Friday, February 15, 2013

Weekly Bull/Bear Recap: Feb. 11-15, 2013

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. 

Weekly Market Performance

->) S&P 500: -0.1%

->) Dow Industrial Average: -0.2%

->) Nasdaq: -0.1%

Markets on Watch

->) FTSE MIB (Italy):  -0.8%;  ->) 10-yr BTP Yield: -3.8%

->) IBEX 35 (Spain): -0.3%;  ->) 10-yr Obligaciones Yield: -3.5%



+  Obama’s State of the Union Speech (SOTU) will inspire confidence throughout the middle class.  Improvements in infrastructure and education, as well as retraining the labor force to compete in today’s dynamic global economy, are sound economic policies that will reignite the American competitive spirit and consequently the economy.  Meanwhile, the U.S. energy boom quietly proceeds.  

+ The U.S. job market continues to heal as per high-frequency indicators such as Weekly Jobless Claims.  The 4-week average for New Jobless Claims is near its lowest level of the recovery.  Firms are confident in the outlook and are not cutting staff.  

+ U.S. housing data continues to look up, according to individual city figures.  Additionally, commercial real estate price trends show improvement.   

+ Consumer confidence in the U.S., which had been a growing thorn for the bulls, is finally starting to turn.  University of Michigan’s Consumer Sentiment survey rises to its highest reading in 3 months with a preliminary February reading of 76.3 vs. a final January reading of 73.8.  Bloomberg’s Consumer Comfort Index is carving out a bottom, printing its highest reading in a month.  Improving confidence is percolating to weekly sales metrics.  Redbook reports that consumption in February has started off on a strong note.  Growing confidence is also finding its way into financial markets.  

+  While January U.S. Industrial Production came in negative, the result came after two very strong months and shouldn’t heighten concern of a reversal of fortune for the sector.  Moreover, other indicators point to stabilization and possibly the beginnings of a new inventory-build.  The New York Empire Manufacturing survey, prints its first positive number in more than half a year in February.  Within the report, confidence in improving future conditions remains constructive.

+  Internationally, G-7 officials affirm their commitment to “market-determined” exchange rates.  Major governments understand that weakening their respective currencies will disadvantage their trading partners.  Cooler heads will prevail.  Meanwhile, financial conditions in the Eurozone have clearly improved.  Along with an overall pace of slower contraction in the EMU, the worse has likely passed.  Stabilization is developing.  



- Yes Obama’s speech had great ideas on boosting economic growth, if you believe that more government intrusion into the private sector (by picking winners and losers) and higher taxes are sound policies.  Overall, political paralysis looks set to continue; nothing will get done.   

- From a valuation and earnings perspective, U.S. risk markets are significantly overbought.  Additionally, buybacks (usually financed by debt) have in the past represented turning points in equity returns.  Furthermore, BofA’s proprietary sentiment indicator is screaming “sell."  All this is taking place, while the sequester budget cuts are close to becoming reality.

- Redbook’s report of strong February U.S. consumption growth isn’t confirmed by Walmart’s “sales disaster" in February.  Higher payroll taxes and rising gas prices will be too much for the consumer to bear in the coming months.  Furthermore, oil looks set to continue its rise (pressuring gas prices higher), when looking at recent   developments in the Middle East.

- Small Business, the engine of job creation in America, remains in a multi-year slump, notching a feeble 88.9 in January vs. 88.0.  The average during recovery/expansion is roughly 97.  Without this important cohort of the American economy, job creation will remain tepid.

- Fed officials lack confidence in implementing policy.  Large disparity of opinions among Fed Presidents is detrimental to investor confidence and implies a lack of Fed control of current economic and financial conditions.  San Fran Fed’s Janet Yellen (Bernanke’s right hand dove) and St. Louis Fed’s James Bullard further convince investors that easy monetary policy is here to stay.  Meanwhile, Esther George of the Kansas City Fed, Richmond Fed’s Jeffrey Lacker, and Philly Fed’s Charles Plosser all caution of market disruptions once the Fed is obligated to tighten monetary policy, thereby limiting the Fed’s ability to unwind monetary largesse and risking longer-term inflation.  Sandra Pianalto of the Cleveland Fed believes the FOMC should elect to reduce their scheduled purchases through year-end. 

- The ugly European data continues: French, German, and Italian (remember that they have elections coming up) Q4 GDPs all print below expectations; meanwhile, Spanish Industrial New Orders for January print worse than expected at -3.1%.  Worse, Europe is supposed to be restructuring its economy, with Germany becoming more of an importer; the latest German Trade data is disappointing in this respect.  In the U.K. a disappointing January Retail Sales report (4th consecutive decline) fans fears of a triple-dip recession.  

Saturday, November 17, 2012

Weekly Bull/Bear Recap: Nov. 12-16, 2012

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.   


+ Weak economic data and fiscal cliff concerns have produced a buying opportunity for risk assets.  Firstly, weakness in this week’s economic data is due to Hurricane Sandy.  Data will revert to trend growth soon and surprise investors to the upside.  Finally, we are beginning to see the contours of a resolution as per recent remarks from Obama and Boehner.  Democrats will pile the pressure on Republicans to relent.  Lawmakers understand the consequences of non-action and will naturally act in time to avoid the bearish scenario.  

+ Long-term U.S. economic bullish tailwinds are forming before our eyes.  Shale oil and “fracking” look to make the U.S. an energy powerhouse, spawning a wave of manufacturing investment and job creation.  The U.S. is forecast to be an oil exporter by 2030.  Furthermore, the housing market is on the mend with housing  bellwethers reporting improved earnings trends, economic data showing falling inventory levels, evidence of an improving trend in delinquencies, and leading indicators such as the S&P Homebuilders index and lumber prices signaling increased vigor ahead.  Finally, China continues to show stabilization; a rebound will ensue in 2013.  Longer-term, new leadership will ensure that the country’s important 5-year plan is properly executed.  These bullish tailwinds will grow stronger in the coming months and will cause a further uptrend in Citi’s Surprise Index (a measure of investor sentiment)…      

+ …In fact, sentiment on Main Street continues to improve and U.S. economic growth quietly surprises to the upside in the 3rd quarter.

+ Athens will likely be given additional time to digest austerity cuts.  European leaders understand that they must give Greece time to adjust.  This is a positive step and shows that political will for a unified Europe remains resilient.  Furthermore, GDP data for France, Germany, and Italy print better than expected.


U.S. companies fear the fiscal cliff and government gridlock is set to continue, all the while bailouts persist.  Falling core capital goods orders (affecting manufacturing), souring small business sentiment, and weakening consumer spending are ingredients for a self-fulfilling prophecy of recession.  Promises of further monetary easing are met with risk markets shrugging.  Monetary policy has become powerless to stop continued economic weakness.     

- Germany will be entering recession soon.  The important ZEW survey implodes in November, falling 4.2 points to -15.7.  A negative balance indicates that more experts expect the economy to contract over the next 6 months.  A political crisis in the Eurozone is increasing in probability.  How can Germany bailout other countries when it now needs stimulus of its own?  That will be a major question on November 20th when the Bundestag votes on the next tranche of aid to Greece.  

- Meanwhile, things are taking a turn for the worse in most if not all of Europe.  For September, Spanish industrial orders collapse almost 6%, while Eurozone industrial production falls the most in 3 years.  In France, recession is knocking on the door and Germany is pondering critiquing the country’s economy (good luck with that).  Meanwhile, most periphery nations are plagued with increasingly violent strikes and protests; the Greek government is beginning to lose control as a GDP print of -7.2% in the 3rd quarter has prompted the Prime Minster to announce that a “Great Depression" has descended on the country.  The IMF and EU continue to spar over the details of a new aid package —wavering IMF support is further fuel for uncertainty.    

