StockTouch Blog

Why September is the worst month for the market

September 5, 2012 by Peter

The stock market certainly has it quirks. As we previously have written about there are many professional behavioral patterns that exist nowhere else but on Wall Street, just check out our previous post on “Sell in May and go away” . So again we bring you a brief seasonal update here for those who constantly try to pull logic or reason out of wonky Wall St behavior.  According to the Stock Traders Almanac September is the worst month of the year, but tends to start strong and end weak (via Stock Traders Almanac):

 Start of business year, end of vacations, and back to school made September a leading barometer month in first 60 years of 20th century, now portfolio managers back after Labor Day tend to clean house

 Biggest % loser on the S&P, Dow and NASDAQ

 Streak of four great Dow Septembers averaging 4.2% gains ended in 1999 with six losers in a row averaging –5.9%, up three straight 2005- 2007, down 6% in 2008

 Day after Labor Day Dow up 13 of last 16

 S&P opened strong 11 of last 15 years but tends to close weak due to end-of-quarter mutual fund portfolio restructuring, last trading day: S&P down 11 of past 17

 September Triple-Witching Week can be dangerous, week after is pitiful.

John Bogle’s 10 rules on investing

by Peter

With over half of Americans invested in mutual funds for retirement or other investment reasons it might make sense to listen when the guy who essentially invented the mutual fund industry speaks about investing. Well that’s just what happened a few weeks back John Bogle listed his 10 rules of investing, and how he created his portfolios that grew the mutual fund industry. Bogle is truly a living legend so his insights are a great addition to some other “rules lists” that I’ve compiled below:

“1. Remember reversion to the mean. What’s hot today isn’t likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don’t follow the herd.

2. Time is your friend, impulse is your enemy. Take advantage of compound interest and don’t be captivated by the siren song of the market. That only seduces you into buying after stocks have soared and selling after they plunge.

3. Buy right and hold tight. Once you set your asset allocation, stick to it no matter how greedy or scared you become.

4. Have realistic expectations. You are unlikely to get rich quickly. Bogle thinks a 7.5 percent annual return for stocks and a 3.5 percent annual return for bonds is reasonable in the long-run.

5. Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk. Your odds of finding the next Apple (AAPL) are low.

6. Minimize the “croupier’s” take. Beating the stock market and the casino are both zero-sum games, before costs. You get what you don’t pay for.

7. There’s no escaping risk. I’ve long searched for high returns without risk; despite the many claims that such investments exist, however, I haven’t found it. And a money market may be the ultimate risk because it will likely lag inflation.

8. Beware of fighting the last war. What worked in the recent past is not likely to work going forward. Investments that worked well in the first market plunge of the century failed miserably in the second plunge.

9. Hedgehog beats the fox. Foxes represent the financial institutions that charge far too much for their artful, complicated advice. The hedgehog, which when threatened simply curls up into an impregnable spiny ball, represents the index fund with its “price-less” concept.

10. Stay the course. The secret to investing is there is no secret. When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy. Discipline is best summed up by staying the course.”

Goldman “The economy is looking…ehhh”

August 27, 2012 by Peter

Well its time for your weekly does of quasi-bad news about the economy, just enough to hold you over till next week. Recent strategy notes from Goldman Sachs are consistent with what many think is the macro economic trend in the US – it’s stronger than the recessionistas have long thought.   So the best take away if you’re long, is that things aren’t yet contracting.  On the flip side though, is the fact that the economy is still far to weak to drop the unemployment numbers.  And the good/bad news is that this reduces the likelihood of QE this year.  More from Goldman’s Jan Hatzius (via ZH):

“The US economic recovery remains sluggish, but we believe that it will pick up a bit in coming months. Tuesday’s data were generally in line with this expectation:

1.    Stronger retail sales. The July retail sales report showed a clear upside surprise, with a 0.9% gain in sales excluding autos, building materials, and gasoline. The month-to-month strength was broad-based, with sizable gains in most core categories, although it mainly served to reverse some of the declines in the prior month.

2.    Slower inventory accumulation. Inventory accumulation has slowed clearly in recent months, with book-value business inventories up just 0.1% in June, down from a peak of 0.8% in January. We believe that this slowdown has been partly responsible for the disappointing performance in manufacturing surveys such as the ISM and Philly Fed. If it is ending, that should help the manufacturing sector over the next few months.

Our proprietary measures of US economic growth have also picked up a bit further. Our Q3 GDP tracking estimate rose to 2.3% from 2.2%, our current activity indicator (CAI) now stands at 1.2% in July after 1.1% in June, and our US-MAP index of US economic data surprises is moving quickly further toward neutral readings on a 60-day exponential moving average basis.”

Whats the deal with global inflation?

by Peter

With the current global climate heating up many economists are worried about how inflation. So Here’s a bit more color on the inflation front.  We’re attempting to look at a larger set of data than we have in the past when just focused domestically.  The chart below shows inflation indicators from Europe, China, the USA and UK.  You can tell from the chart that the recent low inflation and disinflation trend isn’t just going on in the US anymore.  The entire global economy is suffering from a bout of low inflation.  More via Also Sprach Analyst:

“This is the updated chart of the year-on-year inflation for a few selected major economies.  After reaching their peaks last year, inflation has been trending lower, and remains rather muted in the recent months.

Of course, with the US drought, some would worry that inflation would start to tick higher again, as we are now expecting for China as pork prices are likely to rise.  In any case, however, we think it is going to be just as transitory as it was.”

Is buy and hold dead?

August 15, 2012 by Peter

You likely read about a new trading strategy at least once a week if you follow the markets. Be it the math whiz who correlated the mating paths of elephants to the NASDAQ, or your quirky uncles spam emails in which he touts his 100% returns. As an investor I’m constantly trying to question the status quo of market philosophies to attempt to take advantage of them. One of the most prolific and long standing of strategy out there is “Buy and hold”. Touted by billionaires like Warren Buffet and likely your grandmother, this strategy has been around forever and offers little in the way of complexity, which is what makes it rather popular.

So when Jake Zamansky wrote “The death of the Buy and Hold investor” for Forbes, to say they least I was interested. In it Zamansky asks the question “Is buy and hold only for suckers”. He makes the case that “Such investors (“buy and holders”) are sitting ducks for the new breed of “high frequency” traders, the nefarious “dark pools” and Wall street firms who use retail investors as dumping grounds for their dubious products and shares.” Even A recent blog by CNBC producer John Melloy underscores how out of sync buy and hold investors are with the market.

The amount of data showing the disadvantage traditional, long-term investors currently face is staggering. As Mr. Melloy points out: “The average holding period for the S&P 500 SPDR (SPY), the ETF which tracks the benchmark for U.S. stocks, is less than five days, according to worrying statistics in analyst Alan Newman’s latest Crosscurrents newsletter.”

“Given recent average volume, the SPY trades its entire capitalization and then some each and every week. Does anyone really wish to argue where valuation might enter the picture in this scenario? Value does not matter in the slightest,’” according to the analyst.

So is it value investing as a whole that’s gone down the tubes, to the likes of hedge funders and high frequency traders? Can an average retail investor hold his or her own in the market still?

