Bull/Bear Weekly Recap

Submitted by RCS Investments

Bullish

+ Global trade continues to expand.  Industrial production in emerging market economies is up more than 10% from their prerecession peak. (Link Courtesy of News-to-Use). 

+ Chicago PMI shows an increase in activity during the month of July. Manufacturers continue to report expansion in the Mid-West, a very important manufacturing hub.  All sub-components rose, particularly the all important “New Orders” implying that activity is set to increase in the months ahead.  (Links Courtesy of Briefing.com )   
+ Earnings reports continue to impress and various global trade bellwethers cite improved outlooks in the quarters ahead.  These negative macro trends that the bears cite are not affecting company bottom lines.  In fact, revenues are showing more signs of life.

+ Continued reports of Eurozone financial tensions easing as yield spreads continue to contract and the Euro is near a 2.5 month high.  Eurozone sovereign woes? Where?  Meanwhile more countries are finding themselves having to raise rates as economies are overheating in growth. (Courtesy of The Big Picture)

+ The American Staffing Association’s staffing index shows that demand for temporary workers continues to rebound.  Demand levels are quickly approaching 2006 & 2008 levels.  This shows that demand for labor is out there and will soon translate to more robust job reports.

+ Mortgage Applications for purchase rose again for the second week in a row and lends more credence that a floor for demand has been formed. 

+ Case-Schiller Home Prices Index shows that property values are stabilized and will help reinforce consumer confidence and spending.
 

Bearish

- Durable Goods Orders surprised to the downside.  The one sector that was keeping this recovery alive is fading.  The demand side of the equation is still a no show.  The last line of defense for the bulls is looking quite tenuous at this point.

- Chicago Fed’s National Activity Index (one of the best proxies for GDP) came in negative as production and employment related indicators led the deterioration.  This further confirms that employment is not making a significant rebound and end-demand has not taken the baton from the “inventory-bounce-led” recovery.

- GDP growth comes in lighter than expected and the recession was deeper than once thought.  Meanwhile the consumption sub-component grew at a measly 1.6% vs. an already weak 1.9% increase in the first quarter.  Consumption = 70% of the economy and unfortunately it is slowing.  End demand continues to not show and this is what ultimately drives everything else.  A good breakdown can be found here (Courtesy of CalculatedRisk Blog)  

- Beige Book confirms what the Bears (at least me) have been saying: “Economic growth is decreasing rapidly a double-dip is coming much much sooner than anyone is expecting”.  Investors are not prepared for this scenario as most, if not all “pundits” write it off.

- Evidence of a fall in consumer confidence continues to mount as this time the UMich Sentiment survey confirms that confidence took a turn south in the last month. Despite the “better than expected” headline, let’s not forget that this level is far below last month’s closing level of   Cautious consumers = Wallets held close.  

- Dangerous  signs are surfacing that foretell a possible sharp drop in economic activity in the immediate months ahead.  The lights from the oncoming train are getting bigger quickly. (Courtesy ZeroHedge)

- The housing “supply-restraint” dam, which had been in place to buoy home prices, is beginning to crack.  Foreclosures are set to increase a good bit, and with recent underwhelming performance of purchase mortgage applications, prices have nowhere to go but down.  Banks will be under renewed pressure as their "extend-and-pretend" schemes blow up in their collective faces.

 
Observations/Thoughts

>This is welcomed news for the whole country.  Perhaps further good news will actually work to increase overall psyche given that we’ve had solid evidence that confidence has taken a turn for the worse.  Why this recent bout of pessimism?  Perhaps everyone is collectively realizing how big of a mess we are in and how long it will take to actually resolve the structural imbalances.     

> First, an example of what I’ve feared for a while now and mentioned in my Q1 Outlook.  Look for it to get worse.  Second, this is an interesting story in the continued move for more fiscal austerity (something I expect to happen in the quarters ahead: see my Q2 Outlook).  I believe that letting the Bush tax cuts expire on the wealthy would hurt consumption.  Even though it may affect approx. 2% of the population, those 2% account for a large portion of consumption.  However, Obama and the democrats, looking more desperate by the day it seems, may have hit the political hot button they’ve been looking for.  Letting the tax cuts for the wealthy expire is something that they support, and by the way, most of the nation supports as well.  The growing division between the wealthy and the rest is alarming and will no doubt cast a shadow on the build up to the big decision.  I believe that tax cuts for the wealthy will be allowed to expire.  However it is way too soon to be completely confident in that outcome.  If recession hits before the November elections, this sentiment may change quickly. 

>India seems to be having some trouble containing inflationary pressures.  Stimulus and loose monetary conditions are now biting back.  China is having these problems as well.  Various reports of labor unrest (higher wages) and inflationary CPI/PPI reports are becoming daily fodder over there.  I believe they are in a particularly tough spot.  Raising interest rates would help contain inflation, but at the expense of possibly popping a real estate bubble, while letting the Yuan rise would cause another headwind for their already pressured export sector.

> So we have Barton Biggs who nailed the recent bottom with his “I’m off risk” after touting risk all the way over the edge and now we have Barton Biggs &“perma-bear” Richard Russell announcing to get back in.  Since then the market has gone down.  Like Rosenberg says, a “meat-grinder” market is what we have on our hands here.  It loves making fools out of us all doesn’t it?! (Links Courtesy of Zero Hedge and ETF Daily News)

> So we’re in a sustainable recovery?  Yawn

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