- Weakness in Europe is spilling into Asia, with Japan on the cusp of another recession and Taiwan experiencing some intense market declines.  Meanwhile, geopolitics is further clouding the outlook.  Israeli airstrikes   kill the leader of Hamas’s militant wing.  This is occurring within the backdrop of already high  tensions in the region; a report from an U.N. agency fuels further fear of military conflict between Israel and Iran.  

Saturday, August 4, 2012

Weekly Bull/Bear Recap: Jul. 30 - Aug. 3, 2012 

Good Morning, 

First the bullish perspective:

The biggest news for the bulls this past week was the Bureau Labor of Statistics’ payrolls report, which was much better than expectations. This bullish report was also confirmed by ADP’s report, as well as further improvement over the past month in the 4-week average of initial jobless claims. Furthermore, Challenger and Gray reported that mass firings remain very low. The job market has shown stabilization. Meanwhile, on the housing front, the Case-Shiller index posted its 4th straight gain and its largest in nearly 3 years. Year over year growth rates for sub-indexes are near 0% after a steady climb from negative territory. Falling inventory will spur construction spending, making housing an increasing tailwind for domestic growth in the months to come. Anyone telling you that the economy is in a recession with these data points is high on something.

In the euro zone, monetary and political officials are beginning to outline the parameters of a team-up in an effort to stabilize financial markets. Promises by the ECB to buy near-term sovereign debt of periphery nations have resulted in falling yield curves of these securities. In addition, swap spreads, which measure systematic risk, are far from their highs from last year. Improving financial metrics signal that investors are increasingly receptive to the forthcoming solution in the euro zone. Alleviating confidence in the region is helping stabilize global growth.

China, the up and coming economic powerhouse, is showing signs of stabilization. Despite endless bearish chatter of the length of the country’s manufacturing contraction, it pays to note that PMIs are still very close to the 50 mark demarcating expansion from contraction. China’s slowdown is nothing more than that. As officials begin implementing stimulus measures, economic growth is sure to reaccelerate.   The situation there is under control.

At home, income dynamics are improving.  Income growth is strengthening as per the latest Personal Consumption and Expenditures report, which showed wages and salaries rising 0.5% in June. Moreover, the Mortgage Bankers Association reports that re-financings rose to the highest in three years. Continued income growth is resulting in a resilient consumer. Chain store sales surprised to the upside, while vehicle sales rebounded. The Restaurant Performance Index showed that business in this consumer-sensitive sector remains in growth mode. A durable consumer will lead to improved sentiment of investors.

Citi’s economic surprise indicator has bottomed, marking a likely reacceleration of economic activity. This can be corroborated by an improving ECRI growth index, having increased from a low of near -4% two -1.3% today.

And now the bearish perspective:

Continued bluffs by Mario Draghi are harming the reputation of the ECB. Markets plunged midweek on no action from the central bank.  It’s becoming increasingly clear that the Bundesbank will not allow the ECB to proceed, without severe repercussions (Germany drops out?). Efforts to buy time using these bluffs serve to weaken political will.  In Germany, a survey was published in which a majority of the German citizenry now believes the Euro does more harm than good. Furthermore, the tomfoolery creates additional uncertainty, resulting in reduced consumer and business confidence (to the lowest since Sept. 2009).  Geopolitics isn’t helping much either; Russia has sent 3 warships to Syria with army personnel.  Iran/Israel keeps bubbling.

Vaporizing confidence is further strengthening what is an already scary negative feedback loop within the world’s largest economic bloc.  PMIs throughout the region were very negative, Germany in particular. Weak PMIs in France, Spain, the UK (largest fall in three years), and Greece weren’t worth peeking at if you’re a bull banking on stabilization. Unemployment in the region rose to a record 11.2% in June, while retail sales sunk for the 9th consecutive month. Continued weakness in the territory is likely to exacerbate an already faltering global recovery.

In Asia, Japan’s manufacturing PMI and industrial production fell, the latter falling for the 3rd consecutive month. In Taiwan, GDP surprised to the downside. South Korean had some awful data also.  June industrial production fell, while manufacturing confidence fell to a three-year low.  Furthermore, exports plunged almost 9% in July. JP Morgan’s global manufacturing PMI showed a greater pace of deterioration.

The U.S., with its economy also on the verge of recession, isn’t doing much to help as auto imports have plunged since the beginning of the year according to the latest vehicle sales report.  Frailty in the manufacturing sector has become persistent with a slew of reports noting continued weakness. The ISM manufacturing index has contracted for two months in a row, with important leading indicators such as backlogs and new orders signaling more to come. Meanwhile, factory orders declined and core durable goods were revised lower. The Dallas Fed manufacturing report was lackluster as well, with general business activity plunging due to continued uncertainty in Washington. Weekly consumer spending metrics show continued weakness due to a increasing savings rate as a crisis of confidence engulfs the global economy. While the bulls may point to the jobs report as a sign that the economy is stabilizing, it’s unusual that the bulk of the gains came from the service sector in the same period that the ISM’s non-manufacturing report showed an employment sub-index in contraction territory. Furthermore, chatter from CEOs of consumer-based companies does not confirm these bullish numbers. In addition, is improved job growth sustainable when various leading indicators such as the conference Board’s employment trends, and the Monster Employment index both point to limited gains at best?

Friday, February 3, 2012

Weekly Bull/Bear Recap: Jan. 30 - Feb. 3, 2012


+ The U.S. economy is now in a sustainable expansion:

+ The global economic outlook is improving:  

+ In Eurozone political and financial news, European nations take one step closer to integration with 25 out of 27 nations signing the new fiscal compact treaty.  Moreover, leaders signal strong resolve to save the region, as talk of initiating a €1.5 Tn bailout fund is making the rounds.  Meanwhile, the Spanish 10-yr yield breaks under 5%, the Italian 10-yr yield breaks under 6%, the Belgian 10-yr yield breaks under 3.7%, and the French 10-yr yield breaks under 3%.  Markets signal that a strong firewall is in place for a Greek and/or Portuguese default. As a hefty insurance policy, the second LTRO on February 29th will likely be more than double the size of the first one (@ ≈ €1Tn), thus reinforcing the firewall for the banking system from a Greek or Portuguese default.  Besides, the Greek default has been on investors’ radars for so long, even martians on Pluto know that Greece is defaulting.  A climax would result in a rally as uncertainty is lifted.  


- The end game is coming into view for the Eurozone:  

  • Germany has demanded that Greece cede its budgetary sovereignty to the EU, a request Greece has declined.  Furthermore, stiff resistance from Greek political leaders to implement further austerity makes for another “Papandreaou referendum-like” showdown with the troika.  And for the trifecta, the Hellenic republic has warned that it may need even more bailout cash.  
  • Portuguese bond yields are repeatedly hitting record highs; hard default #2 is rapidly approaching.  
  • In Ireland, a solid majority demand a referendum (guaranteeing a defeat for the army of unelected technocrats in Brussels).  As Hollande eloquently stated, “Where democracy retreats and politics pulls back, the markets advance.”  
  • Hollande is creating daylight between himself and Sarkozy in the French presidential election (here’s a primer on what he wants to do).   

- On the region’s economic front, austerity is biting, hard.  Italian business confidence slumps to the lowest in 2 years.  While Germany is benefiting from a weaker Euro, it’s coming at the expense of the rest of the Eurozone; the region’s unemployment rate remains near the highest since 1998.  French consumer spending dives 0.7% vs. expectations of a gain of +0.2%.  Even worse, German December retail sales tank 1.4% vs. expectations of a 0.5% gain (the 4th decline in last 5 prints); so much for a low unemployment rate.  Meanwhile, on the financial front, banks are using some of the LTRO money to buy sovereign bonds; but that’s about it.  They continue to de-leverage, cutting off credit to the Eurozone and undermining any recovery in the region.  Furthermore, post-crisis highs in FX swaps between the ECB and the Fed point to tight liquidity conditions, despite unprecedented worldwide coordinated monetary loosening.        

