Friday, September 16, 2011

Weekly Bull/Bear Recap: September 12-16, 2011

Bull

+ The Eurozone will survive this challenge.  Merkel and Sarkozy vow to keep Greece in the EU and not allow a ‘Lehman’-type event.  If there’s any default, it will be done in an orderly fashion.  Markets have already priced in one for Greece.  Once it happens, it will be bullish for risk-markets as a resolution to the matter would be reached.  Central Banks around the world have pledged to provide support for the European banking sector.     

+ BRICS nations are in talks with the “Institute for International Finance” to pool their resources and lend capital to Greece in order for them to buyback their own outstanding debt at rock bottom prices, thereby reducing their outstanding debt, and averting contagion.  This will help the Eurozone buy more time until the necessary structural reforms are put into place.  While the bond-buying won’t solve the structural issues (Europe needs to become a fiscal union), progress is being made on that front as well.  Taken together with Central Bank support, officals are beginning to think one-step ahead of the crisis.

+ China’s trade numbers prove that the country will continue to power the global recovery.  Surging imports signal that their economy remains resilient in the face of monetary tightening.  Even better, tightening is likely over as inflation measures peaked.  The economy is experiencing a soft-landing.

+ Asia’s Development Bank sees a soft-landing scenario in China and the region as private consumption has buoyed much of its growth.  This scenario, should it play out, would see the global economy avert a double-dip recession, resulting in an overall bullish outcome for equities.   

+ Consumer spending metrics have held in remarkably well and is a signal that consumption remains irrepressible despite all the gloom and doom.  Spending trends are different than consumer confidence.  As long as the consumer doesn’t fall out of bed, the U.S. economy will remain in expansion.  

+ Hard-data keeps pointing to a manufacturing sector that hasn’t fallen out of bed as proposed by the bears and some manufacturing surveys.  Industrial production for August rose 0.2%, the fourth monthly increase, contrary to contraction signals from Empire, and Philly Fed indexes for that same month.  Hard-data is what matters.     

+  The economy has managed to grow even while consumers continue the deleveraging process.  Consumers are slowly building a strong foundation by paying down their debts.  Once debt levels are sufficiently reduced, they will feel increased confidence in their financial situation and consume more as the job market improves.  

Bear

- Jobless Claims spike 11,000 to 428,000, the highest level in 2 months and bodes ill for the job market and the economy.  Manpower publishes a report that points to more of the same.  Strong growth figures won’t be coming as the economy remains at stall speed.  The economy’s condition is on display in the NFIB’s latest Small Business Optimism Index.  The job market remains extremely vulnerable to an exogenous shock.  

- Bank of America announces that up to 30,000 jobs are set to be eliminated over the next few years.  Wasn’t the market exaggerating about the poor health of Bank of America?  Why then did they accept Buffett’s money?  Why are they firing 30K workers?  Why are they openly discussing bankruptcy for Countrywide?  Where there’s smoke there’s likely to be fire.  Same goes for SocGen. (—I hold a short position in financials)

- Yes yes we all know housing sucks, but now there are reports that foreclosure activity is set to increase late 2011/early 2012.  An influx of properties in foreclosure will further place downward pressure on housing prices and inflict more damage to bank balance-sheets.

- The rich got hit where it hurts, investment markets.  Consumer confidence for this group deteriorated significantly last month according to the Gallup Poll.  Note that the wealthy are responsible for a significant portion of consumer spending growth, which underperformed in August relative to expectations.  In regards to the commoner, the situation is even grimmer.  Future expectations as per the University of Michigan consumer confidence survey fell to the lowest levels since….1980 (yes, that’s more than 30 years).     

- The global recovery continues to show signs of significant slowing.  Australian business confidence slumps to the lowest level since April 2009, while austerity plays havoc with Italy’s industrial output.  The OECD Composite Leading Indicators (CLIs) for July are pointing to a significant slowing in global growth.  China’s Shanghai Composite Index remains in a downtrend.  Finally, copper is hanging on key support levels by a thread and has not confirmed this latest equity market rally. — On the Eurozone front, pure pandemonium: the market wants Eurobonds yet Merkel is still not playing ball; Germany unexpectedly delays debate on the EFSF; Finland still demands collateral; Greece’s next tranche payment is unexpectedly delayed forcing them to tap an emergency fund.   The Eurozone turbulence is beginning to critically injure the global recovery.         

- The following months look to reflect more of the same for the manufacturing sector, a clear approach to stall speed.  The Ceridian-UCLA Pulse of Commerce, a leading indicator of manufacturing activity, declined for the 2 consecutive month.  Meanwhile, the Empire Manufacturing report, a survey of manufacturing conditions in the NY area, showed increased weakness.  Its employment sub-index fell into negative territory for the first time this year.  The Philly Fed Index has been in contraction for 3 consecutive months. 

