Weekly Bull/Bear Recap: Jan. 30 - Feb. 3, 2012

Bull

+ The U.S. economy is now in a sustainable expansion:

• The January U.S. non-farm payrolls report shines, while prior months are revised higher by 60K.   A gain of 243K marks the strongest pace of job creation since April.  Furthermore the unemployment rate falls to 8.2% from 8.5%.  Job creation was widespread.  The key cog for a sustainable recovery is now in place. 
• Improvement in the Chicago Fed Midwest Manufacturing index and Dallas Fed Manufacturing survey culminate in a strong national ISM reading of 54.1, the highest since June of 2011 (with positive backlogs to boot).  Looking ahead, a resurgence in business spending in December (Core Durable Goods orders are revised higher to 3.1% from 2.9%), within a stronger factory orders number of 1.1% signal further growth for the beacon of the U.S. recovery in the months ahead.
• The service sector, which accounts for close to 90% of the economy, is reaccelerating.  January’s print is the strongest in 11 months, led by New Orders, Production, and Employment sub-indicies.
• Consumption remains healthy, as car sales have their best January in 3 years.  On the horizon, the payroll tax credit is set to be extended, relieving the economy of excessive fiscal contraction.  Who knows, we might even get further tax cuts!
• Don’t look now, but the ECRI’s leading indicator growth rate is higher for the 3rd consecutive week and is now at its highest level since late August.  ECRI, it’s time to admit that you and the rest of the bears were wrong.
• Consumer confidence continues to recover.  While the Conference Board showed a setback, Bloomberg’s Consumer Comfort index just hit its highest monthly average in more than half a year.  

+ The global economic outlook is improving:  

• In Europe, Germany’s unemployment rate hits a record low and her economy reverts back to growth according to the Markit PMI.  For the Eurozone as a whole, Chris Williamson, Chief Economist at Markit says, “Euro area manufacturing has started 2013 surprisingly well, suggesting the region may avoid a slide back into recession.”  
• UK consumer confidence rises to the highest in 7 months on lower inflation.  
• Russia reports better than expected economic growth, with GDP rising 4.3% vs. expectations of 4.1%.  
• In Japan, industrial production surges 4%.  
• China PMIs point to a soft-landing for the most important link of the global recovery.  Premier Wen is looking to stimulate the small business sector.     

+ In Eurozone political and financial news, European nations take one step closer to integration with 25 out of 27 nations signing the new fiscal compact treaty.  Moreover, leaders signal strong resolve to save the region, as talk of initiating a €1.5 Tn bailout fund is making the rounds.  Meanwhile, the Spanish 10-yr yield breaks under 5%, the Italian 10-yr yield breaks under 6%, the Belgian 10-yr yield breaks under 3.7%, and the French 10-yr yield breaks under 3%.  Markets signal that a strong firewall is in place for a Greek and/or Portuguese default. As a hefty insurance policy, the second LTRO on February 29th will likely be more than double the size of the first one (@ ≈ €1Tn), thus reinforcing the firewall for the banking system from a Greek or Portuguese default.  Besides, the Greek default has been on investors’ radars for so long, even martians on Pluto know that Greece is defaulting.  A climax would result in a rally as uncertainty is lifted.  

Bear

- The end game is coming into view for the Eurozone:  

• Germany has demanded that Greece cede its budgetary sovereignty to the EU, a request Greece has declined.  Furthermore, stiff resistance from Greek political leaders to implement further austerity makes for another “Papandreaou referendum-like” showdown with the troika.  And for the trifecta, the Hellenic republic has warned that it may need even more bailout cash.  
• Portuguese bond yields are repeatedly hitting record highs; hard default #2 is rapidly approaching.  
• In Ireland, a solid majority demand a referendum (guaranteeing a defeat for the army of unelected technocrats in Brussels).  As Hollande eloquently stated, “Where democracy retreats and politics pulls back, the markets advance.”  
• Hollande is creating daylight between himself and Sarkozy in the French presidential election (here’s a primer on what he wants to do).   

