Weekly Bull/Bear Recap: September 6-9, 2011

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Submitted by Rodrigo Serrano of Rational Capitalist Speculator

Weekly Bull/Bear Recap: September 6-9, 2011

Bull

+ US International Trade improved substantially in July and doesn’t   support the argument for a double-dip recession.  The trade deficit (=Exports-Imports) narrowed to $44.8 billion from $51.6 billion in June, a decline of 13.1%.  This is the largest percentage decline since February 2009.  Exports shot up to record highs.  April, May, and June deficits were also revised lower and will result in an upward revision to GDP.   

+ The Non-Manufacturing ISM number points to a surprisingly resilient economy.  A reading of 53.3 for August is higher than expected and, more importantly, is higher than the 52.7 reading for July.  Note that the service industry makes up close to 90% of the economy.  The jobs related subindex reading of 51.6 shows continued expansion in payrolls.  This result confirms that the economy hasn’t entered recession.    

+ Obama announces his stimulus plan.  This time it is centered on jobs which is exactly the prescription our economy needs.  Among the most prominent details: a 50% slashing in payroll taxes to help small businesses and workers, much needed help for state and local governments, and an invitation for private money to participate in rebuilding America.  This package is different than the 2009 stimulus.  It would be much more effective.  

+ An end to the tightening cycle in China is at hand.  Inflation is increasingly under control.  The Chinese economy has survived the cycle in growth mode.  The arguments for a soft-landing are gaining strength.  China’s economy will continue to power the global economy and the bears are setting themselves up for bankruptcy as the market powers higher in the coming weeks.

+ The Euro will make it through this period of turbulence.  Germany’s Constitutional Court rules in favor of the government and deems aid packages for the Eurozone within the guidelines of the German Constitution.  Though the process is painful, the path for the Eurozone is one towards fiscal union — a United States of Europe.  Continued progress will lift the single most damaging headwind threatening the global recovery.

+ While the result may be skewed a bit by seasonal adjustments, a strong rise in industrial production in July for Germany shows that global demand is still online and the global economy remains in growth mode.  Perhaps a better signal of continued global economic growth can be found in Australia, where GDP outperformed analyst expectations.  

Bear

- Swiss authorities pledge unlimited buying of contra-currencies to weaken the Franc and is a shot across the bow in the ongoing global Currency War.  A strengthening Franc has materially damaged Switzerland’s export sector.  Its Central Bank has had enough.  But, will they be able to conquer market forces?  Ask the Japanese (they seem to be the example on so many levels these days).  The devaluation race just shifted into a higher gear.     

- The EU pressure cooker is whistling.  Merkel is losing significant support for her bailout policies.  How can she continue to dole out taxpayer money if her country’s economy is in danger of entering recession?  She’s striking a more hard-lined tone towards Greece on further aid, while behind the scenes, her government is making preparations for a possible Greek default (how’s that for confidence?).  The problem is that political-will in Greece and Italy is wilting in the face of strikes and unrest.  Meanwhile, Trichet makes official the obvious, “downside risks have intensified”.  The tightening cycle in the region has been put on hold and the Central Bank seems to be in disarray.  Austerity is wrecking havoc on the periphery.  Italian officials are tempering their GDP view, which is likely to miss government forecasts.  Spain isn’t producing encouraging economic data.  Let’s not even mention Greece (…oops, just did).  

- OECD cuts growth forecasts for the U.S and Japan.  The report is alarming in that it essentially paints a picture of a giant global stall.  Mirroring the IMF, one can see how dependent investors have become on monetary and fiscal stimulus.  This is NOT normal.  Economies are suppose to grow on their own, yet pleas for all sorts of stimulus drives home the point of just how weak the patient really is.  More morphine please.  

- The jobs market remains in the doldrums as jobless claims rise versus expectations of a decline.  Applications for unemployment insurance rose to 414,000 from an upwardly revised 412,000 (was 409,000).  The 4-week moving average, a better measure of the metric as it smooths out weekly distortions, moved higher by 3,750 to 414,750.  This is the highest level in more than 1 month.       

- Fannie Mae releases its widely followed National Housing Survey.  The results are disappointing and contradict the hopium and kool-aid that the bulls can’t get enough of.  More than 75% of respondents say the economy is on the wrong track.  From Doug Duncan, vice president and chief economist of Fannie Mae, “I believe the public was looking at the U.S. debt, deficit, and the ensuing political struggle with one eye, and looking at Europe and their sovereign debt issues with the other eye, and saying: ‘This is not what we want.’”  This result closely mirrors the recent Bloomberg Confidence survey.  

- Consumption continues to suffer.  The bulls keep ignoring blatant signals of consumption weakness (don’t own WMT).  Meanwhile, let’s take a look at this week’s ECRI reading.  Still supportive of the bear’s views, falling from -4.4 to -6.2.

(Source: dshort.com