- The throes of stagflation are in plain view; China “unexpectedly" holds off on reducing reserve requirements for banks, opting instead for reverse-repurchase contracts.  Simultaneously, here’s what a popping housing bubble looks like.  Protests are progressively more intense.  

- On the U.S. economic front, the S&P Case-Schiller index flags a deepening double-dip for the 99%’s largest asset.  Lower home prices will anchor consumer confidence over the medium-term.  Over the short-term, rising gas prices are starting to damage confidence; the Conference Board’s survey disappoints, printing 61.1 vs. expectations of 68.0 (led by a decline in the present situation). 

- Israel/Iran continues to bubble underneath the facade of bullish sentiment.  No groundbreaking announcements were made after the UN inspection.  Instead, it’s looking increasingly clear that the U.S. is no longer in control of the situation; an Israeli unilateral attack could come in as soon as 3 months.     

Friday, January 27, 2012

Weekly Bull/Bear Recap: January 23-27, 2012


+ 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 RatioThailand’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.     


- 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).    


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

Friday, January 20, 2012

Weekly Bull/Bear Recap: January 16-20, 2012


+ Jobless claims plunge 50K to their lowest level in almost 3 years and clearly demonstrate a strengthening labor market.  Increased confidence means increased credit use = strengthening recovery.  Banks and homebuilders have been leading the ongoing S&P 500 rally. 

+ Manufacturing shows more signs of stabilization, not an imminent recession.  The Empire Manufacturing Survey rises more than 5 points, while the 6-month outlook surges 10 points.  Last week’s ghastly rail traffic report (intermodal) was nothing more than an aberration.  This week’s report shows a sharp rebound, outperforming last year by 7.4%.  Industrial Production rebounds 0.4%, lead by manufacturing’s best performance since December 2010 (+0.9% vs. -0.4% in November).     

+ Inflation is cooling and will give the Fed leeway to initiate further monetary policy (it’s becoming a worldwide phenomenon: Goldilocks environment coming up?).  If economic conditions slow, the bears won’t be able to seize control of the market as the Fed will act as a bullish albatross over their machinations.

+ Risk markets power higher for the week, while copper breaks out of its consolidating triangle to the upside, a sign that the global economy is poised to reaccelerate.  Chinese data strengthens the “further stimulus" and "soft-landing" thesis.  Furthermore, markets are sensing continued progress in the Eurozone crisis.  Confidence is making a comeback, as the German ZEW investor survey hints at a turning point for the Eurozone’s largest economy.  

+ The housing market continues its recovery.  Mortgage applications for purchase rise 10.3% after an 8.1% increase in the prior week; the result is higher home sales.  Furthermore, record low mortgage rates are spurring refinancing applications, surging 26.4% this past week to their best levels since August.  More refinancings = more disposable income for the consumer due to lower monthly mortgage payments.  Finally, the NAHB housing market index rises 4 points to its best reading in 4.5 years.    


- Sentiment is nearing euphoric levels.  Retail investors and even financial advisors are expecting stock prices to move higher.  The wall of worry that characterizes bull markets has crumbled.  Remember rule number 5 by Bob Farrell, “The public buys the most at the top and the least at the bottom.”

- Meanwhile, this earnings season has seen the lowest percentage of companies beating analysts estimates since the 3rd quarter in 2008; I don’t need to tell you what happened thereafter.  Furthermore,…

- … the EFSF is hit with a downgrade.  Authorities brush it off.  More downgrades are coming.  The political tide is turning against the Euro .  Marine La Pen of the anti-euro National Front party is making serious gains in the polls.  François Hollande is closer to winning the French presidency and will demand a renegotiation of the euro fiscal compact. On the Greek front, “Even members of the committee concede the process (Greek private sector involvement negotiations) is unlikely to succeed in time for the crunch date: a 14.5bn bond repayment falling due on March 20."  Finally, if things were all hunky dory, why is the IMF asking for $500 billion?  —-The news trend keeps getting worse.     

- ISCS and Redbook weekly consumer metrics are showing a serious slowdown, even after last month’s disappointing Retail Sales report.  Furthermore, national gas prices have risen roughly 3.6% and the consumer is already feeling it.  Bloomberg’s Consumer Comfort Index falls to -47.4.

- While China’s GDP numbers beat analyst expectations, they portray significant weakening in the country’s export and real estate sectors.  Furthermore, persistently high inflation will limit the amount of stimulus authorities can administer.   


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

Friday, December 30, 2011

Weekly Bull/Bear Recap: December 26-30, 2011


+ U.S. manufacturing continues to show signs of steady growth.  The economy isn’t headed towards recession.  The Chicago ISM reports that its PMI report fell a smidgen, from a 7-month high to 62.5.  Order Backlogs are at their strongest level since April and will keep activity elevated in the region.  Meanwhile, the Richmond Manufacturing Index indicates stabilization, particularly in New Orders.  Need more evidence?  Take a look at the most recent ATA Truck Tonnage Index (released Dec. 21), and Rail Traffic Report.  

+ The Housing Market is the gift that keeps on giving.  Pending Home Sales rise a better than expected 7.3% MoM vs. expectations of a 1.5% rise.  The metric is at its highest level in more than a year.  This increased activity is occurring during the historically weak winter season.  Housing demand has clearly stabilized and a steadily growing construction sector will produce the jobs needed to breathe new vigor into the recovery (i.e. a positive feedback loop).  The Spider Homebuilding ETF (XHB) is hovering near 5-month highs and has broken above its 200-day moving average.  

+ Demand for Italian paper improves.  6-month bills are issued to strong demand.  The issue yields 3.25%, down from double that rate in late November.  10-yr BTPs price at a yield of 6.98%, which is much lower than the 7.56% level an issue priced in late November.  U.S. stocks markets took the results in stride.  Italy has clearly moved back from the precipice.  Monti confirms this view.   

+ U.S. consumer confidence continues its firm recovery.  The Conference Board reports that its survey of consumer confidence rose nearly 10 points, continuing a remarkable 2-month 23.6 increase.  The report cites an improving job market.  These results mirror recent improvement in Gallup’s poll of consumer confidence and last week’s University of Michigan’s survey result.  Meanwhile, the National Restaurant Association reports that its Performance Index rose to 100.6; “Restaurant operators reported their strongest net positive same-store sales results in more than four years, while customer traffic levels also grew in November.”  Hotels finish 2011 in strong fashion.  

+ The U.S. Treasury does not label China a currency manipulator and will calm fears of an imminent bout of protectionism in the months ahead.  


- The Eurozone situation continues to deteriorate.  The Euro sold off strongly on Wednesday, breaking a slight upward trend line, and hitting its lowest level in more than a year vs. the U.S. Dollar and its lowest level against the Japanese Yen in a decade.  Italy successfully sells long-term debt; but, yields rise approaching the auction and after the result.  Hungary, straight up, experiences a failed auction and passes a law that undermines IMF and EU attempts to bailout the country.  Liquidity injections by the ECB are proving futile; there is no confidence or trust.  Spanish Retail Sales in November crater 7.2% YoY after a 7.1% YoY fall in October, the metric’s 17th consecutive drop.  The country’s Economic Minister states that recession has arrived; yet, Deputy Prime Minister Saenz states that additional austerity will be implemented because the country’s budget deficit will exceed its target (sounds like a debt trap to me).  Meanwhile, Italian Business Confidence falls to 92.5 from 94.1, a 2-year low.  French unemployment hits a 12-yr high.  One of Merkel’s 5 economic advisors doesn’t dismiss the possibility of a Eurozone breakup in 2012, while the German Constitutional Court says that it would be “a mistake to pursue a United States of Europe.”

- HSBC publishes its final Chinese Manufacturing PMI result.  It is worse than the preliminary estimate of 49.0, at 48.7.  This compares with a reading of 47.7 in November and marks the second straight month of contraction.  ”Company inventories of finished goods rose for the first time in 17 months as new business wasn’t enough to offset production, according to HSBC.”  

