Weekly Bull/Bear Recap: Jan. 28-Feb. 1, 2013
Bull
U.S. Economic Activity is beginning to reaccelerate:
- Manufacturing reports this week show an improving picture. The ISM Index increases from 50.7 to 53.1 in January. New Orders and Employment subindicies are in solid positive territory. Meanwhile Markit’s PMI Index rises from 54 to 55.8. Both notch their best readings in 9 months. Regionally, the Chicago and Dallas Feds report that activity is picking up steam. Furthermore, Durable Goods Orders are pointing to a stabilization in demand with business investment increasing for the third consecutive month. Manufacturers are becoming more confident in future demand.
- Upward revisions in November, from 161K to 247K, and December, from 155K to 196K, together totaling +127K, accompany a positive BLS jobs report for January (+157K). Meanwhile ADP reports that companies hired at the fastest pace in almost a year. Challenger, Gray, & Christmas announces that job cuts for January are the third lowest since 1993. Firms do not see deteriorating conditions in the months ahead and are maintaining their headcount. The job market continues to heal.
- Light Motor Vehicle Sales start off strong in 2013. Consumption growth continues and will support the economy.
- Overall, Consumer confidence is stabilizing. While we’ve seen some indicators point to souring prospects, other surveys, such as Gallup’s Poll of Consumer Confidence and University of Michigan’s Survey of Consumer Sentiment point to reduced concern over upcoming negotiations in Congress.
- Rising home prices remain a positive for consumer psychology. Prices are set to climb throughout 2013, partly counterbalancing worries over higher taxes. Meanwhile Detroit is seeing a revival —(told you so!).
+ The global economy is set to reaccelerate in the coming months according to JP Morgan’s Global Manufacturing PMI, led by a reacceleration in China (due to domestic demand) and firming U.S. activity. Improvement in these countries is spilling over into Europe…
+ …Germany’s Markit Manufacturing PMI is now just a smidgen below 50, which delineates between contraction and expansion, at 49.8 (an 11-month high). Furthermore, Consumer climate, reported by the Gesellschaft für Konsumforschung (Gfk) group, reveals an improving state of confidence. Perhaps this is due to a recovering job market. Meanwhile, while still contracting, the majority of country-specific PMIs (Spain, Italy, Hungary, and Czech Republic) indicate the worse is over of the region’s recession. The improvement in the global economy can also be seen in Brazil, where the unemployment rate has fallen to a record low.
(Source: Markit Economics)
Bear
- Investors have piled into bullish bets (but earnings have flatlined since Q2 2011), economists all agree that the economy is poised to expand, the VIX is at 2007 levels before the crisis struck, and the bears are capitulating. All are signs of extreme complacency in the face of festering bearish macro trends……
(Weekly Readings —— Solid Line = 32-week average)
- …..and why are investors giddy? Because stocks keep on rising. But smart investors know to use REAL, not Nominal gains to correctly value wealth. “Zimbabwe’s stock market was the best performer this decade — but your entire portfolio now buys you 3 eggs.” — Kyle Bass
- The U.S. Economy is extremely vulnerable and is on the cusp of recession:
- Bull are doused with a bucket of cold water as 4th quarter U.S. GDP prints negative for the first time since Q2 2009. The negative print is a crystal clear indication of how weak and vulnerable this recovery is. Curtailing government expenditures, higher taxes, and rising gas prices as the summer approaches will be too much for the economy to bear.
- U.S. Consumer confidence, as per the Conference Board Consumer Confidence survey, plunges again in January, erasing all of 2012’s gains. Furthermore, the Bloomberg Consumer Comfort Index falls for the fourth straight week. Weekly sales metrics, such as Goldman ICSC and Redbook, reveal weakening consumption trends. This ongoing trend casts a cloud over the direction of consumer spending as worries over reduced incomes due to the expiring 2-yr payroll tax holiday ferment.
- The Household Survey, embedded beneath the widely touted headline jobs number this morning, has not confirmed the improving job market for the third successive month.