- On the region’s economic front, austerity is biting, hard.  Italian business confidence slumps to the lowest in 2 years.  While Germany is benefiting from a weaker Euro, it’s coming at the expense of the rest of the Eurozone; the region’s unemployment rate remains near the highest since 1998.  French consumer spending dives 0.7% vs. expectations of a gain of +0.2%.  Even worse, German December retail sales tank 1.4% vs. expectations of a 0.5% gain (the 4th decline in last 5 prints); so much for a low unemployment rate.  Meanwhile, on the financial front, banks are using some of the LTRO money to buy sovereign bonds; but that’s about it.  They continue to de-leverage, cutting off credit to the Eurozone and undermining any recovery in the region.  Furthermore, post-crisis highs in FX swaps between the ECB and the Fed point to tight liquidity conditions, despite unprecedented worldwide coordinated monetary loosening.        

- The throes of stagflation are in plain view; China “unexpectedly” holds off on reducing reserve requirements for banks, opting instead for reverse-repurchase contracts.  Simultaneously, here’s what a popping housing bubble looks like.  Protests are progressively more intense.  

- On the U.S. economic front, the S&P Case-Schiller index flags a deepening double-dip for the 99%’s largest asset.  Lower home prices will anchor consumer confidence over the medium-term.  Over the short-term, rising gas prices are starting to damage confidence; the Conference Board’s survey disappoints, printing 61.1 vs. expectations of 68.0 (led by a decline in the present situation). 

- Israel/Iran continues to bubble underneath the facade of bullish sentiment.  No groundbreaking announcements were made after the UN inspection.  Instead, it’s looking increasingly clear that the U.S. is no longer in control of the situation; an Israeli unilateral attack could come in as soon as 3 months.     

Weekly Bull/Bear Recap: January 23-27, 2012

Bull

+ The ECB’s Long-Term Refinancing Operation (LTRO) has clearly quelled fears of an imminent liquidity crisis; Spanish and Italian 10-yr yields have plunged.  The operation will provide time for policymakers to forge ahead with structural reforms.  Germany is opening the door for pro-growth policies in the periphery.  Furthermore, Greece is an isolated case.  A Greek default is already priced in and a climax would actually lift the air of uncertainty.  Says billionaire investor George Soros, “I think we are on the verge of putting the acute phase of the crisis behind us,” adding that he believed Italian sovereign bonds represent a “very attractive” speculative investment.  Finally, business confidence in Germany increases for the 3rd month in a row, while record low unemployment boosts consumer confidence.  The bloc’s largest economy will avert recession and support investor confidence in the Eurozone region.

+ U.S. economic data continues to shine.  The Richmond Fed’s manufacturing survey increases from 3 to 12, lead by New Orders and expectations of improved business conditions (we have the same bullish result from the Kansas City Fed); note that all regional surveys have improved in January.  Moreover, the ATA Truck Tonnage Index spikes the most in over a decade in December.  Chief Economist Bob Costello hints that a wave of inventory restocking has begun.  Core Durable Goods Orders reestablish their bullish trend, which bodes well for Q1 manufacturing performance.  On the jobs front, state unemployment rates continue their trek lower.  Finally, consumer confidence improves to 75.0 and is the highest in almost a year. 

+ The global economy has clearly stabilized after a brief air pocket in the prior quarter.  According to the Markit PMI, economic activity in the Eurozone unexpectedly grew in January, led by Germany and France.  Meanwhile, monetary easing; such as India’s unexpected decision to cut their Reserve Ratio, Thailand’s interest rate cut, and Brazil’s upcoming rate cut, will further support economic growth.  Copper and comments from Caterpillar support the global re-acceleration thesis.  Even Japan had some good news on the consumer front.  

+ The Fed announces that interest rates will be held low throughout 2014 and state that they will step in with QE III should the global economy deteriorate further.  Risk assets spike as investors are reassured that the Fed will maintain vigilance for any economic slowdown.  Criticism of the program won’t be nearly as intense as QE II due to slowing economic growth in Emerging Markets.  

+ Obama clears the way for an economy that’s “built to last,” by explicitly stating in his State of the Union address that domestic companies will receive government assistance to create jobs.  Leaders understand the grand opportunities that lie ahead. The U.S.  manufacturing renaissance is in its infancy.     