- Inflation at the consumer level remains at uncomfortably high levels and will hinder the Fed’s ability to come to the aid of falling stock markets.  Core-CPI, the preferred measure for the Fed, rose to 2.0% YoY and discards deflation as a reason for continued monetary easing.  If QE gasoline, which caused increased risk appetite, is unable to be deployed, a key prop for the equity market will remain absent.  

Friday, September 2, 2011

Weekly Bull/Bear Recap: August 29-September 2, 2011

Bull

+ Factory orders surprise to the upside and is further confirmation that a double-dip is only wishful thinking for the bears.  Moreover, contrary to dismal regional manufacturing surveys, the national ISM number posted a surprise expansion reading, well above gloomy estimates.  The US economy has withstood yet another exogenous shock and slams home the message that the economy is stronger than many give it credit for.   

+ A soft-landing for China is forthcoming.  China’s manufacturing PMI is straddling the 50 mark which is exactly what you want for a soft-landing scenario.  Furthermore, it is more than likely that inflation has peaked, hence the worst of the tightening is over.  A soft-landing in China would buoy global growth and would confirm that we’ve actually been in the midst of a secular bull market that started in March 2009.  There’s a large wall of worry for risk-markets to climb, that’s for sure.   

+ Yet another data point that screams “no recession”.  Consumer spending surges by 0.8% (versus expectations of a 0.4% gain) and is a welcome rebound by the consumer.  Consumption adjusted for inflation rose at its quickest clip in 1 and 1/2 years.  Personal income also popped a healthy 0.3%, while the all-important “salaries and wages” metric increased 0.4%.  Furthermore, car sales are making a comeback.  These are data points that do not signal a recession being imminent.  

+ The German recovery continues.  Retail Sales held steady after a surge the prior month.  Private consumption will keep one of the world’s largest economies supported.  Meanwhile, the unemployment rate is the lowest since the reunification roughly 20 years ago.  The number of unemployed fell for a 26th straight month.  The German economy has a lot of momentum behind it.  As long as the engine of the Eurozone keeps expanding, the region will have fundamental support.   

+ Bank lending is increasing and may explode soon if Bernanke decides to lower the interest rate on reserves that the banks have with the Fed.  Increased lending means increased risk-appetite on the part of small/medium sized businesses.  That means that they see demand slowly coming back.  While the increase is small, it does signal an underlying trend of economic healing.

+ Additional QE may be on the way as soon as September 20-21.  Fed Doves have been out in full force this week with Lockhart and Evans both signal additional accommodation should economic data come in sub-par.  Today’s employment report may be the final straw that prompts the Fed into action as dissent melts away.  Risk markets will benefit and a renewed wealth effect will keep the economy on a forward path until fiscal stimulus comes at the end of the year.  


Bear

- The jobs picture is deteriorating.  The ADP Employment report showed a rise of 91,000 which was less than the 110,000 expected by economists.  Jobless claims remain stubbornly above the 400,000 mark.  And finally, the granddaddy of all economic reports, the BLS Employment Situation, just turned in a giant goose egg.  I had a bad feeling about this month.     

-  The global economy is slowing faster than many expect.  Let us count the ways.  Japan’s July industrial production disappoints, rising only 0.6% vs. expectations of 1.5%.  Brazil unexpectedly cuts rates by 50 basis points citing deterioration in the global economic backdrop.  Note that this rate-cut interrupts a tightening cycle and was sudden, which further accentuates the velocity of the slowdown.  What was that about Decoupling?  Eurozone PMI was revised downward from 49.7 to 49.0 and throws more fuel on a seriously developing fire in that area.  France and Italy showed contraction for the first time since July and September 2009, respectively.  Same for the UK.  

- The Restaurant Performance Index, a measure of discretionary spending and consumer confidence, just hit its lowest level in 11 months.  If superimposed with economic performance over the past 4 years, one can see that this index was a harbinger of future economic activity, signaling the impending downturn in 2007 and upturn in early 2009.   

- It’s time to pull out everyone’s favorite indicator to ignore if they’re wrong.  This time it’s on the bear’s side. (Source dshort.com)

     

- Confidence among lowest income households just hit an all-time low according to the Bloomberg Consumer Confidence Index.  Is the “Bernanke-Evans QE3 extravaganza” really coming, potentially unleashing another inflationary surge?  Sure guys, let’s systematically destroy our country from the bottom up.  The Conference Board’s index of consumer confidence plunges to the lowest since the dark days of 2009.  

