Sunday, November 18, 2012 Saturday, November 17, 2012

Weekly Bull/Bear Recap: Nov. 12-16, 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

+ Weak economic data and fiscal cliff concerns have produced a buying opportunity for risk assets.  Firstly, weakness in this week’s economic data is due to Hurricane Sandy.  Data will revert to trend growth soon and surprise investors to the upside.  Finally, we are beginning to see the contours of a resolution as per recent remarks from Obama and Boehner.  Democrats will pile the pressure on Republicans to relent.  Lawmakers understand the consequences of non-action and will naturally act in time to avoid the bearish scenario.  

+ Long-term U.S. economic bullish tailwinds are forming before our eyes.  Shale oil and “fracking” look to make the U.S. an energy powerhouse, spawning a wave of manufacturing investment and job creation.  The U.S. is forecast to be an oil exporter by 2030.  Furthermore, the housing market is on the mend with housing  bellwethers reporting improved earnings trends, economic data showing falling inventory levels, evidence of an improving trend in delinquencies, and leading indicators such as the S&P Homebuilders index and lumber prices signaling increased vigor ahead.  Finally, China continues to show stabilization; a rebound will ensue in 2013.  Longer-term, new leadership will ensure that the country’s important 5-year plan is properly executed.  These bullish tailwinds will grow stronger in the coming months and will cause a further uptrend in Citi’s Surprise Index (a measure of investor sentiment)…      

+ …In fact, sentiment on Main Street continues to improve and U.S. economic growth quietly surprises to the upside in the 3rd quarter.

+ Athens will likely be given additional time to digest austerity cuts.  European leaders understand that they must give Greece time to adjust.  This is a positive step and shows that political will for a unified Europe remains resilient.  Furthermore, GDP data for France, Germany, and Italy print better than expected.

Bear

U.S. companies fear the fiscal cliff and government gridlock is set to continue, all the while bailouts persist.  Falling core capital goods orders (affecting manufacturing), souring small business sentiment, and weakening consumer spending are ingredients for a self-fulfilling prophecy of recession.  Promises of further monetary easing are met with risk markets shrugging.  Monetary policy has become powerless to stop continued economic weakness.     

- Germany will be entering recession soon.  The important ZEW survey implodes in November, falling 4.2 points to -15.7.  A negative balance indicates that more experts expect the economy to contract over the next 6 months.  A political crisis in the Eurozone is increasing in probability.  How can Germany bailout other countries when it now needs stimulus of its own?  That will be a major question on November 20th when the Bundestag votes on the next tranche of aid to Greece.  

- Meanwhile, things are taking a turn for the worse in most if not all of Europe.  For September, Spanish industrial orders collapse almost 6%, while Eurozone industrial production falls the most in 3 years.  In France, recession is knocking on the door and Germany is pondering critiquing the country’s economy (good luck with that).  Meanwhile, most periphery nations are plagued with increasingly violent strikes and protests; the Greek government is beginning to lose control as a GDP print of -7.2% in the 3rd quarter has prompted the Prime Minster to announce that a “Great Depression" has descended on the country.  The IMF and EU continue to spar over the details of a new aid package —wavering IMF support is further fuel for uncertainty.    

- Weakness in Europe is spilling into Asia, with Japan on the cusp of another recession and Taiwan experiencing some intense market declines.  Meanwhile, geopolitics is further clouding the outlook.  Israeli airstrikes   kill the leader of Hamas’s militant wing.  This is occurring within the backdrop of already high  tensions in the region; a report from an U.N. agency fuels further fear of military conflict between Israel and Iran.  

Wednesday, November 14, 2012
Wednesday, August 22, 2012 Monday, July 16, 2012

Mr. Stockman has a very grim outlook in regards to the political environment leading up to the fiscal cliff.  Indeed his view is worse than mine.  

Tuesday, June 26, 2012 Friday, June 8, 2012