Green Shoots

The last two weeks have not been pretty for the 'it's different this time' crowd. Day after day has brough miss after miss in macro-economic data for the US; from PMIs to NFPs, no matter how hard you try, there is not even enough for an 'anecdotal' strategist to pin his BTFD thesis on. Quantitatively, the US macro surprise index has seen its biggest 10-day drop in 10 months, completely reversing all the 'seasonally-adjusted' difference from the 2011 'Deja-Vu' market and macro behavior. So with the first pillar of bullishness (macro data is 'supportive'), it is up to earnings (but but but profitability is at highs) to hold up the market - good luck with that.

Germany, it seems, has had enough with its taxpayers implicitly bearing the burden of the rest of Europe's profligacy as the final solution chosen for Cyprus clearly shows (especially in light of pending German elections). But with all that 'stabilitee' based on one nation's shoulders, the following chart suggests Europe's Atlas is about to shrug. For the last six months, non-German Europe has seen its economies collapse with PMI New Orders pushing new lows now - after some brief episode of hope at the start of the year. Germany, in the meantime has been surging back as expectations of recovery have led sentiment higher and hopes for a European green shoot renaissance. That is until recently. In the last month, Germany's economic momentum has faltered; the green shoots are wilting; and combining real economic weakness with the Europe-wide deposit outflows (hurting the 'financial' economy), Europe is back in the crosshairs.

First, it is Merkel's turn, which last week was furious at Cyprus for daring to reject the first flawed Eurogroup plan impairing insured depositors, only to praise it for now... rejecting said plan. To wit: Chancellor Angela Merkel, "as well as the government, is very happy that the troika, the euro group and Cyprus were able to reach an agreement," German government spokesman Steffen Seibert says in Berlin. He added that difficulties will arise in the short term because of measures aimed to scale back Cyprus’s banking sector, "but in the long run it will lead to a healthier” industry. That remains to be seen, especially when factoring in the Russian response. Which wont be pleasant.

Asia has badly lagged U.S. and European stock markets this year and over the past 12 months. We explain why it's happened and why it may continue.

EURUSD - which was active around the US day session all week and dead otherwise - popped up to take out stops at 1.31 today before fading to end the wek marginally higher. Broadly speaking the European 'Dow' was higher on the week but the individual nation stock indices faded quite notably today with Spain and Italy the worst. European credit markets did not play along at all - with financials especially weak. It does seem like European financial stocks are playin catch down to European credit but the pump remains. In other news, the market's 'old' fulcrum security (and perhaps renewed again) - Spanish bond spreads - had their worst week in the last 4 and surged 23bps (when the rest of the market was practically unchanged). Their is a lot simmering under the surface in Europe, but for now, stocks remain cognitively dissonant thanks to the 'promise' even as Italian and Spanish debt levels push top new all-time highs (ahh the austerity of it all).

Why do I bring all of this up? Because it was China’s stimulus and China’s economy that supposedly lead the world back towards growth again. China is the proverbial canary in the coalmine, the economy that most quickly reveals what’s coming and where we’re all heading…

As we recently noted, despite the incessant chatter that the worst is behind them and the unending belief that if European politicians repeat a lie often enough it will become truth, the following chart perhaps better than many others shows the sorry state that exists in Europe's core and periphery - no green shoots, no second-derivative shifts, and only the 'Merkel-Draghi' wager holding things together. And despite US equity strength, European markets disappointed today with EURUSD back under 1.3000, European stock indices closing red (not holding US equity-driven gains), and Italian and Spanish bond spreads leaking wider into the close (about 10bps off their intrday tights).

You can choose to ignore this and believe that Europe’s Crisis is fixed just as EU political leaders claim. But Europe in general is out of options in terms of solving its debt crisis.