- The FOMC meeting reveals that Fed officials are worried about a stalling economy (confirmed by Q4 numbers) as well as creeping disinflation. Monetary policy is powerless to arrest continued sluggish in the economy; worse, as investors appreciate the negative impact of reduced consumer incomes, there will be a crisis of confidence. ”Don’t Fight the Fed” will be a maxim of the past.
- Europe’s troubles lurk in the background, receiving very little press. The budget scandal in Spain is quietly picking steam and Retail Sales in the country fell for the 30th consecutive month in December. Spanish 10-yr borrowing costs advance roughly 5% this week. Looking at a 3-month view, we now see a higher high. Meanwhile, car sales throughout the periphery remain in a distinguishable downtrend and retail sales throughout the region signal consumer retrenchment. Moreover, Italian Consumer Confidence slumps to a 17-yr low and Business Confidence unexpectedly falls.
- If China has really bottomed and is on the brink of a sustainable recovery, try telling that to the Australians. Straya’s mining-based economy is signaling a red flag for global recovery enthusiasts.
Weekly Bull/Bear Recap: Jan. 21-25, 2013
Bull
+ Existing home sales may have underperformed the consensus forecast, but for good reason. A lack of homes for sale (supply), particularly at the low-value end, was the culprit. This development will help maintain upward momentum in home prices throughout 2013. Moreover, New Home Sales may have printed a negative MoM growth-rate, but this was due to a huge upward revision in November and doesn’t deter the bigger picture of continued growth for the sector in 2013. Overall, inventory levels remain very lean. Higher home prices will result in a positive wealth effect for consumers and help support consumption. Furthermore, low inventory levels will act as an incentive for homebuilders to hire, buttressing economic activity.
+ The U.S. job market is clearly on the mend from the looks of the jobless-claims data. At roughly 352K, the 4-week average is now at its lowest level in almost 5 years. This development is a harbinger for a solid January payrolls report, due in a week from today.
+ The bears’ strongest point, a stalling manufacturing sector, isn’t confirmed at all by Markit’s latest preliminary PMI reading. For January, the overall index rose from 54 to 56.1, a 10-month high. Furthermore leading indicators in the report, such as New Orders, point to further expansion in the months ahead.
+ The world’s largest economic bloc, the European Union, is clearly stabilizing. Germany’s manufacturing PMI rises to the highest in almost a year, while consumer confidence in the European region expands for the second month in a row. Both reports are for January. Meanwhile, the ZEW Center for European Economic Research reports that investor confidence in Germany skyrocketed 24.6 pts, hitting a level not seen in more than 2.5 years (same story for Euro-area confidence). Finally on the financial front, investors are giving the thumbs up at recent reforms in Spain and Portugal; both countries issue bonds to strong demand —- meanwhile, many banks that participated in the LTRO at the zenith of the crisis, are now repaying their loans quicker than expected, a sign of confidence that the worse is over.
+ China continues to surprise to the upside. The country’s manufacturing PMI, released by HSBC, hits a 2-year high in January. Furthermore, Copper is about to break out of its multi-year triangle to the upside (see 3-yr view).
+ The Conference Board’s U.S. leading indicator points to strengthening economic growth in the months ahead, rising 0.5% in December. “Housing, which has long been a drag, has turned into a positive for growth and will help improve consumer balance sheets and strengthen consumption,” says Conference Board economist Kenneth Goldstein.
Bear
- Manufacturing has stalled and is looking to contract soon, as the Federal Reserve Bank of Richmond reports that its manufacturing index slumped to a 6-month low in January. This report follows news of weakness in the sector from the New York and Philly Federal Reserve Banks. Housing, which now only accounts for only 3% of U.S. GDP economy will not be able to pick up the slack (manufacturing accounts for 12% according to the National Association of Manufacturers)…
- …furthermore consumption, which accounts for roughly 70% of the economy is set to shift down a gear as consumers hunker down as they face an expiring 2-year payroll tax holiday. Bloomberg’s Consumer Comfort, which confirms recent falls in the University of Michigan and Conference Board consumer confidence surveys, falls to a 3-month low.
