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).    

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

Weekly Bull/Bear Recap: October 24-28, 2011

Bull

+ The bears are furious as Europe once again, to their disbelief, unites and puts forth a €1 trillion package to backstop banks and sovereign debt markets.  Eurozone officials also negotiate a voluntary haircut of 50% with banks to put Greece on a sustainable path forward and create time for real reform to take place.  The avoidance of a credit event as well as a recapitalization fund of €106 billion ensures that there will not be a disorderly default and that infected banks will be ring-fenced thereby stemming the contagion. The effectiveness of the package results in global equity markets rallying to finish off the week and the Euro rebounding above the important 1.40 mark.  The greatest impediment to the global recovery has been lifted.  Societe Generale strategists said, “the agreement was likely to prove sufficient to ease financial stress and should be comprehensive enough to give the euro area a ‘window of opportunity’ to put its house in order”. 

+ 3Q GDP grows at its fastest pace this year in a marked rebound from the prior quarter.  The gains are lead by…. the resilient consumer.  Double-dippers are finished.  Ignore the consumer confidence surveys.  Yes, people are glum about the economy but life goes on.  People are learning to live with the current circumstances, which by the way are slowly getting better.  The holiday shopping season will pleasantly surprise judging by this news and the most recent uptick in confidence as per the University of Michigan Consumer Sentiment Survey.  Moreover, according to the Chicago Fed National Activity Index, the economy isn’t in recession, only a soft-patch.  The 3 month moving average rose to -0.21 in September from -0.28.  The improvement was centered around employment-related indicators.  And finally, the Philly Fed State Coincident Index increased in September and shows continued improvement from this summer’s soft-patch.      

+ The S&P 500 has broken through its 200-day moving average.  It has also penetrated the neckline resistance.  The Dow Theory is also back into effect as both the industrials and transportation averages have broken through their prior highs.  How was the breadth in the latest rally?  I would say healthy.  Credit has also participated in the rally.  These are signs that the technical picture has improved substantially.  The index is poised to challenge the bull market highs.  Shorts are getting decimated.  Money managers are hopping on board as seasonality is supportive of positive returns to finish the year (Santa Claus rally!), they don’t want to miss the boat! —(S&P 500 below)

+ Yet more signs that the global economy remains on firm footing: Caterpillar (CAT) scores an A+ in its earnings release, reporting a net income/share of $1.71 vs. estimates of $1.57, while guiding higher in its forecast.  Order backlogs remain at an all-time high;  China’s always salient flash PMI moves back into expansion territory, rising to 51.1 from 49.9.  Even better, more signs surface that inflation has indeed peaked and Mr. Wen has signaled a in shift in policy, geared more towards growth.  No hard-landing in China = supported global growth picture.  Copper rockets over 11% this week.  Even Japan gives investors good news with September exports rising by 2.4% YoY vs. estimates of 0.4%, while household spending came in better than expected and the unemployment-rate fell.    

+ While the headline was negative, Durable Goods Orders showed broad strength under the hood.  Orders excluding transportation were up 1.7%, better than the 0.4% expected by analysts, while business capital investment rose 2.4% (this data series just hit a new all-time high).  Furthermore, we have the American Trucking Association (ATA) announcing that September’s tonnage index rose 1.6% after a revised -0.5% reading (was -0.2%).  Chief Economist Bob Costello believes that the economy will skirt another recession.  None of these data points are pointing to a double-dipping economy.  The manufacturing sector is hanging in and remains very resilient.      

+ There are more signs that the Fed is close to stepping up to support market sentiment and the economy.  William Dudley, Fed Vice Chairman, is echoing earlier speeches by Fed members Tarullo and Yellen last week on a possible QE3.  It’s a fantastic time to go long the market and commodities in particular (due to China’s soft-landing).  When will the bears understand that you “don’t fight the Fed”?  

+  New Home Sales popped 5.7% and inventory fell to the lowest in over 6 months as supply continues to whittle down.  Lower supply will eventually lead to stabilized prices and consumer confidence.  Additionally,  changes to the Home Affordable Modification Program (HAMP) will help make refinancing more accessible and streamlined.  Other programs to unclog the financial arteries related to the housing market are being discussed.  Slowly but surely the housing market is healing.  Have you seen homebuilding stocks lately?!      

