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A Bull/Bear Recap

 Bullish

+ US Gov’t is beginning to exit from its position in Citigroup, a sign that private money is sufficient to take the baton from gov’t.  US Capital markets are recovering.+ Goldman and Redbook show a consumer that continues to surprise to the upside.  Even after Easter, we are seeing these metrics increase.  This shows that consumer spending is beginning to do its part in the economic recovery.

+ More signs that manufacturing continues to improve and the wheels of commerce are moving again:  ATA trucking index increases in March.  Chicago PMI shows continued expansion in the Midwest.

+ Mortgage applications (purchase) rose this week and signals increased  demand due to the expiration of the tax credit.  It will insure that sales over the next 2 months will be strong adding to further stabilization of the housing market.

+ Fed pledges to keep rates low for “an extended period” and thus gives the green light to further risk taking as far as the financial markets are concerned.  Committee states that economic conditions have improved with the labor market and consumption showing signs of life.  Business spending has also been performing quite well. 

 + CFNAI (Chicago Fed National Activity Index) shows that the economy is getting closer to trend growth, confirming that the recovery continues, while GDP shows that the US economy continues to be in expansion.  This strength should lead to more job creation and thus more spending power.  US consumer also showed strength and business spending was quite strong. 

Bearish 

- Consumer Confidence remains in the doldrums.  ABC and University of Michigan reports show worsening trend while Gallup Poll and Conference Board showed improving trends, however historically, these readings are still in recessionary terrain.  Confidence remains very fragile as the job market continues struggle.  As long as jobs are hard to come by, consumption growth will be fragile and may even reverse @ any sign of a slowdown.

- China’s Shanghai Index has now hit a 6 month low on concerns of gov’t attempts to cool down the housing market.  Given that this market has been a leading indicator in times past, not to mention the main player in the global economic recovery, does this foreshadow declines in the US? 

- Greece gets downgraded as does Portugal.  The threat of contagion is at the door step.  Meanwhile Germany is really making it tough for the Bulls to look past this issue as they weigh using German taxpayer money to bailout 60 yr old Greek retirees.  This weekend will probably see an announcement for a bailout.  Will this stop the contagion in its tracks, or will the market begin to "test" the resolve of the Eurozone by attacking other countries like Portugal, Spain or even the UK?
http://www.bloomberg.com/apps/news?pid=20601109&sid=akQrIx8SPMHo&pos=10

- CFNAI (Chicago Fed National Activity Index) shows that the economy is still below trend growth even 9 months into the recovery.  Of the four main factors that dictate the final reading, “Housing and Consumption” actually worsened from the previous reading.  Housing has always led us out of recession while consumption comprises 70+% of our economy.  Without these two sectors participating, are we really in a sustainable recovery?       

 -  GDP reading was less than analysts had expected.  Additionally, half of the positive reading was due to continued adjustment in inventories while consumption increased, wages growth came in flat and the savings rate decreased.  Increased consumption on the back of a declining savings rate is unsustainable.

 

Observations/Thoughts  

We have a market that wants to move higher on a better domestic economic picture.  However in today’s globalized world, issues from across the continent are starting to have an effect on market sentiment at home.  On the bullish end though, as long as domestic economic numbers show improvement, there will be buyers.  If the Greece/PIIGS issue is resolved (even if it’s a short/medium term solution, the market may well break the highs from earlier in the month; however 2H 2010 will bring domestic economic headwinds in my view starting with housing in any case).

Consumer Confidence continues to be stuck in the mud as ABC and University of Michigan reports show declining confidence, while Gallup Poll and Conference Board show slight increases from a very depressed base in April. As Lynn Franco from Conference Board said, it all comes down to substantial job growth at this point. If this can be accomplished then the recovery may have legs.  I continue to think otherwise as the consumer is tapped out at home in my view (although we have seen improvement here but on the back of a declining savings rate).  Nonetheless, I will continue to carefully monitor the situation in the US for any changes.  Opportunities for increased consumption exist elsewhere, primarily in Asia, so this is the region that will benefit the most from a jobs standpoint. 
http://www.marketwatch.com/story/consumer-confidence-rises-in-april-2010-04-27

Taking a contrary stance to Mr. Fisher, I think what happens in Europe is pretty important, especially since the Eurozone makes up 20%+ of our total exports and 45+% of S&P500 earnings as of 2008 –(I’m sure this has only increased given the weakened dollar over 2009).  Given that many pundits explained the rise in the S&P 500 was due to large international exposure, with the Eurozone unraveling and China trying to cool itself down, it doesn’t make sense that earnings would continue to rise if these important trade partners don’t take part in the global recovery.  The bulls seem to be ignoring the other side of the coin now.  
http://www.bloomberg.com/apps/news?pid=20601087&sid=ajybDxdGYW.M&pos=5

 
Whether strategic defaults are affecting consumption or not, one thing is certain, they have been increasing.  http://www.bloomberg.com/apps/news?pid=20601087&sid=a7s4OSax0Y.0&pos=5

This recession has been different in that the unemployment created has been structural in nature vs. your typical cyclical.  This means that the job market will remain challenged for some time.  I do not believe that this is a good idea. This will lead to more hardship, crime and obviously less consumption.  If they do not extend unemployment benefits, you can expect to see deterioration in consumption trends as 400K people lose all spending power every month.  Just the idea of it is scary.  (Link via Calculatedriskblog)



Disclosure: No Positions Mentioned