Weekly Bull/Bear Recap: Jul. 16-20, 2012
+ In Euroland, ECB’s Draghi warns the bears: “believe me, it will be enough” on resumed sovereign bond buying. Chatter of a banking license for the ESM is sure to cause a shift in elevated bearish sentiment. The Bundesbank may oppose these measures, but it’s best to ignore them, given they only hold 2 out of 23 votes on the ECB board. Spanish and Italian bond yields plunge in response and risk markets rally (S&P 500 hits a new high this week from early June lows). The Eurogroup and Merllande state that they remain committed to preserve the Euro’s stability. Again, Draghi: “They don’t recognise the political capital that our leaders have invested in this union and Europeans’ support. The euro is irreversible.
+ China looks to be experiencing a soft landing as the HSBC/Markit Manufacturing PMI is only a few tenths away from expansion and is at its highest level in 5 months. Backlogs are now in positive territory. Leaders are “bringing her in” and the trajectory is looking good. Copper is sniffing this development.
+ “Don’t fight the Fed.” In the past, it’s been extremely unprofitable to do so. Officials will do what is necessary to quell market fears regarding the Eurozone. Meanwhile, lower interest rates are helping consumers’ income statements as refinancings reach their highest level since April 2009.
+ While investors are up in arms about what’s going on in Europe, “It’s not as bad as many think.” Market indicators show dramatically reduced probabilities of default in Portugal and Ireland, while Spain’s $900 billion of debt is already priced for a 20% haircut and is “a drop in the bucket” when considering total worldwide debt of roughly $50 trillion. Everyone knows that Greece is going to default, markets move when there’s a surprise; clearly there isn’t one here. Continued debt writedowns will clear the air and coupled with better than expected corporate earnings and improving sentiment, will set the stage for a sustainable rally.
+ The resilient U.S. economy continues to grow. The Chicago Fed National Activity Index rebounds from a weak reading in May. May travel volume rises 2.3% YoY, the largest gain since 2009. Increased transportation is a sign of a healing economy, not one about to fall into recession. In manufacturing, trucking bounces back in June, while growth continues in Kansas City. In housing, the Federal Housing Finance Agency reports that home prices climbed 0.8% in May on a month to month basis and 3.7% year over year. Home prices have now risen 4 months in a row and the latest report was better than expected. This confirms Zillow’s belief that housing prices have finally bottomed, it’s only stabilization or recovery from here. New Home Sales fall, but for a bullish reason. Inventory levels are back to healthy levels and the job-creating construction industry is set to restart after a dismal 6 years. Speaking of jobs, the 4-Week average of jobless claims hits its lowest level since March. The labor market continues its improvement; no sign of recession here.
- Draghi steps up to the plate, but his team doesn’t back him. Sorry Bulls, No banking license for you (they may have 3 votes, but the reality is they call the shots). A Greek default this fall is inevitable. Moreover, Spain reports a worsened economic situation, while more regional authorities request bailouts from the state. The negative feedback loop is gaining strength. Falling confidence (EFSF and Europe’s strongest are downgraded by Moody’s while Italy is downgraded further into junk status) has led to a deepening Eurozone recession as per Markit’s July Eurozone Composite PMI; the horizon looks bleak with backlogs shrinking at the fast rate since mid-2009. Germany’s important Ifo survey falls for the 3rd consecutive month in July. Greece is in a Great Depression. So can we finally change the prescription? Nope, the beatings continue. Good luck Europe.
- Global growth is stalling. Taiwanese industrial production surprises to the downside with its 4th consecutive drop, while South Korean GDP growth was underwhelming. Chinese officials are underestimating the financial turbulence to come, determined to enforce housing curbs even in the face of continued weakness from Europe. The U.K. reports a deepened double-dip recession. Bellwether companies such as UPS, Siemens, Whirlpool, Cisco, and Ford are either cutting outlook/estimates or looking to restructure (ie shed jobs) — for the first time in 3 years, quarterly earnings are poised to drop.
- The approaching fiscal cliff is damaging sentiment. Businesses are holding back, a trend clearly visible when perusing the latest Richmond Manufacturing Index, which implodes from -3 to -17 (well weaker than consensus of 0) as well as core-durable goods orders (a measure of business spending)— 3 out of the last 4 readings has been negative. From Econoday: “Outside of transportation, weakness was widespread in June following a notable gain in May.” Meanwhile, consumers are saying things are getting worse.
- Confidence in governmental organizations is collapsing - and why shouldn’t it? From former IMF division chief Peter Doyle: “After twenty years of service, I am ashamed to have had any association with the Fund at all.”
- Civil war continues unfettered in Syria. Religious tensions are simmering and the worst case scenario of sectarian conflict throughout the region may be close to taking hold. War games between Iran and the U.S. continue, while Israel bluntly states that it will act if Syrian non-conventional weapon stocks are raided by militants. Meanwhile, China raises the stakes in an already tense South China Sea. Schumer says U.S. should play “hardball” on Cnooc’s deal with Nexen; probably because the Yuan as begun to weaken. Will this turn into a flashpoint for Chinese-U.S. relations? Beware of oncoming protectionism.
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