Bear

- Consumer confidence as per the Conference Board plunges in October to the lowest since….(drum roll)…. March ‘09.  Both current nor future conditions are spared; the former dropping from 33.3 to 26.3, while the latter falls from 55.1 to 48.7.  Job-related measures also show deterioration with “jobs not so plentiful” rising to 49.5% from 45%.  Meanwhile, the Bloomberg Consumer Comfort survey corroborates.  Not the results you want to see headed into the holiday shopping season.

- The bull’s thesis that the global economy remains on firm footing belies the true nature of the recovery’s condition (or lack there of), especially when looking at the latest Eurozone Services PMI data.  October’s measure shows contraction for the sector at the broadest pace in more than 2 years (47.2 from 49.1). More austerity coming down the pipe doesn’t bode well in the months ahead.  While “CAT” may have scored an A+ in its earnings and outlook, a slew of other companies (one of them being 3M) don’t see the same scenario in the coming quarters.  Officials in Hong Kong report the country’s first drop in exports in almost 2 years and see the outlook as “bleak”.  India is dangerously approaching stagflationary conditions, evidenced by their recent rate increase coupled with a downgrade of their GDP forecast.  Japan downgrades its growth forecast as well.  

- Let’s simplify the opprobrium with regards to the Eurozone’s latest bailout (nitty gritty can be seen here).  1st) it fails to respect the laws of mathematics, such as factoring out pre-existing commitments and guarantees that won’t be paid (“stepping-out guarantors”: Greece, Ireland, Portugal, Spain, and Italy); 2nd) it fails to account for historical first-loss rates of 50% for sovereign defaults, not the 20% agreed; 3rd) it fully eliminates the possibility of Belgium getting its rating slashed, which would eliminate their contribution to the bailout fund—-we’re not even considering France yet, even though the OAT/Bund spreads are close to record highs; and finally 4) It decimates the Sovereign CDS market, which has its own unintended consequences.  The best method of protection now is simply not to buy/provide credit, or outright selling/shorting of sovereign bonds.   On a side note, this bailout result for Greece becomes an incentive for other countries who have fallen on hard economic times to demand the same treatment.  ”Why should we suffer when they got rewarded for not fulfilling their austerity promises?”.  The circular nature of this plan, the faulty math, and its the rosy assumptions make it unequipped to handle even a slight deterioration in the economic landscape; for instance, a recession in Europe (which would jeopardize France’s AAA rating), or a highly probable downgrade in Belgium.  The Chinese aren’t confident and are prevaricating in their commitment to fund the rescue.  To drive this whole point home, there was little follow-through from Thursday’s rally and doubts are already resurfacing.  

• On the subject of Italy, do the bulls really think that officials are serious about implementing the “required” austerity?  One of the “famed” proposals is to increase its retirement age from 65 to 67 by the year 2026.  And to achieve that, a fight broke out in the legislative chamber; imagine what actual near-term austerity would do.  Most importantly, the Italian sovereign debt market didn’t bite on the solution.  An acute sovereign risk remains.  

- Governments are incapable of allocating a nation’s resources.  These are the results of their actions.  And now they just doubled down by leveraging up to save a failed Euro experiment.  Europe, you are not defeating the speculators, you are making them stronger.  The specious plan of leveraging the EFSF is only working to infect the core of Europe and more importantly is beginning to seed a dangerous sense of nationalism as continued demanded austerity is slowly being seen as a (il)legal act of war.  The more hardship there is (Spain Unemployment just hit the highest in 15 yrs), the more fervid this sentiment it will become.  

-  Do you want to put stock in some PMI survey gauging peoples’ perceptions of the Chinese economy, or do you want to see hard evidence of a slowdown?  Here’s some disturbing activity in the property market.  The bubble is popping.  Time to choose one of two fatal poisons for the Communist party, Mr. Wen.  Clamp down on credit and you get increased protests as people’s life savings vanish as the property bubble pops leading to a subsequent collapse of the economy; or stimulate, leading to wage/panic-induced inflation spiraling out of control.  Material Yuan appreciation seems to be out of the question, to the chagrin of Congress.  Clock’s ticking Mr. Wen.  One thing you might want to remember is that the Fed is pondering another QE experiment (ie. exporting inflation).  Just thought you’d like to know. 

- A dangerous escalation took place between government authorities and “Occupy (You name the city)” movement.  The trend of this campaign is moving toward violence, not compromise. The country’s politics fell into disrepute long ago, but this may take it to a whole new level.  Politicians better start doing something and soon.          

