Europe /US News update

Weekly Bull/Bear Recap:October 17-21, 2011

Bull

+ So far for thereporting season, 63.7% of S&P 500 companies have beaten consensus earningsper share estimates, which is stronger than the past 2 quarters.  Meanwhile, revenue per share has come in linewith average beat rates.  This earningsseason has been been positive for equity markets.  They have just broken through the top end ofthe roughly 3 month range. 

+ The Beige Book paintsthe picture of a stabilized economy after the summer slowdown.  The economy has leveled out even after allthe exogenous shocks it took on: the Japanese earthquake, higher gas prices, astock market crash, and Eurozone worries. Once Europe gets its house in order, the economy will reaccelerate andconfound the bears.  This thesis isclearly on display with the latest Conference Board Leading Indicators report,which published a positive reading of +0.2%. Meanwhile, the 4-week average of jobless claims falls to the lowestlevel since April and the Gallup Poll reports that unemployment hasplunged.   We’re not in recession, only asoft-patch. Here’s some more evidence…  

+ …Industrialproduction for September rises 0.2% and is line with projections.  Manufacturing isn’t falling out of bed, infact, the soft-patch is ending as the Philly Fed Index surges from -17.5 to +8.7in October (annihilating expectations of -9.4). Both New Orders and Backlogsswing into positive territory, while expectations improve from 21.4 to27.2. 

+ It’s not only inmanufacturing where we see increasing activity. The housing market is generating more bustle as the Buildfax ResidentialRemodeling Index hits a new all-time high. Housing starts rocket 15%, while the Home Builder Sentiment Index forOctober rises a much higher than expected 4 points.  While the break-even is 50, it shows that thehousing market is healing.  It’s a stepin the right direction and is good news for the sector primarily responsiblefor our economy’s large challenges. Furthermore policymakers are doing their part to increase demand.  The sector is moving forward.    

+  More countries, such as the BRICS, arestating that they are willing to support the Eurozone via capital injectionswith the IMF.  Global leaders arerealizing the gravity of the situation and are uniting to put forth the properprescriptions to address the issues.  Thepath towards a solution just got easier as Fitch states that an expansion ofthe EFSF wouldn’t put France’s AAA rating in jeopardy.  Furthermore, Spain posted an unexpected risein industrial production orders after an encouraging industrial productionnumber 2 weeks ago.  The country will notenter recession, which will result in an improved fiscal situation.  Notice how Spain’s 10-yr yield has beeninconspicuously absent from the latest run up in yields.  The Eurozone will achieve a solution, justwhen most in the investment community aren’t expecting such an outcome.  This will lead to a powerful rally asbearishness remains elevated.    

+ Consumer priceinflation is beginning to subside and will give the Fed more wiggle room to renewQE in order to support the recovery in the near future.  The Fed will have the market and economy’sback soon.  The bears are frustrated thateven without QE, the economy has been growing and the market has beensupported. 

+ As the globaleconomic restructuring continues, we are starting to see its benefits.  The Chinese are working to expand theirconsumer economy.  With sky-high savingsrate and further development, we will have end-demand from that country fordecades.  Their economy is on sound footing.  As wages begin to equalize between China andthe U.S., more companies are “re-shoring” back to America.  This migration back to the U.S. will resultin a wave of investment and job creation. The best part is that this restructuring is taking place without aslowdown in global trade! 

+  In what will surely help oil supply issueswith Libya, reports proclaim Gaddafi has been fatally injured.  Libya is finally liberated and will result ina speedy recovery of its people as well as oil production.  Oil prices will further decline sending Gasprices, which have dropped 13% since peaking in May, lower and help consumerspending. 

