Weekly Bull/Bear Recap: Mar. 25-29, 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. 

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Bull

+ Cyprus is committed to the Eurozone.  Its sacrifice is a signal of resilient and solid political will.  The Bears continue to dwell on crisis after crisis, but they fail to recognize that these are clear buying opportunities.  Europe is too invested in the project to turn back now; they will create solution after solution, leading to further integration.  Smart investors sniff this trend of “no turning back” (a trend confirmed by 2-yr swap spreads)… 

+ …Risk markets continue to appreciate despite Eurozone worries — the S&P 500 and Dow Industrials have hit record highs.  Stale global growth will begin to rebound due to continued resolution in Europe as well as positive spillover effects from a clearly strengthening U.S. economy:

• The Chicago Fed National Activity Index, a comprehensive indicator of US economic growth, indicates improved economic activity in February. The index’s 3-month moving average marked its fourth straight reading over zero, a level that implies an above-trend pace of growth.
• Moreover, the ECRI’s Leading Indicator is in solid growth territory, evidence of continuing growth over the short to medium-term.  Lakshaman Achuthan is hiding under a rock at this point.   
• Meanwhile, the consumer continues to chug along, defying bearish forecasts of weakness resulting from an increase in payroll taxes, gnawing sequestration, and historically high gas prices. Personal consumption and expenditures increased in February by the most in five months, while January’s reading of 0.2% was revised higher to 0.4%. Even better, because income growth was strong as well, the national savings rate actually increased from 2.6% from 2.2%.  Job creation, along with increasing home values (at the fastest rate since mid-2006 as per the Case-Shiller Index), are offsetting the bearish aforementioned effects. “The economy is in a very good place right now ahead of fiscal restraint. This recovery is sustainable. Consumers are in the drivers seat,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd.  This is especially true when looking at forecasts for March auto sales.   
• An important leading indicator of the housing market, lumber prices, points to residential investment taking a central role in economic growth over the coming years.  

• The Fed’s got the economy’s back.  Dudley,  Rosengren, Evans, and Kocherlakota all announce their support for further easing until economic growth is soundly ensured.  Bernanke says that continued easing will not “beggar thy neighbor,” but instead “enrich-thy-neighbor.”  Stronger domestic economic growth will spill over to increased aggregate demand, increasing trade flows.     
• In manufacturing, the Dallas Fed reported that manufacturing activity in the region increased, while Durable Goods Orders rebounded in February. Overall, the figures suggest that industrial activity continues to expand at a moderate pace.

+ Corporate profits remain at record levels, but this is little reason to believe that they will mean revert.  Through a domestic lens, profits are indeed high vs. the historial average, but from a global perspective, profits are only a little above average and have room to grow.  Because globalization has resulted in many US corporations obtaining revenue streams from abroad, earnings will grow on an improving global economy.  “Conventional thinking sees unsustainably high corporate profits and expects a reversion to the mean. Global thinking sees no a priori reason to worry at all.” 

Bear

- Conditions in Europe are approaching a boiling point.    

The Cyprus bailout is a Pyrrhic Victory, setting two ominous precedents:  

• First, Capital controls have now created two euros, a Cyprus euro, now worth less than a true euro due to its decreased fungibility.  Furthermore, controls are likely to precipitate a liquidity and economic crisis in the country, leading to a “larger than expected” economic contraction and an eventual need for an additional bailout.  Massive job losses are coming as the country’s banking sector, a pivotal source of economic growth is decimated.  Its “solid political will” to stay in the EMU will be tested shortly with the advent of a depression.  
• Second, depositors’ skin is now in the game, which may lead to capital flight from other periphery countries.  —— Where can I find uninsured deposits as a percent of total deposits in the Spainish and Italian banking systems?

Moreover, Dutch Eurogroup head Jeroen Dijsselbloem does his best to further rock the boat by announcing that the Cyprus deal would be a template; a statement quickly refuted by the EU   (when it becomes serious you have to lie right?).  Furthermore, how can Bulls say that political will remains solid when you have comparisons of Merkel to Hitler on “El Pais” (Spain’s largest newspaper) and Luxembourg’s PM saying “Germany and Merkel are striving for hegemony…”?  It’s not only European countries who are ticked off at the Cypriot bailout package.  So….who’s next in line for the Eurozone’s 6th bailout package and a guaranteed depression?  Heeeere’s Slovenia!   

Deterioration seen this week wasn’t limited to Cyprus.  Italian yields rose on lack of a solution to the lingering political deadlock in the country.  Levels to watch on Italian 10-yr yield = 4.87 to 4.89.  A strong break over these levels will signal further trouble for equity markets worldwide.  Economic wise, the data still look bearish for the country: Industrial Orders in January fell another 1.4%, while Retail sales fell 0.5% in February.

-  Red flags are waving in terms of global growth.  The level of complacency throughout the investment community is at deafening levels.  All of a sudden the Phd in economics, copper, is disregarded as a bellwether indicator of global growth.  Perhaps because its clearly not confirming the bullish narrative - (the red metal broke through its multi-year symmetrical triangle pattern to the downside).  What’s more, South Korean GDP disappointed, as did industrial production.  Was this due to Abenomics? - (keep an eye on a possible rising wedge for the Kospi).    

- Is manufacturing in the US really picking up? Most of the rebound in Durable Goods Orders was due to the volatile transportation sector. Core durable goods, a gauge of business spending, actually fell at the steepest rate since July last year (-2.7%), surpassing economists’ forecasts of a 1.2% drop. Meanwhile, the Chicago purchasing managers index came at a disappointing 52.4 versus analyst expectations of 56.1. New Orders plunged 9 pts and Backlogs are now negative.

- Is the housing recovery real?  Not when mortgage purchase applications, a measure of true sustainable demand and not investor buying, is not confirming.  Furthermore, for all the talk of large YoY gains, it’s important to see the forest for the trees; home prices are still down 30% from their peak 7 years ago.   

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: 

• On the political front, Spain’s “Gürtel Scandal” is dampening confidence in the government’s ability to continue its EU-mandated austerity policies.  As a result, Spanish 10-yr yields are back on the rise, advancing 2.3% for the week.  Meanwhile, in addition to a festering bank scandal, February 24-25 will market an important day for Italy and global markets as Silvio Berlusconi’s shocking surge in the polls have already begun to unnerve investors.  Since Jan. 28, Italy’s FTSE MIB has declined more than 7%.  
• On the economic front, Spain posts some depressing Industrial Production numbers for January, while European Retail Sales plunged in December by the most since February 2009 on a YoY basis.  France looks to downgrade its 2013 growth forecast placing Mr. Hollande in a pickle, indeed he’s now asking for a lower Euro.  Pressure on the ECB to join central bankers worldwide in weakening their respective currencies marks an end to the cease fire in the “Global Currency War.”  

- 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%.   

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.