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. 

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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. 18-22, 2013

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.  

Bull

+ The U.S. economy is set to continue its recovery.  The Conference Board’s leading indicator increased 0.2% in January.  ”The indicators point to an underlying economy that remains relatively sound but sluggish,” said Ataman Ozyildririm, economist at The Conference Board.  Meanwhile the ECRI’s leading indicator growth-rate remains in solid positive territory at 7.6% for the week ending February 15th — Lakshman Achuthan has egg all over his face due to his premature recession call.  

+ U.S. Manufacturing is undergoing the beginnings of another inventory build.  The American Trucking Association reports that its tonnage indicator rose for the 3rd consecutive month in January, notching its highest ever reading.  Meanwhile, Markit reports that its PMI registered further expansion for the sector. Chris Williamson, Chief Economist at Markit said: “U.S. manufacturers reported the largest monthly rise in production for almost two years in February, suggesting that the economy is set to rebound from the weak patch seen late last year and allying fears of a double-dip recession.”

+  While the Conference Board has reported declining confidence from the U.S. consumer, on the whole, it has stabilized.  Gallup reports that its measure of consumer confidence remains near a 5-year high.  Bloomberg’s Consumer Comfort Survey is carving out a bottom, as is the University of Michigan’s Consumer Sentiment survey, which last week signaled a 3rd consecutive increase.  

+ Home prices continue to increase (due to falling inventory levels) and will support consumer and investment psychology.  Zillow reports that their pricing index’s 15th consecutive increase was also at the largest annual rate since early 2006.  Meanwhile “the number of American households behind on mortgage payments fell to the lowest level in four years at the end of 2012,” according to the Mortgage Bankers Association.  In the commercial real-estate sector, the AIA announces a strong surge in its Architecture Billings Index.   

+ Global trade flows have bottomed and look to pick up throughout 2013.  Japanese exports for January grew for the first time in 8 months, rising 6.4% on a year over year basis.  Exports to China increased for the first time in 8 months, while exports to the U.S. jumped more than 10%.  Meanwhile, Markit reports that increased demand from Asia is percolating to other major economies, such as Germany.

Bear

- Things are taking a turn for the worse in Europe.  Markit reports a deepening downturn in February, tempering expectations for an end to the region’s economic malaise any time soon.  Moreover, Italian leading indicators point to further weakness ahead (elections are coming up this weekend!) and Euro-wide car sales slump to levels last seen in 1990.  Unfortunately, bullish German business conditions (due to the country’s reluctance to rebalance its economy, which is sorely needed for a long-lasting Eurozone solution) only serve to create complacency in the country.  Perhaps such good economic conditions will make German citizens feel like their economy will not suffer if it left the Eurozone.  A Taylor-Rule analysis of Germany vs. France clearly demonstrates why a one-size-fits-all monetary policy is tearing the region apart.  Meanwhile, financial institutions in Europe remain very vulnerable and Friday’s news that only half of the LTRO money will be repaid speaks volumes of the distrust still present in the banking system.  Liquidity schemes such as the LTRO only mask the underlying fundamental  problems plaguing the Eurozone.  They do nothing to solve them.  

- Market action this week accentuates the extent to which Fed officials have warped financial markets.  After a surprising hawkish set of FOMC minutes, the S&P 500 tumbled over 2 percent.  The weakest multi-year economic recovery on record has only occurred because of unprecedented monetary stimulus.  Any hint of ceasing, or even reducing the dosage of Bernanke’s monetary drug will induce sharp sell offs in risk markets.  The foundations of the global economy remain unhinged and pose grave long-term risks to the investment outlook.  Indeed many are becoming worried with the degree to which the Fed has likely affected long-term economic growth.      

- Quietly, gas prices have increased for 32 consecutive days and endanger PE-multiple expansion.  Along with the expiration of the payroll tax cut and the significant possibility of sequestration, investors will be surprised by deteriorating consumer trends.  

