Weekly Bull/Bear Recap: August 1-5, 2011
+ Gov’t officials are ready to accommodate markets. QE3 or some form of monetary easing could be here sooner than most think. The Fed still stands behind the markets and will help re-initiate the wealth effect, aimed at improving consumer and business confidence. Meanwhile in Europe, officials are committed to slaying the Eurozone predators. The ECB announced that it would be a lender of last resort for Italian and Spanish debt (ie “QEurope”) . A big step towards fiscal union has taken place. Italian officials are implementing the necessary reforms to conform with ECB requests.
+ The job market hasn’t fallen out of bed, plain and simple. The grand-daddy of all economic reports, the July BLS Payrolls, showed a gain of 117K total jobs (Private Sector: 154K) with upward revisions for the prior 2 months of +56K. The ADP jobs report shows an increase of 114K jobs created in July. Finally, jobless claims have actually been declining in the past few weeks. Now that the political stalemate over raising the debt ceiling is over with, businesses will begin to expand once again = increased hiring.
+ Retail Sales figures show that the consumer hasn’t fallen out of bed by any means. Take a look at the Gallup Poll on Consumer Spending; there’s a clear YoY improvement. These measures are sure to improve as oil (gas) prices have plunged recently, which will directly affect consumer spending and confidence (you can see gas prices are already rolling over). Car sales also fared well despite all the industry has had to deal with lately (inventory shortages due to Japanese tsunami/nuclear disaster). Consumer credit for June expanded much more than expected and bodes well for consumption.
+ Congress passes and Obama signs the bill to raise the debt ceiling. The US will not default and business confidence is set to make a come back now that this key uncertainty in the global outlook is lifted. There won’t be a crisis.
+ China’s Official Purchasing Manager’s Index (PMI) shows that the manufacturing sector is cooling, but not in contraction. Inflation metrics have also come down and raises the probability that the nation will undergo a soft landing as tightening policy is relaxed. Another bullish tid-bit is the Non-Manufacturing Index, which actually strengthened. A soft-landing will ensure that their economy continues growing and earnings growth for American companies remains buoyant.
- Europe is straight-up on the ropes and no one knows what to do. You can sense the despair from Eurozone leaders: “Stay calm, breathe deeply”; talk of desperation. Furthermore, Eurozone PMIs disappoint and show that not only are Spain and Greece mired in contraction, but core-nations such as Germany and France are coming alarmingly close to that negative distinction as well. Italy isn’t all that hot either. The worse part is that the policy being pursued/prescribed involves implementing austerity measures, which will further depress growth. It’s all a vicious circle; bailout conditions assume that growth will continue, yet austerity measures will smother it.
- Personal Consumption and Expenditures disappoint and has triggered widespread double-dip jitters. Incomes barely rose (Salaries & Wages actually fell) and spending fell for the first time in two years. The savings rate also rose to its highest reading in 2011. Political stalemate in Washington didn’t help. 70% of the Economy contracted in June.
- The stock market is finally paying attention to what “Mr. Bond” has been saying since the spring when yields were diverging from stock prices. Drastic sell offs in cyclically sensitive metals point to a “more-than-a-hiccup” type of slowing in the global economy. Given how fragile consumer confidence is, these sell-offs may be the final shock that finally blows the whole straw house over. The reverse wealth-effect is taking place.
- US Manufacturing has stalled with its PMI coming in at 50.9. Factory Orders disappointed as well. Is the consumer ready to take over the recovery? Are enough jobs being created to instill confidence? Are exports ready to take over the recovery? A sector needs to step up now, or recession is knocking at the door. Same goes for the global economy. Manufacturing is around the world is showing serious weakness.
- China’s manufacturing sector is officially in contraction as per the HSBC PMI for the first time in more than a year. The reading of 49.3 was the lowest reading since March 2009, when the S&P 500 was in 600-700 territory. Given how much US companies depend on growth in the communist nation, this bearish data should strike fear into investors.