Weekly Bull/Bear Recap: Apr. 1-5, 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

+ A healthy trend in U.S. truck sales signals underlying strength in heavy equipment industries:

• Manufacturing remains a strong source of growth as per Markit’s PMI, which printed 54.6 for March.  New export orders surprised to the upside, signaling expansion in foreign orders, while order backlogs potend further strength ahead for the sector. The report mirrors strength in the February Factory Orders (ex-defense) indicator, which rose a strong 2.4%, reestablishing a strong uptrend.
• The housing recovery continues to show traction, evident by a strong construction spending report for February.  YoY, overall construction rebounded to 7.9% vs. 6.1% in January.

+  Global economic activity is stabilizing: 

• German factory orders over the past 3 months show a distinctive carving of a bottom and confirm improving data out of the Ifo survey.  Furthermore, Italian and Spanish 10-yr yields quietly plunged (higher bond prices) over the week (see 3-month view), a sign that market participants have clearly overreacted with the Cyprus bailout.  European credit markets are signaling that the coast is clear.  
• Chinese Official and HSBC Manufacturing PMIs rose in March, the former rising to an 11-month high.  Moreover, Non-manfacturing PMIs surge from 54.50 to 55.60 (official gauge) and from 52.1 to 54.3 (HSBC gauge).  These results signal a stronger expansion taking place. 

+ Stocks largely recover from triple-digit losses today despite a sub-par jobs report.  The Fed is “Full Steam Ahead” with QE.  The Fed will continue to aid the the recovery.  Furthermore, today’s job report actually has some bright spots.  Leading indicators of employment, such as temporary help employment and construction jobs, are indicating a strengthening job market and economy.  “‘Jobs day’ chatter is irresistible but almost without content. Monthly jobs numbers provide imperfect portraits of the recent past, and they are very poor predictors of the labor market’s future.”   

Bear

- Job creation slowed substantially in March (slowest in 9-months; Labor-force participation at 1979 levels), while corporate layoffs are 30% above year ago levels according to the Bureau of Labor Statistics and Challenger, Gray, & Christmas respectively.  Moreover, an additional spike in Jobless Claims, now at 385K, and a 3rd consecutive decline in the Rasmussen Employment Index further confirms that rose-shaded glasses worn by economists need to be put away quickly.  The U.S. economy is extremely vulnerable to further fiscal contraction and a weakening global economy.

- Markit’s rosy view of U.S. manufacturing isn’t confirmed by the Institute of Supply Management, which reported a significant weakening in growth in March.  The index fell from 54.3 to 51.3.    

- On the global front,

• The BOJ goes all in on money printing, promising to double the size of its monetary base by 2015, in order to defeat deflation.  The action has immediately drawn warnings from a number of prominent investors of a potential avalanche of Yen selling.  
• Canada prints its worst job number since February 2009.  
• Brazilian industrial production disappoints, forcing its central bank to keep rates on hold despite hot inflation.  The country has become an unfortunate victim of rampant central bank printing.  
• In Europe, unemployment hit another record high in February. Spain plans to revise its growth forecast lower (surprise surprise) and will ask for more time to reduce its budget deficit.  And, while many are pointing at no signs of a bank run in Cyprus, the numbers may be telling a different story.  
• The situation in North Korea continues to escalate and U.S. seems to be taking matters pretty seriously.  

Libya

lifeliberty:

Obama in 2007 - “The President does not have power under the Constitution to unilaterally authorize a military attack in a situation that does not involve stopping an actual or imminent threat to the nation.”

Regardless of whether you support U.S. military action in Libya, the fact that the President authorized this action without the approval of Congress should scare you…

The whole situation is scary. What’s scarier is the fact that if things in the Middle East spiral out of control, oil would rocket higher to the point of breaking the back of the current recovery.  Then you’ll have the same shit that happened in 2008.  Massive amounts of money will be lost.  Retirees will be more in the hole.  Unemployment would rise again.  We’d be at risk of a Depression.  This is why this attack on Libya was authorized.  What is happening in the Middle East is an actual and imminent threat….to our economy and therefore the nation.  It’s a shame that the US is so addicted to oil that we have no control of our economic destiny anymore.  We are trying to control it, that’s why we are over there.  But we really aren’t in control anymore.  

We need not look at Libya, Saudi Arabia, Yemen, or Barhain though.  The true perpetrator of this chaos works at the Federal Reserve and is engaging in the ludicrous policy of Quantitative Easing, thereby making all commodities rise in value.  Commodity prices these days do not reflect fundamental factors such as supply and demand.  They reflect speculations on the part of investors with freshly printed dollars.  QE needs to stop.  Plain and simple. 

Today’s Economic Indicators and Observations

+Improving economic results show that the recovery is on firmer footing.

ADP Employment report for November shows a gain of 93K, 23K above expectations, while October was revised higher to 82K from 43K.  The breadth of the gain was improved from the prior months. 

Strong UK PMI and German Retail Sales

Strong China PMI = the economy continues to cruise.

Mortgage Application for purchase inch up 1.1% after that large 14.4% increase and marks a new post-stimulus high. 

ISM Manufacturing gauge comes in at a healthy 56.6 in November from 56.9; Employment sub-index points to additional employment gains in the sector; Supply chains are working as delivery times slowed, however, backlogs continue to contract. 

-Some coals in the stocking as well though:

Challenger Job-Cut report shows a rise in the announced layoffs and is up the highest level since March/April.  While it isn’t cause for alarm just yet, it’s worth keeping an eye on as retailers begin shedding their “holiday workforce”.

The Productivity and Costs report points to employers continuing to squeeze work out of its existing workforce as productivity jumped 2.3% for the 3rd quarter, while labor costs continued to decline, though slightly, down 0.1%.  Overall this helps corporate profits, but at the expense of hiring and inflation (which is what the Fed is desperately attempting to foster).

Strong China PMI may mean more tightening as price gauges are near 2008 highs… with a possible property bubble, the probability of a hard-landing is increasing

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Overall the contradicting economic indicators continue, which is representative of a muddle through economy that is growing, but not at a strong enough pace to bring down the massive labor slack. 

Is the Santa Claus Rally about to begin?  Perhaps, however, I stand by my cautiousness as the name of the game is forecasting what may come in the future, not what’s going on now.  The market has priced this economic improvement already and many headwinds will be getting stronger.

   Housing prices continue to double-dip thus eventually affecting consumption

   Unemployment benefits expiring, affecting consumption as well..will they be extended?

   China applying the breaks via price controls and increasing interest rates

   Eurozone Sovereign debt issues just won’t go away

   State & Local government reigning in spending (see Cisco’s recent earnings report)

   Bush-tax cuts not getting extended…the stakes were raised today by Mitch McConnell