Weekly Bull/Bear Recap

Courtesy of RCS Investments

 Bullish

+ Manufacturing ISM shows a less than expected slowdown and refutes recent bear claims that manufacturing activity is falling off a cliff.  The manufacturing recovery is also seen in the latest AAR weekly report.  Meanwhile, the service sector is beginning to flex its muscle as the ISM Non-Manufacturing gauge rose to 54.3 which was better than expected (New Orders rose to 56.7 from 54.4).  Let’s not forget that the service sector accounts for roughly 90% of the economy.

+ More signs that the labor market is improving as the job sub index of the Manufacturing ISM improves to +58.6%, ADP shows a better than expected gain of 42,000, and Non-Manufacturing ISM employment sub-index rose to expansion territory, @ 50.9.  American Staffing Association continues to show growing demand. 

+ Eurozone continues to print strong manufacturing and retail PMIs, pointing to growth in the region and offsetting fears of a sovereign debt crisis.  The Euro continues to rally.  This region is strengthening and is doing its part in the global recovery.  (Links Courtesy of News-to Use)

+We have a record 10-30 yield spread in Treasuries, which points to a steeper yield curve and is not signaling deflation.  Inflation will win out at the end and this is a positive for risk assets, equities, commodities. (Link Courtesy of Calafia Beach Pundit) 

+ Mortgage applications for purchase rose for a 3^rd straight week, coming in at +1.5%.  Demand has stabilized and now can begin building on this as jobs creation continues.

+The
Savings Rate has increased more than expected and shows that households
have been deleveraging while consumption has been on a steady climb
upward.  At the same time, it also proves that the
deleveraging cycle is further than most people think and balance sheets
are being repaired quicker than expected. 

Bearish 

-  The recovery talk is a bunch of baloney.  Gallup poll points to another month of weakening in consumer spending and declining confidence (confidence has plunged to the lowest this year).  Other surveys point to the same thing.  The reason for the decline in confidence?  Firing continues in earnest and hiring remains tepid.  Wake up people! (Link courtesy of Pragmatic Capitalism)

- Manufacturing in China, the country to anchor the global economic recovery, is showing signs of a slowdown as PMI  gauges come in weaker than expected.  Meanwhile, just a test, but the parameters seem scary and if there really isn’t a bubble, why are they so severe?. 

-  Small
businesses, which account for most of the nations job creation, just
voiced their verdict over the sustainability of the recovery.  The Wells Fargo/Gallup Small business index hits a record low in July.  Discover Small Business Watch falls for the 2^nd month in a row.  No jobs recovery if this sector can’t get off the ground. 

- Personal Consumption and Expenditures report shows a stalling in personal income and spending while previous month readings were weaker than previously thought.  High
joblessness will ensure that wages do not grow strong enough to support
consumption growth penciled in by analysts. Meanwhile, the savings rate
continues to rise as the deleveraging process continues, despite
desperate attempts by the Fed to reverse the cycle.  Structural challenges remain in the US economy, particularly the problem of debt.  

- Factory orders disappoint and points to a slowing in the sector that has carried the economy for the past 6+ months.

- The housing debacle continues in earnest.  Pending home sales fall to a record low down 2.6% after a 29.9% drop the month prior.  A
double dip in housing is all but certain. Banks will feel renewed pain
and another liquidity crisis may ensue as trust evaporates along with
any legitimacy offered by FASB 157.     

Observations/Thoughts  

>Here’s pretty much the main reason why I went Neutral on the US dollar in early July.  Maybe that’s why it’s been going down since late June.  People are anticipating the QE2 announcement soon. 

> A great synopsis of the baby boomers; stats, etc. 

>Equities
have come a long way from just 1 month ago, however many red flags
continue to wave. Treasury Bond yields not confirming the rise (see Bull/Bear Recap from two weeks ago in “Observations”).  ISM
Manufacturing report showed weakness developing in New Orders, and
while we saw a higher Non-ISM Manufacturing report, breadth in the
number of industries reporting expansion is deteriorating.  Small business is not participating in the euphoria (see 3^rd Bearish point) and job creation continues to be anemic.  

> Things are heating up in the Middle East once again.  These “War Games” are what keep this issue on “The Market Radar”.

VIPS Memo (Link Courtesy of Zero Hedge)

http://www.msnbc.msn.com/id/37950730/ns/world_news-mideastn_africa/

http://noir.bloomberg.com/apps/news?pid=20601087&sid=a6D4GBFqhXRo&pos=9 

>This
has to be the most ridiculous idea I’ve read in a long long time and
ties into how a bigger trend of shafting the financially
prudent/savers/renters and favoring risk takers/homeowners and morons
who overspent and took on bigger debts that they could handle; Moral
Hazard and socialism at the national level folks.  I know
I’m being general in the last statement as job losses turn an affordable
mortgage into an unaffordable one; however, my point is that this sort
of policy unequivocally shafts the taxpayer (to cover costs associated
with the program, not to mention expose us to risk from covering a
person with a lower credit score à there’s a reason they have lower credit scores).  Next on the docket QE2 is being discussed.  “Savers,
retirees, you are getting shafted as well.  The Fed is trying to turn
your cash into trash".  Fed officials are trying everything in their
power to debase our currency.  …sure, go ahead, screw the
savers even more; make it harder for the retirees to save.  Get’em to
spend; that’s gotta be the right prescription right?  Spend Spend Spend!!  Don’t save!  Don’t mind oil and commodity prices going higher either…just keep spending.  Finally, the final point in my rant, why do we need stimulus if we are in a “recovery”?  (Link Courtesy of Zero Hedge)

> So why has the market held up so well in the face of increasing bad news?  We are seeing the good side of moral hazard now.  Investors
are expecting more funny money coming from the Fed and/or more stimulus
goodies to keep fueling earnings growth, “the government’s got our
back” is what they think.  Growth need not be organic to investors, as long as it’s coming.  I say that this is the good side of moral hazard because we aren't seeing a substantial crash on bad news at this point.  So things remain mostly stabilized.  As I stated in my Q2 outlook
(See Gov’t Policy section), I think there’s enough political gas (fear)
in the tank for another decent sized stimulus then that’ll be it.  As
far as the Fed goes, it gets a little trickier, but having such an
anemic recovery and oil being above $80 dollars seems like a strong
argument against QE.  While not continuing QE would
increase the chances of a deflationary outcome, initiating QE2 won’t
have much of a positive effect either.  Eventually we would
head right into stagflation as commodity prices would skyrocket at any
sign of growth and treasury yields would become VERY sensitive.  If
markets begin to sense that the Fed or the administration are beginning
to waver in their support for the economy (due to excessive deficits or
a scare on Treasury yields) then we may see the “moral hazard bubble”
pop.  

Please visit RCS Investments
for my expanded and detailed Outlooks (thesis), and my “Market Radar”,
what I believe are the main factors affecting the economy and the
financial markets.

Comments

[Eternal Student]

Always love this report. For the Bears, I'd add that one needs about +150,000 jobs to be created, due to new entrants, which is far greater than the piddly 40,000 that were created.

[equity_momo]

"Moral Hazard Bubble"  - perfect. 

Well , you know what they say, all bubbles eventually pop..