Well Richard Bernstein of Richard Bernstein Advisors offers the antithetical view of today’s high frequency trading mentality/environment and claims that buy and hold isn’t at all dead.  Bernstein just says it’s misunderstood:

“Buy-and-hold strategies typically do perform well, but their success is predicated on buying and holding the correct assets. Having exposures to the correct market segments is called beta management, and investors tend to be very poor beta managers.

“Stocks for the long run” was the theme of the late 1990s and early-2000s, and investors were encouraged to buy-and-hold S&P 500 index funds. That seemed to make sense to them at the time because the US stock market had just finished one of its most successful performance decades in history. As a result, investors preferred US stocks. Unfortunately, US stocks subsequently underperformed.

Chart 2 shows why investors wanted to accentuate US stocks in their portfolios at the beginning of the 2000s. Chart 3 shows what actually happened in the subsequent ten years, and why investors perceive that there was a “lost decade in stocks” and that “buy and-hold is dead”. However, if one had bought and held emerging market stocks in 2000 rather than US stocks, one would be very happy today. If one had bought and held BRICs, one would be very happy today. Buy-and-hold has continued to be a viable investment strategy, so long as investors bought and held the correct stocks!

Ironically, many investors today seem to be following the same formula they followed last decade, and are again buying and holding the prior decade’s winners. In our opinion, these investors are positioning their portfolios for another “lost decade in equities”.”

You can check out the full article here.

So according to Bernstein its not so much a technical change in the market so much as investors are getting lazy and stopped doing their homework. Instead of identifying and purchasing good assets, investors are happy with buying last seasons winners and holding those, which is causing lackluster returns.

It seems there is certainly stillroom in the market for Buy and Hold at least for now, depending on which school of thought you subscribe to. Do you think hedge funders and computers have sucked all the possible value out of the market in a efficient market hypothesis type of way, or do you think there is still room for old fashion hard work and research. As usual only the market can truly dictate.

 

The ultimate bull bear debate

August 13, 2012 by Peter


Every week we typically do a Bull Bear recap here on the Stocktouch blog and we think it serves as a great way to look back on the week for investors or just interested readers. In many ways the current economic climate has formed the ultimate bull versus bear debate. On one side you have Bill Gross, the legendary bond investor who founded PIMCO and has amassed a fortune during one of the greatest bull runs in the history of bonds. We’ve covered Gross’s opinions here a lot and tried to understand why he sees the markets the way he does as a bond investor. Clearly, as we’ve pointed out he’s talking his book most of the time so it’s safe to say he has a bias towards bonds over stocks. Opposing Gross is one of history’s all-time great buy and hold advocates, Jeremy Siegel of Wharton. Both men were on CNBC to discuss their long-term outlook for the equity markets.

Gross recently stated that the cult of equity was dying and that the 6.6% rate of return we’ve seen since the 1920′s was likely too high going forward. He made some controversial statements comparing GDP growth to the market’s total return in which I believe he erroneously neglected to subtract consumption of dividends. Regardless, his bearish equity stance was made plenty clear in his investment letter released recently. Seigel corrected his error saying there were many things wrong with Gross’s statements and goes on to supply historical evidence.

Gross makes his case that expectations going forward need to be muted. On Bloomberg Gross even said, “he’s obviously pushing at windmills in my opinion and he belongs back in his Ivory Tower.” Here’s full back and forth:

Whats going on in the labor market?

August 9, 2012 by Peter

Hopefully if you follow the markets you have been keeping an eye on the labor market updates that came out last week. If you have you noticed the below two data points that came out:

  • The labor report was much better than expected.  Private payrolls jumped 172K vs expectations of 110K.   The unemployment rate jumped to 8.3%.  The bottom line is: this is not recessionary data by any means.  It’s not a great expansion, but it’s also not contraction.  Muddle through continues.
  • The ISM Services report showed a 52.6 reading.  That was better than the 52 analysts expected.  Again, this is expansionary data.

Econoday has a nice summary:

“The great bulk of the nation’s economy is moving steadily forward, based on ISM’s non-manufacturing sample where the composite index rose 5 tenths to 52.6. This level isn’t that strong but details in the report are encouraging led by new orders which rose 1 full point to 54.3. This is right in line with the 4-month average of 54.2. Business activity, which is an indication on output of goods and services in the sample, really took off, up 5.5 points from a depressed June level to 57.2 in July for the best rate of monthly growth since March.

 A negative in the report is a 3 point fall in the employment index to 49.3, a sub-50 level, which is the first of the year and which indicates that the ISM’s sample, on net, cut back on their workforce in July. But the rise in new orders hints at a snap back for this reading in the months ahead.” 

So overall, the US economy continues to look not great, but globally speaking better than most.  These labor numbers are far from good, and it’s a bit alarming to see the market react so optimistically to “ok” numbers.

Bull/Bear Recap: Jul. 30 – Aug. 3, 2012

August 6, 2012 by Peter

Bull:

The biggest news for the bulls this past week was the Bureau Labor of Statistics’ payrolls report, which was much better than expectations. This bullish report was also confirmed by ADP’s report, as well as further improvement over the past month in the 4-week average of initial jobless claims. Furthermore, Challenger and Gray reported that mass firings remain very low. The job market has shown stabilization. Meanwhile, on the housing front, the Case-Shiller indexposted its 4th straight gain and its largest in nearly 3 years. Year over year growth rates for sub-indexes are near 0% after a steady climb from negative territory. Falling inventory will spur construction spending, making housing an increasing tailwind for domestic growth in the months to come. Anyone telling you that the economy is in a recession with these data points is high on something.

In the euro zone, monetary and political officials are beginning to outline the parameters of a team-up in an effort to stabilize financial markets. Promises by the ECB to buy near-term sovereign debt of periphery nations have resulted in falling yield curves of these securities. In addition, swap spreads, which measure systematic risk, are far from their highs from last year. Improving financial metrics signal that investors are increasingly receptive to the forthcoming solution in the euro zone. Alleviating confidence in the region is helping stabilize global growth.

China, the up and coming economic powerhouse, is showing signs of stabilization. Despite endless bearish chatter of the length of the country’s manufacturing contraction, it pays to note that PMIs are still very close to the 50 mark demarcating expansion from contraction. China’s slowdown is nothing more than that. As officials begin implementing stimulus measures, economic growth is sure to reaccelerate.   The situation there is under control.

At home, income dynamics are improving.  Income growth is strengthening as per the latest Personal Consumption and Expenditures report, which showed wages and salaries rising 0.5% in June. Moreover, the Mortgage Bankers Association reports that re-financings rose to the highest in three years. Continued income growth is resulting in a resilient consumer. Chain store salessurprised to the upside, while vehicle sales rebounded. The Restaurant Performance Index showed that business in this consumer-sensitive sector remains in growth mode. A durable consumer will lead to improved sentiment of investors.

Citi’s economic surprise indicator has bottomed, marking a likely reacceleration of economic activity. This can be corroborated by an improving ECRI growth index, having increased from a low of near -4% two -1.3% today.

