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. 

—————————————————————————-

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.  

Weekly Bull/Bear Recap: Mar. 4-8, 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. 

——————————————————————

Bull

+ The U.S. economy clearly remains on the recovery track:

• On Wednesday, we had our first clue that job creation in February was robust, with ADP reporting that 198,000 private sector jobs were created; the advance was broad based across industries. On Thursday, investors received news that the 4-week average of jobless claims fell to its lowest level of the recovery. Finally on Friday, the Bureau of Labor Statistics announced in its payrolls report that 236,000 jobs were generated (see graph below), much better than the consensus estimate of 171,000; additionally, the unemployment rate fell 0.2% to 7.7% versus a consensus estimate of 7.8%.

• The Institute of Supply Management reported that the service sector, which accounts for close to 80% of the economy according to the Bureau of Economic Analysis, grew at a vigorous pace (Composite Index = 56.0). Even better, within the report, new orders spiked 3.8 points to 58.2 (50 demarcates expansion from contraction); meanwhile, the backlogs subindex surged 5.5 points to a solid 55.0, its highest level in 21 months. Orders are piling up (positive backlogs) and new orders are coming in at a quickening pace. These leading indicators exhibit that the bulk of the economy is slated to grow over the coming months. 
• While factory orders for January showed a contraction of 2.0%, the result was heavily skewed by the transportation sector. Beneath the headline number, we see renewed growth in business investment. Core capital-goods orders, which encompass those of non-defense and excluding aircraft, were revised upwards from 6.3% in last week’s Advance Durable Goods report to 7.2%.
• The recovery is set to continue as we have entered a period of “Nirvana for housing.”  Improved debt to income metrics, pointing to household deleveraging in its late innings; increased residential investment and housing starts, which are usually the best leading indicators for the economy; the end of the drag from state and local government layoffs; loosening household credit; and an accommodative Fed are strong tailwinds that will support economic growth in over the next few years.  You can add rising home prices to that list.   
• According to the Fed’s Flow of Funds Accounts report, households’ real net worth is about 8.5% below pre-recession highs; however, if net worth rises at the same rate it did last year we could see a complete recovery from losses sustained during the “Great Recession” by year-end.   

+ Further signs surface that the global economy is stabilizing.  In Europe, region-wide retail sales surprised to the upside in January, climbing 1.2% versus analysts’ forecasts of a 0.3% rise.  This result cancelled out a 0.8% decline in December. Furthermore in China, exports are beginning to increase signaling increased demand from its trading partners.  Meanwhile in Japan, the Nikkei equity index is up roughly 40% over the past 3.5 months.  A weaker Yen is proving the difference as exporters become more competitive in global markets.  

Bear

-  A clear divergence between Germany and the rest of the periphery countries in Europe (see chart below) highlights the risk of the euro chipping away at European unity (French unemployment just hit its highest level since 1999; youth unemployment is at a record high).  The downturn in the region has intensified.  An increasing number of investors believe a strong Euro, due to other central banks easing to high heaven, is an impetus (Eurozone exports plunged at the fastest rate in almost 4 years during Q4).    

Meanwhile, Fitch downgrades Italy’s credit rating due to a strong showing from Beppe Grillo’s 5-Star Movement, increasing political risk to the Eurozone. “The inconclusive results of the Italian parliamentary elections on February 24-25 make it unlikely that a stable new government can be formed in the next few weeks,” Fitch said.  While Germany may be showing strength, is it sustainable?: check out both January new factory orders and car sales.  Meanwhile, Brussel’s prescription for record unemployment in Spain?: raise taxes (brilliant!)

- China institues its harshest property measures yet, leading to a 9.2% plunge in the Shanghai Property Index.  Uncontrolled advances in real estate prices are a symptom of short-sighted rampant monetary easing by major central banks worldwide.  China’s getting irritated by Japan’s Shinzo’s Abenomics.  Currency wars and beggar-thy-neighbor policies greatly increase the prospect for armed conflict.

- Preliminary negative signs of the increase in payroll taxes are slowly sprouting behind the incessant news of new all-time highs for the DJIA. The International Council of Shopping Centers reported that in February US chain store sales rose 1.7%, below the organization’s guidance of 2 to 2.5%.  Meanwhile, the Beige Book released this week also noted slowing retail sales through late February. Deteriorating sales trends will lead to an excess of inventories (keep an eye on the inventories to sales ratio) and ultimately slowing production.  On the job front, the Challenger job-cut report indicates that layoff announcements for February rose to a level seen only twice over the past 16 months.  Moreover, Friday’s news of a falling unemployment rate is likely transitory; the sequester will result in increased unemployment.  Another warning shot comes from Gallup’s Consumer Confidence survey, which has notably deteriorated since the sequester began.

-  The president of the Dallas Fed states the obvious to those who see the forest for the trees. Monetary policy is clearly not a panacea for economic growth. Despite unprecedented amounts of monetary stimulus, lack of credit demand (an idiosyncrasy of a balance-sheet recession) makes transmission of monetary policy to the general economy very difficult. The only credit demand we’re seeing is that related to student loan debt.  

Weekly Bull/Bear Recap: Feb. 4-8, 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.  