- Despite claims of rising home prices leading to stabilization on bubblevision, an informed market observer knows that housing prices are seasonal.  Therefore, instead of looking at MoM gains, we need to look at YoY numbers.  This stat shows that home values declined 4.5% from June 2010.  The consumer’s largest asset remains under intense downward pricing pressure and will serve as an anchor to continued spending growth.  Let’s look ahead now.  Pending Home Sales show a housing sector that remains void of demand.  MBA Purchase Applications show tepid demand as well.  Large supply with low demand = falling prices.  Obviously this cocktail is likely to further exacerbate an already delicate legal battle brewing between the FHFA and the banks.     

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.  

Friday, August 19, 2011

Weekly Bull/Bear Recap: August 15-19, 2011

Bull

+ The Conference Board’s Index of Leading Indicators shows a surprise rise of 0.5% after increases of 0.3% and 0.7% in June and May respectively.  These readings refute the bears’ claims that the economy is headed into recession.  If we’re going back into recession, then why hasn’t this LEI fallen six to 12 months prior to this recession as it has in every instance in the past 50 years?

+ Industrial Production for July clearly shows that the worst is passed with regards to the supply chain disruptions.  The metric notched its best reading in over half a year (while June was revised 0.2% higher).  Auto production is coming back online and was reflected in this data, surging 5.2% from a 0.9% decline the month prior.  Bullish data will be coming down the pipe as this major shock is successfully digested by the resilient economy.  The spring/early summer soft-patch close to ending.

+ The EU is feeling the heat from the market and will ultimately come through as legislation for Eurobonds is now in the offing.  While Merkel may reject Eurobonds (for now), her country has more to lose if the Eurozone breaks down.  The value of the resulting German currency would skyrocket and upend their export sector.  So if they choose to reject Eurobonds, Germany would be screwed.  Meanwhile Sarkozy and Merkel’s meeting on Tuesday produces the first steps towards a “true European economic government”, starting with balanced budget amendments for all countries in the Eurozone.  While the prospect of a Eurobond has been delayed, most investors didn’t expect such a step at this meeting.  Slowly but surely the road towards unification is underway.  Meanwhile, the ECB is having remarkable success in taming rising yields in Italy and Spain.  Yields in those two countries suggest that the situation is actually under control.  The prospects of a Eurozone blow up remains remote (just look at the Euro’s performance in the past week).

+ Fitch declares the US’s ability to pay as rock-solid, affirming their AAA rating with a stable outlook.  The monopoly issuer of currency will never default on its debt.  This issue is now laid to rest.  It will not be the source of another surprise negative shock.

+ China’s economy is stronger than many believe.  Officials there are increasingly comfortable on the letting the Yuan appreciate to temper inflation.  They are confident that their export sector can take the heat.  Lower inflation will give way to an ending to the monetary tightening cycle.  A stronger Yuan will make imports cheaper for Chinese consumers.  They will increase their demand for products made in the US and Europe.  The policy move is setting up a resumption of record imports from the communist country translating to higher exports for the US and Europe.  

+ The weekly consumer metric, Redbook, shows that the consumer is holding up well in spite of the recent plunge in equity markets.  Consumption growth continues despite what the bears tell you.  The consumer hasn’t fallen out of bed and will provide a floor for equity markets very soon, especially with falling gas prices.  

Bear

- The Philly Fed Index turned into a sinkhole falling to a “macabre" -30.7 vs. expectations of +2.0 and down from a reading of +3.2 the month prior.  All (except Prices Paid) sub-indicies plummeted in what is clearly the US economy undergoing a cliff dive.  This reading confirmed the Empire Manufacturing survey, which turned in a 3rd month of contraction in the NY manufacturing area (-7.72 vs. 0 expected).  Of particular note, views of future conditions materially fell indicating that hope for a recovery is damaged (perhaps due to the plunging markets beginning in August).   

- The Housing Market Index and Housing Starts point to more of the same underperformance that has characterized this sector for half a decade.  Good news isn’t forthcoming either as Purchase Applications, a leading indicator of housing demand, almost hit double digits to the downside @ -9.1%.  Note that this sector has had an intricate part in recoveries past.     

- The Global Economy is slowing   quicker than the Bulls expect.  No soft-landing for China.  No soft-landing for Europe as the German economy finds itself without a paddle approaching Angel Falls.  Both core-countries (Ger.& Fra.) in the world’s largest economy have effectively stalled.  Financial market performance there is a mirror image of the USs’ in Late 2008.  Worse yet, now the bailout to Greece is in jeopardy as other Eurozone countries demand the same terms as Finland.  If the Greece bailout fails, the whole bailout strategy up to this point would be upended — goodbye Eurozone.  UK reports some disappointing data (you can suppress riots all you want, but they won’t go away as long as your have an unemployment problem).  Japan’s export data also reflects a weakening global recovery.     

- As discussed in the prior Weekly Bull/Bear Recap, global markets plunging roughly 17%+ is the final straw that breaks the back of the US economy.  Consumer metrics such as the ICSC just notched its third weekly decline with this latest reading registering a fall of 1.5%.