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.  

Weekly Bull/Bear Recap: June 6-10, 2011

Bull:

+ Gas prices keep falling.  The one major headwind towards consumption is disappearing and is setting up the stage towards a strong 2nd Half of the year from the largest sector of the US economy, the consumer. 

+ The Gallup poll’s set of economic indicators do not show an economy that is falling off the cliff.  Underemployment has been steadily declining since the end of April.  Consumer confidence has been stable since gas prices peaked.  Meanwhile, consumer spending, while choppy, has been trending higher the whole year.  These are not signs of a drastic fall in economic activity. 

+ Weekly Consumption metrics remain stable as the worst of the gas prices have come and gone.  Consumption is set to rebound, which will surprise investors and result in a rally quite soon….

+ …Bearish sentiment is also running wild as double-dip fears are reaching a crescendo.  With lower gas prices, and the effects of the Japanese earthquake ebbing, these factors are setting the stage for a sizable rally as the economy in general recovers.   

+ We may have a surprise stimulus package focused on job creation, which would be attacking the economic malaise head on.  Additional stimulus packages would encourage job creation and a psychology of confidence. 

+ 2nd Quarter GDP may get an extra boost from lower imports.  The trade deficit has been declining and points towards a further re-balancing of the global economy.  Exports are hitting record highs. 

Bear:

- From the National Federation of Independent Businesses: “On Main Street, Job Creation is Collapsing.”  Need more proof of a labor market slowdown?  Jobless claims, over 400,000, are now the norm…again. 

- Welcome: …to de-leveraging (it ain’t over). 

- Bernanke’s speech didn’t show a solid conviction of using QE as a viable tool towards fighting ongoing economic weakness (neither did other FOMC members). And ergo the downdraft in the markets on Tuesday, and the complaining on Wednesday. 

- Eurozone woes are a degree from boiling temperature as there is a clear discord between Germany and the ECB.  Germany insists that investors take part in extending bond maturities (which rating agencies have stressed would amount to a technical default and trigger a credit event), while the ECB has stated it would take no part in the plan (maybe because it would result in an imploding banking sector).  Meanwhile, Trichet has signaled that he will raise rates in July to fight inflationary pressures, despite economic weakness in most of the Eurozone. 

- Japan continues to suffer from the fallout of the Nuclear/Tsunami/Earthquake disasters.

- Is the Chinese real estate bubble popping?  I’ve been warning about this for a while now. 

Weekly Bull/Bear Recap: May 16-20, 2011

Bull

+ For all the talk about how narrowing profit margins will put a crip on hiring, Gallup Poll’s Job Creation sub-index keeps showing strengthening hiring trends.  It has been near the top end of its range since mid-May.  Meanwhile, as expected, jobless claims plunge again from from 424,000 to 409,000.  The recent spike was nothing more than a seasonal quirk.  Job growth (in addition to falling gas prices) will serve to buttress consumer spending.

+ Fears of oil refineries being shut down due to the massive flooding along the Mississippi River are dissipating and gasoline futures have plunged roughly 15% since the early May peak.  This is setting the stage for falling gas prices which in turn will lead to an acceleration in consumer spending in the months ahead.  

+  It’s not like elevated gas prices have been significantly affecting the consumer anyways.  American’s have gotten used to higher prices as they only make up 5-6% of the consumption pie.

+ The bond market is doing its part in helping housing with mortgage rates dropping for the 5th straight week to their lowest level this year.  This is happening right in the middle of spring buying, which should help stabilize the housing market and improve consumer confidence.  Meanwhile these lower rates have also set off a wave of refinancing, which will free up more disposable income for households.

+ The Wall of Worry remains high.  Given how individual investors are always the last to the party, it’s bullish when they bailout at the slightest drop in the S&P 500.  There’s buying power on the sidelines and once the consumer seeings falling gas prices, consumption growth will take a leg up and investors will buy once again.   

+ Home Depot raised its outlook for the year as same-store sales returned to positive territory after falling in prior months due to bad weather.  Having a market-leader in home improvement announce a raised outlook is a harbinger of improving investment growth in housing.  (Don’t own nor am I shorting Home Depot)

+ The Linkedin IPO is a great success with the stock surging more than 110% after its debut on Thursday.  Investor appetite for risk remains strong and signals improving confidence in the recovery.  Market conditions, such as falling rates, oil prices, increased lending, and rising stock prices will make it easier for the recovery to progress. (Don’t own nor am I shorting Linkedin)

+ Bank lending is the life blood of the economy.  So when you see reports of increased lending to businesses, it signals that confidence is increasing on the part of banks and small businesses as they believe business conditions have improved enough to take risks.  The animal spirits are coming back and is a welcomed development for the recovery. 

