Bull/Bear Weekly Recap: Mar 28-Apr 1

From Rodrigo Serrano of RCS Investments

Bull/Bear Weekly Recap: Mar 28-Apr 1

Bull

+ The job market continues it’s healing process as the Monster Employment Index, ADP Payroll, Chicago PMI, and BLS job reports show palpable improvement.  The Monster Employment Index shows that job demand remains on the rise and signals that improved job numbers are in store.  The BLS jobs report shows back-to-back 200+ gains in job creation for the first time in the recovery.  The unemployment rate falls further. 

+The S&P500 is showing strong breadth in the latest rebound and supports the case that the bull market remains healthy.  Meanwhile, the Dow Jones Transports and Industrials burst through resistance and they are now at new bull market highs.  According to the Dow Theory, the bull market has more to run. 

+ The March Chicago PMI report shows that the manufacturing sector continues to grow.  Order backlogs hit their highest level since 1974 and bodes well for continued demand growth going forward in the mid-west.   Employment is also soaring, hitting its highest level since February 1973.  This has translated to a healthy ISM reading.  The expansion in the manufacturing sector has entered its 20th consecutive month.

+The Conference Board’s European Leading Economic Index hits an all-time high and points to continued expansion in the Eurozone.  German and French economic metrics are pointing to better confidence and improved business conditions.  The Euro has been rallying as a result. 

+ Chinese PMI indicators increase, thereby decreasing concerns that the country is in for a hard landing.  “Today’s data from China’s logistics federation showed output, orders and export orders grew at a faster pace in March than in February. Input prices rose at a slower pace, the survey suggested.” — Bloomberg.  The economy has withstood tightening by officials.  Growth is stronger than the bears think.   

+ Business conditions are certainly improving.  People are dining out and restaurants are reporting improved business conditions.  CEOs are seeing better times ahead.  State tax revenues are increasing again showing tangible improvement in the US economy. 

Bear

- Consumer confidence continues to deteriorate by posting its largest drop in over a year.  Rising oil and food prices are to blame (QE3 looks less likely), while stagnant wages (due to a high unemployment rate) result in less disposable income for households.  In an ominous sign for the job market, consumers views of job availability & income growth expectations declined.  I had warned (see my outlook: “Consumer Confidence” section) how a quick rise in gas prices could dent confidence as the year wore on. 

- Where’s all the good news coming from with regards to the Eurozone?  From the core countries: Germany and France.  The periphery, however, is in worsening shape.  Portugal revises its budget deficit from 7.2% to 8.6% complicating a hefty 3 month repayment schedule on the horizon.  Meanwhile, Ireland’s financial industry is in shambles.  Both country’s yield spreads compared to German bunds are near records.   Meanwhile inflation is becoming an issue and the ECB is about to raise interest rates.  How is this suppose to improve the periphery’s problems?

- Housing prices continue their double-dip, precisely as I had forecast as early as mid-last year.  Most bank balance sheets are not prepared for a renewed decline in home prices.  Note that financial ETFs seemed to have double-topped.  (see bottom of report)

-  The noose around the economic recovery is growing tighter as oil has broken through $107/barrel.  Libya’s civil war may be a long one.   Meanwhile, the Chicago PMI commentary from the survey panel shows that inflationary pressures are quickly building and are resulting in margin squeezes/passing costs to customers (can the consumer handle higher prices right now?).  Japan’s earthquake is also to blame as it has resulted in a supply shock. 

-  While the headline may read “Weekly jobless claims dip 6,000 to 388,000” a closer look at the data (or actually reading the article) shows that the previous week was revised up from 382,000 to 394,000, a pretty big jump.  The 4-week average inched higher to 394,250.  The labor market remains quite weak, especially considering how long this “recovery” has been. 

-  The fallout from the Japanese earthquake begins to hit the economic indicators.  After initial investor giddiness that Japan would see a V-shaped recovery, reality seems to be setting in.