Bull:

+ The service sector, which accounts for almost 80% of the U.S. economy, remains in growth mode.  The Institute of Supply Management’s Non-Manufacturing survey reports a healthy 55.2 composite reading and an extremely bullish Employment subindicator of 57.5, its strongest reading since February 2006.  Furthermore, Export New Orders crossed into expansion territory and imply improving global trade conditions.  Indeed, today’s U.S. International Trade report “suggests exports — a key engine of the U.S. recovery — are finding their footing after stalling last year…”

+ The global expansion thesis is further boosted by Singaporean manufacturing ending its spell of contraction, German Factory Orders showing signs of bottoming (mirroring improvement in recent Ifo surveys), and Japanese Machinery Orders increasing for the 3rd consecutive month. 

+ The bears have severely erred on their assumption that China wouldn’t be able to execute a soft landing.  In addition to improving manufacturing surveys, HSBC’s Services PMI survey is now solidly in expansion territory, notching a reading of 54 from 51.7 in December.  China is in position to lead the global recovery again.

+ The U.S. consumer remains quite resilient.  Chain Store sales surge the most since September 2011 and are much better than expected, while Gallup’s Consumer Spending report shows a 4-week average YoY gain of almost 30%.

+ Fed officials are optimistic that a positive wealth effect has taken hold and Q4 GDP numbers reflect only a transitory blip (due to weather-related events) towards continued recovery (Q4 GDP will be positive when the second revision is published).  Rising home values as well as gains in U.S. stock markets have improved consumer psychology.  Furthermore, investors can take solace that the FOMC won’t be backtracking on its promise to continue providing monetary stimulus even in the face of improving economic conditions.

+  The U.K. has seen a string of improving economic numbers this week: the Services Purchasing Manager’s Index swings into expansion in January; Same Store Sales improve 1.9% as well; and Industrial Production for December prints better than expected.  In addition, investors are nodding at recent economic improvement in Europe.      

Bear:

The European political and economic storm looks to pick up strength in the months ahead: 

• On the political front, Spain’s “Gürtel Scandal” is dampening confidence in the government’s ability to continue its EU-mandated austerity policies.  As a result, Spanish 10-yr yields are back on the rise, advancing 2.3% for the week.  Meanwhile, in addition to a festering bank scandal, February 24-25 will market an important day for Italy and global markets as Silvio Berlusconi’s shocking surge in the polls have already begun to unnerve investors.  Since Jan. 28, Italy’s FTSE MIB has declined more than 7%.  
• On the economic front, Spain posts some depressing Industrial Production numbers for January, while European Retail Sales plunged in December by the most since February 2009 on a YoY basis.  France looks to downgrade its 2013 growth forecast placing Mr. Hollande in a pickle, indeed he’s now asking for a lower Euro.  Pressure on the ECB to join central bankers worldwide in weakening their respective currencies marks an end to the cease fire in the “Global Currency War.”  

- Inter-market trends are deteriorating.  A look at the XLF/XLU ratio indicates that deflation fears may resurface soon and would be a negative for equity markets and bullish for Treasury bonds.  In fact, 10-yr Treasury yields are showing a negative divergence vs. equity markets and is a red flag.  Furthermore, equity markets are at long-term resistance, all the while investor sentiment is very bullish.  The stage is set for a correction over the coming weeks. 

- U.S. Weekly sales metrics (Goldman ICSC and Redbook) show continued weakening consumption trends.  Tepid growth readings over the course of January, in addition to a third consecutive weak reading from Discover’s U.S. Spending Monitor, are a shot across the bow for a subpar January Retail Sales report, due on Feb. 13.  Perhaps this is because job creation has stalled according to Gallup’s Job Creation indicator, which just slumped to an 11-month low.  Or perhaps it’s because the nation’s average gas price has risen 17 cents from a week ago.  

- Q4’s Productivity and Unit Labor Cost report portends deteriorating earnings trends for corporations.  Productivity (output per worker) declined  2.0% and was more than expected; meanwhile, unit labor costs surged 4.5% vs. market expectations of a 3.1% increase.  Real wages, vs. nominal, continue to shrink.  ”Hourly pay for American workers fell for the second straight year after factoring out inflation, marking the worst two-year stretch in the U.S. since World War Two.”  

- Does Canada have a popping housing bubble?  Canadian building permits in December plunged 11.2%, after a 17.9% drubbing the month before.  Meanwhile housing starts crater 18.5%.   

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.

—(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. 

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.

(Source: Motor Intelligence) 

• Corelogic announces that prices in October rose 6.3% year-over-year, the largest increase since 2006. Plunging inventory will lead to firming prices over the coming year.  
• The BLS Payrolls November report today shows a decrease in the unemployment rate to 7.7% (the lowest since December 2008) as well as a better than expected 146,000 jobs created.  Averting the fiscal cliff (lawmakers will come to an agreement; Republicans will relent) will result in a release of pent up business investment, resulting in accelerated growth this coming spring.  Stock markets are sniffing out this strengthening tailwind.   
• Finally, resilient economic growth in the U.S. is spilling into Mexico, evident by rising consumer confidence and improving business conditions.   

+ 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. 

— (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.    

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.