Submitted by Rodrigo Serrano of Rational Capitalist Speculator
Weekly Bull/Bear REcap: Veteran's Day Edition 2011
+ The Greek saga ends with the inauguration of a new coalition government; positioned to swiftly ratify the EU bailout package. Italy’s Senate approves economic reforms needed to bring back confidence into markets. Berlusconi will be out and Monti in. The bears never thought it could happen. Officials came through in the clutch. They will not let the Euro fail. Italian yields collapse to 6.4-6.5% and well away from the danger zone of 7%. Slowly but surely the largest headwind for the global economy is weakening on the back of strong and decisive policy actions. With the Eurozone contagion contained, “we’ll have a slowdown in the world economy, but a manageable one.”
+ Chinese inflation is in a lucid downtrend and sets the stage for additional easing from officials. The Year over Year (YoY) change in CPI for October prints inline with expectations at +5.5% vs. +6.1% in September and +6.2% in August. The good news is reinforced by the PPI reading, sinking to +5.0% YoY vs. +5.7% expected. The soft-landing is materializing before our eyes. There are absolutely no signs of a hard-landing. While domestic investment growth may slow, consumption is charging to take its place. The bears are in for a shock and the bull market will reignite, running shorts over. Chanos will have egg on his face.
+ October shows clear improvement in manufacturing as per the American Association of Railroads. UPS CEO Kurt Kuehn states that he believes the holiday shopping season “will be solid”. University of Michigan reports that consumer sentiment has recovered to highs last seen in June with a reading of 64.2 in November, vs. 60.9 in October and 61.5 expected. Momentum in consumer spending has led to increased demand to restock inventories. Jobless Claims fall under 400K and to the lowest in 7 months. Finally, exports hit an all-time high in September. Obama’s pledge to double exports by 2015 is proving prophetic. The U.S. economy is resistent to recession in Europe.
+ The time to buy for the longer-term is now, due to fundamental, valuation, technical, and sentiment factors. Problems around the world are obviously recognized and have been priced in. Furthermore, leaders will do everything to avoid an outcome that would put the global recovery at risk. Besides, events in Europe really don’t affect earnings or cash flow growth of domestic companies. The market is trading on sentiment/psychology, not fundamentals. The U.S. economy has proven that it’s resistent to a Eurozone slowdown. A Santa Claus rally is coming as Europe headwinds weaken.
+ ”On a four quarter trailing basis, earnings for the S&P 500 are set to total $94.77 (Operating Earnings), which would eclipse the old record of $91.47 set in Q2 2007.” Folks, the S&P 500 is now trading at only 11.6 times next years earnings of $108.01 and at 13.7 times trailing twelve month earnings. Should normalcy in PE ratios return (15), the S&P 500 would rally roughly 14 and 30% respectively from 1,250. For the bears, does the graphic below look like a V-shape recovery to you? With a Eurozone resolution slowly but surely coming and a China soft landing, 2012 will be another record year for U.S. corporate profits. The time to buy is now as this realization begins to hit in early 2012.
- Political risk continues to grow. Eurozone governments are becoming sclerotic and ineffable sell-offs in financial markets are boarding on panic. This time German citizens are asking for a referendum. Merkozy lays the first hints of a restructured Eurozone (ie the Euro in its current form would be finished) —only to fervidly deny it less than 48 hrs later (what is this high school?). Slovakia openly ponders a Eurozone split as well. Italy’s 10-yr yield surpasses the 7% level, while the entire Italian bond yield curve inverts. 100% of the time a country’s 10-yr yield has surpassed this level, they’ve requested a bailout. But Italy is too big to save. The ECB would need to print with reckless abandon. However, Germany has said no to the idea (can you blame them after Weimar?). Besides, inflation is already running hot in the country. The first EFSF bond-issue receives tepid demand and officials now warn that the EFSF will probably be reduced in size (no longer €1 Trillion in firepower). An odd sequence of events culminates with S&P maintaining France’s AAA rating with a stable outlook; the market gainsays that distinction with OAT/Bund spreads hitting Euro-era highs. Let’s not forget the Bonos/Bunds spread; it just hit an Euro-era high as well.
- European economic data disappoints and signals that the region is plunging into recession. German industrial production falls 2.7%, while Eurozone retail sales fall 0.7%. Both indicators post their 2nd consecutive decline. France is entering recession, yet officials are implementing austerity. Good luck with that. Italian industrial production falls in September; a “national unity” government, which has the bulls all giddy, is about to make it worse. Spain’s feeble recovery stalls. Bulls are hoping (there’s that word again) for a mild recession in the region. Really?.
- U.S economic data refutes bullish hopium…again. Corelogic reports a second consecutive decline in home prices and they expect the trend to continue. Delinquencies and foreclosures are back on the rise. Fannie Mae requests aaaaaaaanother bailout, this time $7.8 billion (a few days after Freddy Mac requested its pound of taxpayer flesh). 1/3 of all mortgaged homes are underwater. The NFIB Small Business Optimism index remains in recessionary territory, coming in at 90.2 for the month of October vs. 88.9 the prior month. To put this reading in perspective, the average recessionary reading is 92, while the average expansion reading is 100. The ECRI sticks to its guns. Recession is a “fait accompli” according to them.
- Chinese data confirms a “synchronized global slowdown” taking place with exports plunging 7.1% MoM. The YoY growth rate falls to 15.9% YoY in October vs. 17.1% YoY in September, the lowest in almost 2 years. Weakness will continue. Lets not forget that exports account for roughly 30% of their economic structure. Auto sales for October implode 7+% and shows that the consumer is weakening. Consumption makes up roughly 35% of China’s economy. Furthermore, a property bubble is in the process of popping and will precipitate a collapse in fixed-investment, which accounts for roughly 50% (source IMF) of Chinese economic growth. If the U.S. and Europe go into recession (Europe’s already in one), China will undergo a hard-landing, plain and simple.
- The QE printing train continues in earnest with Swiss National Bank’s chief Phillip Hildenbrand reaffirming his commitment to defend the 1.20 level. Remember how the UK did its own QE? Well, it’s not working. The bulls are in for a rude awaking when Bernanke unleashes QE3 only to have the U.S. economy go into recession anyways.
- The Wall of Worry has crumbled and has given away to a Slope of Hope. Investors are enthusiastically awaiting the famed Santa rally. The margin of error for Eurozone officials is very thin. There better not be any “unexpected” bad news in the coming weeks.