Bear:

Continued bluffs by Mario Draghi are harming the reputation of the ECB. Markets plunged midweek on no action from the central bank.  It’s becoming increasingly clear that the Bundesbank will not allow the ECB to proceed, without severe repercussions (Germany drops out?). Efforts to buy time using these bluffs serve to weaken political will.  In Germany, a survey was publishedin which a majority of the German citizenry now believes the Euro does more harm than good. Furthermore, the tomfoolery creates additional uncertainty, resulting in reduced consumer and business confidence (to the lowest since Sept. 2009).  Geopolitics isn’t helping much either; Russia has sent 3 warships to Syria with army personnel.  Iran/Israel keeps bubbling.

Vaporizing confidence is further strengthening what is an already scary negative feedback loop within the world’s largest economic bloc.  PMIs throughout the region were very negative, Germany in particular. Weak PMIs in France, Spain, the UK (largest fall in three years), and Greece weren’t worth peeking at if you’re a bull banking on stabilization. Unemployment in the region rose to a record 11.2% in June, while retail sales sunk for the 9th consecutive month. Continued weakness in the territory is likely to exacerbate an already faltering global recovery.

In Asia, Japan’s manufacturing PMI and industrial production fell, the latter falling for the 3rd consecutive month. In Taiwan, GDP surprised to the downside. South Korean had some awful data also.  June industrial production fell, while manufacturing confidence fell to a three-year low.  Furthermore, exports plunged almost 9% in July. JP Morgan’s global manufacturing PMIshowed a greater pace of deterioration.

The U.S., with its economy also on the verge of recession, isn’t doing much to help as auto imports have plunged since the beginning of the year according to the latest vehicle sales report.  Frailty in the manufacturing sector has become persistent with a slew of reports noting continued weakness. The ISM manufacturing index has contracted for two months in a row, with important leading indicators such as backlogs and new orders signaling more to come. Meanwhile, factory orders declined and core durable goods were revised lower. The Dallas Fed manufacturing report was lackluster as well, with general business activity plunging due to continued uncertainty in Washington. Weekly consumer spending metrics show continued weakness due to a increasing savings rate as a crisis of confidence engulfs the global economy. While the bulls may point to the jobs report as a sign that the economy is stabilizing, it’s unusual that the bulk of the gains came from the service sector in the same period that the ISM’s non-manufacturing report showed an employment sub-index in contraction territory. Furthermore, chatter from CEOs of consumer-based companies does not confirm these bullish numbers. In addition, is improved job growth sustainable when various leading indicators such as the conference Board’s employment trends, and the Monster Employment index both point to limited gains at best?

Alpha aint as easy as it used to be

by Peter

Over the past decade average (pairwise) correlation among “risk assets” has been on the rise (Chart below). What is a risk asset you might wonder? Well it simply put could be a asset subject to a change in its value, but more specific to this example its in reference to a “risk trade”. This all ties back to the financial crisis in 2008, when investors across the globe dumped everything which carried the risk of loss (meaning everything except US treasury bonds, priced in US Dollars). The term risk on came back when stock markets made a low in March of 2009 and nearly everything else started to go back up with it. Investors were back in the market willing to risk money (thus…risk on).  So, we have:

Risk On = Long: Stock Indices, commodity currencies (Aussie/Canadian/NewZealand), energy, grains, softs (cotton, cocoa, etc) and Short: US Dollar, Bonds, Yen, Swiss

Risk Off = Long: US treasuries, US Dollar, Jap Yen, Swiss Franc, Short: stocks, commodities, foreign currencies.

So there are a number of possible causes for this trend in correlation among risk assets. So far JPMorgan’s write-up on the topic from over a year ago still provides the most reasonable explanation.

JPMorgan (May-2011): – Globalization of capital markets, and new risk-management and alpha extraction techniques have driven the secular increase of cross-asset correlations. “

This means that global macro events increasingly drive world financial markets, as investment professional’s focus more on central banks than their specific investment mandates. Trading between “risk-on” and “risk-off” dominates valuations across assets classes. Consistent “alpha extraction” is becoming far more difficult and the choice of beta (risk appetite) rather than investment selection differentiates fund managers. The following quote describes quite well the investment climate dominated by rising correlations across risk assets.

“JPMorgan (27-Jul-12): – Many investors say they lack conviction, and find it harder to gauge value and market direction amid so much political uncertainty. This uncertainty is breeding inactivity. The steady rise in correlation between risk assets is making it harder to find diversified sources of alpha. US equity managers are having their worst year since 1995 in trying to beat the S&P500, underperforming on average by 1.11% YTD. Hedge fund managers have delivered only some 2% YTD, after fees, pushing them way down in the YTD return hit parade. This lack of active returns is forcing many to stay close to their benchmark and to take less risk.”

 

Weekly Bull/Bear Recap: Jul. 23-27, 2012

July 30, 2012 by Peter

Bull

+ In Euroland, ECB’s Draghi warns the bears: “believe me, it will be enough” on resumed sovereign bond buying.  Chatter of a banking license for the ESM is sure to cause a shift in elevated bearish sentiment.  The Bundesbank may oppose these measures, but it’s best to ignore them, given they only hold 2 out of 23 votes on the ECB board.  Spanish and Italian bond yields plunge in response and risk markets rally (S&P 500 hits a new high this week from early June lows).  The Eurogroup and Merllande state that they remain committed to preserve the Euro’s stability.  Again, Draghi: “They don’t recognise the political capital that our leaders have invested in this union and Europeans’ support. The euro is irreversible.

+ China looks to be experiencing a soft landing as the HSBC/Markit Manufacturing PMI is only a few tenths away from expansion and is at its highest level in 5 months.  Backlogs are now in positive territory.  Leaders are “bringing her in” and the trajectory is looking good.  Copper is sniffing this development.

+ “Don’t fight the Fed.”  In the past, it’s been extremely unprofitable to do so.  Officials will do what is necessary to quell market fears regarding the Eurozone.  Meanwhile, lower interest rates are helping consumers’ income statements as refinancings reach their highest level since April 2009.
+ While investors are up in arms about what’s going on in Europe, “It’s not as bad as many think.”  Market indicators show dramatically reduced probabilities of default in Portugal and Ireland, while Spain’s $900 billion of debt is already priced for a 20% haircut and is “a drop in the bucket” when considering total worldwide debt of roughly $50 trillion.  Everyone knows that Greece is going to default, markets move when there’s a surprise; clearly there isn’t one here.  Continued debt writedowns will clear the air and coupled with better than expected corporate earnings and improving sentiment, will set the stage for a sustainable rally.

+ The resilient U.S. economy continues to grow.  The Chicago Fed National Activity Index rebounds from a weak reading in May.  May travel volume rises 2.3% YoY, the largest gain since 2009.  Increased transportation is a sign of a healing economy, not one about to fall into recession.  In manufacturing, trucking bounces back in June, while growth continues in Kansas City.  In housing, the Federal Housing Finance Agency reports that home prices climbed 0.8% in May on a month to month basis and 3.7% year over year.  Home prices have now risen 4 months in a row and the latest report was better than expected.  This confirms Zillow’s belief that housing prices have finally bottomed, it’s only stabilization or recovery from here.  New Home Sales fall, but for a bullish reason.  Inventory levels are back to healthy levels and the job-creating construction industry is set to restart after a dismal 6 years.  Speaking of jobs, the 4-Week average of jobless claims hits its lowest level since March.  The labor market continues its improvement; no sign of recession here.