- Japan reports an ugly set of economic numbers.  Retail Sales for November fall 2.3% YoY and was much worse than expectations for a 0.1% gain.  This translated to an equally ugly Household Spending YoY print of -3.2%.  Meanwhile, Industrial Production falls 2.6%, again, worse than the 0.7% decrease expected by economists.  

- Behind all the hoopla of stabilized demand and a statistical bounce off multi-decade lows in construction, the housing double-dip is sure to become reality early next year (it’s actually already in a double-dip if looking at the SA index).  The NSA S&P Case Shiller Home Price Index of 20 cities drops 3.4% YoY, its 13th consecutive YoY decline.

- Goldman Sachs declares that BRIC economic growth has peaked.  Emerging markets will not save the globe from recession.

Saturday, December 24, 2011

Weekly Bull/Bear Recap: X-Mas ‘11 Edition


++ U.S. data continues to show an economy that’s weathering a turbulent global economy much better than the bears could have ever anticipated:

  • The Dow Theory has flagged a buy signal.  Both the Dow and Trannie indices  notch new highs.  This price action corroborates underlying U.S. economic strength.  The equity bull market is set to continue. 
  • The Conference Board’s Leading Indicator surpasses the consensus estimate of 0.3%, rising 0.5%.  "The LEI is pointing to continued growth this winter, possibly even gaining a little momentum by spring," Conference Board economist Ken Goldstein said.
  • The downward trend in Jobless claims has driven a stake right through the heart of the “U.S. recession” thesis.  Jobless claims fall to the lowest since April 2008.
  • Michigan Consumer Sentiment surprises to the upside with a final reading of 69.9 from 64.1 in November and represents a 6-month high.  Consumer psyche is healing as the economy improves.
  • The housing market continues on its steady recovery with the NAHB Housing Index producing its best reading since 2008.   Housing Starts surge well ahead of expectations.  Even better, rising permits point to more building in the months ahead (i.e. jobs will be created).  Typically the housing market has led recoveries in times past.  Homebuilder stocks are near 5-month highs.    
  • The Architectural Billings Index is back in positive territory.  Expectations are clearly displaying a bottoming construction sector (look at the divergence between current conditions and expectations).  It’s nowhere but up from here.  This important sector will finally contribute to economic growth.

++  European economic data points to stabilization. Even stabilizing data, along with renewed and unprecedented efforts to steady the banking system, will result in renewed confidence and rallying markets.    


-  European economic data foretells more social and political pressures on the horizon.  Spanish Industrial Orders disappoint with a meager gain of 0.9% for December versus consensus expectations of 4.0%.  Italian 4th quarter GDP signals the start of the country’s 5th recession in the past 10 years (consumer confidence plunges to 1996 levels).  France is likely in recession as well.  Greek bailout talks are about to collapse as Vega threatens to sue.      

- The S&P 500 is nearing its late October highs, yet there are clear red flags in regards to the rally’s health.  The complacency is palpable.  The VIX has plunged to 20, a far cry from “blood on the streets” that sustains any significant rally.  Meanwhile, 10-yr U.S. Treasury yields are nowhere near challenging their late October highs.  Ditto for copper.  These stark differences are bearish divergences.  Italian 10-yr yields are back above the 7% level (yields for Greece and Portugal are hugging their respective high marks as well).  Banks are using their “newfound wealth” to stash more cash with the ECB, not buy crap government debt as the bulls had hoped.  Nothing fundamentally has changed in the Eurozone or China.  

- Recent economic data exemplifies the pervasive weakness slowly infecting the global economy.  Unrest continues in China and is likely to grow amidst weakening export growth and a popping housing bubble.  November Japanese exports fall 4.5% YoY.  

— The Bulls are getting carried away with the decoupling theory:  
  • 3rd quarter U.S. GDP has now been revised lower by 25%, plunging from an initial reading of 2.46% to 1.81%.  This adjustment was largely due to a sharp downward revision in annualized consumer services consumption and cautious inventory management.  Real per-capita disposable income is imploding @ an -1.9% annualized rate and will seriously impede the longer-term prospects of any recovery…  
  • November PCE: Personal Spending in November rose just 0.1%, while the all-important wage component fell 0.1%.  The Savings Rate fell 0.1% to 3.5%, the lowest since the onset of recession in 2007.  Consumption growth will not be sustainable without a significant improvement in the employment situation.   
  • The Chicago Fed National Activity Index (CFNAI) disappoints with a reading of -0.37 from -0.11.  The decrease is led by a sharp decrease in production-related indicators (i.e. Industrial Production/Manufacturing).  
  • The Aruoba-Diebold-Scotti Business Conditions Index doesn’t show a decoupling U.S. economy; instead it shows one that is simply muddling through and vulnerable to an exogenous shock, such as an Eurozone implosion or a Chinese hard-landing.   

- Iran announces plans to conduct a 10-day naval exercise at the Straits of Hormuz, feasibly impeding oil freight traffic.  The game of cat-and-mouse has the potential to upend the global recovery if it spirals out of control.  Relations between Israel and Turkey take a turn for the worse after Israel cancels a large military contract.    

Friday, December 16, 2011

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


++ The U.S. economy has clearly surprised to the upside.  Gloomy analysts have underestimated its strength, even in the face of global economic troubles.  These external issues will eventually resolve themselves in benign fashion.  

  • U.S. manufacturing data this week demonstrates continued improvement.  Led by New Orders and Expectations, both the Philly Fed and Empire State manufacturing surveys show improvement in business conditions.  Ditto for Rail traffic. 
  • Economic Bellwether FedEx reported better than expected earnings due to strong holiday sales and continued economic growth.     
  • The NFIB Small Business survey shows that hiring plans in November are the most since mid 2008, meanwhile, jobless claims plunge to 366K from 390K, the lowest in 3.5 years.  Both these indicators clearly signal a strengthening job market and economy.  
  • The Payroll Tax Extension is sure to pass and will mitigate fiscal contraction taking place next year.
  • Consumers are repairing their balance-sheets.  Household financial obligations as a share of disposable income have fallen to almost 20-year lows.  This alongside steadily growing demand.  Retail sales, while weak MoM, are actually at record highs (nominal) and the YoY growth rate remains above 6%.  Improved balance-sheets will help consumer confidence and boost spending over the longer-term.     

+ Markets have had plenty of time to digest the effects of a Greek default.  They have already priced in a default for the country; yet the system has held together.  Even better, an effective bond auction in Spain points to a stabilization of demand = improved confidence.  Also, a successful Italian confidence vote shows continued solidarity behind austerity plans.  Monti is taking care of the situation.     

+ The global restructuring is taking place as China reports stronger consumer demand (which will continue to boost our exports).  Furthermore, a high correlation between food prices and equity market performance points to outperformance of the asset class as lower inflation brings about easing in the months ahead.  Note that China now understands what needs to be done.  They are embarking on producing the solution, which will lead to secular and sustainable global economic growth.  The country also has plenty of resources to boost demand, counteracting slowing exports, thereby avoiding a hard landing.      


- Top government leaders are becoming confrontational.  Citizens are becoming resentful and terrorism against the entrenched plutocracy is a clear budding negative trend.  In addition to warning on Spanish banks, Moody’s now joins S&P, in its comments last week, with a warning on the lack of immediate resolution to the Eurozone’s woes.  And for the trifecta, Fitch slaps credit-watch negatives on multiple countries (let’s just call it “everyone”).  A mass S&P downgrade may occur this very weekend.  The latest EFSF fact sheet is released.  The fund still relies on Spain and Italy contributing roughly 31% of the fund’s capital commitments.  How’s this going to happen if they are on the chopping block?  The crisis will yield recurring flare-ups in early 2012 (starting with the bull’s favorite country, Greece).  And with dwindling political will, implementation risk will rise even further if Francois Hollande takes the French helm.  Europe’s banking system is close to suffering a heart attack; ECB again refuses to print.  Hungary/IMF talks collapse.

