Thursday, January 9, 2014 Friday, December 9, 2011

Weekly Bull/Bear Recap: December 5-9, 2011

Bull

+ The U.S. economy is decoupling from Europe.  The job market is on the mend, confidence is rising, and credit is in greater use; all resulting in greater consumption power.  Housing continues to improve (Mortgage Applications have clearly stabilized).  Looking under the stock market’s hood, we can see that breadth is not showing any weakness whatsoever.  This is an indication that U.S. economic growth is real and a lifting of Eurozone uncertainties will lead to higher stock prices in the weeks to come.

+  European countries take the first step towards a fiscal union; this time it’s a step in the right direction.  It is likely that 26 out of the 27 countries in the EU will accept the treaty changes.  The bears keep underestimating the will of collective Europe to see the Euro experiment through to the end.  Italian Prime Minister Monti presents additional austerity measures.  Sovereign bond markets signal that Eurozone officials are finally attacking the core problems.  Furthermore, the bears are exaggerating the depth of the Eurozone recession.  German Factory Orders surge 5.2% in October, while Eurozone Retail Sales for the same month surprise to the upside, coming in at +0.4% vs. +0.1% expected.  It will only be a mild and manageable recession.     

+ Fed officials are preparing a revamped communication method, designed to clarify its intentions for monetary policy.  Rates would be floored and easing would take place as long as the unemployment-rate remains above its natural rate.  Should the inflation-rate surpass a limit of possibly 3% (up from 2%), then officials would lay off the monetary gas pedal.  Along with a new wave of likely doves holding votes at the FOMC next year, QE will make an appearance in early 2012.  The time to buy is now as the Fed will reflate.

+ A soft-landing in China is playing out as lower inflation now allows officials to strongly loosen monetary policy soon.  Furthermore, the region is proving resistant to a European slowdown.  By sporting extra large FX reserves and plenty of room to loosen monetary policy, Asian countries will have “extra fiscal and monetary headroom” to fight the effects of a mild European recession.  Prudent investors are taking advantage of a very mis-priced market.  Over the longer-term, investing during these times will end up being a very good decision.  

Bear

- “The ECB had given the signal that it would print if European leaders agreed to a fiscal compact”, said the bulls.  Alas it was not meant to be.  Furthermore, an overthrow of Democracy on a gargantuan scale is furtively taking place.  Technocrats are staging a coordinated coup on the citizens of every Eurozone country.  S&P places 15 Euro nations (including core-countries France and Germany)…and the EFSF on “credit watch negative”, which means that there’s a 50% chance that they will be downgraded in the next 3 months.  The safety net that is the EFSF would be finished.  Ireland looks to reopen its can of bailout worms at the summit when it requests to renegotiate its bailout.  Confidence hasn’t returned to financial markets; this can be seen when overnight deposits at the ECB remain near all-time highs.  Banks would rather deposit their surplus funds at the ECB instead of lending them out.  

-  UK shopping figures show their weakest growth since May.  Spanish Industrial Production plunges 4%, the worst drop in over a year, while growth of Italian Industrial Production hits its lowest YoY rate in roughly 2 years.  The Eurozone is the largest economy in the world, at $16.2 trillion.  It’s common sense that if this region is going through a severe recession, the world will certainly feel the effects…

- …Deleveraging by European banks has resulted in global liquidity problems and has cut off a major source of funding for Asian trade, resulting in an accelerated deterioration in Asia.  China’s official services PMI implodes to 49.7 from 57.7 (the  lowest since February, 2009), while HSBC Services PMI falls to a 3 month low of 52.5 in November (hard manufacturing data underperforms as well).  Japanese Machinery Orders, a leading indicator of industrial production, falls 6.9%, and is worse than all analysts’ estimates.    

- The U.S. ISM Non-Manufacturing index falls to the lowest level since the beginning of the year, the report’s Employment sub-index is now contracting.  Remember that services industry accounts for close to 90% of economic activity.  Another headwind is starting to show itself in the form of political paralysis on extending the current payroll tax breaks.  Regarding the all the good news in the housing market, it’s time to wake up!  ECRI’s Lakshman maintains the firm’s recession call.  

- Geopolitical tensions continue to rise.  Reports of Iran preparing for a possible near-term strike may result in oil easily surpassing its bull market high of roughly $118, thus quickly sinking the feeble U.S. recovery. The country also took the opportunity to confirm the capture of a U.S. stealth drone, downed the prior week.  Furthermore sabotage takes place, this time in Syria, marking an escalation of tensions in the country.    

Wednesday, November 23, 2011 Friday, May 20, 2011

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.     

Thursday, May 12, 2011 Friday, March 18, 2011

Bull/Bear Weekly Recap: Mar 14 - Mar 18

Bull

+ The Conference Board released its US leading indicator and it points to improvement in the economy in the months ahead.  8 of the 10 factors that make up the final reading showed improvement.  The recovery is poised to continue despite what the bears keep saying. 

+ The labor market is improving as jobless claims fall by 16,000 to 385,000 while the 4 week average falls by 7,000 to 386,250, the lowest level since July 2008.  The last piece of the bullish thesis is finally falling into place.  Increased job creation will create sustainable consumer demand and fuel the US economy’s recovery.

+ The Philly Fed index for March moves to the highest reading since 1984 and points to a pick up in momentum for the manufacturing sector.  New Orders soared, while unfilled orders and delivery times showed increased activity.  Employment remains in positive territory as well.  This is yet another signal that the recovery has legs. 

