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).    

———————————————————————————————-

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

Weekly Bull/Bear Recap: New Year’s ‘12 Edition

Bull

+ U.S. economic data continues to shine.  Let us count the ways:

• U.S. ISM manufacturing logs its best result since June; led by New Orders, Production, and Employment.  Auto demand remains strong and exports revert back above the 50 mark.  
• Confidence is at its best level since June, according to Gallup Poll.  It’s at its best level since July, according to the Bloomberg Consumer Comfort Index.  Why?…  
• …The labor market is markedly improving as per both the ADP and BLS job reports, which turn in readings of +325K and +200K jobs created respectively; the unemployment rate falls to the lowest in almost 3 years at 8.5%.  Both results are better than expectations.  Jobless claims plunge 15K and the 4-week average falls to the lowest in over 3 years.
• The Association of American Railroads reports that rail traffic picked up in December.  From the looks of the graph, it looks like the recovery is actually gaining steam.         

+ The European Service PMI report turns in a better than expected result (indicating stabilization), while German Unemployment falls to a record low for unified Germany.  The bears state that a major recession will cause a flareup in the debt crisis.  These data points, as well as loosening monetary policy in the quarters ahead due to falling inflation, suggest that both recession and the debt crisis will be contained and will surprise many. 

+ Any synchronized global slowdown will be shallow, surprising investors to the upside.  China’s service PMI shows continued growth in its domestic economy, producing a reading of 52.5 and unchanged from November; while the country’s official manufacturing PMI rebounds to 50.3 in December from 49.0.  Whisper numbers for inflation are 4% in December = loosening monetary policy.  Meanwhile, UK manufacturing PMI data increases to 49.6 from 47.7 and is just a smidgen below the 50 mark, the demarcation between expansion vs. contraction; demand increased from Germany and China according to the report.  UK services PMI reports its strongest result in 5 months, rising to 54.0 in December from 52.1.       

Bear

- Greece is in a depression and a debt trap.  Falling revenue, due to austerity measures, is complicating the slated EUR130 billion bailout.  It will have to be larger, which aggravates an already delicate political situation.   Spain’s government deficit may be larger than 8%; to which the government responds, “the beatings will continue until moral improves.”  Good luck slashing the size of the government in a social welfare state without serious unrest.  Hungary is on the precipice and has requested help from the IMF, again.  Italian and Spanish 10-yr yields are marching higher again, while French 10-year OATs fall in value for 8 consecutive days.  Sovereign bond markets aren’t drinking the equity hopium.    

- While the bulls focus on lagging indicators, such as the unemployment rate (btw, Eurozone’s unemployment rate stays stuck at a record 10.3%), let’s focus on some leading indicators shall we?  German factory orders plunge 4.8% MoM in November, while October’s result was revised down from +5.2% to +5.0%.  Factory orders in Germany have plunged more than 8% in the past 5 months.  This data point signals a sharp slowdown on tap in Q1.  Here’s a coincident indicator, “Confidence in Euro Region at Two-Year Low as German Orders Slide.”    Bullish news from the UK?  Ok, here’s an offset: “UK car sales fall to lowest since 1994.” 

- The key risk to China’s slow-landing thesis continues to lurk.  Chinese home prices fall for the 4th consecutive month in December.  Premier Wen Jiabao states the obvious, China’s in a stagflationary dilemma.  No substantial loosening is coming.  Furthermore, falling housing prices are morphing into a political crisis for the communist country.    

- The ECRI’s leading indicator growth rate has broken through support of a narrow 7-week range, falling to -8.2 from -7.6.  Recession is knock knock knocking on heav…the U.S.’s door.

- America’s debt to GDP ratio surpasses 100%.  Increased interest expense on this debt smothers investment in real economic growth, falling potential GDP, and a loss of confidence.  Politicians will revert to money printing, which will lead to high long-term inflation and a lower standard of living for all.

- Iran and the U.S. are a rogue’s attack away from war.    