- The slowdown in Europe has spread throughout the globe.  Japan’s salient Tankan survey points to a deteriorating global economic outlook.  Indian industrial production fell for the first time in more than 2 years, falling 5.1% YoY in October.  Chinese exports are the lowest since the dark days of 2009, rising 13.8% in November, vs. 15.9% in October.  The country’s flash PMI indicates that a second month of contraction is in the cards.  The populace is becoming restless.  The property bubble (which exists in all its splendor) has popped.  Yet, officials aren’t loosening as expected by the bulls.  Last, but certainly not least, OECD leading indicators point to continued weakening in the months ahead.  The world is entering a synchronized global recession, and yet not only is the ECB not printing but neither is the Fed.  Stocks will need to fall further to induce action.

- Tech bellwethers Intel and Texas Instruments, cut Q4 sales forecasts.  Retail sales disappoint, as does Best Buy, despite all the hype in November.

- Geopolitics remains the bearish gorilla-sized joker in the whole bull/bear debate.  Tensions are at a boiling point after Iran proudly demonstrates the captured drone.  The U.S. has asked for its return.  So if the Iranians say no, then what?  Does the U.S. look like a weakling and mosey on?  Btw, another drone crashed this week.  Iran ‘practices' the closure of the Straits of Hormuz (oil would promptly rise over $120 and kill any global recovery).  Finally, we had some notable protectionist news this week from China.  How will Congress react when Yuan appreciation ceases as Chinese officials move to protect their export-reliant economy from a “very severe" trade situation in 2012?     

- The wound to confidence that was the MF Global implosion is festering.  The Fractional Reserve System is slowly coming apart as “Hypothecation” (the re-pledging of excess collateral) connects all leveraged liabilities to a dwindling supply of hard cash-flow producing assets.  It is becoming clear that the whole system is built on the confidence —currently fickle and fragile — that a liability has its specific collateral to backstop it.  What happens if the collateral is indirectly pledged to multiple liabilities?  Who has a right to the collateral?  MF Global may only be the tip of the credit destruction iceberg.  
Friday, December 9, 2011

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


+ 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.  


- “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.    

Friday, December 2, 2011

Weekly Bull/Bear Recap: November 28 - December 2, 2011


+ Central Banks unite.  Led by the Fed, central banks from Europe to Japan agree to cut U.S. Dollar liquidity swap rates from OIS +100 bps to OIS +50 bps, thereby lowering the cost of obtaining dollars around the world.  Meanwhile, China cuts it’s Reserve-Ratio to help their economy maintain its soft-landing.  This is a global move to assist and provide time for European governments to finalize the definitive steps towards a fiscal union… 

+ The demise of the euro is exaggerated.  A 12-yr chart, the Euro vs. US Dollar shows a euro currency that is historically very strong when compared to the dollar.  Why?  This chart puts into context how bad things really are in the Eurozone.  Authorities are formulating a solution.  Italian and Spanish 10-year yields plunge during the week, the latter due in part to Spain reporting positive fiscal data.  German retail sales rise by a more than expected +0.7% (exp. +0.1%).  Greece’s roughly $7 billion tranche is approved as that situation is put to rest.    

+ The U.S. economy is proving resistant to Europe’s recession.  It is healing.  The ADP Jobs report reported a strong gain in employment and was not unexpected if you were keeping track of the Gallup Poll for Job Creation.  The BLS labor report continues to support the thesis of a continued recovery.  It may in fact be underestimating the strength of the job market.  Job growth continues.  U.S. states report their broadest economic growth since April.  Even better, the Payroll Tax Cut extension is sure to pass and will help reduce fiscal contraction in 2012.  The Fed is keeping a watchful eye over the U.S. economy as well and is ready to provide monetary stimulus (QE3) if needed. 

+The manufacturing sector will keep growing next year, as said by Jeff Smith, director of investor relations of FedEx.  Remember that FedEx is an important economic bellwether and has been an accurate predictor of trouble lying ahead (look at the dates of the prior two links).  Car sales just keep on growing and will provide the continued demand needed to keep factories in operation.  Both the Chicago ISM and the Rail Traffic Report drive this point home (pun intended).  

+ Black Friday shines … Cyber Monday shines … as consumer flock to stores and spend a record amount.  ShopperTrak posts the largest YoY gain in its National Retail Sales Estimate since 2006-2007.  Consumer confidence surges as well.  Meanwhile, credit card delinquencies fall to a 16-yr low and supports the view that the consumer has been able to slowly repair his/her balance sheet.  Consumption has not suffered much as a result.   Growing demand and confidence signals that Eurozone problems aren’t weighing on the U.S. economy.

+ The housing market is improving.  Pending Home sales jump 10.4% and signals improving demand trends.  Inventory levels are making marked declines.  Furthermore, prices just hit an 8 year low and affordability has hit a multiple-decade high.  The time to buy is now.       


-  The U.S. economy remains in a balance sheet recession.  De-leveraging continues in earnest.  Black Friday sales through the roof?  Manufacturers are eating the costs.  Why?  Because they lack pricing power.  The 1.8% YoY growth rate in wages, from this week’s employment report, is the lowest since December-10.  Meanwhile, CPI = 3.5%.  Real spending power is vanishing.  In wtf news, S&P downgrades 37 banks.  The downgrades are partly due to an ongoing double-dip in home prices, which will soon pick up speed

- Bullish hopium keeps butting heads with reality.  The IMF denies the latest “rumor-du-semaine” of providing aid to Italy or Spain.  Notice how the EFSF isn’t even spoken about anymore?  That option has failed miserably.  Meanwhile, rumors of bilateral agreements will not sit well with European   citizens.  It’s clear that the “solution” is transforming into a convoluted and surreptitious attempt to undermine democracy on an awesome scale.  Signs of desperation are everywhere.  French and Spanish debt are soon to be downgraded.  German opposition to ECB printing stands firm.  Meanwhile, in economic news, the zone’s unemployment rate hits a Euro-era high, while PMI indicators signal the beginnings of a severe recession.         

- The global economic slowdown is permeating throughout the global economy.  More warnings of unrest as well as China’s property sector, this time from the OECD.  Moreover, Vice Premier Li Keqiang said that the property market is at a “critical stage”.  China’s policy reversal signals worse than expected problems, corroborated by the country’s latest PMI report.  China’s PMI mirrors others in the Asian sector, signaling a slowdown in the entire region.  Officials’ options are limited to deadly poisons.  South Korean Factory Output slides.  Japanese Unemployment surges to 4.5% from 4.1% in September, worse than all analysts’ estimates.  Furthermore,  the Japanese bond markets catch a chill from the Eurozone crisis.  On the Protectionist front, China announces that it’s halting Yuan appreciation, just before a high-level exchange of power for both superpowers in 2012.  Both leaderships will be working to assert their strength vs their archrival.

- Geopolitical risk is making a strong comeback.  Oil is near $100 a barrel despite very little visibility in the demand outlook.  Why?  Well, there’s some shady happenings going on between Israel and Iran, which bodes ill for a stabilization of the region; compounding the increased tensions, a potential “Iran Hostage Crisis" part deux occurred this week, this time against the UK.  Syria is turning into an uncomfortable game of chicken between the U.S., China, and Russia.

-  The bulls are bullish about a global central bank intervention.  They should be asking themselves, “do officials see danger lurking?”  They took action because the situation is deteriorating quickly and confidence remains fragile, not because things are all hunky-dory.  It is becoming “shockingly clear" that printing funny money will make matters worse.  "We are headed in the wrong direction, and if we don’t bring it under control, we are going to have social unrest."—Fisher.  

