Sunday, January 26, 2014

However, while spreads (and yields) tumble in all the PIIGS, with Italian yields at almost 7-year lows, it is perhaps surprising to some that Italian bad loan rates are at their highest on record. 

I think most of the divergence is due to high hopes that the worse has passed along with the added security that the ECB stands ready to do….well “whatever it takes.”  
Should economic growth falter, markets will begin to worry about the ECB’s promise and will push the central bank to execute on its promise.  
However, the important detail is that growth continues in Europe so these possible “mispricings” are likely to continue.
One more issue to mention is that a hard landing in China could shift investor sentiment enough to negatively affect the delicate state of affairs in Euroland.   

However, while spreads (and yields) tumble in all the PIIGS, with Italian yields at almost 7-year lows, it is perhaps surprising to some that Italian bad loan rates are at their highest on record

I think most of the divergence is due to high hopes that the worse has passed along with the added security that the ECB stands ready to do….well “whatever it takes.”  

Should economic growth falter, markets will begin to worry about the ECB’s promise and will push the central bank to execute on its promise.  

However, the important detail is that growth continues in Europe so these possible “mispricings” are likely to continue.

One more issue to mention is that a hard landing in China could shift investor sentiment enough to negatively affect the delicate state of affairs in Euroland.   

Friday, January 24, 2014
While it’s not a good idea to base trading strategy solely off of sentiment, the headline on Marketwatch isn’t very comforting if you’re a bull.  Markets like to climb walls of worry.  Doesn’t seem like there’s much worry so far.  

While it’s not a good idea to base trading strategy solely off of sentiment, the headline on Marketwatch isn’t very comforting if you’re a bull.  Markets like to climb walls of worry.  Doesn’t seem like there’s much worry so far.  

Tuesday, September 10, 2013 Friday, February 8, 2013

Weekly Bull/Bear Recap: Feb. 4-8, 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.  

Bull:

+ The service sector, which accounts for almost 80% of the U.S. economy, remains in growth mode.  The Institute of Supply Management’s Non-Manufacturing survey reports a healthy 55.2 composite reading and an extremely bullish Employment subindicator of 57.5, its strongest reading since February 2006.  Furthermore, Export New Orders crossed into expansion territory and imply improving global trade conditions.  Indeed, today’s U.S. International Trade report “suggests exports — a key engine of the U.S. recovery — are finding their footing after stalling last year…

+ The global expansion thesis is further boosted by Singaporean manufacturing ending its spell of contraction, German Factory Orders showing signs of bottoming (mirroring improvement in recent Ifo surveys), and Japanese Machinery Orders increasing for the 3rd consecutive month

+ The bears have severely erred on their assumption that China wouldn’t be able to execute a soft landing.  In addition to improving manufacturing surveys, HSBC’s Services PMI survey is now solidly in expansion territory, notching a reading of 54 from 51.7 in December.  China is in position to lead the global recovery again.

+ The U.S. consumer remains quite resilient.  Chain Store sales surge the most since September 2011 and are much better than expected, while Gallup’s Consumer Spending report shows a 4-week average YoY gain of almost 30%.

+ Fed officials are optimistic that a positive wealth effect has taken hold and Q4 GDP numbers reflect only a transitory blip (due to weather-related events) towards continued recovery (Q4 GDP will be positive when the second revision is published).  Rising home values as well as gains in U.S. stock markets have improved consumer psychology.  Furthermore, investors can take solace that the FOMC won’t be backtracking on its promise to continue providing monetary stimulus even in the face of improving economic conditions.

+  The U.K. has seen a string of improving economic numbers this week: the Services Purchasing Manager’s Index swings into expansion in January; Same Store Sales improve 1.9% as well; and Industrial Production for December prints better than expected.  In addition, investors are nodding at recent economic improvement in Europe.      