Bear

– Draghi steps up to the plate, but his team doesn’t back him.  Sorry Bulls, No banking license for you (they may have 3 votes, but the reality is they call the shots).  A Greek default this fall is inevitable.  Moreover, Spain reports a worsened economic situation, while more regional authorities request bailouts from the state.  The negative feedback loop is gaining strength.  Falling confidence (EFSF and Europe’s strongest are downgraded by Moody’s while Italy is downgraded further into junk status) has led to a deepening Eurozone recession as per Markit’s July Eurozone Composite PMI; the horizon looks bleak with backlogs shrinking at the fast rate since mid-2009.  Germany’s important Ifo survey falls for the 3rd consecutive month in July.  Greece is in a Great Depression.  So can we finally change the prescription?  Nope, the beatings continue.  Good luck Europe.

– Global growth is stalling.  Taiwanese industrial production surprises to the downside with its 4th consecutive drop, while South Korean GDP growth was underwhelming.  Chinese officials are underestimating the financial turbulence to come, determined to enforce housing curbs even in the face of continued weakness from Europe.  The U.K. reports a deepened double-dip recession.  Bellwether companies such as UPSSiemensWhirlpoolCisco, and Ford are either cutting outlook/estimates or looking to restructure (ie shed jobs) — for the first time in 3 years, quarterly earnings are poised to drop.

– The approaching fiscal cliff is damaging sentiment.  Businesses are holding back, a trend clearly visible when perusing the latest Richmond Manufacturing Index, which implodes from -3 to -17 (well weaker than consensus of 0) as well as core-durable goods orders (a measure of business spending)— 3 out of the last 4 readings has been negative.  From Econoday: “Outside of transportation, weakness was widespread in June following a notable gain in May.”  Meanwhile, consumers are saying things are getting worse.

– Confidence in governmental organizations is collapsing – and why shouldn’t it? From former IMF division chief Peter Doyle: “After twenty years of service, I am ashamed to have had any association with the Fund at all.

– Civil war continues unfettered in Syria.  Religious tensions are simmering and the worst case scenario of sectarian conflict throughout the region may be close to taking hold.  War games between Iran and the U.S. continue, while Israel bluntly states that it will act if Syrian non-conventional weapon stocks are raided by militants.  Meanwhile, China raises the stakes in an already tense South China Sea.  Schumer says U.S. should play “hardball” on Cnooc’s deal with Nexen; probably because the Yuan as begun to weaken.  Will this turn into a flashpoint for Chinese-U.S. relations?  Beware of oncoming protectionism.

Chinese PMI hits 5 month high

July 26, 2012 by Peter

At Stocktouch we like to straddle the fence in regards to our outlook on the global markets. Being a good blend of optimist and pessimist, which hopefully makes for good reading. So our optimist side was delighted when a decent bit of good news came in an otherwise sea of bad news for global growth.  Chinese PMI hit a 5-month high in July although it’s still in contraction range (via Markit):

“The HSBC Flash China Manufacturing Purchasing Managers’ Index™ (PMI™) is published on a monthly basis approximately one week before final PMI data are released, making the HSBC PMI the earliest available indicator of manufacturing sector-operating conditions in China. The estimate is typically based on approximately 85%–90% of total PMI survey responses each month and is designed to provide an accurate indication of the final PMI data.

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & CoHead of Asian Economic Research at HSBC said: “July’s headline PMI picked up modestly to a five-month high of 49.5, suggesting that the earlier easing measures are starting to work. That said, the below-50 July reading implied demand still remaining weak and employment under increasing pressure. This calls for more easing efforts to support growth and jobs. We believe the fast falling inflation allows Beijing to do so and a more meaningful improvement of growth is expected in the coming months when these measures fully filter through.”

Weekly Bull/Bear Recap: Jul. 16-20, 2012

July 22, 2012 by Peter

Bull

+ Housing continues to show signs that the worst is finally over and that therecovery is slowly gaining strength.  Improvement on the margin is becoming clear.  The NAHB Housing index rises by the most since 2002 to its highest reading since 2007. Housing starts rise to their highest since October 2008 and are up 40% over the past 18 months (permits remain in an uptrend).  Higher starts than completions signal that job creation is coming soon as the latter catches up.  Meanwhile, refinancing through the HARP program is gaining momentum, leading to improved income streams for many consumers.

+  Manufacturing remains a sturdy sector for the U.S. recovery.  Despite a negative reading in the ISM’s latest survey, the hard data tells a different story.  Total output rises 0.4% in June, led by a 0.7% rebound in manufacturing, to a new post-recovery high and more than reversing a decline of 0.2% in the prior period.  Output has expanded for 29 consecutive months.  YoY rates for Industrial and Manufacturing Production are 4.7% and 5.6% respectably, still reasonably healthy.  Production of business equipment remains in solid growth territory.

+ Global economic activity is stabilizing and growth is set to resume in the coming months.  China has begun preparations for additional spending/stimulus and copper is starting to sniff this strengthening development (3-Mth chart view is best).  The country’s housing market is already heating up.  Meanwhile, Italian Industrial Orders are stabilizing, rising by 1.7% in May, offsetting a 1.8% drop in the prior month.  Moreover, Spanish Industrial New Orders also came in better than expected; the country’s OECD leading indicator shows stabilization in the coming months.

+ The U.S. economy is dynamic and is transforming before our very eyes.  Exports, shale gas/oil investments, and oil discoveries are new fountains of growth.  Consumer deleveraging has come far and home prices are enticing for long-term investment.  Furthermore, China is finally embarking on the path towards becoming the next world’s consumer.  This is undoubtably bullish.

+ Risk assets are holding up well, even as investors are concluding that QE3 may not be forthcoming.  Furthermore, short-interest is at levels preceding powerful bullish moves, such as in Q3 2011: “To the extent people have gone short U.S. domestic equities, I think they’re kind of wasting their time” — Michael Shaoul.  Continued bearishness means there’s a wall of worry to climb…

+ …Furthermore, earnings reports from international  companies have surpass expectations.  Continued signs of stabilization in global economic conditions will lead to higher stock prices.  Tech has been buoyant even in the face of all the sour macro news.  The market’s reaction to the news is more telling than the news itself.         

Bear

–  In Spain, home prices are absolutely imploding, bad loans are mushrooming, and bank deposits are dwindling.  Valencia signals distress and taps assistance from the government.  The results?  A Spanish Treasury official says there’s “no money left to pay services” and sovereign bond prices collapse (so much for the summit); 100 billion euros will not be enough to shore up Spain’s banking system.  Meanwhile the ECB reverses its position and now advocates imposing losses on senior bondholders of slumping financial companies.  The threat of losses is the pin to pop the “Moral Hazard Bubble.”  Meantime, Germany says sovereigns will still be responsible for bailout money; the country’s economic sentiment report falls for the 3rd consecutive month; and Deutsche-marks are making a comeback.  Moreover, 13 Italian banks are downgraded by Moody’s.  The Eurozone has already split according to intra-bank capital flows.

