— Martin Wolf (Financial Times)
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.
+ 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.”
- 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: Jan. 28-Feb. 1, 2013
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)
- 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.