Friday, November 25, 2011

Weekly Bull/Bear Recap: Thanksgiving Edition, 2011


+ U.S. economic data remains a major thorn in the bear thesis.  It proves that the economy is resistant to a European recession:  

+ The World Bank says that China will head for a soft-landing.  Aside from falling inflation (see page 2) and loosening monetary policy, Asian countries also have strong balance sheets and will be able to resort to fiscal stimulus to vaccinate their economies making them resistant to a potential West slowdown.  According to the Conference Board, they might not even have to resort to such measures.

+ Profits continue to surprise to the upside.  Only in the 1970s and 1980s did we see PE ratios this low when using NIPA (National Income and Product Accounts) profits as the “E” in P/E.  Those periods turned out to be fantastic opportunities to buy stocks for the long-term investor.   

+ Lakshman Achuthan looks like he’s about to get egg on his face.  The rate of growth of the ECRI’s U.S. Leading Indicator has improved for the 3rd straight week.  The index’s growth rate improved to -7.3% from an upwardly revised -7.8%.  The index is beginning to signal a re-acceleration in U.S. economic growth.  


- In Eurozone news, Banco de Valencia is nationalized and signals the first of many more to come in Europe.  Belgium, which has not had a government for 18 months now, demands a renegotiation of the Dexia bailout.  They demand that more of the weight be put on the French government.  Their debt-rating is cut by S&P.  A downgrade of France’s credit rating and a scrapping of the current form of the EFSF is practically   inevitable.  Ireland demands relief in the form of a reward for their sacrifice in bailing out investors in 2008.  Greece scraps the orignal bailout with the EU and is now demanding larger haircuts.  The core of Europe has officially been infected as Germany experiences a failed Bund auction.  The Bundesbank had to step in and buy 39% of the planned sale due to little demand (is this monetization?).  Belgian/German spreads hit new highs; Italy 10-yr yields are soundly above the 7% mark; Austria is finding itself on the edge of a banking crisis (which it will obviously bailout, thus resulting in one less AAA country); and Hungary turns hungry.  European credit markets are paralyzed.  The bulls plead for the ECB to print, however, If they did, then countries would need to become apostates of their sovereignties, that’s unlikely to happen.  Preliminary Eurozone PMIs for manufacturing and services sectors continue to report contraction.  Germany remains opposed to Eurobonds and ECB printing.    

- The deficit committee finally announces the obvious and sets the stage for a feisty but futile attempt to expand the payroll tax and unemployment benefits.  The fiscal contraction that would result would be the cherry on top for the recession in 2012.  Furthermore another stress-test is in the cards for the banking sector.  The scenarios they are using are downright ugly.  This is another warning to the sound investor who “reads between the lines”.   

- On the U.S. economic front, Q3 GDP is revised downward by 20% to 2.0% from 2.5%.  An important leading indicator is pointing to further slowing in the coming months.    Business Investment (Core Capital Goods: excluding transportation & defense) takes a sizable hit in the October Durable Good Orders report.  It declined 1.8%, while last month’s reading of +2.4% is revised down to a gain of just 0.9%.  From an earnings standpoint, guidance for the 4th quarter and 2012 disappoints.  

- On the global economy front, China’s HSBC preliminary manufacturing gauge sinks to the lowest in 32 to months on the back of a renewed contraction in new orders.  Copper is rolling over as well and is poised to take out its lows next week.  These “leading-indicators” of the global recovery are flashing red.  Meanwhile, Geopolitical tensions are heating up with a possible showdown in Syrian waters between the U.S. and Russia.  Meanwhile, Iran/Israel’s furtive crisis keeps bubbling

- Treasury yields are raising red flags as well.  Yields are back near early October lows and dictate that equity markets have more to fall as they catch up with the asset class that has been right-on in diagnosing the Eurozone crisis.  Capital floods U.S. Treasury auctions for the week, indicating a raised sense of fear.  Taken together with copper prices and other poorly performing in Asian indices, it’s becoming clear that the global economy has stalled.     

Tuesday, November 22, 2011

Belated Weekly Bull/Bear Recap: November 14-18, 2011

I mentioned how I wouldn’t post a Weekly Bull/Bear Recap for the prior week.  However, given how important it was imho, I decided to do a belated report just to “register” everything.  



+ The Eurozone still has an opportunity to resolve the crisis without it critically damaging the recovery.  The region’s most important generators of growth: the French and German economies, showed signs of resistance with GDP growth notching annualized growth rates of 1.6 and 2.0% respectably.  Even if the region fell into recession, the effect on the U.S. economy is absorbable.  

++ The U.S. economy is resistent to European woes:

  • The Conference Board’s Leading Indicators post a strong rise and confirm that the U.S. economy may in fact accelerate during the early part of 2012.    
  • Jobless claims fall to their lowest levels since April.  The job market is improving before everyones’ eyes.  It’s important to note the strong correlation between the S&P 500 and the trend in jobless claims.  The market will catch up with economic reality very soon.
  • Retail sales for the month of October rise 0.5% after a 1.1% surge in September.  Core Retail sales log in their strongest month since March and the headline measure has risen 5 months in a row.  Weekly Retail Metrics show the beginnings of a “surprisingly solid holiday shopping season”.  
  • It’s not just the consumer who’s showing increased mettle.  Manufacturing data shines as the November Empire Manufacturing Index reverts back to growth after 5 months of contraction on the back of an increase in shipments.  Expectations rebound to 39 from 6.7.  Industrial Production (Factory output) for October grows for the 4th month in a row, up 0.5% from 0.3%.  
  • The Housing market is showing signs of life with the Housing Market Index posting a reading of 20 for the month of November.  While this remains in recessionary territory, when coupled with other housing related indicators, such as housing permits, one can see that the sector has hit bottom already and is slowly on the road to recovery.     

+Producer Prices fall more than expected in October, down 0.3% MoM.  The YoY rate declines from 7.0% to 6.1%.  U.S. wholesale prices in for the same month fall at the fastest monthly rate since February 2010.  Meanwhile, CPI unexpectedly declines as well.  The Fed Hawks have little reason to stand in the way of further QE.  Risk assets, especially commodities, will benefit as the doves take charge.     


- European data continues to point to recession.  The Eurozone economy grew at its weakest rate since exiting recession over 2 years ago, with an annualized growth rate of 0.6% for Q3.  While the bulls may point out that the German and French economies showed signs of resistance to the overall glum results, it may serve well to note that Germany’s ZEW Economic Sentiment indicator just plunged to -55.2 in November from -48.3 (…to go along with the country’s dismal Industrial Orders report from two weeks ago) and that France is implementing austerity. Eurozone-wide Industrial production sinks 2.0% in September and Italy’s Industrial Orders report shows a cratering of 8.3% in September.  These terrible metrics come packaged with 3-year high inflation.          

- European technocratic governments will not solve the structural problem.  In fact, they may make the situation worse, given their illegitimacy.  Further austerity will lead to this dawning realization.  Spain douses prospects of successful adherence to deficit targets, while “alarm bells are ringing" in France.  The ECB sticks to its view that the Securities Market Programme is only temporary.  This results in an explosion of various bond spreads, from Austria to France to Belgium.  Italian 10-yr yields of BTPs burst through the 7% level again; French OAT/Bund spreads soar to Euro-era highs; the Spaniards have a failed auction (Bonos respond in-kind); and even German bunds aren’t bought fervidly anymore.    

- Global economic data is deteriorating further.  Where will the growth catalyst come from?  China is hesitant to loosen monetary conditions too quickly, despite inflation coming down.  Warnings of a banking crisis and a popping property bubble grow louder.  Japan cuts its economic outlook due to weaker global conditions.  India remains mired in stagflation.  

- The housing market isn’t going anywhere.  Mortgage applications for purchase remain near decade-lows.  Furthermore, the manufacturing sector isn’t showing broad growth anymore, and with a deteriorating global economy, won’t provide the solid source of growth that the bulls have grown accustomed to.  