Bear:

The European political and economic storm looks to pick up strength in the months ahead: 

Inter-market trends are deteriorating.  A look at the XLF/XLU ratio indicates that deflation fears may resurface soon and would be a negative for equity markets and bullish for Treasury bonds.  In fact, 10-yr Treasury yields are showing a negative divergence vs. equity markets and is a red flag.  Furthermore, equity markets are at long-term resistance, all the while investor sentiment is very bullish.  The stage is set for a correction over the coming weeks. 

- U.S. Weekly sales metrics (Goldman ICSC and Redbook) show continued weakening consumption trends.  Tepid growth readings over the course of January, in addition to a third consecutive weak reading from Discover’s U.S. Spending Monitor, are a shot across the bow for a subpar January Retail Sales report, due on Feb. 13.  Perhaps this is because job creation has stalled according to Gallup’s Job Creation indicator, which just slumped to an 11-month low.  Or perhaps it’s because the nation’s average gas price has risen 17 cents from a week ago.  

- Q4’s Productivity and Unit Labor Cost report portends deteriorating earnings trends for corporations.  Productivity (output per worker) declined  2.0% and was more than expected; meanwhile, unit labor costs surged 4.5% vs. market expectations of a 3.1% increase.  Real wages, vs. nominal, continue to shrink.  ”Hourly pay for American workers fell for the second straight year after factoring out inflation, marking the worst two-year stretch in the U.S. since World War Two."  

- Does Canada have a popping housing bubble?  Canadian building permits in December plunged 11.2%, after a 17.9% drubbing the month before.  Meanwhile housing starts crater 18.5%.   

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.   

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.  

Sunday, November 11, 2012

I have updated my portfolio allocation to account for several changes over the past month.  My recent activity has included harvesting short-term profits as well as getting stopped out of a few bearish positions.  

Technically the market (SPY) has completed a head-and-shoulders pattern, breaking below the neckline level of 1,405-1,407.  A lower low has been put in and is a bearish development.  I look to increase bearish exposure if the S&P 500 is unable to retake its 200-day moving average.  I will focus on news out of Europe in addition to Spanish and Italian 10-yr yields.  Will the Dow Theory continue to flash red?  Will confidence fall due to the upcoming fiscal cliff?  

If the SPY is able to nullify its recent head-and-shoulders pattern, by breaking back over the neckline of (1,410-1,415), then investors may aim for a retest of the bull market highs at the 1,460s.  I would look to decrease my downside exposure in this case; perhaps the rally that results may be tradable.  

  

Sunday, July 22, 2012

Sentiment remains mixed.  Usually the group called the dumb money (retail investors) seems to be more cognizant of the rocky macro backdrop, while fund managers are more sanguine (who’s wrong?).  

A VIX of just over 16.20 tells me that markets have not priced in any negative surprise from the Eurozone or China.  While sentiment remains mixed, there’s certainly optimism that things will resolve themselves.    

Wednesday, July 18, 2012
The VIX recently broke under 16 and signals a high amount of complacency, despite high levels of short-interest.  Like I said, sentiment is currently mixed.    

The VIX recently broke under 16 and signals a high amount of complacency, despite high levels of short-interest.  Like I said, sentiment is currently mixed.    

To the extent people have gone short U.S. domestic equities, I think they’re kind of wasting their time,” Michael Shaoul, chairman of Marketfield Asset Management in New York, which oversees more than $2 billion, said July 11. “As I said last year when Europe was falling apart and the U.S. was going down, once this panic is over we’ll go straight back up again.

Short Sales on NYSE Top 2011 Peak as September Bets Lost 21% - Bloomberg

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Sentiment gauges are mixed.  If Europe takes care of business (in a sustainable fashion), stocks would rally. There’s increasing bearishness, but investors would still be negatively surprised if Europe fragmented or China hard-landed causing further losses.

Tuesday, June 26, 2012

Should Europe come out with solid advances on its path towards fiscal union this week, markets would likely rally.  Expectations are pretty low for this summit to produce substantial progress. 

Tuesday, April 10, 2012

If bad news were to come, investors wouldn’t be ready.

Friday, January 27, 2012

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 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.     

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

Wednesday, January 25, 2012 Friday, January 20, 2012

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