– The U.S. economy is entering a recession.  The consumer is faltering, evident by the third consecutive drop in headline and core retail sales, both falling for the third consecutive month, the first time that’s happened since the dark days of 2008 (weekly consumer metrics don’t point to a rebound in the immediate term).  Meanwhile, the job market looks to be headed south as per a plunging employment sub-index in the Philly Fed’s manufacturing report as well as the National Association’s for Business Economic report on hiring trends.  These trends are confirmed by both the Gallup Poll’s U.S. Economic Confidence Indicator and the Conference Board’s U.S. Leading Indicator.  Continued suffering in the middle to lower-class is slowly creeping to its breaking point.

– Bernanke warns on the assumption that funny money will cure all ills (in fact, the “unintended consequences” of ZIRP are clearly making things worse).  The looming fiscal cliff as well as weakness in Europe are together critically damaging confidence.  Both must be resolved he says.  Unfortunately, “it’s out of our hands,” which means that the Fed would be powerless to stop the oncoming contagion from a Eurozone implosion or a crisis of confidence from continued political bickering —likely to lead right up to the final hours.  Meanwhile, how on earth can the bulls say there’s high bearishness out there when the VIX just recently leaked under 16?  This sticks of complacency — there’s continued misplaced hope that Europe will get things done and that China will stimulate the global economy back into recovery.

– Continued uncertainty in Europe is negatively affecting global business sentiment.  The IMF slashes its global growth forecast, while foreign investment in China falls almost 7% YoY in June.  Premier Wen sure sounds more worriedthan bullish analysts banking on a second-half rebound.  Global bellwethers are sounding the alarm of a slowing business environment.

– Geopolitics continues to cast its shadow over the faltering global economy.  Syria is now officially in a “non-international armed conflict,” or civil war; Russia reaffirms its support for al-Assad.  Meanwhile, the Middle East is fast turning into a proxy war among the mightiest.  Israel vows a response against “a global campaign of terror carried out by Iran and Hezbollah” after 5 Israelis are killed in a bus explosion in Bulgaria.  Finally, the thinly covered South China Sea disputeisn’t going away.

– Housing prices have not bottomed, not when you have rising shadow inventorystagnant purchase applications, and an unclogging foreclosure pipeline.

Dissecting Bridgewater founder Ray Dalio’s letter to investors

July 20, 2012 by Peter

Ray Dalio of Bridgewater writes a quarterly letter to the shareholders of his fund, which just came out this week. Being one of the largest and most storied funds/managers in history we certainly think it’s a must read. The firm as usual these days takes a concerned tone to begin, writing that the world’s policymakers are in effect putting the world economy in serious jeopardy:

“We estimate that in the past few months global growth has slowed from about 3.3% to 1.9% and that 80% of the world’s economies have slowed, including all of the largest. The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country’s decline tends to reinforce another’s, making a self-reinforcing global decline more likely and a reversal more difficult to produce. And at this point, while actions have been taken, none of the world’s largest economies are stimulating aggressively via either monetary or fiscal policy, further reducing the odds of a reversal.”

We’ve pulled out what we think are the highlights on various asset classes and sectors below:

On stocks:

“The recent deterioration in global financial conditions and growth rates will certainly be a headwind to top-line revenue growth, but companies still retain plenty of ability to protect their operating margins and profitability by keeping labor costs down (given labor market slack and labor market competition from emerging markets). Yet the markets are currently pricing in the worst real earnings growth rate in a 100 years. To further exemplify, the dividend yield of US non-financial corporations is higher than the yield on US Government notes, something that has only happened once in the past 50 years, during the peak of the 2008 credit crisis. And this is now occurring in an environment in which companies have abundant liquidity to cover their dividends.”

On global bonds:

“The fat tail possibility that Europe’s deleveraging will become disorderly must be considered a real possibility that would be significantly bullish for bonds. However, markets are now pricing in low growth and continued deleveraging for an extended period of time. This shift from pricing in a normal recovery to a deleveraging makes sense to us; however, what is priced in now suggests a low probability that even in 10 years much progress will have been made.”

On oil:

“The backdrop of tight spare capacity, combined with an uncertain Iranian situation (both around the efficacy of sanctions, which went into full effect in July, and the possibility of a more significant disruption), produces upside risks. At current prices, we would still expect demand to be strong enough to produce a gradual tightening of capacity over time, and if OPEC follows its typical pattern of leaning against recent price changes, it will reverse some of its recent supply increases.”

On gold:

“Gold is also being supported by secularly increasing demand. Prior to the financial crisis, gold was substantially under-owned relative to financial assets, and despite stepped-up purchases of gold by central banks and sovereign wealth funds, the shift toward greater holdings of the precious metal is still in its early stages…speculative gold positions had been significantly reduced [by the end of the quarter] and as a result are less likely to be a bearish short-term driver going forward.”

Weekly Bull/Bear Recap: Jul. 9-13, 2012

July 15, 2012 by Peter

Bull

+ We can now confidently discard the notion that there’s a housing bubble in China; plenty of pent-up demand remains.  Furthermore, secondary yet important indicators point to a turnaround in the coming quarters.  Finally consider that more stimulus is coming.  All these factors point to a 2nd half rebound in economic activity and thus an increasing tailwind for the resilient global economy.

+ Global trade remains resilient as per Germany’s May trade balance report, which shows a much greater than expected 3.9% MoM gain in exports, reversing a decline of 1.7%.  The E.U.U.K., and India all announce good news in their May manufacturing reports.  Meanwhile, Australian consumer confidence rises to a 5-month high.        

+ Monetary officials are on alert; South Korea unexpectedly cut rates as does Brazil, joining the U.K., China, and the ECB last week in globally synchronized policy to kick-start global growth. The Fed will loosen policy in due time.  Don’t fight the Fed…not to mention the slew of other easing central banks.

+ France is starting to soften its stance against ceding sovereignty to Brussels.  Furthermore, European politicians are learning from past mistakes, giving Spain and likely Portugal and Ireland more time in adjusting their economies to avoid acute political turmoil.  These are solid steps forward towards fiscal union.

+ The effects of deleveraging are beginning to fade and consumers feel more comfortable using credit.  Revolving debt rose to the highest since November 2007.  Deleveraging has been done in a controlled manner; consumer demand remains in growth mode as per the ICSC-Goldman’s bullish report. Consumer balance sheets are healthier, with help from stabilized home prices and a reduction of negative equity-properties.

Bear

– U.S. economic activity is stalling; in fact, the ECRI says we’re in recession now.  Meanwhile the Conference Board’s Employment Trends Index has flatlined since February and May’s JOLT survey could not make up for April’s plunge; the job market is stalling.  Small businesses, the engine of job creation, has downshifted in the past month, leading to a 7-month low in the University of Michigan’s latest consumer confidence survey.  Negative pre-announcements are near record levels (post-financial crisis) and equity prices of important economic bellwethers are dropping like flies.

– Infighting among Eurozone countries persists.  Austerity continues to be the medicine administered to fight the Eurozone crisis (to the chagrin of ISTAT).  The German Constitutional Court says deliberations over the ESM could take up to 3 months, while 160 of Germany’s most respected economists urge citizens to vote against further integration.  Moreover, time is ticking but the alarm will not ring in 6 months, way sooner.

– Global economic activity will weaken further with China and Italy showing particularly worrying signs as per OECD leading indicators (China’s GDP is spurious…period).  Japan’s May Machinery Orders plunge 14.8%.  The EIA’s global demand outlook deteriorates as per their latest report.  Central banks are panicking.