Weekly Bull/Bear Recap: October 17-21, 2011

Bull

+ So far for the reporting season, 63.7% of S&P 500 companies have beaten consensus earnings per share estimates, which is stronger than the past 2 quarters.  Meanwhile, revenue per share has come in line with average beat rates.  This earnings season has been been positive for equity markets.  They have just broken through the top end of the roughly 3 month range.  

+ The Beige Book paints the picture of a stabilized economy after the summer slowdown.  The economy has leveled out even after all the exogenous shocks it took on: the Japanese earthquake, higher gas prices, a stock market crash, and Eurozone worries.  Once Europe gets its house in order, the economy will reaccelerate and confound the bears.  This thesis is clearly on display with the latest Conference Board Leading Indicators report, which published a positive reading of +0.2%.  Meanwhile, the 4-week average of jobless claims falls to the lowest level since April and the Gallup Poll reports that unemployment has plunged.   We’re not in recession, only a soft-patch. Here’s some more evidence…      

+ …Industrial production for September rises 0.2% and is line with projections.  Manufacturing isn’t falling out of bed, in fact, the soft-patch is ending as the Philly Fed Index surges from -17.5 to +8.7 in October (annihilating expectations of -9.4). Both New Orders and Backlogs swing into positive territory, while expectations improve from 21.4 to 27.2.  

+ It’s not only in manufacturing where we see increasing activity.  The housing market is generating more bustle as the Buildfax Residential Remodeling Index hits a new all-time high.  Housing starts rocket 15%, while the Home Builder Sentiment Index for October rises a much higher than expected 4 points.  While the break-even is 50, it shows that the housing market is healing.  It’s a step in the right direction and is good news for the sector primarily responsible for our economy’s large challenges.  Furthermore policymakers are doing their part to increase demand.  The sector is moving forward.    

+  More countries, such as the BRICS, are stating that they are willing to support the Eurozone via capital injections with the IMF.  Global leaders are realizing the gravity of the situation and are uniting to put forth the proper prescriptions to address the issues.  The path towards a solution just got easier as Fitch states that an expansion of the EFSF wouldn’t put France’s AAA rating in jeopardy.  Furthermore, Spain posted an unexpected rise in industrial production orders after an encouraging industrial production number 2 weeks ago.  The country will not enter recession, which will result in an improved fiscal situation.  Notice how Spain’s 10-yr yield has been inconspicuously absent from the latest run up in yields.  The Eurozone will achieve a solution, just when most in the investment community aren’t expecting such an outcome.  This will lead to a powerful rally as bearishness remains elevated.     

+ Consumer price inflation is beginning to subside and will give the Fed more wiggle room to renew QE in order to support the recovery in the near future.  The Fed will have the market and economy’s back soon.  The bears are frustrated that even without QE, the economy has been growing and the market has been supported.  

+ As the global economic restructuring continues, we are starting to see its benefits.  The Chinese are working to expand their consumer economy.  With sky-high savings rate and further development, we will have end-demand from that country for decades.  Their economy is on sound footing.  As wages begin to equalize between China and the U.S., more companies are “re-shoring” back to America.  This migration back to the U.S. will result in a wave of investment and job creation.  The best part is that this restructuring is taking place without a slowdown in global trade!  

+  In what will surely help oil supply issues with Libya, reports proclaim Gaddafi has been fatally injured.  Libya is finally liberated and will result in a speedy recovery of its people as well as oil production.  Oil prices will further decline sending Gas prices, which have dropped 13% since peaking in May, lower and help consumer spending.  

Bear

- Sure Bulls, the economy is getting better because surveys and metrics are increasing.  Sure….now open your eyes and see the bigger picture; see reality.  The Occupy Wall Street protests have metastasized throughout the world.  The more bailout packages are implemented, the more ardent and violent the remonstrances will become.  The end of the road for the infamous policy of bailouts is at hand.  Banksters nor the Fed are helping their case.  It has become politically (not to mention morally) unacceptable for investors and the wealthy to get bailed out at the expense of billions of taxpayers and the poor.  

