Submitted by Rodrigo Serrano Of Rational Capitalist Speculator
Weekly Bull/Bear Recap: X-Mas ‘11 Edition
++ U.S. data continues to show an economy that’s weathering a turbulent global economy much better than the bears could have anticipated:
- The Dow Theory has flagged a buy signal. Both the Dow and Trannie indices notch new highs. This price action corroborates underlying U.S. economic strength. The equity bull market is set to continue.
- The Conference Board’s Leading Indicator surpasses the consensus estimate of 0.3%, rising 0.5%. “The LEI is pointing to continued growth this winter, possibly even gaining a little momentum by spring,” Conference Board economist Ken Goldstein said.
- The downward trend in Jobless claims has driven a stake right through the heart of the “U.S. recession” thesis. Jobless claims fall to the lowest since April 2008.
- Michigan Consumer Sentiment surprises to the upside with a final reading of 69.9 from 64.1 in November and represents a 6-month high. Consumer psyche is healing as the economy improves.
- The housing market continues on its steady recovery with the NAHB Housing Index producing its best reading since 2008. Housing Starts surge well ahead of expectations. Even better, rising permits point to more building in the months ahead (i.e. jobs will be created). Typically the housing market has led recoveries in times past. Homebuilder stocks are near 5-month highs.
- The Architectural Billings Index is back in positive territory. Expectations are clearly displaying a bottoming construction sector (look at the divergence between current conditions and expectations). It’s nowhere but up from here. This important sector will finally contribute to economic growth.
++ European economic data points to stabilization. Even stabilizing data, along with renewed and unprecedented efforts to steady the banking system, will result in renewed confidence and rallying markets.
- Germany’s salient Ifo Business Climate Index turns in a better than expected reading of 107.2 from 106.6 and is its second consecutive increase. Meanwhile, GfK’s notes that gains in consumer confidence over the past two months will hold. ”Unemployment in Europe’s largest economy is at a two-decade low of 6.9 percent, supporting consumer spending and helping to limit the impact of the euro-region turmoil.” German Business Expectations also show a better than expected reading.
- The Spanish 10-yr yield plunges and signals renewed confidence that the crisis is being contained (same for France, Ireland and Belgium)
- November Italian Retail Sales pleasantly surprise with a reading of +0.1% versus expectations of a 0.2% contraction, while political backing for austerity measures to ameliorate the crisis remains strong.
- The ECB has provided Eurozone officials time to push forward with the creation of a “fiscal compact” and improve crisis fighting measures. Little by little, the ECB is moving closer to outright QE. This eventual result means that the solution investors are looking for will eventually come and the crisis will be eliminated.
- European economic data foretells more social and political pressures on the horizon. Spanish Industrial Orders disappoint with a meager gain of 0.9% for December versus consensus expectations of 4.0%. Italian 4th quarter GDP signals the start of the country’s 5th recession in the past 10 years (consumer confidence plunges to 1996 levels). France is likely in recession as well. Greek bailout talks are about to collapse as Vega threatens to sue.
- The S&P 500 is nearing its late October highs, yet there are clear red flags in regards to the rally’s health. The complacency is palpable. The VIX has plunged to 20, a far cry from “blood on the streets” that sustains any significant rally. Meanwhile, 10-yr U.S. Treasury yields are nowhere near challenging their late October highs. Ditto for copper. These stark differences are bearish divergences. Italian 10-yr yields are back above the 7% level (yields for Greece and Portugal are hugging their respective high marks as well). Banks are using their “newfound wealth” to stash more cash with the ECB, not buy crap government debt as the bulls had hoped. Nothing fundamentally has changed in the Eurozone or China.
- Recent economic data exemplifies the pervasive weakness slowly infecting the global economy. Unrest continues in China and is likely to grow amidst weakening export growth and a popping housing bubble. November Japanese exports fall 4.5% YoY.
- 3rd quarter U.S. GDP has now been revised lower by 25%, plunging from an initial reading of 2.46% to 1.81%. This adjustment was largely due to a sharp downward revision in annualized consumer services consumption and cautious inventory management. Real per-capita disposable income is imploding @ an -1.9% annualized rate and will seriously impede the longer-term prospects of any recovery…
- …November PCE: Personal Spending in November rose just 0.1%, while the all-important wage component fell 0.1%. The Savings Rate fell 0.1% to 3.5%, the lowest since the onset of recession in 2007. Consumption growth will not be sustainable without a significant improvement in the employment situation.
- The Chicago Fed National Activity Index (CFNAI) disappoints with a reading of -0.37 from -0.11. The decrease is led by a sharp decrease in production-related indicators (i.e. Industrial Production/Manufacturing).
- The Aruoba-Diebold-Scotti Business Conditions Index doesn’t show a decoupling U.S. economy; instead it shows one that is simply muddling through and vulnerable to an exogenous shock, such as an Eurozone implosion or a Chinese hard-landing.
- Iran announces plans to conduct a 10-day naval exercise at the Straits of Hormuz, feasibly impeding oil freight traffic. The game of cat-and-mouse has the potential to upend the global recovery if it spirals out of control. Relations between Israel and Turkey take a turn for the worse after Israel cancels a large military contract.