From Rodrigo Serrano of RCS Investments
Weekly Bull/Bear Recap: July 11-15, 2011
+ Earnings reports are coming in and have been encouraging thus far. Google shines blowing past Wall Street’s expectations on higher online advertising demand. Citigroup reports much better than expected earnings on improved investment-banking performance as did JP Morgan. Mattel’s results also make the case for a strong corporate picture. Improved corporate guidance over the second half of the year, coupled with low valuations of 12-13x using 2011 earnings will stoke investor enthusiasm in the second half of the year. (I do not own nor am I shorting any of these companies).
+ Jobless claims fall further, from 427K to 405K, and proves that their recent rise was due to transitory factors. They will continue their path downward and lead to better labor market conditions in the second half of the year. This will help consumption in the months ahead and confirm 2011 earning estimates.
+ Chinese economic data comes in better than expected. Consumption and industrial production, critical factors for the global recovery, both exceed expectations. China isn’t headed for a hard-landing and global economic activity will remain buoyed by continued growth in demand from the communist nation.
+ Executives see a rebound in the second half of the year. Large mergers such as BHP Billiton’s acquisition of Petrohawk Energy Corp and Icahn’s bid for Clorox show that growth opportunities are seen as the global recovery progresses. (Don’t own or short these companies)
+ Consumer metrics for July have started off on the right foot. Goldman ICSC and Redbook gauges both show strengthening consumer trends on a YoY basis. Markets are quite gloomy with many thinking that the economy is about to fall into recession. Not from the looks of consumer demand!
+ The UCLA Meridian Pulse of Commerce Index, a leading indicator of manufacturing activity, rebounded by 1% after falling the prior two months. This indicates that the manufacturing sector isn’t falling out of bed. Economic activity remains in growth mode. Furthermore the Empire Manufacturing Survey, while negative for the second month in a row, is showing more signs that the recent soft patch is just that, a soft patch. Future expectations rose almost 10 pts to 32.2, while the future employment index crossed into positive territory once again.
+ While retail sales for June might have seemed weak, a look under the hood shows encouraging trends and a June YoY performance that is the highest since 2005.
+ Slowly but surely, housing is healing and the market is smelling the bottom for this all-important sector. Lower foreclosures —> less supply of houses —> stabilized housing prices —> improved consumer confidence —> higher spending.
- Empire State Manufacturing Index notches its second consecutive negative reading. Average workweek, New Orders, and Backlogs are in negative territory. Meanwhile Industrial Production for June rose only 0.2%, less than expected. To exacerbate the miss, most of the gains were due to the volatile utilities component. What happened to the transitory nature of this soft patch bulls?
- University of Michigan Consumer Sentiment for the first half of July implodes to 63.8 from 71.5 at the end of June. Can Main Street have some of that hopium that analysts and managers are sniffing?
- The US is warned …(twice!) that it may get its credit rating slashed should politicians fail to resolve the current budget impasse. Some predict that this will trigger closer scrutiny of the US from bond vigilantes. Interest rates would rise as treasury bonds sell off strongly.
- The Eurozone sovereign debt woes are officially back. This time we got the two big kahunas front and center: Spain and Italy (lets throw Ireland and Greece in there for good measure). Can Eurozone officials pull another rabbit out of the hat? Citigroup hopes so.
- Bernanke is a little gun shy now about opening the monetary spigot again. Why wouldn’t he be? Oil was less than a $1.00 away from hitting $100 again just on speculation that he might turn the faucet back on! Also, the latest inflation numbers show an ominous rise in Core CPI and makes the case for inflation becoming more entrenched in the economy. Any further printing at this point would be destabilizing for the consumer. The Fed isn’t coming to the rescue right away this time.
- Chinese inflation in June comes in at 6.4% on a YoY basis, at the top end of expectations. Social discontent is becoming more pervasive throughout the country and puts officials in a very difficult situation. Meanwhile, their economy is showing more signs of slowing as imports came in soft, which resulted in a larger than expected trade surplus.
- The housing market remains moribund as MBA purchase applications, a leading indicator of housing demand, hasn’t shown any signs of rebounding. The consumer’s largest asset looks to experience further price declines. QE hasn’t done much for this asset class.