From Rodrigo Serrano of Rational Capitalist Speculator
Weekly Bull/Bear Recap: December 5-9, 2011
+ The U.S. economy is decoupling from Europe. The job market is on the mend, confidence is rising, credit is in greater use; all resulting in greater consumption power. Housing continues to improve (Mortgage Applications have clearly stabilized). Looking under the stock market’s hood, we can see that breadth is not showing any weakness whatsoever. This is an indication that U.S. economic growth is real and a lifting of Eurozone uncertainties will lead to higher stock prices in the weeks to come.
+ European countries take the first step towards a fiscal union; this time it’s a step in the right direction. It is likely that 26 out of the 27 countries in the EU will accept the treaty changes. The bears keep underestimating the will of collective Europe to see the Euro experiment through to the end. Italian Prime Minister Monti presents additional austerity measures. Sovereign bond markets signal that Eurozone officials are finally attacking the core problems. Furthermore, the bears are exaggerating the depth of the Eurozone recession. German Factory Orders surge 5.2% in October, while Eurozone Retail Sales for the same month surprise to the upside, coming in at +0.4% vs. +0.1% expected. It will only be a mild and manageable recession.
+ Fed officials are preparing a revamped communication method, designed to clarify its intentions for monetary policy. Rates would be floored and easing would take place as long as the unemployment-rate remains above its natural rate. Should the inflation-rate surpass a limit of possibly 3% (up from 2%), then officials would lay off the monetary gas pedal. Along with a new wave of likely doves holding votes at the FOMC next year, QE will make an appearance in early 2012. The time to buy is now as the Fed will reflate.
+ A soft-landing in China is playing out as lower inflation now allows officials to strongly loosen monetary policy soon. Furthermore, the region is proving resistant to a European slowdown. By sporting extra large FX reserves and plenty of room to loosen monetary policy, Asian countries will have “extra fiscal and monetary headroom” to fight the effects of a mild European recession. Prudent investors are taking advantage of a very mis-priced market. Over the longer-term, investing during these times will end up being a very good decision.
- “The ECB had given the signal that it would print if European leaders agreed to a fiscal compact”, said the bulls. Alas it was not meant to be. Furthermore, an overthrow of Democracy on a gargantuan scale is furtively taking place. Technocrats are staging a coordinated coup on the citizens of every Eurozone country. S&P places 15 Euro nations (including core-countries France and Germany)…and the EFSF on “credit watch negative”, which means that there’s a 50% chance that they will be downgraded in the next 3 months. The safety net that is the EFSF would be finished. Ireland looks to reopen its can of bailout worms at the summit when it requests to renegotiate its bailout. Confidence hasn’t returned to financial markets; this can be seen when overnight deposits at the ECB remain near all-time highs. Banks would rather deposit their surplus funds at the ECB instead of lending them out.
- UK holiday shopping figures show their weakest growth since May. Spanish Industrial Production plunges 4%, the worst drop in over a year, while growth of Italian Industrial Production hits its lowest YoY rate in roughly 2 years. The Eurozone is the largest economy in the world, at $16.2 trillion. It’s common sense that if this region is going through a severe recession, the world will certainly feel the effects…
- …Deleveraging by European banks has resulted in global liquidity problems and has cut off a major source of funding for Asian trade, resulting in an accelerated deterioration in Asia. China’s official services PMI implodes to 49.7 from 57.7 (the lowest since February, 2009), while HSBC Services PMI falls to a 3 month low of 52.5 in November (hard manufacturing data underperforms as well). Japanese Machinery Orders, a leading indicator of industrial production, falls 6.9%, and is worse than all analysts’ estimates.
- The U.S. ISM Non-Manufacturing index falls to the lowest level since the beginning of the year, the report’s Employment sub-index is now contracting. Remember that services industry accounts for close to 90% of economic activity. Another headwind is starting to show itself in the form of political paralysis on extending the current payroll tax breaks. Regarding the all the good news in the housing market, it’s time to wake up! ECRI’s Lakshman maintains the firm’s recession call.
- Geopolitical tensions continue to rise. Reports of Iran preparing for a possible near-term strike may result in oil easily surpassing its bull market high of roughly $118, thus quickly sinking the feeble U.S. recovery. The country also took the opportunity to confirm the capture of a U.S. stealth drone, downed the prior week. Furthermore sabotage takes place, this time in Syria, marking an escalation of tensions in the country.