+ A deflationary scenario for the US economy is out the window as headline CPI for February comes in at a hotter than expected +0.5% MoM (+2.1% YoY — and within the Fed’s implied inflation target), while the core measure rises by +0.2% MoM (1.1% YoY — and the highest since March 2010).  The US is not Japan.

+ OECD composite leading indicators show that the global recovery remains intact. Leading indicators in the US and Euro area show robust expansion in the months ahead.  While China’s leading indicator showed a possible moderate downturn there, the Conference Board released its China-centric leading indicator which showed a rebound in January.  This will certainly help ease concerns that that country is headed for a sudden slowdown.   

+ Weekly retail metrics for the second week in March show that positive YoY trends remain intact.  The recent spike in oil prices has not deterred the American consumer.  Consumption trends remain healthy, which is conducive to continued job growth.

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Bear

- Japan’s earthquake paralyzes the country as major auto companies are forced to suspend operations costing billions of dollars in lost production.  Potential damage to global recovery may be significant, especially if there is a catastrophic nuclear disaster. 

- While news in the Middle East has taken a back seat recently (why wouldn’t it after what happened in Japan?), tensions continue to simmer.  Saudi Arabia is sending troops to Bahrain to quell unrest in the tiny kingdom.  This course of action has certainly raised eyebrows and tensions between the US and Saudi Arabia are on the rise as well. Furthermore the US has changed its tune with regards to Libya.  We may see military conflict here.  Oil prices are likely to remain elevated.  

- Oil closes above $102 and will be a persist thorn on the side of the bullish thesis.  The bulls keep pointing to leading indicators signaling that the economy will rebound.  If the rebound continues to gain strength, it will be met with ever increasing oil prices until there is demand destruction and the economic recovery short-circuits.   

- Housing remains in the doldrums as both Housing Starts and Permits declined more than expected.  Permits slumped to a record low and the report points to continued moribund activity in the housing market is exactly  what  I  expected in my bi-annual outlook.  Let’s not forget, housing has been an absolutely integral factor to US economic recoveries in the past. 

- Inflation is clearly evident at the producer level with PPI in February far exceeding the consensus coming in at +1.6% vs. +0.7% expected (+5.6% YoY).  Food prices at the finished level are increasing at the fastest pace since 1974.  This report may prompt calls for the Fed to end their QE policy, which would be a negative for financial markets as investors have grown accustomed to the Bernanke Put.

- China continues to battle inflation.  The Chinese central bank has signaled that it will use interest rate increases as the primary tool to battle the monetary phenomenon.  Using this method may pop a real estate bubble and derail the global recovery. 

Friday, March 11, 2011

Bull/Bear Weekly Recap: Mar 7 - Mar 11 — March Madness Edition!

Bull

+ Oil concerns are starting to recede as evidenced by this weeks performance in Saudi equities.  They have rebounded approximately 10-14%.  Investors in the region are anticipating that the “Day of Rage” in Saudi Arabia will not be as bad as previously thought.

+ The job market continues to improve as per the Conference Board Employment Trends Index.  “The strong growth in the Employment Trends Index suggests that the pickup in jobs may accelerate in the next couple of quarters.”—Gad Levanon, Associate Director, Macroeconomic Research at The Conference Board.

+ Atlanta Fed chief Dennis Lockhart signals that he would vote for more accommodation should oil prices rise substantially and endanger the recovery.  The Fed will be ready to support economic growth if it begins to falter.

+ Weekly retail metrics have shown resilience while retail sales for February experienced the biggest jump in 4 months and have been positive now for 8 months running.  These results show that higher oil prices haven’t destroyed consumer demand to this point. 

+ Mortgage Applications for purchase and refis rocketed higher last week as lower rates spurred demand.  The Mortgage Bankers Association cited an improved job market paving the way for increased demand. 

+ Confidence among consumers is rising as consumer credit for January rose by $5.0 Bln, the fourth increase in a row.  If credit is being used, it may mean that consumer’s feel more at ease with economic conditions and are increasing their consumption.

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Bear

- Spain is downgraded by Moodys and yield spreads for the PIIGS continue to widen.  Furthermore, there was little sign of a long-term solution from the recent EU summit.  The financial crisis’s best kept secret continues to grow.   

- Middle East issues continue to grow, as Kuwait and Yemen are the latest countries making news.  Kuwait is the world’s 4th largest exporter.  Despite the recent rally in Saudi indexes, reports of violence are beginning to surface.

- China inflation numbers raise concerns that inflation may be getting out of hand and officials will need increase rates at the expense of stronger economic growth.  If China is in the midst of a housing bubble, the economy may be vulnerable at this point.  Copper prices continue to fall and are at a 3 month low. 

- Signs of a slowdown in manufacturing growth rates are becoming more noticeable.  YoY growth rates in rail traffic are slowing.  

- Consumer credit numbers for January showed an increase for sure, but it was all government related.  Revolving credit actually fell.  While the headline made for some bullish fodder, the details show that consumers are still cautious. 

- While the US recovery continues, it remains very fragile and vulnerable to  negative exogenous shocks.  We have plenty of those at the moment (which seem to be affecting the US economy already): higher oil prices, a possible blow up in the Eurozone, or a massive earthquake in the world’s 3rd largest economy.

Wednesday, February 16, 2011
Click on the Pic for an excellent summation of the violence sweeping the Middle East.

Click on the Pic for an excellent summation of the violence sweeping the Middle East.

Tuesday, February 15, 2011
It’s Yemen’s turn.

It’s Yemen’s turn.