- Complacency reigns in Euroland as Draghi states that the darkest times have passed. Are we really out of the woods? Investors are ignoring worrisome developments. Spanish unemployment hits a record high while stories of corruption within the country’s government swirl about, creating political uncertainty at the flashpoint of the debt crisis. Meanwhile in France, Europe’s second largest economy, recession is knocking on the door and could result in another flashpoint.
- From a technical perspective, stocks are very overbought at these levels. Now is not the time to make risk-on bets as the S&P 500 also approaches multi-year resistance and many macro risks remain lurking in the background.
—(Source Bespoke Investment Group)
- Common sense says that constant intervention and warping of financial markets by central banks will inevitably come back to haunt investors and the global economy. Warnings grow of a credit bubble as rampant central bank intervention has masked the true cost of money. The subsequent adjustment will undoubtably be painful.
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.
Bull
+ 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.
Bear
- 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.
A weak economy and high unemployment could hurt President Barack Obama re-election chances in November and bolster Republican challenger Mitt Romney’s campaign. Republicans are in Tampa, Florida, this week to formally nominate Romney and have pointed to the dismal growth in making the case to elect their candidate. (via New GDP Numbers Do Obama No Favors — US Business News - CNBC)
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I’ve had a jump on this trend since the beginning of the year:
“While Obama has exercised enormous patience for China’s economic restructuring, political will is clearly decreasing. Mitt Romney looks to be the front-runner for the Republican Party in the presidential elections. It is clear that he has no misgivings on China being a currency manipulator. If the U.S. economy were to go into a double-dip recession, Obama’s chances of reelection would decrease markedly, while Romney’s would increase. The probability of this political outcome can be seen in real time here, here and here (notice the inverse correlation between the final two charts).”
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Here’s my mid year outlook:
“If one’s higher probability scenario calls further economic turbulence, like mine, it would be prudent to begin wondering what life would be like under a Romney presidency in regard to global trade.”
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While it’s not a given that Romney will win, it seems that a worsening economy would doom Obama.
On the other hand, the revision upwards was due to stronger than expected consumer spending:
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“The upward revision to second-quarter growth was largely because consumers spent at a slightly faster pace than first estimated. Consumer spending grew a 1.7 percent rate, better than the 1.5 percent initial estimated. Exports, which add to growth, were also stronger, growing at a 6 percent rate.” — CNBC
Spanish Recession Deepens as Austerity Damps Outlook: Economy - Bloomberg
Spain’s recession worsened in the second quarter as the government’s austerity push to reduce the euro area’s third-biggest budget deficit and a slump in consumer spending offset growth in exports.
Gross domestic product fell 0.4 percent from the previous quarter, when it declined 0.3 percent, the Madrid-based National Statistics Institute said today. That’s in line with an estimate published July 30. Separately, Spain’s borrowing costs fell to the lowest in three months at an auction today after the nation’s bonds rallied this month on optimism the European Central Bank will agree on a plan to help peripheral nations. — Bloomberg
Fed’s Rosengren Says Jobs Slowdown Signals Further U.S. Weakness - Businessweek
“My discussions with bankers, exporters, and business managers indicate more restraint by firms in investing in capital, and in hiring employees, as the firms wait for some of the economic uncertainty to be resolved,” Rosengren said.
A more interconnected global banking system means that a “serious financial shock” in Europe could have a “large impact” on banking shares and the broader U.S. stock market, he said.
“Such stock price declines could impact households and businesses on both sides of the Atlantic, and problems in Europe could potentially cause a more significant retrenchment by European financial institutions operating in the United States,” Rosengren said. “Given global employment and fiscal challenges, the global economy remains quite vulnerable to financial shocks.”
