Weekly Bull/Bear Recap: May 16-20, 2011

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Submitted by Rational Capitalist Speculator

Bull

+ For all the talk about how narrowing profit margins will put a crip
on hiring, Gallup Poll’s Job Creation sub-index keeps showing
strengthening hiring trends.  It has been near the top end of its range
since mid-May.  Meanwhile, as expected, jobless claims plunge
again from from 424,000 to 409,000.  The recent spike was nothing more
than a seasonal quirk.  Job growth (in addition to falling gas prices)
will serve to buttress consumer spending.

+ Fears of oil refineries being shut down due to the massive flooding along the Mississippi River are dissipating and gasoline futures have plunged roughly 15% since the early May peak.  This is setting the stage for falling gas prices which in turn will lead to an acceleration in consumer spending in the months ahead.  

+  It’s not like elevated gas prices have been significantly affecting the consumer anyways.  American’s have gotten used to higher prices as they only make up 5-6% of the consumption pie.

+ The bond market is doing its part in helping housing with mortgage rates dropping for the 5th straight week
to their lowest level this year.  This is happening right in the middle
of spring buying, which should help stabilize the housing market and
improve consumer confidence.  Meanwhile these lower rates have also set off a wave of refinancing, which will free up more disposable income for households.

+ The Wall of Worry remains high
Given how individual investors are always the last to the party, it’s
bullish when they bailout at the slightest drop in the S&P 500. 
There’s buying power on the sidelines and once the consumer seeings
falling gas prices, consumption growth will take a leg up and investors
will buy once again.   

+ Home Depot raised its outlook for the year
as same-store sales returned to positive territory after falling in
prior months due to bad weather.  Having a market-leader in home
improvement announce a raised outlook is a harbinger of improving investment growth in housing.  (Don’t own nor am I shorting Home Depot)

+ The Linkedin IPO
is a great success with the stock surging more than 110% after its
debut on Thursday.  Investor appetite for risk remains strong and
signals improving confidence in the recovery.  Market conditions, such
as falling rates, oil prices, increased lending, and rising stock prices
will make it easier for the recovery to progress. (Don’t own nor am I
shorting Linkedin)

+ Bank lending is the life blood of the economy.  So when you see reports of increased lending to businesses,
it signals that confidence is increasing on the part of banks and small
businesses as they believe business conditions have improved enough to
take risks.  The animal spirits are coming back and is a welcomed
development for the recovery. 

Bear

- Here are some more leading indicators for the Bulls.  The Conference Board Leading Indicator fell in April for the first time in almost a year
Worse, 2 of the 4 sub-indicators that came in positive were the
“interest-rate spread” (which is obviously manipulated by Bernanke’s
ZIRP policy) and “stock prices” (POMO anyone?).  Meanwhile, the ECRI
just delivered the bear clarion call: “Global-Slowdown is coming”.  

- The housing market continues to defy the optimists.  Numbers for April showed no sign of increasing construction activity anytime soon
as Housing Starts and Permits (which is a leading indicator) both
showed declines of 10.6% and 4.0% respectably.  Meanwhile, in a sign of
how non-existent demand is for housing, despite the lowest mortgage
rates of the year, existing home-sales still managed to drop in April (when they should be rising due to home buying season).  If I was a home builder, I’d be depressed as well.

- The Japanese earthquake and subsequent nuclear disaster (which just because the news isn’t on bubblevision anymore doesn’t mean it’s gotten any better), is beginning to show up in US economic data.  Industrial production for April came in flat surprising economists expectations for a slight gain.  February and March data were also revised lower.

- In news not having to do with the earthquake, the Empire Manufacturing Report was quite disappointing
for the bulls, coming in miles below the consensus estimate of 19.6, at
11.9 and down from 21.7 in April.  Prices paid rose 12 pts to the
highest since July 2008.  Meanwhile, the Philly Fed manufacturing index
for May showed that factories in the mid-west grew at the slowest pace in 8 months.  Contrary to economist’s expectation for the gauge to rise to 20.1, it came in at 3.9.  Yep I’d say that was a miss. 

- As if the Eurozone needed another dumb decision by a politician
In one of the weirdest financial stories of the year, IMF chief
Dominique Strauss-Kahn was just sick of dealing with the Eurozone issues
and let out his frustrations on a poor 32-year-old maid (nodding head).    

- Don’t you think it’s odd when you have analysts, money managers,
and bubble vision all chanting about how we are in the midst of a
recovery and that conditions are setting up for a major rally to end the
year while you have insiders dumping their stock to the tune of 350x sellers to buyers?  Putting my common sense cap on, something just doesn’t make sense here!   

- The Middle East is still a hotbed of Cold Wars, rising tensions, and sectarian violence.  Obama just upped the ante on the Syrian president, while laying down a controversial plan
for Israel to return to pre-1967 (ex. Gaza and West Bank) borders in
its peace process with the Palestinian state.  Israel has bluntly
rejected the proposal.

- The Eurozone made headlines late this week with S&P downgrading Greece sovereign debt due to a possible “soft-restructuring”, tensions are erupting between Eurozone officials (the wind speed on the house of cards is increasing).  Meanwhile, it’s not only the Finnish or Greek populace getting sick of the austerity (in order to bailout investors), Spain is now in the spotlight
as Zapatero’s “Socialist” party is set to suffer major losses in the
days ahead. Spanish 10-yr yields are at the top of their multi-month
range.  Things may be taking a turn for the worse.