–  Geopolitical tensions are elevated and rising.   Japan is planning to buy the Senkaku/Daioyu islands, drawing the ire of China and risks increasing tensions over territorial disputes in the South and East China Seas (Sansha city is the flashpoint).  Meanwhile, protectionism is increasingly used as a weapon of aggression and is alarming.

– MF Global part 2 has officially commenced.  Corruption is rampant in our broken financial system and is further eroding trust.

Weekly Bull/Bear Recap: Jul. 2-6, 2012

July 8, 2012 by Peter

Bull

+ The U.S. economy continues to grow; recent data is only a pause that refreshens.

  • The consumer is resilient in the face of slowing economic conditions abroad.  The National Restaurant Association reports that performance and expectations for May are near 2006 levels. Meanwhile, auto sales rebound, surprising most analysts.
  • U.S. Rail Traffic continues to show an expanding economy and two key sectors of the economy, autos and housing, are poised to lead a re-acceleration of growth.
  • Construction spending for May surges the most in 5 months, signaling that activity has finally bottomed and will be a job creator in the quarters to come.
  • Speaking of job creation, ADP reports a stronger pace.  Meanwhile, jobless claims fall under 380K for the first time since mid-May, planned job cuts plunge to a 13-month low, and the Monster Employment shows growing labor demand.  While the BLS job report is below expectations, wage growth firms up and the average workweek ticks higher.

+ Gas prices have plunged over the past 3 months, while ISM Prices-Paid subcomponents are in deep contraction territory.  Conditions are ripe for the Fed to initiate another QE and confirm that central banks are coordinating policy, causing a turn in sentiment and a powerful rally.

+ Meanwhile, China has plenty of ammunition for additional stimulus.  However, the economy is stabilizing on its own as per China’s non-manufacturing index, which rises to a 3-month high of 56.7.  There will be no hardlanding in China.  Monetary officials are loosening monetary policy, setting the stage for a strengthening recovery over the 2nd half of the year.

+ German factory orders come in better than expected and is good news for the exporting powerhouse.  Global growth has weakened but will stabilize soon.

Bear

– Investors are giving the thumbs down towards solutions presented at the latest European summit .  Spanish yields are back within striking distance of 7%, whileItalian bonds are above 6%.  Core-countries are reneging on providing unconditional help to the periphery.  A crisis of confidence is set to fragment the Eurozone.  We are at most weeks away from a negative worldwide financial shock, leading to a global recession.

– Merkel is under increasing pressure from officials in her native Germany.  The CSU, the Constitutional Court, and now the President of the Bundesbank are making it clear that political will in Germany has been exhausted.  A referendum must take place.  Meanwhile, the Greek government is set to collapse again soon.  The ECB cut interest rates, but it isn’t enough for the QE-addicted market.  Finland says the “unthinkable.”

– U.S. economic data continues to point to increasing sluggishness and ultimately a recession.  The ISM June’s manufacturing index turns in its first contraction print in 35 months; important leading indicators — New Orders and Backlogs — are in solid negative territory.  While ADP shows an improved labor market, the BLS has a different account of its health.  Weekly consumer metricsare showing significant weakness and outlooks in the retail sector are getting slashed.

– Global economic data continues to disappoint.  Euro-area unemploymentclimbs to a record 11.1% in May.   The bulls were wrong, Germany did not decouple from the rest of Europe, as May’s PMI fell to a 3-year low and weighted on a gloomy Eurozone PMI.  Slumping New-Orders for most PMIs signal global recession has arrived.  Globally coordinated interest-rate cuts smell of panic.

– “But trust is shattered at the very top of the financial system.

What is Tail risk and what does it mean to the average investor

July 6, 2012 by Peter

 

The mysterious world of hedge funds is always something fun to peer into as a normal investor, perhaps to get a glimpse of some genius trade ideas or just to follow the smart money. So this week when a new paper on tail risk and hedge fund returns came out we were clearly all over it. First thing though, what is tail risk and why do hedge funds care, and should you care as a retail investor? Well, Tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution. In simpler terms, When a portfolio of investments is put together, it is assumed that the distribution of returns will follow a normal pattern. Under this assumption, the probability that returns will move between the mean and three standard deviations, either positive or negative, is 99.97%. This means that the probability of returns moving more than three standard deviations beyond the mean is 0.03%, or virtually nil. However, the concept of tail risk suggests that the distribution is not normal, but skewed, and has fatter tails. The fatter tails increase the probability that an investment will move beyond three standard deviations. Distributions that are characterized by fat tails are often seen when looking at hedge fund returns.

Now few things in the investing community are more poorly understood than alpha creation and risk adjusted returns. Most investors in general have no idea whether their fund manager is actually generating returns that justify the risk levels or even if the manager is providing a service that justifies a fee that is higher than a correlated index. More often than not, we find that investment managers are mirroring an index or taking on more risk than their returns justify, but the investors don’t realize or understand how to properly benchmark their manager so they continue paying for something that is totally unjustified.  AiCIO recently interviewed the authors of the paper:

“We want to distinguish between genuine expertise of a hedge fund manager rather than outperforming by taking on extra risk — anyone can take on extra crash risk and get a higher return,” Kelly told aiCIO following the recent release of his academic paper on the topic, which he co-wrote with Erasmus University Professor Hao Jiang.

If investors want to measure risk correctly, they must be more careful about calculating the returns generated by hedge fund managers’ willingness to take tail-risk positions, exposing them to downside risk, according to Kelly’s paper titled “Tail Risk and Hedge Fund Returns.” The main thrust of the research: hedge fund managers tend to be more willing to take on positions that have a high likelihood of crashing in order to earn higher expected returns.

Paper abstract:

“We document large, persistent exposures of hedge funds to downside tail risk. For instance, the hardest hit hedge funds in the 1998 crisis also suffered predictably worse returns than their peers in 2007-2008. Using the conditional tail risk factor derived by Kelly (2012), we find that tail risk is a key driver of hedge fund returns in both the time-series and cross-section. A positive one standard deviation shock to tail risk is associated with a contemporaneous decline of 2.88% per year in the value of the aggregate hedge fund portfolio. In the cross-section, funds that lose value during high tail risk episodes earn average annual returns more than 6% higher than funds that are tail risk-hedged, controlling for commonly used hedge fund factors. These results are consistent with the notion that a significant component of hedge fund returns can be viewed as compensation for selling disaster insurance.”

While not all investors have the capital to be invested in hedge funds, its important to note that these analytical frameworks and ideals can be applied to any managed accounts. So regardless of if you are invested with Fidelity in their emerging markets mutual fund or some hot shot hedge fund in Greenwich, any smart investor should be making sure their manager isn’t taking on too much risk to get those returns.