Bear

- Global growth is slowing to a stall.  Japan’s central bank cuts its 2011 and 2012 economic growth forecasts, citing strains from balance-sheet repair in the U.S. and weaker growth due to the European debt crisis.  On a grander scale, the IMF slashes its global growth forecasts and expects the Eurozone to enter a recession.  Meanwhile, Australia and the UK are teetering on the brink of recession, while South Korea reports its slowest economic growth in 2 years.  In China, officials want to see a 30% decline in residential real estate to reach a “reasonable” level —(and in the process cause an uprising of the middle-class).  Meanwhile, protests in Tibet are spiraling out of control.  Finally, Obama ups the ante on protectionism with his State of the Union address.

-  The Eurozone crisis is worsening.  There is still no agreement on the Greek Private Sector Involvement (PSI) negotiations, raising the specter of a credit event and uncontrolled default (how many times have we heard that a deal is close?).  Making matters worse, EU leaders and banks are demanding further austerity on the depression-racked country due to missed targets.  How long before peripheral citizen’s say “The hell with this” or creditor governments say “This isn’t working”?   Meanwhile, Portugal is fast coming down the pipe with 10-yr bond yields hitting record highs, as Antonio Saraiva, the head of the country’s industry confederation, confesses that the nation will need a bailout.  In Spain, recession is knocking at the door, while unemployment is far worse than expectations.  In Italy, Monti’s government is set to face its first real test as truckers have blocked the flow of essential goods into Rome and other large cities.  In France, S&P downgrades 3 banks and the country’s president acknowledges that he’s likely to lose the presidency in 3 months, unleashing a wave of uncertainty in regards to Eurozone economic policy.  Finally, “Trade unions plan (a) pan-EU action against (the) fiscal compact.”     

- Despite all the hoopla in the past month, the U.S. remains vulnerable to an exogenous shock.  4th Quarter GDP disappoints, growing 2.8% vs. expectations of 3.0%; note that the economy hasn’t grown over 3% since the Q2 2010.  Final demand registers a paltry 0.8% and Personal Consumption underperform expectations.  Meanwhile, Fed President Dudley sees “significant impediments” to economic growth this year.  Finally, weekly consumer metrics continue to flag a significant slowdown in January versus an already weak December.

- The probability of an oil price spike, likely upending the global recovery, grows.  The EU imposes an embargo of Iranian oil (to begin July 1st), despite Iranian threats of a blockade of the Straits of Hormuz or just cutting off supply immediately.  Meanwhile, oil producers are now content with $100 oil, saying that it won’t affect global growth; we’ve heard this before, but the threshold price keeps rising.  Azerbaijan police foil another Iran plot to assassinate the country’s Israeli ambassador.  

- Japan reports a trade deficit for the first time since 1980.  While sporting a debt to GDP ratio of over 200%, any consistent trade outflow from the country would conjure anxiousness towards its real paying ability (not printed Yen, which implies a loss of real value of interest payments).    

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Be sure to check out my latest macro outlook and market forecasts.  Thanks for your support.

Weekly Bull/Bear Recap: January 16-20, 2012

Bull

+ Jobless claims plunge 50K to their lowest level in almost 3 years and clearly demonstrate a strengthening labor market.  Increased confidence means increased credit use = strengthening recovery.  Banks and homebuilders have been leading the ongoing S&P 500 rally. 

+ Manufacturing shows more signs of stabilization, not an imminent recession.  The Empire Manufacturing Survey rises more than 5 points, while the 6-month outlook surges 10 points.  Last week’s ghastly rail traffic report (intermodal) was nothing more than an aberration.  This week’s report shows a sharp rebound, outperforming last year by 7.4%.  Industrial Production rebounds 0.4%, lead by manufacturing’s best performance since December 2010 (+0.9% vs. -0.4% in November).     

+ Inflation is cooling and will give the Fed leeway to initiate further monetary policy (it’s becoming a worldwide phenomenon: Goldilocks environment coming up?).  If economic conditions slow, the bears won’t be able to seize control of the market as the Fed will act as a bullish albatross over their machinations.

