Tuesday, August 28, 2012 Wednesday, August 31, 2011 Friday, August 26, 2011

Weekly Bull/Bear Recap: August 22-26, 2011

Bull

+ Despite plunging stock markets and all the bearishness and all the talk of a global double-dip being right around the corner, copper, the metal with a Ph.D in economics, hasn’t fallen out of bed.  The bears can deny the strength of the recovery all they want, but this price action proves that it remains on track.  The global economy is only undergoing a soft-patch.  

+ China’s Flash PMI for August supports the case for a soft-landing.  The preliminary reading rose to 49.8 from 49.3 in July.  Their economy is withstanding tightening from government officials.  Given that inflation has likely peaked, the worst of the policy tightening is over.      

+ The Chicago Fed National Activity Index (CFNAI) doesn’t show an economy that’s fallen off a cliff as the bears suggest.  The index turned in a better than expected reading of -0.06 for the month of July vs. -0.38 in June led by ”Production-related indicators”.  Sentiment indicators such as the Empire/Philly Manufacturing Indexes have been deceiving as of late.  Financial markets have been fooled and will correct to the upside shortly.    

+ Durable goods orders surprise to upside, doubling economists’ projections and signaling an economy that remains in growth mode.  Many manufacturing hard-data metrics are not confirming recent sentiment surveys.  Hard-data is what matters

+ Bernanke doesn’t announce that monetary stimulus is forthcoming, but to the disbelief of the bears, the markets rallied.  This proves that risk-markets are able to fend for themselves.  The economy is stronger than many believe. This is clearly obvious when looking at the latest corporate profits report.  Bernanke has done a fine job of nursing the economy back to health.  It’s Washington’s turn to take over with some fiscal stimulus.    

+ Libya rebel forces have taken control of Tripoli and are headed to Qaddafi’s hometown of Sirte.  The beginning of the end is finally at hand for the 6+ month conflict.  One large uncertainty in the oil outlook has been removed and thus we may see lower prices in the weeks ahead, a perfect prescription for consumer spending.  

+ Warren Buffett invests $5 Billion in Bank of America and is a huge vote of confidence in our repaired financial sector.  Furthermore, as per numerous  analysts, including Meredith Whitney, the bank has more than enough liquidity to deal with current headwinds.  The financial sector is much better prepared to deal with whatever negative surprise may result.  This is not 2008.  

Bear

- Despite not dominating the front-page, developments from the Eurozone aren’t encouraging.  A Finnish fly has made its way into the bailout soup.  EU Industrial Orders for June, excluding the volatile transport sector, erased its prior monthly gain, falling 3.0% after a rise of 2.9% in May.  This indicator has regressed since March.  German investor confidence fell to the lowest since the dark days of 2008, while the EU Manufacturing PMI just indicated contraction.  In light of the “austerity-fever” gripping all of Europe, expect more of the same bad news in the coming months.  Ongoing austerity at this point is a major policy mistake.   

- Stock market volatility is affecting consumption patterns as the all-important back-to-school season is off to an uninspiring start.  Falling consumption (end-demand) will lead to decreased orders for manufacturers.  The negative feedback loops are taking effect.

- Bernanke and the Fed have their hands tied.  No announcement for QE3 was forthcoming.  The Fed has tacitly signaled that it’s powerless to stop the structural impediments affecting the economy.  Don’t fight the Fed they say.  Not anymore.  

- Will our economy be able to withstand yet another exogenous shock in the form of a major hurricane hitting many of our major eastern seaboard cities?     

- Jobless claims move higher vs. expectations of a fall (like bond yields, higher is bad).  They rose 5,000 to 417,000 from an upwardly revised 412,000 (was 408,000).  Claims are now firmly over 400,000 again and signals a labor market that remains substantially weak.  If the bulls feel tempted to take out Verizon workers as proposed in the article, no problem, let’s take out the transportation component of their beloved Durable Goods Orders bullish tid-bit….capital spending came in negative in that case.    

- Housing continues to produce bad news.  New Home Sales underperform.  Purchase applications (a leading indicator of housing demand) have now fallen 3 weeks in a row to a 15-year low, despite a historic plunge in Treasury yields during that time (lower interest rates).  That’s how bad the housing market is.  Furthermore, delinquency rates are rising again and are sure to add further pressure to investor confidence on the true value of Mortgage backed Securities. 

- Japan’s credit rating is cut by Moody’s Investor Service.  While investors remain focused on what’s going on in Europe, we have a budding problem here.  Remember, negative surprises are just that, surprises.  Could the next crisis actually come from here?  In a twist of irony, a rising Yen is in effect slowly asphyxiating their economy.  

Thursday, August 25, 2011