More bearish concerns

by Peter

There has been alot of bearish sentiment as of late in the news, and even on this blog in the last few posts. So we thought we’d continue the pattern and let you know that its not just small investors that are turning bearish on equities.  Now the persistent negativity is spilling over to the most superstitious bunch of all, Wall Street analysts and traders. Sell side analysts have become more bearish than they’ve been in the last 15 years.  According to Merrill Lynch’s sell side consensus indicator just 49.3% of analysts are currently bullish.  This level hasn’t been seen since 1998.  Merrill Lynch says (via Business Insider):

“After triggering a Buy signal in May, our measure of Wall Street bullishness on stocks declined again, marking the ninth time in eleven months that the indicator has fallen. The 0.8 ppt decline pushed the indicator down to 49.3, the first time below 50 in nearly 15 years, suggesting that sell side strategists are now more bearish on equities than they were at any point during the collapse of the Tech Bubble or the recent Financial Crisis. Given the contrarian nature of this indicator, we are encouraged by Wall Street’s lack of optimism and the fact that strategists are recommending that investors significantly underweight equities vs. a traditional long-term average benchmark weighting of 60-65%.”

Yet another recession call

July 1, 2012 by Peter

So we attempt to stay impartial here at Stock touch and just report the news as we see it. So for the longest time we haven’t made any “call” on the recession.

Despite the fact that its becoming extremely popular to make these calls. In a recent update Mike Shedlock offered 12 reasons why economic optimism is unfounded.

He says:

1.Europe is a disaster.

2.US manufacturing is cooling rapidly

3.China is cooling rapidly: China Manufacturing PMI 7-Month Low, Sharpest Decline in New Export Orders Since March 2009

4.US Monetary policy is at best useless, but more likely net harmful, especially to those on fixed income.

5.First year presidential politics are frequently recessionary

6.US still needs fiscal tightening

7.Unemployment insurance has expired for millions: 200,000 Lose Unemployment Benefits This Week, Nearly Half From California

8.Self-Employment desperation: 100% of U.S. Jobs Added Since 2010 Have Been Self-Employment, Contractor, or Other Jobs Without Unemployment Insurance Benefits

9.Last two jobs reports have been dismal: Another Payroll Disaster: Jobs +69,000, Employment Rate +.1 to 8.2%, April Jobs Revised Lower to +77,000; Long-term Unemployment +310,000

10.The 4-week moving average of weekly unemployment claims is at the highest rate of the year, at 386,250.

11.New home sales cannot gain significant traction: New Home Sales Hype vs. Reality

12.Tax Armageddon

While Shedlock has some great points about the global and domestic economy its easy to find negative things if you’re looking for them, and that seems to  be what all the cool kids are doing these days. Despite this, there are still a small group of economist who subscribe to the expansion/contraction model view  on the world who disagree. One of the more glaring non-recessionary components of the model is – fixed private investment.  In the last 45 years ALL SEVEN recessions have been led by a decline in fixed private investment.  The only time this came close to being in jeopardy was in 1982 during a double dip.

The Q1 2012 reading was 10% year over year.  So if we’re in a recession or on the verge of a recession then fixed private investment must be cratering as we speak.  The new media and economists in general (we aren’t sure if those to are mutually exclusive yet) have to recognize that economic forecasting is largely a game of playing the odds and the odds of a recession with fix private investment at 10% is extremely low.

Why Greece cant leave the Euro

June 29, 2012 by Peter

With all that is going on in Europe right now, and we’re not talking Football, there have been swirling rumors that Greece might leave the Euro.  We’ve previously written several blog posts on the topic of why Germany needs Greece to stay in the Euro, how Europe is experiencing a currency crisis and what solutions there are for the Euro. So far though we have yet to cover why Greece can’t/shouldnt leave the Euro. Thankfully BlackRock’s Russ Koesterich argues that leaving the eurozone is a pretty horrible path for Greece.  In a new video, he lays out four reasons why.

  • “You’re going to effectively wipe out the savings of much of the middle-class.”
  • “If you go back to the drachma – and that drachma is going to depreciate as it almost certainly will against the euro – you also run the risk of inflation.”
  •  “Typically when you see a country leave a currency union and depreciate their currency, part of the benefit is that it makes their export sector more competitive.  Greece has a very small, and at this point uncompetitive export sector.  So, they won’t get that benefit.”
  •  “Greece still runs a very large primary deficit.  In other words, the government cannot pay their bills even before you figure in the costs of interest payments.  If Greece leave the euro, the European Union will no longer be subsidizing that deficit, which means the Greek government is going to have to cut back on its spending dramatically and pose even more pain on the Greek population.”

Koesterich believes that Greece still faces tremendous pain in the form of austerity if it stays in the Eurozone.  But he believes its a much better option than leaving.

JP Morgan on QE3

June 22, 2012 by Peter

JP Morgan as one of the larger investment banks usualy has some good comments on the markets and the effect of potential future government actions.  So when they came out with a new report on QE3 I perked up. For now, they’re saying the markets will likely have trouble finding their footing without a robust policy response or stabilization in the macro data. Whats possible more Interesting, is Morgan does NOT believe QE3 will be a positive catalyst going forward:

“For a sustainable rally we would need the following: either a stabilisation in macro momentum or, more importantly, a robust policy response. Restart of the SMP programme, short selling bans nor the IMF rescue of Spain fit the bill. Markets tended to quickly rollover post these types of actions historically. Eurobonds remain as distant as ever.

However, if ESM were to get a banking licence and were to be used for direct peripheral bank recapitalisations, this would be a very important positive. We think the likelihood of this is low at present, but if it were to happen we would have to get more constructive. An aggressive policy response by Chinese and/or US officials could be another positive signal, but this is not likely immediately. In ’08/’09 China delivered fiscal stimulus worth 14% of GDP, compared to nearly nothing now. We would not use the hope of QE3 as an argument to be bullish. If one really thinks QE3 is likely to be announced over the next few months, we believe both the market and macro dataflow would weaken further ahead of this.

While our stance is a cautious one, the following factors should temper the downside:
1) Equities are under owned. This is not a short-term help, but on a medium-term horizon it is reasonable
to look for a shift out of bonds into stocks.
2) Valuations are not stretched – Again, this is not a great support if the earnings are at risk, but
valuation multiples are low in the context of the last 20-30 years.
3) US is unlikely to witness a recession over the next 12-18 months, but a growth scare is very possible.
4) EM policy is focused on easing now. A third of the EM inflation basket is food. Agricultural commodity
prices are well behaved now and this is allowing most EM central banks to refocus on growth.
5) Asset reflation – all the key central banks continue expanding their balance sheets.
6) Corporate sector balance sheets are healthy and profit margins in this cycle have been much
higher than most thought. Equities historically tended to peak 4-5 quarters post the margins peaking.”

This is one of the first major banks to come out with a stance like this. As many large asset managers and banks alike find that they benefit from QE3 (which we’ve discussed in previous posts) its interesting to see a statement like this.

Retail sales numbers and the economy

by Peter

One of the best indicators for some time of recessionary tendencies in the economy has been retail sales numbers. They give a very clear signal on the health of the US consumer and what they’re looking to spend. As expected there’s still no recession, but this weeks retail sales disappointment led to broad downgrades for Q2 GDP.  The WSJ’s Real Time Economics provided some details:

J.P. Morgan Chase – now expects U.S. gross domestic product to grow at a 2.0% annual growth rate, down from its previous 2.5% projection.

BofA Merrill Lynch –   Today’s report slices 0.5 percentage point from second quarter GDP growth, leaving us tracking 1.9%.”