Bear

- Here are some more leading indicators for the Bulls.  The Conference Board Leading Indicator fell in April for the first time in almost a year.  Worse, 2 of the 4 sub-indicators that came in positive were the “interest-rate spread” (which is obviously manipulated by Bernanke’s ZIRP policy) and “stock prices” (POMO anyone?).  Meanwhile, the ECRI just delivered the bear clarion call: “Global-Slowdown is coming”.  

- The housing market continues to defy the optimists.  Numbers for April showed no sign of increasing construction activity anytime soon as Housing Starts and Permits (which is a leading indicator) both showed declines of 10.6% and 4.0% respectably.  Meanwhile, in a sign of how non-existent demand is for housing, despite the lowest mortgage rates of the year, existing home-sales still managed to drop in April (when they should be rising due to home buying season).  If I was a home builder, I’d be depressed as well.

- The Japanese earthquake and subsequent nuclear disaster (which just because the news isn’t on bubblevision anymore doesn’t mean it’s gotten any better), is beginning to show up in US economic data.  Industrial production for April came in flat surprising economists expectations for a slight gain.  February and March data were also revised lower.

- In news not having to do with the earthquake, the Empire Manufacturing Report was quite disappointing for the bulls, coming in miles below the consensus estimate of 19.6, at 11.9 and down from 21.7 in April.  Prices paid rose 12 pts to the highest since July 2008.  Meanwhile, the Philly Fed manufacturing index for May showed that factories in the mid-west grew at the slowest pace in 8 months.  Contrary to economist’s expectation for the gauge to rise to 20.1, it came in at 3.9.  Yep I’d say that was a miss. 

- As if the Eurozone needed another dumb decision by a politician.  In one of the weirdest financial stories of the year, IMF chief Dominique Strauss-Kahn was just sick of dealing with the Eurozone issues and let out his frustrations on a poor 32-year-old maid (nodding head).    

- Don’t you think it’s odd when you have analysts, money managers, and bubble vision all chanting about how we are in the midst of a recovery and that conditions are setting up for a major rally to end the year while you have insiders dumping their stock to the tune of 350x sellers to buyers?  Putting my common sense cap on, something just doesn’t make sense here!   

- The Middle East is still a hotbed of Cold Wars, rising tensions, and sectarian violence.  Obama just upped the ante on the Syrian president, while laying down a controversial plan for Israel to return to pre-1967 (ex. Gaza and West Bank) borders in its peace process with the Palestinian state.  Israel has bluntly rejected the proposal.

- The Eurozone made headlines late this week with S&P downgrading Greece sovereign debt due to a possible “soft-restructuring”, tensions are erupting between Eurozone officials (the wind speed on the house of cards is increasing).  Meanwhile, it’s not only the Finnish or Greek populace getting sick of the austerity (in order to bailout investors), Spain is now in the spotlight as Zapatero’s “Socialist” party is set to suffer major losses in the days ahead. Spanish 10-yr yields are at the top of their multi-month range.  Things may be taking a turn for the worse.     

Weekly Bull/Bear Recap: Apr 11-15

Bull

+ The Meridian-UCLA Pulse of Commerce shows a rebound for the month of March and confirms that the manufacturing recovery will continue in the months ahead.  There is little danger of a sudden fall in manufacturing activity.  This belief is further reinforced by March Industrial Production and Empire Manufacturing reports. 

+ OECD leading indicators point to an acceleration in growth for the US and Europe.  China’s leading indicator is showing that a “soft-landing” is in store for them.  The stable outlook for the big three global economic powerhouses will insure that we will not have a global double-dip. 

+Weekly Sales Metrics point to a resilient consumer as results for the first week in April come in positive, despite the recent spike in oil prices. The consumer continues to defy skeptics.

+ Consumer confidence as per the Bloomberg Consumer Comfort Index rises for the 3rd week in a row, confirmed by the University of Michigan Consumer Sentiment report.  While oil prices have risen recently, the consumer is getting used to higher prices.  Consumer confidence is stabilizing. 