- China’s Shanghai Composite falls roughly 5% as officials signal more tightening measures for the property market.  Despite a rallying U.S. equity market, China’s equity measures remain mired in a long-term downward trend, which is a red flag.  Want another red flag?  Copper plunges more than 5% for the week.  A look at the 3-yr price chart shows us that a bearish solution to a symmetric triangle is looking increasingly probable.    

- An awkward moment for U.S./Chinese relations occurs with Mandiant announcing that the Chinese military accounts for a large number of cyber-attacks on America, an accusation immediately disputed by Chinese officials who point out that the U.S. also accounts for a large number of cyber-attacks on their country as well.  

Weekly Bull/Bear Recap: 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. 28-Feb. 1, 2013

Bull

U.S. Economic Activity is beginning to reaccelerate:

• Manufacturing reports this week show an improving picture.  The ISM Index increases from 50.7 to 53.1 in January.  New Orders and Employment subindicies are in solid positive territory.  Meanwhile Markit’s PMI Index rises from 54 to 55.8.  Both notch their best readings in 9 months.  Regionally, the Chicago and Dallas Feds report that activity is picking up steam.  Furthermore, Durable Goods Orders are pointing to a stabilization in demand with business investment increasing for the third consecutive month.   Manufacturers are becoming more confident in future demand.
• Upward revisions in November, from 161K to 247K, and December, from 155K to 196K, together totaling +127K, accompany a positive BLS jobs report for January (+157K).  Meanwhile ADP reports that companies hired at the fastest pace in almost a year.  Challenger, Gray, & Christmas announces that job cuts for January are the third lowest since 1993.  Firms do not see deteriorating conditions in the months ahead and are maintaining their headcount.  The job market continues to heal.   
• Light Motor Vehicle Sales start off strong in 2013.  Consumption growth continues and will support the economy.  
• Overall, Consumer confidence is stabilizing.  While we’ve seen some indicators point to souring prospects, other surveys, such as Gallup’s Poll of Consumer Confidence and University of Michigan’s Survey of Consumer Sentiment point to reduced concern over upcoming negotiations in Congress.  
• Rising home prices remain a positive for consumer psychology.  Prices are set to climb throughout 2013, partly counterbalancing worries over higher taxes.  Meanwhile Detroit is seeing a revival —(told you so!).  

+  The global economy is set to reaccelerate in the coming months according to JP Morgan’s Global Manufacturing PMI, led by a reacceleration in China (due to domestic demand) and firming U.S. activity.  Improvement in these countries is spilling over into Europe…

+  …Germany’s Markit Manufacturing PMI is now just a smidgen below 50, which delineates between contraction and expansion, at 49.8 (an 11-month high).  Furthermore, Consumer climate, reported by the Gesellschaft für Konsumforschung (Gfk) group, reveals an improving state of confidence.  Perhaps this is due to a recovering job market.  Meanwhile, while still contracting, the majority of country-specific PMIs (Spain, Italy, Hungary, and Czech Republic) indicate the worse is over of the region’s recession.  The improvement in the global economy can also be seen in Brazil, where the unemployment rate has fallen to a record low.

(Source: Markit Economics) 

Bear

- Investors have piled into bullish bets (but earnings have flatlined since Q2 2011), economists all agree that the economy is poised to expand, the VIX is at 2007 levels before the crisis struck, and the bears are capitulating.  All are signs of extreme complacency in the face of festering bearish macro trends……  

(Weekly Readings —— Solid Line = 32-week average)

- …..and why are investors giddy?  Because stocks keep on rising.  But smart investors know to use REAL, not Nominal gains to correctly value wealth.  “Zimbabwe’s stock market was the best performer this decade — but your entire portfolio now buys you 3 eggs.” — Kyle Bass

- The U.S. Economy is extremely vulnerable and is on the cusp of recession: 