+ Risk markets power higher for the week, while copper breaks out of its consolidating triangle to the upside, a sign that the global economy is poised to reaccelerate.  Chinese data strengthens the “further stimulus” and “soft-landing” thesis.  Furthermore, markets are sensing continued progress in the Eurozone crisis.  Confidence is making a comeback, as the German ZEW investor survey hints at a turning point for the Eurozone’s largest economy.  

+ The housing market continues its recovery.  Mortgage applications for purchase rise 10.3% after an 8.1% increase in the prior week; the result is higher home sales.  Furthermore, record low mortgage rates are spurring refinancing applications, surging 26.4% this past week to their best levels since August.  More refinancings = more disposable income for the consumer due to lower monthly mortgage payments.  Finally, the NAHB housing market index rises 4 points to its best reading in 4.5 years.    

Bear

- Sentiment is nearing euphoric levels.  Retail investors and even financial advisors are expecting stock prices to move higher.  The wall of worry that characterizes bull markets has crumbled.  Remember rule number 5 by Bob Farrell, “The public buys the most at the top and the least at the bottom.”

- Meanwhile, this earnings season has seen the lowest percentage of companies beating analysts estimates since the 3rd quarter in 2008; I don’t need to tell you what happened thereafter.  Furthermore,…

- … the EFSF is hit with a downgrade.  Authorities brush it off.  More downgrades are coming.  The political tide is turning against the Euro .  Marine La Pen of the anti-euro National Front party is making serious gains in the polls.  François Hollande is closer to winning the French presidency and will demand a renegotiation of the euro fiscal compact. On the Greek front, “Even members of the committee concede the process (Greek private sector involvement negotiations) is unlikely to succeed in time for the crunch date: a 14.5bn bond repayment falling due on March 20.”  Finally, if things were all hunky dory, why is the IMF asking for $500 billion?  —-The news trend keeps getting worse.     

- ISCS and Redbook weekly consumer metrics are showing a serious slowdown, even after last month’s disappointing Retail Sales report.  Furthermore, national gas prices have risen roughly 3.6% and the consumer is already feeling it.  Bloomberg’s Consumer Comfort Index falls to -47.4.

- While China’s GDP numbers beat analyst expectations, they portray significant weakening in the country’s export and real estate sectors.  Furthermore, persistently high inflation will limit the amount of stimulus authorities can administer.   

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Be sure to check out my latest macro outlook and market forecasts.  Thanks for your support.   

Weekly Bull/Bear Recap: December 26-30, 2011

Bull

+ U.S. manufacturing continues to show signs of steady growth.  The economy isn’t headed towards recession.  The Chicago ISM reports that its PMI report fell a smidgen, from a 7-month high to 62.5.  Order Backlogs are at their strongest level since April and will keep activity elevated in the region.  Meanwhile, the Richmond Manufacturing Index indicates stabilization, particularly in New Orders.  Need more evidence?  Take a look at the most recent ATA Truck Tonnage Index (released Dec. 21), and Rail Traffic Report.  

+ The Housing Market is the gift that keeps on giving.  Pending Home Sales rise a better than expected 7.3% MoM vs. expectations of a 1.5% rise.  The metric is at its highest level in more than a year.  This increased activity is occurring during the historically weak winter season.  Housing demand has clearly stabilized and a steadily growing construction sector will produce the jobs needed to breathe new vigor into the recovery (i.e. a positive feedback loop).  The Spider Homebuilding ETF (XHB) is hovering near 5-month highs and has broken above its 200-day moving average.  

+ Demand for Italian paper improves.  6-month bills are issued to strong demand.  The issue yields 3.25%, down from double that rate in late November.  10-yr BTPs price at a yield of 6.98%, which is much lower than the 7.56% level an issue priced in late November.  U.S. stocks markets took the results in stride.  Italy has clearly moved back from the precipice.  Monti confirms this view.   

+ U.S. consumer confidence continues its firm recovery.  The Conference Board reports that its survey of consumer confidence rose nearly 10 points, continuing a remarkable 2-month 23.6 increase.  The report cites an improving job market.  These results mirror recent improvement in Gallup’s poll of consumer confidence and last week’s University of Michigan’s survey result.  Meanwhile, the National Restaurant Association reports that its Performance Index rose to 100.6; “Restaurant operators reported their strongest net positive same-store sales results in more than four years, while customer traffic levels also grew in November.”  Hotels finish 2011 in strong fashion.  