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Mr. Rosengren sees what I see: “Continued uncertainty is breaking the current fragile one (positive feedback loop) and the prospect of a self-fulfilling prophecy of global recessionis becoming dangerously real.” (RCS Investments Macro Outlook Mid-2012)
The G-20 summit beginning tomorrow kicks off a round of crisis meetings that take place amid the weakest global economy since the 2009 recession. Its four euro-region participants, German Chancellor Angela Merkel, French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy, then meet in Rome on June 22. European Union leaders hold their own summit in Brussels June 28-29 to discuss a road map to closer political and economic union as a means of staunching the turmoil. (via Europe Gets Emerging Market Crisis Ultimatum as G-20 Meet - Bloomberg)
Lakshman Achuthan brings the case of falling coincident indicators.
I believe that the odds are in favor of a U.S. recession during the year. Global growth continues to slow and recognition risk in Europe remains elevated. China’s trade numbers are also showing substantial slowing. This exogenous headwind will only increase throughout the year.
Negative consumer dynamics (rock bottom savings rates as well as poor income growth) will keep the U.S. consumer vulnerable. While I still believe the U.S. recovery continues, it is weakening and becoming increasingly fragile.
NFIB small-business index at post-recession high - MarketWatch
Couple this news with yesterday’s Employment Trends Index (another post-recession high), stabilizing home prices and consumer confidence and the case for a continued U.S. economic recovery remains viable.
However, with Europe taking a drastic turn for the worse in recent days and Germany now finding itself ostracized, it feels like the union is facing its fiercest test yet. Germany must relent to Eurobonds so that trade and budget deficits in peripheral countries are recycled by German surpluses.
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“Germany is pursuing a “balance-of-payments (BOP) recalibration” by forcing these nations to become surplus countries. This involves increasing competitiveness via internal wage deflation (i.e. cutting costs), in an effort to drastically reduce or eliminate their trade deficits. It also requires that governments eliminate their budget deficits by raising taxes and undergoing austerity. As long as German-mandated austerity persists, the probability of a Eurozone split up will increase. These policies are resulting in deep recessions and are tearing apart the social fabric of Europe. Resentment towards Germany and the financial elite is becoming engrained in the psyche of regular citizens in the periphery. Remonstrations are progressively intense. Like trends in financial markets, psychological trends aren’t linear. We are currently in a lull and protests are likely to pick up in the coming months, as the effects of austerity harshly bite Main Streets of periphery countries. Unfortunately, these countries are only in the middle innings of this BOP recalibration, at best; more pain lies ahead. Political risk remains extremely elevated. Furthermore, existing government and private debt is so large that debt traps are becoming evident in Greece, Portugal, and Spain. They in turn will lead to further austerity and worsening political and social trends, a nefarious feedback loop.”
—- RCS Investments Macro Outlook (Begn-2012) —January 16, 2012
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.
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Bull
+ 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.
Bear
- 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.
Asia Has Room for Stimulus: World Bank - Bloomberg
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…”may well trigger another recession”? The World Bank may be a step behind here.
Australia in Recession; Spending Slide Spreads from Housing to Service Sector; Australia's Double Whammy; US Dollar Safe Haven?
The only thing I take issue with Mish is his article is that the U.S. dollar is not a safe haven in the long-term. I would rather hold back and pass judgement at a later point in time.
It might sound crazy, but all it would take to break the back of any precious metal bull market is for authorites to recognize that QE and printing are a big long-term negative for economic growth. A large swath of defaults as well as a continued manufacturing boom in the U.S. would be good long-term reasons to be bullish on the greenback.
Like I said, I’m not ready to pass judgement on the long-term direction of the dollar just yet.
Stickin to his guns.
Copper has broken down and is signaling another leg lower for risk-assets in the coming weeks. The global recovery is becoming critically injured on continued worries in the Eurozone. Furthermore, it’s interesting to note that emerging markets have been underperforming in the past couple of weeks.
These signs point to an increasing risk of a global double-dip recession. A positive resolution in the Eurozone is imperative to save the global recovery.
