If bad news were to come, investors wouldn’t be ready.
Weekly Bull/Bear Recap: January 23-27, 2012
Bull
+ 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 Ratio, Thailand’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.
Bear
- 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).
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"Tying It All Together" with David Rosenberg
Good stuff here. I’ve been a deflationist/disinflationista for a while now (check out my past outlooks). However, I do disagree with Rosenberg in that low rates will keep the bond bull alive for a while.
It’s not a matter of time, it’s one of process. Once China achieves a sustainable recovery, led by their consumers, the Fed will eventually be forced to raise rates. The time will come sooner than many believe. The Fed, with its forecast of exceptionally low rates until 2014 is setting the stage for a bond market top. Most will think that rates aren’t going up, most will be sure that bond prices will stay high and interest rates low. It is during these times that bull markets end. Keep an eye on China; they hold the key to the bond bull.
Weekly Bull/Bear Recap: January 16-20, 2012
Bull
+ 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.
Bear
- 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.
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Plunge In NYSE Short Interest Explains Recent Market Rally
This falls along the lines of a decreased wall of worry. (see 3 posts down).
SENTIMENT IN EUROPE CRATERS
European equities are probably on their way towards pricing the worse of the crisis. Sentiment is very negative and may prove to be a positive for European equities in the medium-to-longer term.
While this doesn’t give the signal to buy by itself, it’s important to consider what may be priced into the market already.
Weekly Bull/Bear Recap: Veteran’s Day Edition, 2011
Bull
+ 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.
Bear
- 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.
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Bonds Beat Stocks: 1981-2011
Treasuries are beginning to get some attention after their remarkable run, which I took advantage of since the early stages of my macro analyst career.
Although I still believe that the asset class has more to run, sentiment is weakening as a factor for more appreciation. More and more investors are realizing how prudent the investment would have been over the past couple of decades.
I’ll be monitoring what may be a growing love for the asset class. A top usually takes place when most people are buying the investment. Suffice to say, with all the fear out there and the possibility of turbulence ahead, Treasuries may end up being universally loved in the months ahead.
What goes up, must come down.
Greece to Hold Referendum on New Debt Deal - NYTimes.com
The rest of the week will be nail-biting up until the confidence-vote. In the days leading up to the vote, the markets will need to deal with headline-risk on its possible result. If it passes, then the government will have a reinforced mandate and may result in some relief.
However, the prospect of a nationwide referendum in December or January may cast a shadow of uncertainty over the “seasonal” year-end rally that many are expecting. I can’t tell you how many times I’ve heard about seasonality and performance anxiety. Is sentiment too bullish? When it seems like a slam dunk trade, it usually ends up being the opposite.
Never underestimate the importance of sentiment, nor the power of lack of common sense.
The package has cheered investors but I’m saying it now, this won’t be the last of the sovereign debt crisis.
Weekly Bull/Bear Recap: October 10-14, 2011
Bull
+ The Eurozone is hitting an important inflection point. Economic data has suddenly surprised to the upside. Global growth is making a comeback as the twin-headwinds, the Japanese earthquake and higher oil prices, dissipate. Germany and France pledge to deliver a solid solution to the debt crisis. All countries pass the EFSF Expansion legislation. Berlusconi survives his confidence vote, a vote of confidence in ultimate integration. The rescue plan is coming into better focus. Europe is getting its act together and that is great for the bulls. There’s a huge wall of worry for the market to climb.
+ It’s about time equity markets recognize the clearly stronger than expected economic data in recent weeks. The economy isn’t in recession and will reaccelerate in the months ahead (just look at September retail sales!). Markets are beginning to rally as high levels of bearishness constitute a high “wall of worry” for markets to climb. Did you know that relative to interest rates, the U.S. stock market seems to be discounting 2012 S&P profits of around $60 a share? (Source: Question 6 of “10 Questions for the Bears”) Earnings will surprise to the upside —case and point: Google. The global recovery is set to pick up after a Eurozone solution is presented this month.
+ This week, the 4-week average for Jobless Claims fell to the lowest level since August and is a positive for the labor market. The job market remains resilient. With the Europe situation moving forward, financial conditions will improve and job growth will accelerate in the months ahead.
+ A true green shoot, the Yuan remains in an uptrend. This would help in their fight against inflation and increase their purchasing power for global products. The global economic restructuring remains in progress. This can also be seen with recent U.S. international trade data. Growth in exports remains in healthy double-digit levels. Exports as a % of GDP has blown past the recent high in 2008. The restructuring is taking place in the U.S. economy. Furthermore, the global economy isn’t headed for a protectionist wave as 3 trade agreements with Columbia, South Korea, and Panama were approved by Congress.