Friday, November 11, 2011

Weekly Bull/Bear Recap: Veteran’s Day Edition, 2011


+ The Greek saga ends with the inauguration of a new coalition government; positioned to swiftly ratify the EU bailout package.  Italy’s Senate approves economic reforms needed to bring back confidence into markets.  Berlusconi will be out and Monti in.  The bears never thought it could happen.  Officials came through in the clutch.  They will not let the Euro fail.  Italian yields collapse to 6.4-6.5% and well away from the danger zone of 7%.  Slowly but surely the largest headwind for the global economy is weakening on the back of strong and decisive policy actions.  With the Eurozone contagion contained, “we’ll have a slowdown in the world economy, but a manageable one."   

+ Chinese inflation is in a lucid downtrend and sets the stage for additional easing from officials.   The Year over Year (YoY) change in CPI for October prints inline with expectations at +5.5% vs. +6.1% in September and +6.2% in August.  The good news is reinforced by the PPI reading, sinking to +5.0% YoY vs. +5.7% expected.  The soft-landing is materializing before our eyes.  There are absolutely no signs of a hard-landing.  While domestic investment growth may slow, consumption is charging to take its place.  The bears are in for a shock and the bull market will reignite, running shorts over.  Chanos will have egg on his face.  

+ October shows clear improvement in manufacturing as per the American Association of Railroads.  UPS CEO Kurt Kuehn states that he believes the holiday shopping season “will be solid”.  University of Michigan reports that consumer sentiment has recovered to highs last seen in June with a reading of 64.2 in November, vs. 60.9 in October and 61.5 expected.  Momentum in consumer spending has led to increased demand to restock inventories.  Jobless Claims fall under 400K and to the lowest in 7 months.  Finally, exports hit an all-time high in September.  Obama’s pledge to double exports by 2015 is proving prophetic.  The U.S. economy is resistent to recession in Europe.

+ The time to buy for the longer-term is now, due to fundamental, valuation, technical, and sentiment factors. Problems around the world are obviously recognized and have been priced in.  Furthermore, leaders will do everything to avoid an outcome that would put the global recovery at risk.  Besides, events in Europe really don’t affect earnings or cash flow growth of domestic companies.  The market is trading on sentiment/psychology, not fundamentals.  The U.S. economy has proven that it’s resistent to a Eurozone slowdown.  A Santa Claus rally is coming as Europe headwinds weaken.

On a four quarter trailing basis, earnings for the S&P 500 are set to total $94.77 (Operating Earnings), which would eclipse the old record of $91.47 set in Q2 2007.”  Folks, the S&P 500 is now trading at only 11.6 times next years earnings of $108.01 and at 13.7 times trailing twelve month earnings.  Should normalcy in PE ratios return (15), the S&P 500 would rally roughly 14 and 30% respectively from 1,250.  For the bears, does the graphic below look like a V-shape recovery to you?  With a Eurozone resolution slowly but surely coming and a China soft landing, 2012 will be another record year for U.S. corporate profits.  The time to buy is now as this realization begins to hit in early 2012.   



- Political risk continues to grow.  Eurozone governments are becoming sclerotic and ineffable sell-offs in financial markets are boarding on panic.  This time German citizens are asking for a referendum.  Merkozy lays the first hints of a restructured Eurozone (ie the Euro in its current form would be finished) —only to fervidly deny it less than 48 hrs later (what is this high school?).  Slovakia openly ponders a Eurozone split as well.  Italy’s 10-yr yield surpasses the 7% level, while the entire Italian bond yield curve inverts.  100% of the time a country’s 10-yr yield has surpassed this level, they’ve requested a bailout.  But Italy is too big to save.  The ECB would need to print with reckless abandon.  However, Germany has said no to the idea (can you blame them after Weimar?).  Besides, inflation is already running hot in the country.  The first EFSF bond-issue receives tepid demand and officials now warn that the EFSF will probably be reduced in size (no longer €1 Trillion in firepower).  An odd sequence of events culminates with S&P maintaining France’s AAA rating with a stable outlook; the market gainsays that distinction with OAT/Bund spreads hitting Euro-era highs.  Let’s not forget the Bonos/Bunds spread; it just hit an Euro-era high as well.

- European economic data disappoints and signals that the region is plunging into recession.  German industrial production falls 2.7%, while Eurozone retail sales fall 0.7%.  Both indicators post their 2nd consecutive decline.  France is entering recession, yet officials are implementing austerity.  Good luck with that.  Italian industrial production falls in September; a “national unity” government, which has the bulls all giddy, is about to make it worse.  Spain’s feeble recovery stalls.  Bulls are hoping (there’s that word again) for a mild recession in the region.  Really?.        

-  U.S economic data refutes bullish hopium…again.  Corelogic reports a second consecutive decline in home prices and they expect the trend to continue.  Delinquencies and foreclosures are back on the rise.  Fannie Mae requests aaaaaaaanother bailout, this time $7.8 billion (a few days after Freddy Mac requested its pound of taxpayer flesh).  1/3 of all mortgaged homes are underwater.  The NFIB Small Business Optimism index remains in recessionary territory, coming in at 90.2 for the month of October vs. 88.9 the prior month.  To put this reading in perspective, the average recessionary reading is 92, while the average expansion reading is 100.  The ECRI sticks to its guns.  Recession is a “fait accompli” according to them.

- Chinese data confirms a “synchronized global slowdown" taking place with exports plunging 7.1% MoM.  The YoY growth rate falls to 15.9% YoY in October vs. 17.1% YoY in September, the lowest in almost 2 years.  Weakness will continue.  Lets not forget that exports account for roughly 30% of their economic structure.  Auto sales for October implode 7+% and shows that the consumer is weakening.  Consumption makes up roughly 35% of China’s economy.  Furthermore, a property bubble is in the process of popping and will precipitate a collapse in fixed-investment, which accounts for roughly 50% (source IMF) of Chinese economic growth.  If the U.S. and Europe go into recession (Europe’s already in one), China will undergo a hard-landing, plain and simple.      

- The QE printing train continues in earnest with Swiss National Bank’s chief Phillip Hildenbrand reaffirming his commitment to defend the 1.20 level.  Remember how the UK did its own QE?  Well, it’s not working.  The bulls are in for a rude awaking when Bernanke unleashes QE3 only to have the U.S. economy go into recession anyways.

- The Wall of Worry has crumbled and has given away to a Slope of Hope.  Investors are enthusiastically awaiting the famed Santa rally.  The margin of error for Eurozone officials is very thin.  There better not be any “unexpected” bad news in the coming weeks. 


Friday, November 4, 2011

Weekly Bull/Bear Recap: Halloween Edition ‘11


+ China’s Purchasing Manufacturing Index (PMI), conducted by HSBC, points to a stabilizing economy, improving to 51.1 from 49.9.  Both new orders and export orders recuperate, moving above 52.  The former notches its best result since May, while the latter notches its best print since November of last year.  All this is happening while the Yuan appreciates to its strongest level since 2005, meaning that the economy is able handle the pressure.  The Chinese economy and the engine of global growth is undergoing a soft-landing.  The Shanghai Composite Index rises to the highest in 6 weeks as Premier Wen is on the ball and will ensure that a soft-landing takes place by “fine-tuning" monetary policy to focus more on growth over inflation.    

+ It’s not just in China where we are beginning to see stabilization.   South Korea’s latest PMI shows symptoms of a soft-landing in the communist country as well.  Meanwhile, Russia, Brazil, and India, all post PMI results indicative of stabilizing economies.  Russia’s PMI rises to 50.4 from 50, India’s rises to 52 from 50.4, and Brazil posts a 46.5 from 45.5.  With monetary policy now more focused on growth, lower interest rates will surely help.   The time to buy is when everyone is in panic mode.    