- It’s funny how the bulls/vacuum tubes keep getting fooled by European officials.  Merkel says that “dreams” of this package solving all the Eurozone’s problems are misplaced, while a second summit is scheduled for Wednesday.  Meanwhile, the negative omens are becoming hard to ignore (but they still are!):  Greece is dangerously close to descending into anarchy.  Utility of the EFSF changes every couple of hours not to mention the amount of guarantees.  Words of warning for France, this time from both Moody’s and S&P.  A cut in the country’s 2012 growth forecast won’t help matters.  Moody’s wasn’t as nice to Spain, cutting their rating on Spanish “Bonos” citing falling growth and a budding banking crisis.  S&P was even meaner to Italian banks (24 got the ax).  Germany axes 2012 growth forecasts, while Greece is making it hard to justify throwing good money after bad.  Officials in the region ban CDS outright; here’s the beginning result of that great idea.  Next up, a banning of ratings of sovereign debt from rating agencies (Period)  Europe is on the precipice.  Will next week be “Black Week”?           

- Manufacturing data is still showing a faltering recovery.  The Empire Manufacturing index for October shows a larger than expected contraction in the NY area.  Looking ahead 6 months, expectations are dimming as well.

- On the global economy front (sans-Europe), the Chinese are ticked with the U.S. Senate after they passed currency legislation to further pressure them to allow the Yuan to appreciate.  Beijing and Washington are playing a dangerous game of chicken in what could be a plunge into protectionism, which would absolutely be disastrous for the global economy.  Brazil lowers its key interest rate less than 2 months after the last cut (so the global economy is recovering eh?).  The UK economy is slowing down, while prices continue to rise (stagflation).   

- China’s GDP growth falls to the lowest since the dark days of 2009 and underperforms expectations.  Bulls say that the performance is good and the market is overreacting.  The signs of a poor and deteriorating banking system, a property market slowdown, high inflation, and a weakening export sector (the reason why the Yuan doesn’t appreciate faster) have not deterred their view.  Meanwhile, copper sinks more than 5% for the week.  The Shanghai Index hits lows last seen since…(drum roll)…..March ‘09.  The bulls are frogs in 95 degree Celsius water and getting hotter.  Many still believe that their economy will withstand a Europe shock and result in a soft-landing.  Few expect China to wither.  This is exactly the environment that leads to market downdrafts. 

- Bullish hopium for a housing comeback is premature.  ”The seasonally adjusted Purchase Index decreased 8.8% from one week earlier and is at the lowest level in the survey since December 1996”.  Remember “Foreclosure-gate”?  Ready for a possible comeback?  Existing Home Sales keep scraping the bottom.  Positive seasonal effects on housing prices have come to an end.  On the commercial side, the Architecture Billings Index declined in September and is back in contraction.  ”It appears the conditions seen last month were more of an aberration.”     

- PPI runs hotter than expected, coming in with a headline reading of 6.9% YoY in September.  When paired with an increase in import prices of +13.4%, inflation at the the producer and importer level will buoy the CPI, or decimate company margins if consumer’s wages can’t keep up.  Many bulls viewed the tamer CPI readings as a signal for more wiggle room for QE3.  Sure, go ahead bulls, let’s break that 23-yr high in the Misery Index.  We are one QE away from stagflation.  

- 11 consecutive declines in the ECRI.  ’nough said.

Weekly Bull/Bear Recap: July 11-15, 2011

Want to know my Macro and Market Forecasts? Please check out my Mid-Year Outlooks (a/o June 16, 2011): here and here.  I update these outlooks bi-annually. 