- So what happened to deflation?  PPI and CPI metrics come in hotter than expected.  These readings will make it difficult for the Fed to justify another round of quantitative easing.  For equity investors basing their hopes on the upcoming Jackson Hole meeting, the data points to a negative result.  

- Jobless Claims poke back up 400K while last week’s reading was revised higher.  The job market is still too weak to carry any sustainable recovery.  With recent economic performance, can we realistically say that job growth will resume in the near-term?  The answer doesn’t require a degree in rocket science.   

Friday, August 12, 2011

Weekly Bull/Bear Recap: August 8-12, 2011

Bull

+ France will not be downgraded and thus the European Financial Stability Facility (EFSF) will remain in force.  Furthermore, Spanish and Italian bond yields have been plunging.  Steps by the ECB to calm down investors’ jitters are working.  Meanwhile, the UK newspaper responsible for Societe Generale’s plunge apologizes for publishing “bull”.  Merkel and Sarkozy have planned for a meeting on Tuesday to further re-enforce that governments are on the case and will propose solutions.  Markets around the world have recently reversed and are smelling a resolution to the Eurozone woes.    

+ In a historic Fed meeting, Bernanke and Co. announces a specific timeframe for holding rates at exceptionally low levels.  This has practically rendered CDs for less than 3 years useless and forces investors to chase yield (ie, invest in the stock market and longer dated corporate bonds).  The Fed has the market’s back and will do everything in its power to re-kindle the animal spirits.  Don’t fight the Fed….

+ …furthermore, lower rates are resulting in soaring mortgage refinancings.  Discretionary income will increase due to lower mortgage payments and will help consumer confidence.

+ Retail Sales rise for the month of July, notching their best performance in 4 months.  The breadth of the gains was not limited to just gas/food purchases.  Core Sales rose 0.5% vs. 0.2% expected.  May and June were revised upward as well.  With plunging gas prices and the debt-ceiling issues in the rearview mirror, the consumer will have a clear path toward recovery and increased confidence.  Stocks are not priced for a resurgence in consumer spending.  Stock valuations are compelling in light of this.    

+ Who said that the global economy is slowing?  Japanese Machinery Orders, a leading indicator of industrial production, shows a better than expected gain.  Who said that China was slowing?  China’s exports just hit a new all-time record.  Demand from around the world doesn’t seem to be slowing.  This dynamic provides them with wiggle room to raise the value of the Yuan and continue the process of global rebalancing.  Property investment sales keep growing and will cushion their economy from a softening manufacturing sector.  The soft-landing scenario is becoming more probable with every data point.     

+ Oil prices have plunged recently.  Gas price will follow suit and result in a huge, market-created, tax cut.  Consumption will make a strong come back from an already respectable   performance.  This will result in a risk rally as double-dip recession talk is the norm at this point due to high bearish sentiment.

+ Jobless claims fall under 400K for the first time in more than 3 months and is evidence that despite all these headwinds, the economy marches on.  It’s much stronger than the bears believe.  Just ask the insiders, who have significantly increased their stock purchases, just like March of 2009.   

Bear

- Markets are tumbling around the world.  This is the final “shock” that tips the US economy back into recession.  Consumers watch in horror as the markets have plunged more than 15% in the past 2 weeks, more than wiping out 2011 gains (QE2 gains gone).  Consumers will become   cautious (lowest reading since May of 1980!),   spending will decrease and companies will cease hiring (it’s not like hiring has been strong anyways).  The negative feedback loops are coming into motion.

- A French downgrade would render the European bailout package null and void as it is dependent on France being a AAA country.  If the country is downgraded, it would result in the absence of a safety net for Greece, Spain, and Italy.  While the rating agencies have denied the prospects for a downgrade, the market is rendering its opinion (which is what matters).  Rumors (a-la-2008) are beginning to surface regarding French banks and their exposure to derivatives.  Need more 2008 memories?  Various European countries have instituted a short-selling ban; signs of desperation no?  

- As if memories of 2008 weren’t enough, officials are now facing a slowing Eurozone economy.  Industrial Production for the whole region unexpectedly fell, while France (yes, the country the world so desperately needs to be rated AAA), just reported that its economy stalled.  Greece’s economy contacted 6.9% YoY.  Worse is that these data points come before the latest bout of risk-aversion.  

- US international trade numbers show a much larger than expected deficit.  That will likely result in a negative influence on an already weak Q2 GDP number.  The reason for the deficit was due to subdued export growth, = a weakening global economy.  Persistent current account deficits usually result in a depreciating currency.  The dollar is already at dangerously low levels.   

