 3, 2012 

Good Morning, 

First the bullish perspective:

The biggest news for the bulls this past week was the Bureau Labor of Statistics’ payrolls report, which was much better than expectations. This bullish report was also confirmed by ADP’s report, as well as further improvement over the past month in the 4-week average of initial jobless claims. Furthermore, Challenger and Gray reported that mass firings remain very low. The job market has shown stabilization. Meanwhile, on the housing front, the Case-Shiller index posted its 4th straight gain and its largest in nearly 3 years. Year over year growth rates for sub-indexes are near 0% after a steady climb from negative territory. Falling inventory will spur construction spending, making housing an increasing tailwind for domestic growth in the months to come. Anyone telling you that the economy is in a recession with these data points is high on something.

In the euro zone, monetary and political officials are beginning to outline the parameters of a team-up in an effort to stabilize financial markets. Promises by the ECB to buy near-term sovereign debt of periphery nations have resulted in falling yield curves of these securities. In addition, swap spreads, which measure systematic risk, are far from their highs from last year. Improving financial metrics signal that investors are increasingly receptive to the forthcoming solution in the euro zone. Alleviating confidence in the region is helping stabilize global growth.

China, the up and coming economic powerhouse, is showing signs of stabilization. Despite endless bearish chatter of the length of the country’s manufacturing contraction, it pays to note that PMIs are still very close to the 50 mark demarcating expansion from contraction. China’s slowdown is nothing more than that. As officials begin implementing stimulus measures, economic growth is sure to reaccelerate.   The situation there is under control.

At home, income dynamics are improving.  Income growth is strengthening as per the latest Personal Consumption and Expenditures report, which showed wages and salaries rising 0.5% in June. Moreover, the Mortgage Bankers Association reports that re-financings rose to the highest in three years. Continued income growth is resulting in a resilient consumer. Chain store sales surprised to the upside, while vehicle sales rebounded. The Restaurant Performance Index showed that business in this consumer-sensitive sector remains in growth mode. A durable consumer will lead to improved sentiment of investors.

Citi’s economic surprise indicator has bottomed, marking a likely reacceleration of economic activity. This can be corroborated by an improving ECRI growth index, having increased from a low of near -4% two -1.3% today.

And now the bearish perspective:

Continued bluffs by Mario Draghi are harming the reputation of the ECB. Markets plunged midweek on no action from the central bank.  It’s becoming increasingly clear that the Bundesbank will not allow the ECB to proceed, without severe repercussions (Germany drops out?). Efforts to buy time using these bluffs serve to weaken political will.  In Germany, a survey was published in which a majority of the German citizenry now believes the Euro does more harm than good. Furthermore, the tomfoolery creates additional uncertainty, resulting in reduced consumer and business confidence (to the lowest since Sept. 2009).  Geopolitics isn’t helping much either; Russia has sent 3 warships to Syria with army personnel.  Iran/Israel keeps bubbling.

Vaporizing confidence is further strengthening what is an already scary negative feedback loop within the world’s largest economic bloc.  PMIs throughout the region were very negative, Germany in particular. Weak PMIs in France, Spain, the UK (largest fall in three years), and Greece weren’t worth peeking at if you’re a bull banking on stabilization. Unemployment in the region rose to a record 11.2% in June, while retail sales sunk for the 9th consecutive month. Continued weakness in the territory is likely to exacerbate an already faltering global recovery.

In Asia, Japan’s manufacturing PMI and industrial production fell, the latter falling for the 3rd consecutive month. In Taiwan, GDP surprised to the downside. South Korean had some awful data also.  June industrial production fell, while manufacturing confidence fell to a three-year low.  Furthermore, exports plunged almost 9% in July. JP Morgan’s global manufacturing PMI showed a greater pace of deterioration.

The U.S., with its economy also on the verge of recession, isn’t doing much to help as auto imports have plunged since the beginning of the year according to the latest vehicle sales report.  Frailty in the manufacturing sector has become persistent with a slew of reports noting continued weakness. The ISM manufacturing index has contracted for two months in a row, with important leading indicators such as backlogs and new orders signaling more to come. Meanwhile, factory orders declined and core durable goods were revised lower. The Dallas Fed manufacturing report was lackluster as well, with general business activity plunging due to continued uncertainty in Washington. Weekly consumer spending metrics show continued weakness due to a increasing savings rate as a crisis of confidence engulfs the global economy. While the bulls may point to the jobs report as a sign that the economy is stabilizing, it’s unusual that the bulk of the gains came from the service sector in the same period that the ISM’s non-manufacturing report showed an employment sub-index in contraction territory. Furthermore, chatter from CEOs of consumer-based companies does not confirm these bullish numbers. In addition, is improved job growth sustainable when various leading indicators such as the conference Board’s employment trends, and the Monster Employment index both point to limited gains at best?