——————————————————————————————————

Bull

+ Earnings reports are coming in and have been encouraging thus far. Google shines blowing past Wall Street’s expectations on higher online advertising demand. Citigroup reports much better than expected earnings on improved investment-banking performance as did JP Morgan.  Mattel’s results also make the case for a strong corporate picture.  Improved corporate guidance over the second half of the year, coupled with low valuations of 12-13x using 2011 earnings will stoke investor enthusiasm in the second half of the year.  (I do not own nor am I shorting any of these companies). 

+ Jobless claims fall further, from 427K to 405K, and proves that their recent rise  was due to transitory factors. They will continue their path downward and lead to better labor market conditions in the second half of the year. This will help consumption in the months ahead and confirm 2011 earning estimates.

+ Chinese economic data comes in better than expected. Consumption and industrial production, critical factors for the global recovery, both exceed expectations. China isn’t headed for a hard-landing and global economic activity will remain buoyed by continued growth in demand from the communist nation.

+ Executives see a rebound in the second half of the year.  Large mergers such as BHP Billiton’s acquisition of Petrohawk Energy Corp and Icahn’s bid for Clorox show that growth opportunities are seen as the global recovery progresses. (Don’t own or short these companies)    

+ Consumer metrics for July have started off on the right foot. Goldman ICSC and Redbook gauges both show strengthening consumer trends on a YoY basis. Markets are quite gloomy with many thinking that the economy is about to fall into recession. Not from the looks of consumer demand!

+ The UCLA Meridian Pulse of Commerce Index, a leading indicator of manufacturing activity, rebounded by 1% after falling the prior two months. This indicates that the manufacturing sector isn’t falling out of bed. Economic activity remains in growth mode. Furthermore the Empire Manufacturing Survey, while negative for the second month in a row, is showing more signs that the recent soft patch is just that, a soft patch. Future expectations rose almost 10 pts to 32.2, while the future employment index crossed into positive territory once again.

+ While retail sales for June might have seemed weak, a look under the hood shows encouraging trends and a June YoY performance that is the highest since 2005.

+ Slowly but surely, housing is healing and the market is smelling the bottom for this all-important sector.  Lower foreclosures —> less supply of houses —> stabilized housing prices —> improved consumer confidence —> higher spending.     

Bear

- Empire State Manufacturing Index notches its second consecutive negative reading.  Average workweek, New Orders, and Backlogs are in negative territory.  Meanwhile Industrial Production for June rose only 0.2%, less than expected. To exacerbate the miss, most of the gains were due to the volatile utilities component. What happened to the transitory nature of this soft patch bulls?

- The bulls keep denying it, but it’s the same story. GDP estimates keep getting slashed. Small business, the engine of job creation isn’t showing recovery, in fact the readings are recessionary.

- University of Michigan Consumer Sentiment for the first half of July implodes to 63.8 from 71.5 at the end of June.  Can Main Street have some of that hopium that analysts and managers are sniffing?   

- The US is warned …(twice!) that it may get its credit rating slashed should politicians fail to resolve the current budget impasse.  Some predict that this will trigger closer scrutiny of the US from bond vigilantes.  Interest rates would rise as treasury bonds sell off strongly. 

- The Eurozone sovereign debt woes are officially back. This time we got the two big kahunas front and center: Spain and Italy (lets throw Ireland and Greece in there for good measure).  Can Eurozone officials pull another rabbit out of the hat?  Citigroup hopes so.

- Bernanke is a little gun shy now about opening the monetary spigot again.  Why wouldn’t he be?  Oil was less than a $1.00 away from hitting $100 again just on speculation that he might turn the faucet back on!  Also, the latest inflation numbers show an ominous rise in Core CPI and makes the case for inflation becoming more entrenched in the economy.  Any further printing at this point would be destabilizing for the consumer.  The Fed isn’t coming to the rescue right away this time.      

- Chinese inflation in June comes in at 6.4% on a YoY basis, at the top end of expectations. Social discontent is becoming more pervasive throughout the country and puts officials in a very difficult situation. Meanwhile, their economy is showing more signs of slowing as imports came in soft, which resulted in a larger than expected trade surplus.