Royal Bank of Scotland – lowered its forecast for second-quarter GDP to 1.9% growth from 2.2%

Barclays Capital – “The retail ex-autos component, relevant for GDP tracking, rose 0.1%, in line with our forecast, although a one-tenth downward revision to March (to 0.0%) was sufficient to push our 2Q GDP tracking estimate down by one-tenth, to 1.8%.”

Credit Suisse also highlighted a downward revision to April’s numbers, and moved its tracking estimate for 2Q GDP to 2.2% from 2.5%.

Goldman: We’ll see QE3 next wek

June 17, 2012 by Peter

Goldman’s Jan Hatzius has been backing up his call for QE3 for sometime and is now backing it up even more on CNBC saying

We expect the Federal Open Market Committee (FOMC) to ease monetary policy at next week’s
scheduled meeting.  Our baseline is a new asset purchase program that involves an expansion of the balance sheet, but an extension of Operation Twist and/or a further lengthening of the short- term interest rate guidance in the FOMC statement beyond the current “late 2014” formulation are also possible.

As for the weak economy, the numbers are really getting down there…

Disappointments across a broad range of indicators this week caused a two-tenths decline
in our GDP tracking estimate for Q2 to 1.6%.  Though the CPI excluding food and energy held
at 2.3% year-on-year, we see increasing signs that core inflation will fall over the next year.  

 While the Fed is still sticking to their previous statements on QE3, but with all this pressure from investors and the situation in Europe getting more interest we shall see how the Fed handles this next week.


Is the global economy in a Contraction phase?

June 8, 2012 by Peter

Global growth is set to slow and contract according to Goldman Sachs’s Global Leading Indicator (GLI), which is basically an index which tries to highlight trends ahead of economic reports released by individual countries

Notably the GLI turned negative ahead of the Internet bubble bursting at the turn of the millennium and far in advance of the Financial Meltdown of 2008..  They’re now saying it points to a global contraction:

“The first of these frameworks relates the phase of the cycle, as represented by our Global Leading Indicator, to the performance of asset markets. Last week’s final reading of our May GLI now shows that the global economy has been in the ‘contraction’ phase (negative and falling momentum) since April. This is typically the phase that is most damaging for risk assets and most helpful for government bonds.”

And from a different piece Goldman notes that the GLI “point to an increasingly worrying outlook for the global economy”:

“Momentum Negative, Headline Barely Positive. Our May Final GLI headline came in at 0.1%yoy, up from last month’s revised reading of -0.1%yoy. Monthly momentum deteriorated further to -0.06%mom from a revised -0.03%mom in April. The revised series shows that momentum peaked in January at a lower level than originally indicated, and has shifted into negative territory over the last two months. The final May momentum reading with the full set of components is notably weaker than the preliminary print, reflecting the fact that global data continue to underperform their US counterparts (which receive a heavier weight in the preliminary GLI calculations). Overall, the sequential GLI shifts point to an increasingly worrying outlook for the global economy.”

Source: Goldman Sachs

Its scary enough when its one big bank saying these things, but the ECRI‘s leading indicator has pointed to exactly the same future, noting: “We have been seeing contractions in our long leading indicators for a while”. While these indicators dont add much to the mix in hindsight, they are a worrisome alert for the future for investors.

Chinese “hard landing”?

by Peter

There have been talks of a Chinese hard-landing for a while now as China continues to pump out dismal numbers. Is this really so bad? And what are the odds of a hard landing?

First what exactly does “hard-landing” mean? It’s defined as four consecutive quarters of growth of five percent or below, so they’re off the mark, the data does raise concerns of a deeper weakness in the Chinese economy though, so lets take a look:

  • Industrial production fell to 9.3 percent year-over-year (YoY) growth in April, from 11.9 percent the previous month and missing expectations of 12.2 percent growth.
  • Fixed Assets Investment (FAI) year-to-date grew 20.2 percent YoY, against expectations of 20.5 percent growth.
  • Retail sales grew 14.1 percent YoY, down from 15.2 percent the previous month, and against expectations of a 15.1 percent rise.
  • CPI grew 3.4 percent YoY, down from 3.6 percent the previous month and in line with consensus view. Meanwhile, PPI fell 0.7 percent YoY beating expectations for a 0.5 percent drop.
  • China also released weak April trade data yesterday with imports and exports missing expectations.

Following on last months weak data, Ting Lu, China economist for Bank of America-Merrill Lynch, and his team have revised down their previously upbeat forecasts for Chinese growth:

We previously forecasted China’s GDP growth could quicken from 8.1% yoy in 1Q to 8.5% in 2Q, and we had maintained our 2012 annual GDP growth forecast at 8.6% since October 2011. With poor readings from April, we decide to change our views and forecasts.

We cut 2Q yoy GDP growth to 7.6% from 8.5% and cut 2012 annual GDP growth to 8.0% from 8.6%. IP growth could rebound in either May or June from the low of 9.3% yoy in April, and GDP growth may rebound in 3Q to 8.0% and 8.2% in 4Q. QoQ growth (seasonally adjusted, not annualized) could slow to 1.6% in 2Q from 1.8% in 1Q, rebound to 2.4% in 3Q, and then soften to 2.2% in 4Q.”

Before we start crying wolf and saying the sky is falling we should remember there is a sliver lining to all this. China’s policy stimulus could be more aggressive than has been previously forecasted. Ting who had previously forecast two 50 basis points RRR cuts before the end of the year, says the probability of rate cuts will increase. Beijing could also further ease credit supply, start more projects and spend more on social welfare. They could also pick up the pace on constructions of social housing and infrastructure all contributing to growth.

George Soros on Europe

June 6, 2012 by Peter

If the name George Soros isnt synonymous with European fiscal problems in your head, than you havent been starring at a Bloomberg terminal long enough.He is known as “The Man Who Broke the Bank of England” because of his$1 billion in investment profits during the 1992 Black Wednesday UK currency crisis. As we’ve stated on this blog before, Europe is in a currency crisis, so what Soros has to say about anything on currency crises should hold some weight. From the start of what we’re calling the “Euro Crisis” Soros has seen this as a currency crisis resulting from the lack of political unity and an incomplete union.  In a speech over the weekend Soros summed up the problems in Europe in 2 paragraphs:

 “The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.

But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.”

Soros says Germany must resolve the crisis and that time is running out.  He’s dead right Germany must make concessions here or let the entire Euro project begin to unravel.  Although however Soros seems a bit to focused a bit  on the Germans, saying that their hand must be forced through increased political pressure from the South. It is true, however there needs to be a compromise. Germany is right to hold its ground regarding euro bonds, bailouts or rescue schemes by the ECB as we’ve previously covered here on this blog. If the Germans show the credit card before anyone (France, Italy, Ireland, Portugal, etc…) accepts deeper European fiscal integration/more centralized fiscal authority, those who needed the money will either take too long to accept fiscal integration or simply not go through with it once they have what they want.

As Cullen over at Pragcap stated a in a blog post:

“There is simply no middle ground here.  It’s either a move towards fiscal union or full break-up.  It’s time for all of us to stop debating why this crisis won’t end and for the leaders in Europe to actually come to a workable long-term solution.  They’re holding the entire world hostage due to a lack of political unity….”