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.     

Wednesday, December 1, 2010

Today’s Economic Indicators and Observations

+Improving economic results show that the recovery is on firmer footing.

ADP Employment report for November shows a gain of 93K, 23K above expectations, while October was revised higher to 82K from 43K.  The breadth of the gain was improved from the prior months. 

Strong UK PMI and German Retail Sales

Strong China PMI = the economy continues to cruise.

Mortgage Application for purchase inch up 1.1% after that large 14.4% increase and marks a new post-stimulus high. 

ISM Manufacturing gauge comes in at a healthy 56.6 in November from 56.9; Employment sub-index points to additional employment gains in the sector; Supply chains are working as delivery times slowed, however, backlogs continue to contract. 

-Some coals in the stocking as well though:

Challenger Job-Cut report shows a rise in the announced layoffs and is up the highest level since March/April.  While it isn’t cause for alarm just yet, it’s worth keeping an eye on as retailers begin shedding their “holiday workforce”.

The Productivity and Costs report points to employers continuing to squeeze work out of its existing workforce as productivity jumped 2.3% for the 3rd quarter, while labor costs continued to decline, though slightly, down 0.1%.  Overall this helps corporate profits, but at the expense of hiring and inflation (which is what the Fed is desperately attempting to foster).

Strong China PMI may mean more tightening as price gauges are near 2008 highs… with a possible property bubble, the probability of a hard-landing is increasing

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Overall the contradicting economic indicators continue, which is representative of a muddle through economy that is growing, but not at a strong enough pace to bring down the massive labor slack. 

Is the Santa Claus Rally about to begin?  Perhaps, however, I stand by my cautiousness as the name of the game is forecasting what may come in the future, not what’s going on now.  The market has priced this economic improvement already and many headwinds will be getting stronger.

   Housing prices continue to double-dip thus eventually affecting consumption

   Unemployment benefits expiring, affecting consumption as well..will they be extended?

   China applying the breaks via price controls and increasing interest rates

   Eurozone Sovereign debt issues just won’t go away

   State & Local government reigning in spending (see Cisco’s recent earnings report)

   Bush-tax cuts not getting extended…the stakes were raised today by Mitch McConnell

Wednesday, November 17, 2010
If the Fed instituted QE2 to “lower rates and boost borrowing”, why did they focus on the 5-7 year range and leave the long end out to dry?  Now look what’s being negatively impacted by this strategy.

If the Fed instituted QE2 to “lower rates and boost borrowing”, why did they focus on the 5-7 year range and leave the long end out to dry?  Now look what’s being negatively impacted by this strategy.

Saturday, November 6, 2010

A little dark humor to end the week.

(This is a real news story)