• Bull are doused with a bucket of cold water as 4th quarter U.S. GDP prints negative for the first time since Q2 2009.  The negative print is a crystal clear indication of how weak and vulnerable this recovery is.  Curtailing government expenditures, higher taxes, and rising gas prices as the summer approaches will be too much for the economy to bear.
• U.S. Consumer confidence, as per the Conference Board Consumer Confidence survey, plunges again in January, erasing all of 2012’s gains.  Furthermore, the Bloomberg Consumer Comfort Index falls for the fourth straight week.  Weekly sales metrics, such as Goldman ICSC and Redbook, reveal weakening consumption trends.  This ongoing trend casts a cloud over the direction of consumer spending as worries over reduced incomes due to the expiring 2-yr payroll tax holiday ferment.
• The Household Survey, embedded beneath the widely touted headline jobs number this morning, has not confirmed the improving job market for the third successive month.  
• The FOMC meeting reveals that Fed officials are worried about a stalling economy (confirmed by Q4 numbers) as well as creeping disinflation.  Monetary policy is powerless to arrest continued sluggish in the economy; worse, as investors appreciate the negative impact of reduced consumer incomes, there will be a crisis of confidence.  ”Don’t Fight the Fed” will be a maxim of the past.  

- Europe’s troubles lurk in the background, receiving very little press.  The budget scandal in Spain is quietly picking steam and Retail Sales in the country fell for the 30th consecutive month in December.  Spanish 10-yr borrowing costs advance roughly 5% this week.  Looking at a 3-month view, we now see a higher high.  Meanwhile, car sales throughout the periphery remain in a distinguishable downtrend and retail sales throughout the region signal consumer retrenchment.  Moreover, Italian Consumer Confidence slumps to a 17-yr low and Business Confidence unexpectedly falls.

- If China has really bottomed and is on the brink of a sustainable recovery, try telling that to the Australians.  Straya’s mining-based economy is signaling a red flag for global recovery enthusiasts. 

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.

Starting the Week: Jul. 23-27, 2012 

  from  

Starting the Week (6/25-29/12)

The following week will bring plenty of important economic data.  I’ll be focused on the following reports:

• Durable Goods Order (down 2 months running), 
• Chicago Fed National Activity index, 
• Chicago, Dallas, Kansas, and Richmond Fed PMIs (is slowing manufacturing activity pervasive?), and finally 
• Confidence data (Conference Board and UMich).  Can confidence recover from the beating it took last month?

Housing has some important reports as well and are likely to show continued improvement.  Consumer spending is a backwards looking indicator, but it’ll be interesting to see if weakness in the past couple of months has affected the consumer.  Finally, keep an eye on the jobless claims report.  It may increase in importance due to its high frequency nature and increased jitters amongst investors.  

Globally, I’m looking at Japanese, Taiwanese, and Singaporean Industrial Production.  French consumer confidence has shined in the face of all the gloomy data out of the eurozone; will it continue?  How’s the job market holding up in Germany?  German Unemployment change will come June 28th.  On Thursday I’ll be looking at the Italian 10-yr auction, which then leads us to the important European summit next weekend.   

You can find the day and time of all these releases (and many more) at my new page, here.   

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Technically speaking, the S&P 500 may have some good support at the 1,295-1,300.  This area contains not only the 200-MA but also some longer-term trend lines.  As resistance, I’d focus on the 50-day moving average at 1,345, then 1,360, near the 6/19 highs.  

Looking at patterns, it seemed that the market had completed a bullish inverted head-and-shoulders; however, continued resistance from Merkel in regards to using the bailout funds to purchase periphery government debt has damaged bullish sentiment.  The S&P is now retesting the neck line.  

Overall, bulls and bears continue to wrestle for control.  The outcome will be heavily influenced by Merkel’s opposition to using the bailout funds for sovereign debt purchases or news of progress towards a banking union imho.  Therefore risk markets will pay particular attention to political headlines from Germany.  Furthermore, a bad Durable Goods report is a potential bearish catalyst.  Volatility may increase given high uncertainty on the outcome of the eurozone summit to take place next week.  

(from The Economist — Tumbling towards the summit - 6/23/12)