+ The U.S. Treasury does not label China a currency manipulator and will calm fears of an imminent bout of protectionism in the months ahead.  

Bear

- The Eurozone situation continues to deteriorate.  The Euro sold off strongly on Wednesday, breaking a slight upward trend line, and hitting its lowest level in more than a year vs. the U.S. Dollar and its lowest level against the Japanese Yen in a decade.  Italy successfully sells long-term debt; but, yields rise approaching the auction and after the result.  Hungary, straight up, experiences a failed auction and passes a law that undermines IMF and EU attempts to bailout the country.  Liquidity injections by the ECB are proving futile; there is no confidence or trust.  Spanish Retail Sales in November crater 7.2% YoY after a 7.1% YoY fall in October, the metric’s 17th consecutive drop.  The country’s Economic Minister states that recession has arrived; yet, Deputy Prime Minister Saenz states that additional austerity will be implemented because the country’s budget deficit will exceed its target (sounds like a debt trap to me).  Meanwhile, Italian Business Confidence falls to 92.5 from 94.1, a 2-year low.  French unemployment hits a 12-yr high.  One of Merkel’s 5 economic advisors doesn’t dismiss the possibility of a Eurozone breakup in 2012, while the German Constitutional Court says that it would be “a mistake to pursue a United States of Europe.”

- HSBC publishes its final Chinese Manufacturing PMI result.  It is worse than the preliminary estimate of 49.0, at 48.7.  This compares with a reading of 47.7 in November and marks the second straight month of contraction.  ”Company inventories of finished goods rose for the first time in 17 months as new business wasn’t enough to offset production, according to HSBC.”  

- Japan reports an ugly set of economic numbers.  Retail Sales for November fall 2.3% YoY and was much worse than expectations for a 0.1% gain.  This translated to an equally ugly Household Spending YoY print of -3.2%.  Meanwhile, Industrial Production falls 2.6%, again, worse than the 0.7% decrease expected by economists.  

- Behind all the hoopla of stabilized demand and a statistical bounce off multi-decade lows in construction, the housing double-dip is sure to become reality early next year (it’s actually already in a double-dip if looking at the SA index).  The NSA S&P Case Shiller Home Price Index of 20 cities drops 3.4% YoY, its 13th consecutive YoY decline.

- Goldman Sachs declares that BRIC economic growth has peaked.  Emerging markets will not save the globe from recession.

Weekly Bull/Bear Recap: X-Mas ‘11 Edition

Bull

++ U.S. data continues to show an economy that’s weathering a turbulent global economy much better than the bears could have ever anticipated:

• The Dow Theory has flagged a buy signal.  Both the Dow and Trannie indices  notch new highs.  This price action corroborates underlying U.S. economic strength.  The equity bull market is set to continue. 
• The Conference Board’s Leading Indicator surpasses the consensus estimate of 0.3%, rising 0.5%.  “The LEI is pointing to continued growth this winter, possibly even gaining a little momentum by spring,” Conference Board economist Ken Goldstein said.
• The downward trend in Jobless claims has driven a stake right through the heart of the “U.S. recession” thesis.  Jobless claims fall to the lowest since April 2008.
• Michigan Consumer Sentiment surprises to the upside with a final reading of 69.9 from 64.1 in November and represents a 6-month high.  Consumer psyche is healing as the economy improves.
• The housing market continues on its steady recovery with the NAHB Housing Index producing its best reading since 2008.   Housing Starts surge well ahead of expectations.  Even better, rising permits point to more building in the months ahead (i.e. jobs will be created).  Typically the housing market has led recoveries in times past.  Homebuilder stocks are near 5-month highs.    
• The Architectural Billings Index is back in positive territory.  Expectations are clearly displaying a bottoming construction sector (look at the divergence between current conditions and expectations).  It’s nowhere but up from here.  This important sector will finally contribute to economic growth.

++  European economic data points to stabilization. Even stabilizing data, along with renewed and unprecedented efforts to steady the banking system, will result in renewed confidence and rallying markets.    

