The Bull/Bear Weekly Recap - August 20

Submitted by RCS Investments

The Bull/Bear Weekly Recap


+More signs surface that banks are beginning to loosen lending standards and is a critical element in sustaining and further boosting the economic recovery.  The demand-side is stabilizing as well after quarters of contraction. 

+ Industrial Production shows a healthy rise led by auto production and was larger than expected.  The manufacturing recovery continues and has not fallen off a cliff by any stretch.  Coupled with last weeks report of the UCLA-Ceridian Pulse of Commerce (a leading indicator), we can be sure that this sector will continue to contribute to Q3 growth.

+Confidence in Europe continues to show as Irish and Spanish auctions go on without a hitch, while the German ZEW current conditions rose the most in its history in August.  Economic performance in the country continues to defy skeptics.

+ The Mortgage Bankers Association reports that their Refi-Index has reached the highest level since May 2009.  Increased refinancings will help in freeing up disposable income for increased consumption. 

+ Abroad, the Shanghai and Sensex stock markets show improving prospects for economic growth in those regions.  Lower inflation gauges will support more stimulus measures in China, while India’s Sensex is near 30 month highs. 

+ In Europe, Greece is surpassing expectations in controlling its budget deficit and has helped ease sovereign debt concerns, while the German Bundesbank raised its 2010 growth forecast. The global recovery continues with China and Germany leading the way.    



- Empire and Philly Manufacturing Indexes show a slowly fading recovery in this sector as both readings come in less than expected.  For the both indexes, New Orders move into negative territory for the first time in over a year.  End demand better come soon!

- Jobless Claims are strongly pointing to a double-dip on the horizon as job losses are increasing. The job market is not improving as the bulls state.  Looking at the details of the Philly Manufacturing index, the “Average Employee Workweek" sub-index fell from +1.7 to -17.1.  Demand for labor from this sector is decreasing as the inventory restocking phase is complete.     

- NAHB Index fell to the lowest reading since the March of 2009, when the stock market was plunging to its lows.  Given that every recovery has been presaged by a rebound in this sector, can we be confident that this whole "recovery" is sustainable and that a double dip can be averted? While housing accounts for a smaller portion of GDP, home prices are still extremely important to consumer confidence.  A struggling sector, along with the huge glut of homes, will ensure that housing prices will take another leg down and with it, consumption and the banks. Need proof?  Check the latest Mortgage Applications report from the MBA as it seems that demand is showing stabilization after some increased readings in the past few weeks.  If this is where new demand is, prepare for the housing “ice age” this winter. (Link Courtesy of CalculatedRiskBlog

- Consumer confidence remains in the doldrums as per the ABC and Gallup Polls.  No recovery is being seen on Main Street.  This is translating to weakening consumption trends as the second most important shopping period for retailers, back-to-school, is thus far turning out to be a dud.  Weekly consumption metrics, Goldman and Redbook, are showing renewed weakening in YoY consumption growth rates as well.  Earnings growth penciled in by analysts is too high given this metric.

- Leading indicators point to a slowing economy.  However, one must note that most of the positive impetus in the past months has been due to the “Interest Rate Spread”, which has been artificially maintained by the Fed’s ZIRP policy.  Subtracting this from the metric and you get an economy that is facing a higher probability of entering a double-dip recession with every passing month. 

-  The ECRI leading indicator growth rate just declined back into double digit territory @ -10.0, while the prior week was revised from -9.8 to -10.2, so in reality we have no been in double digit negative growth for 3 weeks.  The signs of a double-dip continue to grow despite the consensus clearly not expecting one.    



 Looks like their will be little to no help coming from the fiscal side for a while.  That one last stimulus based on fear that I was expecting in my Q2 Outlook has come and gone (though I thought it would be bigger), meanwhile, … 

…the warning flags are waving more aggressively: housing, treasury yields, jobless claims, manufacturing, and consumer confidence.   Is the other side of this hurricane upon us? 

What I had harped about for months is now finally hitting the mainstream.  Structural issues have not been dealt with.  

As an investor, these are the types of articles you do NOT want to see on Bloomberg.  It shows that consumers are still struggling and that the second most important period for retailers is turning out to be a dud.

An excellent synopsis of the impending protectionism that investors are failing to discount (only beginning to get slightly mentioned in the media). (Link Courtesy of Mish' Global Economic Trend Analysis)     

What you see here are countries that are dependent on exports.  China has the same problem as they have kept the Yuan from strengthening.  Speculation is that England may do another round of QE.  Obama is promising to double exports.  Not everyone can be an exporter ladies and gents.  The world economy will remain set back until emerging markets can formulate sustainable recoveries in their underdeveloped domestic economies.  That development would be a step in the right direction. 

…our Fed continues to believe that QE is the best solution to our problems.  For a good analogy regarding stimulus and the economy, check this out.  I wrote it a while back.  Note: QE qualifies as monetary “stimulus”. 

Here we go again. 

It’s been a great run for Treasuries for quite a while.  My Bullish call on this asset class was spot on.  But the gains are unlikely to continue now that we are seeing “capitulation” from the most ardent Treasury bears and high levels of bullishness in general.  Everyone is now on the same side of the boat, which means that there’s little impetus for further considerable bullish moves for the time being.  I’m considering moving to a neutral stance…stay tuned. 


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