- Chinese inflation numbers point to stagflation as recent increases in interest rates haven’t done enough to temper sticky inflation in their economy.  More will need to be done to temper inflation, thereby increasing an already high probability of a hard-landing in the communist nation.  This is affecting Australia, where speculation grows that their central bank will need to cut rates.   

- OPEC downgrades its oil demand forecast for the rest of 2011 and 2012.  While the bulls harp on how lower gas prices will help consumption, the drop in oil is more nefarious as it reflects an on-coming hard-landing in China as well as a drop in economic activity in the US and Europe.  Did oil’s plunge in 2008 result in a “second half” recovery?  Nope.

- London is experiencing the worst riots in living memory.  Many blame the recent killing of an innocent man in Tottenham .  However reading between the lines, it’s clear that constant shafting of the poor by cutting their pensions and benefits to save the hide of the wealthy is a secular trend that is approaching a boiling point: in England, in Syria, in Spain, in Greece, and the list goes on.

- AIG sues Bank of America for misrepresentation of mortgage backed securities and has brought forth concern amongst investors as to their true value.  B of A’s stock price has plunged recently to sub $7.  It doesn’t help that the housing market is in the process of double-dipping adding an additional layer of uncertainty. (I hold a short position on the financial industry ETF).

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Want to know my Macro and Market Forecasts?  Check out my Mid-Year Outlooks (a/o June 16, 2011): here and here.  They are updated twice a year.  

—- Front Page of Rational Capitalist Speculator: here —-


Wednesday, August 10, 2011 Friday, August 5, 2011

Weekly Bull/Bear Recap: August 1-5, 2011

Want to know my Macro and Market Forecasts?  Check out my Mid-Year Outlooks (a/o June 16, 2011): here and here.  They are updated twice a year.

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Bull

+  Gov’t officials are ready to accommodate markets.  QE3 or some form of monetary easing could be here sooner than most think.  The Fed still stands behind the markets and will help re-initiate the wealth effect, aimed at improving consumer and business confidence.  Meanwhile in Europe, officials are committed to slaying the Eurozone predators.  The ECB announced that it would be a lender of last resort for Italian and Spanish debt (ie “QEurope”) .  A big step towards fiscal union has taken place.  Italian officials are implementing the necessary reforms to conform with ECB requests. 

+ The job market hasn’t fallen out of bed, plain and simple.  The grand-daddy of all economic reports, the July BLS Payrolls, showed a gain of 117K total jobs (Private Sector: 154K) with upward revisions for the prior 2 months of +56K. The ADP jobs report shows an increase of 114K jobs created in July.  Finally, jobless claims have actually been declining in the past few weeks.  Now that the political stalemate over raising the debt ceiling is over with, businesses will begin to expand once again = increased hiring.

+ Bearishness is pervasive.  ”Recession”, “Fall 2008" are words/phrases uttered in every other sentence by the financial media.  When there’s "blood on the streets", you want to be buying.      

+ Retail Sales figures show that the consumer hasn’t fallen out of bed by any means.  Take a look at the Gallup Poll on Consumer Spending; there’s a clear YoY improvement.  These measures are sure to improve as oil (gas) prices have plunged recently, which will directly affect consumer spending and confidence (you can see gas prices are already rolling over).  Car sales also fared well despite all the industry has had to deal with lately (inventory shortages due to Japanese tsunami/nuclear disaster).  Consumer credit for June expanded much more than expected and bodes well for consumption.     

+ Congress passes and Obama signs the bill to raise the debt ceiling.  The US will not default and business confidence is set to make a come back now that this key uncertainty in the global outlook is lifted.  There won’t be a crisis.  

+ China’s Official Purchasing Manager’s Index (PMI) shows that the manufacturing sector is cooling, but not in contraction.  Inflation metrics have also come down and raises the probability that the nation will undergo a soft landing as tightening policy is relaxed.  Another bullish tid-bit is the Non-Manufacturing Index, which actually strengthened.  A soft-landing will ensure that their economy continues growing and earnings growth for American companies remains buoyant.

Bear

- Europe is straight-up on the ropes and no one knows what to do.  You can sense the despair from Eurozone leaders: “Stay calm, breathe deeply”; talk of desperation.  Furthermore, Eurozone PMIs disappoint and show that not only are Spain and Greece mired in contraction, but core-nations such as Germany and France are coming alarmingly close to that negative distinction as well.  Italy isn’t all that hot either.  The worse part is that the policy being pursued/prescribed involves implementing austerity measures, which will further depress growth.  It’s all a vicious circle; bailout conditions assume that growth will continue, yet austerity measures will smother it.    

Personal Consumption and Expenditures disappoint and has triggered widespread double-dip jitters.  Incomes barely rose (Salaries & Wages actually fell) and spending fell for the first time in two years.  The savings rate also rose to its highest reading in 2011.  Political stalemate in Washington didn’t help.  70% of the Economy contracted in June.   