+China is putting its piggy bank to work, buying beaten down banks. For the bears, who warn of a hard-landing due to mal-investment and a banking crisis, Chinese officials are clearly showing that they aren’t afraid to dip into their roughly $3 trillion in foreign reserves to bailout their banking system. They are also initiating “targeted easings” to address liquidity issues in their economy.
+ Japan’s August Machinery Orders surprise to the upside. This report is a leading indicator for Japan’s industrial sector and signals that the global recovery remains resilient to all the current headwinds. Need more proof? China is increasing its purchases of copper signaling that they don’t think prices will stay low for long due to higher demand. Australia announces a decrease in their unemployment rate to 5.2% for the month of September from 5.3% in August.
Bear
- Regarding the Eurozone, the bulls fail to “read between the lines”. An important crisis summit in the Eurozone is pushed back due to continued disagreement between Germany, France, and the ECB. The act of countries with deteriorating credit quality expected to contribute to the bailout is circular in nature and is nothing more than a shell-game. A “50% Haircut on Greek Debt” gets a cold reception from investors. The ECB finds itself torn on interest rate policy choices. Greece comes no where near its targets, yet in a sign of desperation, the troika still approves the next tranche. This puts Greece in the driver’s seat; so it pays to focus on what’s going on there (hint: not good). Trichet has some words of warning. Sure, Slovakia approves the EFSF (at the expense of a collapsing government), now what? The banks are against recapitalizations and recaps are not a solid sustainable solution to the crisis anyways. While equity markets rally, bond yields in Spain, Italy,rise for the week. France is now making some noise with the Oat/Bund spread at Euro-era records (quite the disconnect). Furthermore, you have continued red-flags of increased danger of recession in the region…
- …and the world for that matter. Indonesia signals an end to its tightening cycle as weak demand leads to a surprise rate cut of 25 bps to 6.5%. Singapore cuts its growth forecast and eases monetary policy. China’s property bubble is popping, its financial system is struggling amidst massive amounts of mal-investment, and inflation remains sticky to the upside. The country’s copper inventories are revealed to be double the estimate. Exports/Imports are weakening and the U.S. Senate approves protectionist legislation, designed to more effectively pressure China into raising the Yuan, it seems to be having a negative effect though. Trade war? Furthermore, questions arise on the current viability of the famed “Decoupling” theory. UK manufacturing falls 0.3%, a third consecutive drop, while unemployment is becoming a serious issue. Fitch downgrades UK banks and places 12+ more on credit watch negative.
- A leading indicator of manufacturing is plunging and is pointing to a significant slowdown in manufacturing activity in the coming months. Remember that manufacturing has been the driver of this otherwise very weak recovery. ECRI, 10th decline in a row.
- NFIB Small Business Survey points to continued weakness in the overall economy. While the index did increase, the rise is weak compared to the 6 monthly declines that preceded it. Owners continue to cite “poor sales” as their biggest problem. Probably because we’re in a balance-sheet recession with pre-crisis debt obligations weighing heavily on households’ post-crisis incomes and asset values. A weak small business sector translates to a continued tepid job market. A weak job market translates to weak spending and weakened consumer confidence.
- The FOMC is in chaos. We have a clear divergence of opinion and prescription for our current economic malaise. The fed straight up doesn’t know what else to do. Furthermore, fiscal stimulus isn’t forthcoming, setting up for a big disappointment when the Fed unleashes QE3 and investors realize that they are powerless.
- A “little” trouble brewing for the banks?
Roubini: Slowdown Brings Forward New Crisis - Bloomberg
Roubini is starting to make the rounds again. He’s being featured on Bloomberg and other news outlets more often.
This is a signal of deteriorating investor sentiment. Remember in the dark days of 2009 when he was on world-wide tours warning of cataclysms? Funny enough, it turned out to be the absolute bottom of the bear market (so far…).
While he’s being featured more, we’re nowhere near the bearish sentiment levels that characterized early 2009. From a sentiment standpoint, I believe equity markets still have plenty of room to fall.
10-year yields headed toward 1.75%: RBS - The Tell - MarketWatch
Finally, people are catching on…and that’s making me more nervous on my bullish Treasury call. I may have to reassess in the coming weeks. My call has resulted in a massive gain already.