+ The National Restaurant Association’s Restaurant Performance Index rises above the break-even point and signals that the economy remains resilient and in growth mode.  Let’s not forget that this indicator was an accurate harbinger of tougher times for the U.S. economy in 2007 (see the chart in the link above).  Currently it’s not showing a contracting economy.  The consumer remains durable and poor confidence indicators more than likely reflect frustration with government policy instead of an actual decline in economic conditions.  Furthermore, Gas prices for October averaged $3.44, a drop of 8% from the prior month.  This is in effect a tax break for the consumer…  

+ … a key example of this stable demand can be found in the latest car sales data, which shows the highest level of annualized sales since February.  Based on the chart (thanks to CalculatedRiskBlog), one can clearly observe the slowing that took place during the soft-patch in June.  Given that we’re not seeing that right now, it confirms that the economy is not falling apart by any means.   

+ The job market shows also shows a stout economy despite incessant headwinds.  Gallup signals a drop in unemployment in October.  The ADP Employment report shows a gain of 110K jobs vs. expectations of 100K, led by small businesses.  Challenger Gray & Christmas reports that planned layoffs fall to 43K, the lowest since June.  Jobless Claims fall to the lowest level in a month.  Worker productivity rises in the 3rd quarter after falling the prior 2 quarters, while labor costs fall.  Both falling costs and higher productivity will help profit margins maintain their high levels.  The October BLS jobs report shows an unexpected decrease in the unemployment rate due to a strong gain in the household survey; 80,000 news jobs are created and prior months are revised up by a total of 102,000 jobs.  Overall, none of these indicators are pointing to a double-dip in the economy.            

+ In the U.S., the Fed meeting produces a bullish scenario for equities.  With no Hawks, but instead one Dove dissenting, the stage is set for QE3 in the immediate months ahead.  The economy is slowly improving and inflation has begun its decent.  Lower inflation allows the Fed more flexibility for accommodative policy.  In the Eurozone, Draghi delights the bulls with a surprise rate cut.  The new ECB chief is brazen and proves that he is more active than Trichet.  A general shift has occurred with the world’s central banks.  They are united in loosening policy to promote growth.  Don’t fight central banks.  Having done so in the past couple of years has been a losing strategy, hands down.  

+ The Texas Manufacturing Outlook and Chicago PMI surveys show that manufacturing, remains in growth mode.  While it has slowed somewhat, there is little sign of contraction on the horizon.  In the Chicago PMI, New Orders remain soundly above the 50 mark, at 61.3, while the Employment sub-index just hit its highest level in 6-months.  Factory Orders for September were better than expected on the back of strong business investment.         


- Reality bites for the Eurozone.  The first sale of EFSF bonds is cancelled due to “market conditions”—(a euphemism for no confidence?).  Italian yields spike over 6.3% and is also a vote of no confidence from markets (will margins get hiked soon?).  Berlusconi arrives at the G-20 meeting empty handed; Merkozy/EU mandated reforms are met with stiff resistance with Umberto Bossi stating that raising the retirement age from 65 to 67 would spark a revolution in the country.  As a result, Italy is disgraced at the G-20 with a "closer monitoring" of the country’s deficit-cutting plan by the IMF in addition to the EU —that didn’t sit well with Berlusconi.  The Italian government is close to collapsing.  In France, 10-yr OAT/Bund spreads hit a Euro-era high.  Draghi states that ECB support is “temporary and limited”; don’t count on the ECB stepping in and saving the day (here’s my crazy hunch on what would happen if the ECB were to print…and here’s a good reason why).  Democracy dies in its birthplace and is to be replaced with a technocracy (no referendum, austerity will continue until morale improves).  Papa I is likely out and could be replaced with Papa II (“yes” confidence vote pending).  If a “no” results, snap elections would take place (ie. the entire bailout will be in jeopardy again).  Meanwhile the German Constitutional Court is back, playing the “evil” enforcer of actual democratic principles. The next default is knocking on the door as Portugal’s 10-yr yield is flirting with 12%.  Spain throws some more ice cold water with its announcement that GDP stalled in the 3rd quarter, calling into question the viability of achieving their deficit targets.  There’s a good possibility that the country is already in recession and that the coming months will be worse.  The G-20 meeting fails to provide a breakthrough to propitiate investors; even worse, hardly any countries from the G-20 have said that they’ll participate in EFSF. 

- Eurozone Economic data was pitiful as well: German Retail Sales in September increase less than expected, coming in at 0.4% vs. expectations of 1.1% and follows a 2.7% plunge in August; meanwhile October Unemployment rises for the first time in 18 months; the country’s October Manufacturing PMI shows a contraction for the first time in 2 years; and finally, September Factory Orders implode 4.3%, falling for the 3rd consecutive month vs. expectations of a 0.1% increase.  Italian Unemployment spikes up to 8.3% vs. expectations of 7.9%; its October Manufacturing PMI comes in at 43.3, while Services PMI prints an ugly 43.9, a 28 month low; at the same time CPI rises more than expected 0.6% vs. 0.2%.  Eurozone Manufacturing PMI for October drops more than initial estimates to 47.1 from 48.5 in September and below the initial estimate of 47.3.  Eurozone unemployment rises to 10.2% vs. expectations of 10% (highest since mid-98), all the while CPI rises 3%.  Draghi cuts rates (the Bundesbank must be thrilled) and states the obvious: Europe is headed towards recession.  Mild may be putting it….mildly though.     

- Japan moves forward with QE.  The U.S. might do QE.  The U.K. is doing QE.  And now the ECB must print in order to stem contagion in the region (or Germany proposes a fiscal union — referendum time for Germany in that case).  Should the ECB act, expect oil at $100 in short order and a global stagflationary scenario to develop in the months ahead.  Savers and those on fixed income are getting royally screwed with “funny money” printing.    

- The global economy is screeching to a halt.  China’s Official Manufacturing PMI (yes there are two) falls to 50.4 in October from 51.2 and the lowest since February ‘09.  Taiwan’s PMI is mired in contraction.  South Korea’s exports to Europe plunge 20+% YoY.  The Reserve Bank of Australia cuts interest rates to 4.5%, citing signs of slower global trade along with lower commodity prices.  You can throw a popping housing bubble into the explanation as well.  The disquietude in Latin American markets increases as Brazilian Industrial Production disappoints.  Canada reports its worst jobs report since 2009.  OECD cuts its rosy outlooks for the U.S. and Europe released in May down by 42% and 85% respectively (D’oh!!).      

- The investment community is thunderstruck on reports of missing capital (lastest figure = $633 Million) from MF Global.  The firm made leveraged (there’s that word again) bets on risky European sovereign debt markets.  Commingling occurred in one of the largest commodity brokers as well as a big player in the futures market.  Investor confidence, during a very fragile period for financial markets, will erode further.  Bill Gross —”(investors are) more concerned about the return of their money than the return on their money”.     

- The U.S. economy continues to deteriorate.  A Leading indicator for the job market, the Conference Board’s Online Labor Demand Index, is flagging a slowdown in the coming months.  The Manufacturing recovery is stalling as per the Institute of Supply Management (ISM), as its manufacturing index falls more than expected to just above the 50 mark.  While new orders did indeed cross into positive territory, the even more important “backlogs” component remains in contraction.  Without growing backlogs, the sustainability of this tepid pop in new orders remains in question.  The American Staffing Association reports that labor demand is trailing the prior year.  Chain Store sales disappoint as the Savings Rate is at 2007 lows (1.8% YoY in avg hr earnings doesn’t keep up with 3.9% YoY CPI — where’s the spending power going to come from?).  And finally, we have the Bloomberg Consumer Comfort Survey falling last week to the lowest level since the the dark days of 2009.  From Econoday: “the index fell to minus 53.2 in the week ended October 30, the second-lowest reading in almost 26 years of data, from minus 51.1. The gauge has held below minus 50 for six of the past seven weeks, a period unmatched even during the 2008-2009 economic slump.”

- It’s time to start paying attention to developments here.     


…and for a little humor to end this wild week, courtesy of CNN (via Zero Hedge)