• Germany’s salient Ifo Business Climate Index turns in a better than expected reading of 107.2 from 106.6 and is its second consecutive increase.  Meanwhile, GfK’s notes that gains in consumer confidence over the past two months will hold.  ”Unemployment in Europe’s largest economy is at a two-decade low of 6.9 percent, supporting consumer spending and helping to limit the impact of the euro-region turmoil.”  German Business Expectations also show a better than expected reading.
• The Spanish 10-yr yield plunges and signals renewed confidence that the crisis is being contained (same for France, Ireland and Belgium)
• November Italian Retail Sales pleasantly surprise with a reading of +0.1% versus expectations of a 0.2% contraction, while political backing for austerity measures to ameliorate the crisis remains strong.   
• The ECB has provided Eurozone officials time to push forward with the creation of a “fiscal compact” and improve crisis fighting measures.  Little by little, the ECB is moving closer to outright QE.  This eventual result means that the solution investors are looking for will eventually come and the crisis will be eliminated.  

Bear

-  European economic data foretells more social and political pressures on the horizon.  Spanish Industrial Orders disappoint with a meager gain of 0.9% for December versus consensus expectations of 4.0%.  Italian 4^th quarter GDP signals the start of the country’s 5th recession in the past 10 years (consumer confidence plunges to 1996 levels).  France is likely in recession as well.  Greek bailout talks are about to collapse as Vega threatens to sue.      

- The S&P 500 is nearing its late October highs, yet there are clear red flags in regards to the rally’s health.  The complacency is palpable.  The VIX has plunged to 20, a far cry from “blood on the streets” that sustains any significant rally.  Meanwhile, 10-yr U.S. Treasury yields are nowhere near challenging their late October highs.  Ditto for copper.  These stark differences are bearish divergences.  Italian 10-yr yields are back above the 7% level (yields for Greece and Portugal are hugging their respective high marks as well).  Banks are using their “newfound wealth” to stash more cash with the ECB, not buy crap government debt as the bulls had hoped.  Nothing fundamentally has changed in the Eurozone or China.  

- Recent economic data exemplifies the pervasive weakness slowly infecting the global economy.  Unrest continues in China and is likely to grow amidst weakening export growth and a popping housing bubble.  November Japanese exports fall 4.5% YoY.  

• 3^rd quarter U.S. GDP has now been revised lower by 25%, plunging from an initial reading of 2.46% to 1.81%.  This adjustment was largely due to a sharp downward revision in annualized consumer services consumption and cautious inventory management.  Real per-capita disposable income is imploding @ an -1.9% annualized rate and will seriously impede the longer-term prospects of any recovery…  
• …November PCE: Personal Spending in November rose just 0.1%, while the all-important wage component fell 0.1%.  The Savings Rate fell 0.1% to 3.5%, the lowest since the onset of recession in 2007.  Consumption growth will not be sustainable without a significant improvement in the employment situation.   
• The Chicago Fed National Activity Index (CFNAI) disappoints with a reading of -0.37 from -0.11.  The decrease is led by a sharp decrease in production-related indicators (i.e. Industrial Production/Manufacturing).  
• The Aruoba-Diebold-Scotti Business Conditions Index doesn’t show a decoupling U.S. economy; instead it shows one that is simply muddling through and vulnerable to an exogenous shock, such as an Eurozone implosion or a Chinese hard-landing.   

- Iran announces plans to conduct a 10-day naval exercise at the Straits of Hormuz, feasibly impeding oil freight traffic.  The game of cat-and-mouse has the potential to upend the global recovery if it spirals out of control.  Relations between Israel and Turkey take a turn for the worse after Israel cancels a large military contract.    

Weekly Bull/Bear Recap: December 12-16, 2011

Bull

++ The U.S. economy has clearly surprised to the upside.  Gloomy analysts have underestimated its strength, even in the face of global economic troubles.  These external issues will eventually resolve themselves in benign fashion.  