+In the face of the Japanese earthquake and rising oil prices, China’s economy is rumbling along with larger than expected growth in exports for the month of March.  This reading gives the government room to let the Yuan appreciate in order to curb inflation.  The economy is strong enough to endure rate increases as well as Yuan appreciation.  The global re-balancing is occurring. 

+ Despite what the bears keep saying, Eurozone conditions continue to improve and the region may be undervalued. Irish 10-yr yield spreads have come down markedly now that all the dirty laundry is exposed and sentiment is improving.  China announces that it’s investing in Spain (signaling confidence that the country will get its finances under control — the market is beginning to think so!). 

Bear

- Alcoa’s quarterly report stokes investor concern that its quarterly results may be a harbinger of reports to come as the earnings season continues.  If so, then the market may undergo selling pressure.  (I don’t own nor am I shorting Alcoa).   The dynamic of higher energy prices and raw materials can also be seen in this week’s PPI report, which shows that crude and intermediate inflation are nestled in the pipeline. If companies lack pricing power (I believe many lack it — especially discretionary companies), margins will get squeezed throughout the summer.  

- A key ingredient in the bullish thesis, improvement in the job market, has been extremely lackluster and in fact went into reverse this week.  Jobless claims popped over 400K for the first time in 2 months while last week’s reading was revised higher (surprise surprise).

- NFIB shows a recessionary reading.   “It looks like everyone became more pessimistic in March,” said NFIB chief economist Bill Dunkelberg. “Or, perhaps, this is a ‘new normal’ and we are unlikely to see the surges usually experienced at the start of a recovery.”  Bill, that “new normal” you speak about is called a “depression”.

- Economists are revising their Q1 GDP estimates downward as weaker than expected end-demand and shoddy trade data force them to acknowledge what the bears have been saying for months, economic growth is almost non-existent.  When will the bulls open their eyes to what’s really going on?

- Has China’s property bubble popped?  A MoM decline of +26% made me do a double-take (transaction volumes have plunged as well).  Furthermore, Xia Bin, a monetary policy adviser to the PBOC, states that more interest rate increases are coming in order to tame inflation.  A stagflationary scenario seems to be at hand.

- Japan’s nuclear disaster is upgraded to the highest accident-severity rating, on par with the Chernobyl nuclear meltdown in 1986.  Quickness of economic recovery is coming under more doubt. 

Bull/Bear Weekly Recap: Apr 4-8

Bull

+ Retail Sales for the month of March surpass expectations (Actual: 2.2% vs. -0.5% expected) despite a shifted Easter effect, cold weather, rising gas prices, and falling consumer confidence.  The consumer is stronger than most think as the job market continues to heal. 

+ Mortgage Applications for purchase rose through March by approximately 16%.  This points towards a stabilization in home sales and prices) in the immediate months ahead.   This will aid in improving consumer confidence.

+ The ISM Services Report, a gauge of the US service sector which comprises roughly 75% of the economy, signals continued strong growth with a healthy 57.3% reading.  New Orders (both domestic and export related) as well as Backlogs continue to show strength in the months ahead.

+ The dreaded double-dip is a long-shot in the near to medium term as per the New York Federal Reserve’s Treasury Spread Report.  The economy is in healing mode. 

+ Ireland government bows to pressure and withdrawals its threat of administering haircuts for senior bond holders thereby avoiding the threat of contagion.  Meanwhile, shining economic numbers out of Germany will ensure that the the Eurozone Crisis will remain contained. 

Bear

- Gov’t spending at the state and local level is clearly falling as per the latest Gallup job creation report.  Also, have a look at the Cisco stock chart (3 yr view for max effect).  Cisco is considered by many to be a bellweather for gov’t spending.  It’s ugly.  State and Local Gov’t spending accounts for roughly 12% of the economy.  —(I don’t own any shares of Cisco)

- The Eurozone issues are still simmering.  When will Germans be sick of ponying up for the bailout fund (it’s slowly happening)?  When will taxpayers of peripheral nations finally be fed up with bailing out the wealthy, who made bad bets to begin with?  When will citizens be fed up of undergoing austerity due to bad decisions by investors? Common sense please!

- China continues to raise rates in order to cool inflation precisely as I had postulated a year ago.  To a certain extent, they have no choice.  They must combat inflation as riots would occur if officials don’t put a cap on the insidious phenomenon.  Meanwhile, more rumblings from the real estate sector surface.