- The stock market is finally paying attention to what “Mr. Bond” has been saying since the spring when yields were diverging from stock prices.  Drastic sell offs in cyclically sensitive metals point to a “more-than-a-hiccup” type of slowing in the global economy.  Given how fragile consumer confidence is, these sell-offs may be the final shock that finally blows the whole straw house over.  The reverse wealth-effect is taking place.  

- US Manufacturing has stalled with its PMI coming in at 50.9.  Factory Orders disappointed as well.  Is the consumer ready to take over the recovery?  Are enough jobs being created to instill confidence?  Are exports ready to take over the recovery?  A sector needs to step up now, or recession is knocking at the door.  Same goes for the global economy.  Manufacturing is around the world is showing serious weakness.   

- China’s manufacturing sector is officially in contraction as per the HSBC PMI for the first time in more than a year.  The reading of 49.3 was the lowest reading since March 2009, when the S&P 500 was in 600-700 territory.  Given how much US companies depend on growth in the communist nation, this bearish data should strike fear into investors.  

Friday, July 29, 2011

Weekly Bull/Bear Recap: July 25-29, 2011

Want to know my Macro and Market Forecasts?  Check out my Mid-Year Outlooks (a/o June 16, 2011): here and here.  They are updated twice a year.

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Bull

+ Jobless Claims fall more than expected as companies can’t lay off any further.  They are lean and posed to hire in the second half of the year as the global economy rebounds. 

+ Emerging market economies will act as an ongoing support to the bull market as earnings growth is increasingly focused on the development of the new global consumer.  Plenty of companies have pointed to growth in Asia as the impetus for their out-performance.

+ Another sign emerges pointing to the transitory nature of the current soft-patch as the Dallas Fed Manufacturing Index notches a reading of -2 vs. -17.5 the month prior.  New Orders vroomed back to +16 from +6.4.  Need another?  Check out the latest “Truck Tonnage Report" from the American Trucking Association.  This all important barometer of the US recovery shows that manufacturing remains moving forward.  

+ Credit is loosening.  The Federal Reserve Bank of St. Louis just reported a spike in commercial bank credit issuance for the week ending 7/13.   

+ The Case-Schiller Index shows a stabilization in home prices.  This will help consumer sentiment.  Furthermore, here’s an interesting economic indicator, which portrays increased home-buyer interest.  From the looks of Pending Home Sales, buyer activity is increasing.   

+ The US economy may be slowing, but it’s not headed into another recession.  The ECRI leading indicator has stabilized at a growth rate of 2.0% for the week ending 7/22/11, from a reading of 1.6% the prior week.

Bear

- The Chicago Fed National Activity Index (CFNAI) points to continued economic weakness as its 3 month average moved from -0.31 to -0.6 in June.  It is now only a smigen away from the important -0.7 reading.  “When the CFNAI-MA3 value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun.”

- The CFNAI reading is also supported by the Q2 GDP report which showed a US economy perilously close to contraction, coming in at 1.3% (below estimates of 1.6%).  Q1 was revised down to a gain of only 0.4% from 1.3%.  The economy is extremely vulnerable right now.  Any exogenous shock (US default anyone?  or maybe the Eurozone again?) could tip it into recession.  ”Leading Economists”, making $100K x ?, are wrong again.  Why can’t they simply look at consumer confidence indicators, which have been falling most of the year?  It’s Main Street who really drives economic growth, not Wall Street.  

-  Santander gives investors the jitters as it reports much larger than expected protection insurance to be paid, denting profits.  Should Spanish financial conditions continue to worsen, the bailout package may not be enough to calm investor’s nerves.  Take a look at Spain’s 10-yr yield; it’s barely budged since the Eurozone bailout package was announced.  Same goes for Italy.  

- Durable Goods Orders disappoint with an “unexpected” decline of more than 2% in June.  What was the beacon of the US recovery looks to be stalling.  With consumer spending still weak, a fall in factory activity would further weaken an already very vulnerable economy.  The bulls should be praying for no exogenous shock as it would most certainly tip the apple cart.  

- The housing recovery talk is completely uncalled for.  Mortgage applications fall 3.8% and marks the 3rd consecutive fall for this leading indicator.  High joblessness will keep demand muted for the foreseeable future.  Meanwhile, you have New Home Sales posting an “unexpected” miss

Friday, July 22, 2011

Weekly Bull/Bear Recap: July 18-22, 2011

Want to know my Macro and Market Forecasts?  Check out my Mid-Year Outlooks (a/o June 16, 2011): here and here.  They are updated twice a year.