• U.S. manufacturing data this week demonstrates continued improvement.  Led by New Orders and Expectations, both the Philly Fed and Empire State manufacturing surveys show improvement in business conditions.  Ditto for Rail traffic. 
• Economic Bellwether FedEx reported better than expected earnings due to strong holiday sales and continued economic growth.     
• The NFIB Small Business survey shows that hiring plans in November are the most since mid 2008, meanwhile, jobless claims plunge to 366K from 390K, the lowest in 3.5 years.  Both these indicators clearly signal a strengthening job market and economy.  
• The Payroll Tax Extension is sure to pass and will mitigate fiscal contraction taking place next year.
• Consumers are repairing their balance-sheets.  Household financial obligations as a share of disposable income have fallen to almost 20-year lows.  This alongside steadily growing demand.  Retail sales, while weak MoM, are actually at record highs (nominal) and the YoY growth rate remains above 6%.  Improved balance-sheets will help consumer confidence and boost spending over the longer-term.     

+ Markets have had plenty of time to digest the effects of a Greek default.  They have already priced in a default for the country; yet the system has held together.  Even better, an effective bond auction in Spain points to a stabilization of demand = improved confidence.  Also, a successful Italian confidence vote shows continued solidarity behind austerity plans.  Monti is taking care of the situation.     

+ The global restructuring is taking place as China reports stronger consumer demand (which will continue to boost our exports).  Furthermore, a high correlation between food prices and equity market performance points to outperformance of the asset class as lower inflation brings about easing in the months ahead.  Note that China now understands what needs to be done.  They are embarking on producing the solution, which will lead to secular and sustainable global economic growth.  The country also has plenty of resources to boost demand, counteracting slowing exports, thereby avoiding a hard landing.      

Bear

- Top government leaders are becoming confrontational.  Citizens are becoming resentful and terrorism against the entrenched plutocracy is a clear budding negative trend.  In addition to warning on Spanish banks, Moody’s now joins S&P, in its comments last week, with a warning on the lack of immediate resolution to the Eurozone’s woes.  And for the trifecta, Fitch slaps credit-watch negatives on multiple countries (let’s just call it “everyone”).  A mass S&P downgrade may occur this very weekend.  The latest EFSF fact sheet is released.  The fund still relies on Spain and Italy contributing roughly 31% of the fund’s capital commitments.  How’s this going to happen if they are on the chopping block?  The crisis will yield recurring flare-ups in early 2012 (starting with the bull’s favorite country, Greece).  And with dwindling political will, implementation risk will rise even further if Francois Hollande takes the French helm.  Europe’s banking system is close to suffering a heart attack; ECB again refuses to print.  Hungary/IMF talks collapse.

- The slowdown in Europe has spread throughout the globe.  Japan’s salient Tankan survey points to a deteriorating global economic outlook.  Indian industrial production fell for the first time in more than 2 years, falling 5.1% YoY in October.  Chinese exports are the lowest since the dark days of 2009, rising 13.8% in November, vs. 15.9% in October.  The country’s flash PMI indicates that a second month of contraction is in the cards.  The populace is becoming restless.  The property bubble (which exists in all its splendor) has popped.  Yet, officials aren’t loosening as expected by the bulls.  Last, but certainly not least, OECD leading indicators point to continued weakening in the months ahead.  The world is entering a synchronized global recession, and yet not only is the ECB not printing but neither is the Fed.  Stocks will need to fall further to induce action.

- Tech bellwethers Intel and Texas Instruments, cut Q4 sales forecasts.  Retail sales disappoint, as does Best Buy, despite all the hype in November.

- Geopolitics remains the bearish gorilla-sized joker in the whole bull/bear debate.  Tensions are at a boiling point after Iran proudly demonstrates the captured drone.  The U.S. has asked for its return.  So if the Iranians say no, then what?  Does the U.S. look like a weakling and mosey on?  Btw, another drone crashed this week.  Iran ‘practices‘ the closure of the Straits of Hormuz (oil would promptly rise over $120 and kill any global recovery).  Finally, we had some notable protectionist news this week from China.  How will Congress react when Yuan appreciation ceases as Chinese officials move to protect their export-reliant economy from a “very severe” trade situation in 2012?     

Weekly Bull/Bear Recap: December 5-9, 2011

Bull

+ The U.S. economy is decoupling from Europe.  The job market is on the mend, confidence is rising, and credit is in greater use; all resulting in greater consumption power.  Housing continues to improve (Mortgage Applications have clearly stabilized).  Looking under the stock market’s hood, we can see that breadth is not showing any weakness whatsoever.  This is an indication that U.S. economic growth is real and a lifting of Eurozone uncertainties will lead to higher stock prices in the weeks to come.

