Weekly Bull/Bear Recap: December 12-16, 2011
++ The U.S. economy has clearly surprised to the upside. Gloomy analysts have underestimated its strength, even in the face of global economic troubles. These external issues will eventually resolve themselves in benign fashion.
- U.S. manufacturing data this week demonstrates continued improvement. Led by New Orders and Expectations, both the Philly Fed and Empire State manufacturing surveys show improvement in business conditions. Ditto for Rail traffic.
- Economic Bellwether FedEx reported better than expected earnings due to strong holiday sales and continued economic growth.
- The NFIB Small Business survey shows that hiring plans in November are the most since mid 2008, meanwhile, jobless claims plunge to 366K from 390K, the lowest in 3.5 years. Both these indicators clearly signal a strengthening job market and economy.
- The Payroll Tax Extension is sure to pass and will mitigate fiscal contraction taking place next year.
- Consumers are repairing their balance-sheets. Household financial obligations as a share of disposable income have fallen to almost 20-year lows. This alongside steadily growing demand. Retail sales, while weak MoM, are actually at record highs (nominal) and the YoY growth rate remains above 6%. Improved balance-sheets will help consumer confidence and boost spending over the longer-term.
+ Markets have had plenty of time to digest the effects of a Greek default. They have already priced in a default for the country; yet the system has held together. Even better, an effective bond auction in Spain points to a stabilization of demand = improved confidence. Also, a successful Italian confidence vote shows continued solidarity behind austerity plans. Monti is taking care of the situation.
+ The global restructuring is taking place as China reports stronger consumer demand (which will continue to boost our exports). Furthermore, a high correlation between food prices and equity market performance points to outperformance of the asset class as lower inflation brings about easing in the months ahead. Note that China now understands what needs to be done. They are embarking on producing the solution, which will lead to secular and sustainable global economic growth. The country also has plenty of resources to boost demand, counteracting slowing exports, thereby avoiding a hard landing.
– Top government leaders are becoming confrontational. Citizens are becoming resentful and terrorism against the entrenched plutocracy is a clear budding negative trend. In addition to warning on Spanish banks, Moody’s now joins S&P, in its comments last week, with a warning on the lack of immediate resolution to the Eurozone’s woes. And for the trifecta, Fitch slaps credit-watch negatives on multiple countries (let’s just call it “everyone”). A mass S&P downgrade may occur this very weekend. The latest EFSF fact sheet is released. The fund still relies on Spain and Italy contributing roughly 31% of the fund’s capital commitments. How’s this going to happen if they are on the chopping block? The crisis will yield recurring flare-ups in early 2012 (starting with the bull’s favorite country, Greece). And with dwindling political will, implementation risk will rise even further if Francois Hollande takes the French helm. Europe’s banking system is close to suffering a heart attack; ECB againrefuses to print. Hungary/IMF talks collapse.
– The slowdown in Europe has spread throughout the globe. Japan’s salient Tankan survey points to a deteriorating global economic outlook. Indian industrial production fell for the first time in more than 2 years, falling 5.1% YoY in October. Chinese exports are the lowest since the dark days of 2009, rising 13.8% in November, vs. 15.9% in October. The country’s flash PMI indicates that a second month of contraction is in the cards. The populace is becoming restless. The property bubble (which exists in all its splendor) has popped. Yet, officials aren’t loosening as expected by the bulls. Last, but certainly not least, OECD leading indicators point to continued weakening in the months ahead. The world is entering a synchronized global recession, and yet not only is the ECB not printing but neither is the Fed. Stocks will need to fall further to induce action.
– Tech bellwethers Intel and Texas Instruments, cut Q4 sales forecasts. Retail sales disappoint, as does Best Buy, despite all the hype in November.
– Geopolitics remains the bearish gorilla-sized joker in the whole bull/bear debate. Tensions are at a boiling point after Iran proudly demonstrates the captured drone. The U.S. has asked for its return. So if the Iranians say no, then what? Does the U.S. look like a weakling and mosey on? Btw, another drone crashed this week. Iran ‘practices‘ the closure of the Straits of Hormuz (oil would promptly rise over $120 and kill any global recovery). Finally, we had some notable protectionist news this week from China. How will Congress react when Yuan appreciation ceases as Chinese officials move to protect their export-reliant economy from a “very severe” trade situation in 2012?
– The wound to confidence that was the MF Global implosion is festering. The Fractional Reserve System is slowly coming apart as “Hypothecation” (the re-pledging of excess collateral) connects all leveraged liabilities to a dwindling supply of hard cash-flow producing assets. It is becoming clear that the whole system is built on the confidence —currently fickle and fragile — that a liability has its specific collateral to backstop it. What happens if the collateral is indirectly pledged to multiple liabilities? Who has a right to the collateral? MF Global may only be the tip of the credit destruction iceberg.
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