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Bull

+ IBM, Microsoft, and Intel earnings results point to continued business spending and expanding operations.  Meanwhile, a very positive report from GE points to credit demand making a come back.  Businesses are preparing for increased global demand led by China. Meanwhile, growth  in offshore earnings will ensure that S&P500 companies maintain steady earnings growth and keep the bull market chugging. (Don’t own nor am I shorting any of these companies)

+ This week’s rally was set off by the inevitable solution to the Eurozone debt crisis.  For all who were chicken-littling, you missed a great opportunity to buy.  The Nasdaq and S&P were up almost 4% this week, while the Dow was up roughly 3%.  Markets like to climb a wall of worry and that’s exactly what they did.      

+ The slowdown in the global economy is transitory as Japan, the main victim of the exogenous shock that was the earthquake and nuclear disaster, just reported a trade surplus and signals that supply is making its way back online.  Their economy is recovering and will translate to a global rebound in the second half of the year.  The Eurozone is also bouncing back with manufacturing orders for May zooming higher by 3.6% vs. expectations of a 0.8% rise; the increase was led by Spain, Italy, and France.     

+ Slowly but surely, the construction sector is getting back on its feet.  The US Housing Starts report posts a surprise gain and its best result since the beginning of the year.  Another indicator, the Buildfax Residential Remodeling Index just turned in its highest reading in the index’s history.  Housing affordability is at its best in 3 decades.  Construction affects large swaths of the economy, so these news-bits deal a double bull effect.  

Bear

- China’s HSBC flash PMI for July just hit its lowest level in over 2 years and is signaling contraction for the first time in over a year.  Speaking of China being in contraction, didn’t Premier Wen say that inflation was conquered just a month ago?  So what’s this?  This goes to show you that officials have no idea what they’re up against.  They are way behind the curve.  More tightening to come.  Pssst….the Shanghai Composite notched a lower close in 4 of the past 5 days; it looks to be rolling over again.  

- So Europe decides to turn the EFSF into a TARP Clone/Quasi-QE Machine.  They also declare that Greece will undergo a “transitory" default (I’m glad "transitory" isn’t Pee Wee’s word of the month or I’d be deaf).  Now that the US has stopped QE, here comes the EU.  Now the American consumer will be held hostage by the Europeans as oil just hit $100 a barrel….again. 

- Sentiment is slowly turning.  If China is contracting, Europe is a hair away, and the US is perilously  close, any negative event at this point will tip the scale.  Confidence can be fickle.  Just look at the follow through from the Eurozone deal rally on Thursday, not very good.    

- The recent good news in housing is…”transitory”.  Purchase applications to buy a home have been flat to down in the past 2 months, while existing home sales “unexpectedly” declined.  As long as the job market remains depressed, don’t count on any rebound in housing anytime soon.  The same can be said for commercial real estate.  

Friday, July 15, 2011

Weekly Bull/Bear Recap: July 11-15, 2011

Want to know my Macro and Market Forecasts? Please check out my Mid-Year Outlooks (a/o June 16, 2011): here and here.  I update these outlooks bi-annually. 

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Bull

+ Earnings reports are coming in and have been encouraging thus far. Google shines blowing past Wall Street’s expectations on higher online advertising demand. Citigroup reports much better than expected earnings on improved investment-banking performance as did JP Morgan.  Mattel’s results also make the case for a strong corporate picture.  Improved corporate guidance over the second half of the year, coupled with low valuations of 12-13x using 2011 earnings will stoke investor enthusiasm in the second half of the year.  (I do not own nor am I shorting any of these companies). 

+ Jobless claims fall further, from 427K to 405K, and proves that their recent rise  was due to transitory factors. They will continue their path downward and lead to better labor market conditions in the second half of the year. This will help consumption in the months ahead and confirm 2011 earning estimates.

+ Chinese economic data comes in better than expected. Consumption and industrial production, critical factors for the global recovery, both exceed expectations. China isn’t headed for a hard-landing and global economic activity will remain buoyed by continued growth in demand from the communist nation.

+ Executives see a rebound in the second half of the year.  Large mergers such as BHP Billiton’s acquisition of Petrohawk Energy Corp and Icahn’s bid for Clorox show that growth opportunities are seen as the global recovery progresses. (Don’t own or short these companies)    

+ Consumer metrics for July have started off on the right foot. Goldman ICSC and Redbook gauges both show strengthening consumer trends on a YoY basis. Markets are quite gloomy with many thinking that the economy is about to fall into recession. Not from the looks of consumer demand!

+ The UCLA Meridian Pulse of Commerce Index, a leading indicator of manufacturing activity, rebounded by 1% after falling the prior two months. This indicates that the manufacturing sector isn’t falling out of bed. Economic activity remains in growth mode. Furthermore the Empire Manufacturing Survey, while negative for the second month in a row, is showing more signs that the recent soft patch is just that, a soft patch. Future expectations rose almost 10 pts to 32.2, while the future employment index crossed into positive territory once again.