Bear

- Sure Bulls, theeconomy is getting better because surveys and metrics are increasing.  Sure….now open your eyes and see the biggerpicture; see reality.  The Occupy WallStreet protests have metastasized throughout the world.  The more bailout packages are implemented,the more ardent and violent the remonstrances will become.  The end of the road for the infamous policyof bailouts is at hand.  Banksters northe Fed are helping their case.  It hasbecome politically (not to mention morally) unacceptable for investors and thewealthy to get bailed out at the expense of billions of taxpayers and the poor.

- It’s funny how thebulls/vacuum tubes keep getting fooled by European officials.  Merkel says that “dreams” of this packagesolving all the Eurozone’s problems are misplaced, while a second summit isscheduled for Wednesday.  Meanwhile, thenegative omens are becoming hard to ignore (but they still are!):  Greece is dangerously close to descendinginto anarchy.  Utility of the EFSFchanges every couple of hours not to mention the amount of guarantees.  Words of warning for France, this time fromboth Moody’s and S&P.  A cut in thecountry’s 2012 growth forecast won’t help matters.  Moody’s wasn’t as nice to Spain, cuttingtheir rating on Spanish “Bonos” citing falling growth and a budding bankingcrisis.  S&P was even meaner toItalian banks (24 got the ax).  Germanyaxes 2012 growth forecasts, while Greece is making it hard to justify throwinggood money after bad.  Officials in theregion ban CDS outright; here’s the beginning result of that great idea.  Next up, a banning of ratings of sovereigndebt from rating agencies (Period) Europe is on the precipice.  Willnext week be “Black Week”?          

- Manufacturing data isstill showing a faltering recovery.  TheEmpire Manufacturing index for October shows a larger than expected contractionin the NY area.  Looking ahead 6 months,expectations are dimming as well.

- On the global economyfront (sans-Europe), the Chinese are ticked with the U.S. Senate after theypassed currency legislation to further pressure them to allow the Yuan toappreciate.  Beijing and Washington areplaying a dangerous game of chicken in what could be a plunge intoprotectionism, which would absolutely be disastrous for the globaleconomy.  Brazil lowers its key interestrate less than 2 months after the last cut (so the global economy is recoveringeh?).  The UK economy is slowing down,while prices continue to rise (stagflation).  

- China’s GDP growthfalls to the lowest since the dark days of 2009 and underperformsexpectations.  Bulls say that theperformance is good and the market is overreacting.  The signs of a poor and deteriorating bankingsystem, a property market slowdown, high inflation, and a weakening exportsector (the reason why the Yuan doesn’t appreciate faster) have not deterredtheir view.  Meanwhile, copper sinks morethan 5% for the week.  The Shanghai Indexhits lows last seen since…(drum roll)…..March ‘09.  The bulls are frogs in 95 degree Celsiuswater and getting hotter.  Many stillbelieve that their economy will withstand a Europe shock and result in asoft-landing.  Few expect China towither.  This is exactly the environmentthat leads to market downdrafts.

- Bullish hopium for ahousing comeback is premature.  ”Theseasonally adjusted Purchase Index decreased 8.8% from one week earlier and isat the lowest level in the survey since December 1996”.  Remember “Foreclosure-gate”?  Ready for a possible comeback?  Existing Home Sales keep scraping thebottom.  Positive seasonal effects onhousing prices have come to an end.  Onthe commercial side, the Architecture Billings Index declined in September andis back in contraction.  ”It appears theconditions seen last month were more of an aberration.”  

- PPI runs hotter thanexpected, coming in with a headline reading of 6.9% YoY in September.  When paired with an increase in import pricesof +13.4%, inflation at the the producer and importer level will buoy the CPI,or decimate company margins if consumer’s wages can’t keep up.  Many bulls viewed the tamer CPI readings as asignal for more wiggle room for QE3. Sure, go ahead bulls, let’s break that 23-yr high in the MiseryIndex.  We are one QE away from stagflation. 

- 11 consecutivedeclines in the ECRI.  ’nough said.

(Source: http://www.zerohedge.com/news/weekly-bullbear-recap-october-17-21-2011)