In the aftermath of yesterday's surge in German hopium measured by the ZEW Economic Survey which took out all expectations to the upside, it was inevitable that the other double-dipping country, France, telegraphed some optimism despite a contracting economy and would follow suit with a big  confidence beat, and sure enough the French INSEE reported that February business sentiment rose from 87 to 90, on expectations of an unchanged number. And the subsequent prompt smash of investor expectations in Switzerland, where the ZEW soared from -6.9 to +10.0 tells us that something is very wrong in the Alpine country if it too is trying so hard to distract from the here and now. And while one can manipulate future optimism metrics to infinity, it is reality that is proving far more troublesome for Europe, as could be seen by the Italian Industrial Orders print which crashed -15.3% Y/Y on expectations of a smooth -9.5% drop, down from -6.7% previously. Since industrial orders are a proxy for future demand, a critical issue as Italy enters 2013 after six consecutive quarters of economic contraction and with no relief on the horizon, it is only fitting that Italy should shock the world with an off the chart confidence beat next.

While it is commendable that Bernanke has generated a wealth effect of some 12% for those few who are planning for retirement, another problem is where the funding for this increase has come from. As Bloomberg explains, while two thirds of the increase came courtesy of the stock market, or some 8% in absolute terms, the rest was from funded (and matched) contributions to accounts. This is equal to $2733 in actual money set aside for retirement in 2012, a far cry from the maximum allowed $17,500 per year, with the actual cash outflow excluding the corporate match substantially less. This amount to a measly $228 per month (less net of matching) that the average American who has a 401(k), has set aside for retirement. We understand now why Bernanke is so hell bent on hitting that Dow 32,000 bogey - without it, the average retired American will wake up very soon one day and realize that the money is gone. All gone.

While stocks suggest all is well, and anecdotal macro data (seasonally slandered by fiscal cliff drag-forwards and 'weather') might offer hope that green shoots are back; one glance at the following chart of US, Europe, and Asia (ex-Japan) EBITDA tells a very different story. With cashflow clearly barely budging, is it any wonder that companies are creating conservative balance sheets? It sure feels like a recessionary environment...

We would assume that tomorrow's ECB meeting will be the usual smug gloating by Draghi of how the market has turned around so exuberantly and implicitly that means all is well. While Willem Buiter just took that complacent perspective to task, we thought the following six simple charts of Good (well not terrible), Bad, and Ugly macro-economic data would simplify reality...

Sometimes people, a vast majority of people, just don’t get it and so the present tense of the world goes on for a while until reality pops up or is forced upon them. It is rather like momentum which proceeds until the fuel runs out. Sometimes it is like living on Earth; the lack of recognition that hydrogen and oxygen surrounds you does not negate the fact that these two gases are present even though you cannot see them; you are still alive and breathing afterall. What we are used to, what we look for, are bubbles that reflect one asset class or another. In the past it has been Real Estate or dot.com or high tech or equities or bonds so that the search is constantly defined by some sector. Present conditions, however, dictate something entirely different, in my opinion, which is not one asset class or another as defined by relative valuation but all of the world’s asset classes as defined by global policies set by the world’s central banks acting in collusion. We are living in a gas house bubble.

Just as Byron Wien publishes his ten surprises for the upcoming year, Morgan Stanley has created a heady list of seventeen macro surprises across all countries they cover that depict plausible possible outcomes that would represent a meaningful surprise to the prevailing consensus. From the "return of inflation" to 'Brixit' and from the "BoJ buying Euro-are bonds" to a "US housing recovery stall out" - these seventeen succinctly written paragraphs provide much food for thought as we enter 2013.

Green shoots, growth off a small base, and self-reported awesomeness notwithstanding, the crux of many investors' thesis for believing in a housing recovery is the fact that homebuilder stocks have risen so magnificently; after all the stock market is a 'discounting mechanism' right? (aside from September 2000 and October 2007) The funny thing is - we've seen this kind of 'rally' in homebuilder stocks before, and somewhat remarkably we are following its trajectory almost to the day. 284-days from the March 2009 trough, XHB (the homebuilder ETF) peaked and then lost 30% in the next 45 days. Today marked Day-285 of the current homebuilder rally (coincidentally running at around the same 120% annualized return and exhibiting similar short-squeeze tendencies). Add to that worrying analog, the third divergence between homeowner 'comfort' and renter 'comfort this year - each prior time ending in a rapid collapse in homeowner confidence; and we remain skeptical that the 'market' knows best in this case.