+ While retail sales for June might have seemed weak, a look under the hood shows encouraging trends and a June YoY performance that is the highest since 2005.

+ Slowly but surely, housing is healing and the market is smelling the bottom for this all-important sector.  Lower foreclosures —> less supply of houses —> stabilized housing prices —> improved consumer confidence —> higher spending.     

Bear

- Empire State Manufacturing Index notches its second consecutive negative reading.  Average workweek, New Orders, and Backlogs are in negative territory.  Meanwhile Industrial Production for June rose only 0.2%, less than expected. To exacerbate the miss, most of the gains were due to the volatile utilities component. What happened to the transitory nature of this soft patch bulls?

- The bulls keep denying it, but it’s the same story. GDP estimates keep getting slashed. Small business, the engine of job creation isn’t showing recovery, in fact the readings are recessionary.

- University of Michigan Consumer Sentiment for the first half of July implodes to 63.8 from 71.5 at the end of June.  Can Main Street have some of that hopium that analysts and managers are sniffing?   

- The US is warned …(twice!) that it may get its credit rating slashed should politicians fail to resolve the current budget impasse.  Some predict that this will trigger closer scrutiny of the US from bond vigilantes.  Interest rates would rise as treasury bonds sell off strongly. 

- The Eurozone sovereign debt woes are officially back. This time we got the two big kahunas front and center: Spain and Italy (lets throw Ireland and Greece in there for good measure).  Can Eurozone officials pull another rabbit out of the hat?  Citigroup hopes so.

- Bernanke is a little gun shy now about opening the monetary spigot again.  Why wouldn’t he be?  Oil was less than a $1.00 away from hitting $100 again just on speculation that he might turn the faucet back on!  Also, the latest inflation numbers show an ominous rise in Core CPI and makes the case for inflation becoming more entrenched in the economy.  Any further printing at this point would be destabilizing for the consumer.  The Fed isn’t coming to the rescue right away this time.      

- Chinese inflation in June comes in at 6.4% on a YoY basis, at the top end of expectations. Social discontent is becoming more pervasive throughout the country and puts officials in a very difficult situation. Meanwhile, their economy is showing more signs of slowing as imports came in soft, which resulted in a larger than expected trade surplus.

Friday, July 8, 2011

Weekly Bull/Bear Recap: July 4-8, 2011

Bull

+ Here’s more proof that the weakness in the economy is transitory. Consumption metrics show renewed consumer appetite for spending, while same-store-sales signal improvement in consumer sentiment. The stage is set for a successful back-to-school season.

+ The Dow Transports have just notched a new bull market high. Lower gas prices will lead to better margins for companies and will lead to higher disposable income for the consumer.

+ The job market continues its recovery.  ADP shows a resurgence in hiring activity with a greater than expected gain of 157K, while Jobless claims plunge 14K to 418K.  The Monster Employment Index shows that demand for labor is increasing.  The bears keep thinking that the economy’s stalled, it hasn’t. 

+ Factory Orders for May indicate that the Japanese earthquake was a transitory event.  Unfilled orders also increased, implying increased demand —-> a recovery in the months ahead.  This will increase the vitality of the recovery. 

+ Copper is signaling that the soft-patch is effectively over, surging more than 11% since mid-May, despite continued Eurozone worries.  It sits only 5 % from its highs in April.  The same can be said for Lumber which is less than 2% off its highs.   

Bear

- What was that bulls?  In what is the most important economic report every month, the June BLS jobs report disappointed with a dismal 18,000 jobs created and large downward revisions for April and May totaling 44,000.  The unemployment rate rose as well to 9.2% from 9.1%.  The workweek also fell and wages were flat.  A pretty dismal report by all standards.  The job market is pointing to a stalled economy.   

- ISM-Non Manufacturing Survey dipped more than expected and signals that the largest component of the US Economy is losing momentum. Among the areas of interest within the report: backlogs are now contracting (from 55.0 to 48.5) and new orders lost momentum (from 56.8 to 53.6).  Furthermore, inventories are starting to pile up signaling lacking demand. 

- The Eurozone is quietly festering.  Portugal’s credit rating gets slashed by 4 notches to junk status.  Italian bonds are beaten down due to political troubles in that country.  Despite the approval of further bailout funds for Greece, the Euro has effectively rolled over. 

- China raises interest rates due to rampant inflation and increases the probabilty of a hard-landing in the communist nation.  Whisper numbers for June inflation may be 6.0%+.  Meanwhile, most investors keep whistling past the graveyard and believe that the situation there will take care of itself.  We’ll see. 

- It may be time to keep a closer eye on the ECRI leading indicator

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Happy Birthday America!