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Another Late Bull/Bear Recap

Bullish

 

+Personal Consumption Expenditures show accelerating growth, while the savings rate continues to fall.  Have animal spirits trumped caution?
+Greece default fears have been abated by recent plan of action should the country run into trouble. 
+(True Green Shoot): Bank of America is beginning to engage in principal writedowns.  Elimination of debt is a true green shoot in my view. 

Industrial Production continues strong (Chicago PMI and ISM reports) while Factory Orders continue to increase signaling strength in the coming months and possible job creation.  This sector has been the shining beacon in the recovery thus far. 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aeajXD2GHo6w&pos=1


Americans feel more comfortable with their retirement savings and are not as concerned with everyday expenses (caveat:  % of Americans saying that they will cut back on spending continues to be high).  Are animal spirits making a comeback?

http://www.financial-planning.com/news/scottrade-retirement-hogan-2666339-1.html\

 

Retail Sales (Goldman ICSC and Redbook) continue to power higher making a big move in the last 3 weeks and makes the case for a recovering consumer, more demand, and more jobs created.  The virtuous cycle may be beginning.

 

China manufacturing continues its expansion.  Last months weak PMI numbers were a blip it seems.  New export orders and output continue to expand signaling strength in the coming months. 

Bearish

 

-Consumer confidence continues to point towards caution on the part of consumers. 
-Wages and Salaries portion of income continues to show very slow growth.  Without growth in this metric, rises in consumption are not sustainable. 
-Geopolitical tensions remain elevated (Iran and China)

Eurozone/IMF financial assistance plan for Greece hasn’t calmed down market jitters.

http://www.marketwatch.com/story/greek-debt-worries-return-2010-03-31

 

Possible legislative attack on Wall Street may result in lower future earnings as banks are forced to pony up  their newfound profits, courtesy of the taxpayer. 

 

ADP, Challenger job cut report, and Jobless claims continue to show that private sector jobs are being shed.  Monster.com job shows only a marginal increase in hiring intentions.  Jobs are the key cog of the bullish thesis.  No strong job growth = no sustainable increase in aggregate demand. 

 

PCE expenditures shows increases in consumption a result of non-durables (groceries and clothing).  This increase is causing a drop in the savings rate.  Are people depleting their savings to buy necessities to live?  PCE also shows flat incomes.  An increase in expenditures is not sustainable if there isn’t a increase in income. 


Thoughts

This article was interesting.  The key here is Dorsey's motto: "Observe everything, believe nothing, and invest only on the basis of the behavior errors of others."  The stock market is mostly about perception and cycles, both business and psychological.  The economy matters very little, primarily because the market discounts cash flows.  Companies have thus far been able to give the impression that profit growth will continue, but the caveat here is how heathy the growth has been.  In my view it hasn't been all that much.  Perception would have you believe that growth can continue (whether due to actual growth, or moral hazard through continued gov't intrusion). The answer is fast approaching for sure.

http://www.marketwatch.com/story/stocks-correction-in-gurus-crystal-ball-2010-03-29?dist=afterbell

Is the Greece deal really a done deal?

http://www.ft.com/cms/s/0/6a618b7a-3847-11df-8420-00144feabdc0.html

Taxes Taxes Taxes...coming to a local gov't near you.  What effect will this have on spending?  If anything, it can't be a positive.  

http://www.nytimes.com/2010/03/28/us/28taxes.html?pagewanted=all

The China Yuan climax is approaching.  I still doens't look like China will bend to US pressure.  They are out for their own interests and feel that letting the Yuan rise risks an already thinned-margin export sector to start making red prints.  

http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2010/03/chinas_currency.html 

With health care out of the way, the administration has a bulls-eye on Wall Street now.  Populist anger along with a party that is struggling to survive politically will no doubt lead to legislation that will likely harm Wall Street.  Not that I’m against that, but harmful legislation will be another headwind in addition to shady balance sheets.  This would provoke more bank tightening.  An successful attack on Wall Street would be negative for the fragile economic recovery

http://www.politico.com/news/stories/0310/35216.html

 

We have seen some pretty good news over the course of this week on the economic front.  The labor market has begun to improve, global trade continues to rebound, and manufacturing in the US and abroad continues to carry the recovery.  While in the short-term this may translate to a bullish backdrop, in the bigger picture, this improvement has purely been based on extremely low interest rates and wide gov’t intervention.  We may be entering a time when good news starts to become bad news for the equity markets.  Why?  Because as stronger economic numbers come, the case grows stronger to withdrawal all this support.  If not, interest rates would rise substantially.  This would likely create a headwind too large for the economy to surpass.  Real estate continues to struggle and higher rates would surely be the final nail in the coffin, if it hasn’t been hammered already.  My view is that withdrawing this support would also lead to weaker economic growth (if not contraction).  Either way, we are at a point that no matter what happens, headwinds will only become stronger.  


Disclosure: Short Silver, Emerging Markets, Financials, Real Estate, Materials