- The Japan earthquake/tsunami/nuclear disaster is horrific and set to linger longer than most expect.   It will impede Japan’s economic recovery (the Nikkei Index is sniffing this).  The damage to global supply chain is still uncertain.  But we are seeing the effects in the US for sure. 

- Investors have piled into the “Bernanke Put” trade.  It’s a can’t lose market.  Bernanke better be able to turn on the spigot quickly when economic activity begins to stall, which it will if oil prices keep rising (now over $112).  Investors are all but guaranteeing that the Fed will be there.  Will politicians turn on the Fed if economic activity begins to stall, thus reinforcing that QE was nothing more than a sham?   

Bull/Bear Weekly Recap: Mar 28-Apr 1

Bull

+ The job market continues its healing process as the Monster Employment Index, ADP Payroll, Chicago PMI, and BLS job reports show palpable improvement.  The Monster Employment Index shows that job demand remains on the rise and signals that improved job numbers are in store.  The BLS jobs report shows back-to-back 200+ gains in job creation for the first time in the recovery.  The unemployment rate falls further. 

+The S&P500 is showing strong breadth in the latest rebound and supports the case that the bull market remains healthy.  Meanwhile, the Dow Jones Transports and Industrials burst through resistance and they are now at new bull market highs.  According to the Dow Theory, the bull market has more to run. 

+ The March Chicago PMI report shows that the manufacturing sector continues to grow.  Order backlogs hit their highest level since 1974 and bodes well for continued demand growth going forward in the mid-west.   Employment is also soaring, hitting its highest level since February 1973.  This has translated to a healthy ISM reading.  The expansion in the manufacturing sector has entered its 20th consecutive month.

+The Conference Board’s European Leading Economic Index hits an all-time high and points to continued expansion in the Eurozone.  German and French economic metrics are pointing to better confidence and improved business conditions.  The Euro has been rallying as a result. 

+ Chinese PMI indicators increase, thereby decreasing concerns that the country is in for a hard landing.  “Today’s data from China’s logistics federation showed output, orders and export orders grew at a faster pace in March than in February. Input prices rose at a slower pace, the survey suggested.” — Bloomberg.  The economy has withstood tightening by officials.  Growth is stronger than the bears think.   

+ Business conditions are certainly improving.  People are dining out and restaurants are reporting improved business conditions.  CEOs are seeing better times ahead.  State tax revenues are increasing again showing tangible improvement in the US economy. 

Bear

- Consumer confidence continues to deteriorate by posting its largest drop in over a year.  Rising oil and food prices are to blame (QE3 looks less likely), while stagnant wages (due to a high unemployment rate) result in less disposable income for households.  In an ominous sign for the job market, consumers views of job availability & income growth expectations declined.  I had warned (see my outlook: “Consumer Confidence” section) how a quick rise in gas prices could dent confidence as the year wore on. 

- Where’s all the good news coming from with regards to the Eurozone?  From the core countries: Germany and France.  The periphery, however, is in worsening shape.  Portugal revises its budget deficit from 7.2% to 8.6% complicating a hefty 3 month repayment schedule on the horizon.  Meanwhile, Ireland’s financial industry is in shambles.  Both country’s yield spreads compared to German bunds are near records.   Meanwhile inflation is becoming an issue and the ECB is about to raise interest rates.  How is this suppose to improve the periphery’s problems?

- Housing prices continue their double-dip, precisely as I had forecast as early as mid-last year.  Most bank balance sheets are not prepared for a renewed decline in home prices.  Note that financial ETFs seemed to have double-topped.  (see bottom of report)

-  The noose around the economic recovery is growing tighter as oil has broken through $107/barrel.  Libya’s civil war may be a long one.   Meanwhile, the Chicago PMI commentary from the survey panel shows that inflationary pressures are quickly building and are resulting in margin squeezes/passing costs to customers (can the consumer handle higher prices right now?).  Japan’s earthquake is also to blame as it has resulted in a supply shock. 

-  While the headline may read “Weekly jobless claims dip 6,000 to 388,000” a closer look at the data (or actually reading the article) shows that the previous week was revised up from 382,000 to 394,000, a pretty big jump.  The 4-week average inched higher to 394,250.  The labor market remains quite weak, especially considering how long this “recovery” has been. 

-  The fallout from the Japanese earthquake begins to hit the economic indicators.  After initial investor giddiness that Japan would see a V-shaped recovery, reality seems to be setting in.

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