+  European countries take the first step towards a fiscal union; this time it’s a step in the right direction.  It is likely that 26 out of the 27 countries in the EU will accept the treaty changes.  The bears keep underestimating the will of collective Europe to see the Euro experiment through to the end.  Italian Prime Minister Monti presents additional austerity measures.  Sovereign bond markets signal that Eurozone officials are finally attacking the core problems.  Furthermore, the bears are exaggerating the depth of the Eurozone recession.  German Factory Orders surge 5.2% in October, while Eurozone Retail Sales for the same month surprise to the upside, coming in at +0.4% vs. +0.1% expected.  It will only be a mild and manageable recession.     

+ Fed officials are preparing a revamped communication method, designed to clarify its intentions for monetary policy.  Rates would be floored and easing would take place as long as the unemployment-rate remains above its natural rate.  Should the inflation-rate surpass a limit of possibly 3% (up from 2%), then officials would lay off the monetary gas pedal.  Along with a new wave of likely doves holding votes at the FOMC next year, QE will make an appearance in early 2012.  The time to buy is now as the Fed will reflate.

+ A soft-landing in China is playing out as lower inflation now allows officials to strongly loosen monetary policy soon.  Furthermore, the region is proving resistant to a European slowdown.  By sporting extra large FX reserves and plenty of room to loosen monetary policy, Asian countries will have “extra fiscal and monetary headroom” to fight the effects of a mild European recession.  Prudent investors are taking advantage of a very mis-priced market.  Over the longer-term, investing during these times will end up being a very good decision.  

Bear

- “The ECB had given the signal that it would print if European leaders agreed to a fiscal compact”, said the bulls.  Alas it was not meant to be.  Furthermore, an overthrow of Democracy on a gargantuan scale is furtively taking place.  Technocrats are staging a coordinated coup on the citizens of every Eurozone country.  S&P places 15 Euro nations (including core-countries France and Germany)…and the EFSF on “credit watch negative”, which means that there’s a 50% chance that they will be downgraded in the next 3 months.  The safety net that is the EFSF would be finished.  Ireland looks to reopen its can of bailout worms at the summit when it requests to renegotiate its bailout.  Confidence hasn’t returned to financial markets; this can be seen when overnight deposits at the ECB remain near all-time highs.  Banks would rather deposit their surplus funds at the ECB instead of lending them out.  

-  UK shopping figures show their weakest growth since May.  Spanish Industrial Production plunges 4%, the worst drop in over a year, while growth of Italian Industrial Production hits its lowest YoY rate in roughly 2 years.  The Eurozone is the largest economy in the world, at $16.2 trillion.  It’s common sense that if this region is going through a severe recession, the world will certainly feel the effects…

- …Deleveraging by European banks has resulted in global liquidity problems and has cut off a major source of funding for Asian trade, resulting in an accelerated deterioration in Asia.  China’s official services PMI implodes to 49.7 from 57.7 (the  lowest since February, 2009), while HSBC Services PMI falls to a 3 month low of 52.5 in November (hard manufacturing data underperforms as well).  Japanese Machinery Orders, a leading indicator of industrial production, falls 6.9%, and is worse than all analysts’ estimates.    

- The U.S. ISM Non-Manufacturing index falls to the lowest level since the beginning of the year, the report’s Employment sub-index is now contracting.  Remember that services industry accounts for close to 90% of economic activity.  Another headwind is starting to show itself in the form of political paralysis on extending the current payroll tax breaks.  Regarding the all the good news in the housing market, it’s time to wake up!  ECRI’s Lakshman maintains the firm’s recession call.  

- Geopolitical tensions continue to rise.  Reports of Iran preparing for a possible near-term strike may result in oil easily surpassing its bull market high of roughly $118, thus quickly sinking the feeble U.S. recovery. The country also took the opportunity to confirm the capture of a U.S. stealth drone, downed the prior week.  Furthermore sabotage takes place, this time in Syria, marking an escalation of tensions in the country.