Weekly Bull/Bear Recap: August 8-12, 2011

Bull

+ France will not be downgraded and thus the European Financial Stability Facility (EFSF) will remain in force. Furthermore, Spanish and Italian bond yields have been plunging. Steps by the ECB to calm down investors’ jitters are working. Meanwhile, the UK newspaper responsible for Societe Generale’s plunge apologizes for publishing “bull”. Merkel and Sarkozy have planned for a meeting on Tuesday to further re-enforce that governments are on the case and will propose solutions. Markets around the world have recently reversed and are smelling a resolution to the Eurozone woes.

+ In a historic Fed meeting, Bernanke and Co. announces a specific timeframe for holding rates at exceptionally low levels. This has practically rendered CDs for less than 3 years useless and forces investors to chase yield (ie, invest in the stock market and longer dated corporate bonds). The Fed has the market’s back and will do everything in its power to re-kindle the animal spirits. Don’t fight the Fed….

+ …furthermore, lower rates are resulting in soaring mortgage refinancings. Discretionary income will increase due to lower mortgage payments and will help consumer confidence.

+ Retail Sales rise for the month of July, notching their best performance in 4 months. The breadth of the gains was not limited to just gas/food purchases. Core Sales rose 0.5% vs. 0.2% expected. May and June were revised upward as well. With plunging gas prices and the debt-ceiling issues in the rearview mirror, the consumer will have a clear path toward recovery and increased confidence. Stocks are not priced for a resurgence in consumer spending. Stock valuations are compelling in light of this.

+ Who said that the global economy is slowing? Japanese Machinery Orders, a leading indicator of industrial production, shows a better than expected gain. Who said that China was slowing? China’s exports just hit a new all-time record. Demand from around the world doesn’t seem to be slowing. This dynamic provides them with wiggle room to raise the value of the Yuan and continue the process of global rebalancing. Property investment sales keep growing and will cushion their economy from a softening manufacturing sector. The soft-landing scenario is becoming more probable with every data point.

+ Oil prices have plunged recently. Gas price will follow suit and result in a huge, market-created, tax cut. Consumption will make a strong come back from an already respectable performance. This will result in a risk rally as double-dip recession talk is the norm at this point due to high bearish sentiment.

+ Jobless claims fall under 400K for the first time in more than 3 months and is evidence that despite all these headwinds, the economy marches on. It’s much stronger than the bears believe. Just ask the insiders, who have significantly increased their stock purchases, just like March of 2009.

Bear

- Markets are tumbling around the world. This is the final “shock” that tips the US economy back into recession. Consumers watch in horror as the markets have plunged more than 15% in the past 2 weeks, more than wiping out 2011 gains (QE2 gains gone). Consumers will become cautious (lowest reading since May of 1980!), spending will decrease and companies will cease hiring (it’s not like hiring has been strong anyways). The negative feedback loops are coming into motion.

- A French downgrade would render the European bailout package null and void as it is dependent on France being a AAA country. If the country is downgraded, it would result in the absence of a safety net for Greece, Spain, and Italy. While the rating agencies have denied the prospects for a downgrade, the market is rendering its opinion (which is what matters). Rumors (a-la-2008) are beginning to surface regarding French banks and their exposure to derivatives. Need more 2008 memories? Various European countries have instituted a short-selling ban; signs of desperation no?

- As if memories of 2008 weren’t enough, officials are now facing a slowing Eurozone economy. Industrial Production for the whole region unexpectedly fell, while France (yes, the country the world so desperately needs to be rated AAA), just reported that its economy stalled. Greece’s economy contacted 6.9% YoY. Worse is that these data points come before the latest bout of risk-aversion.

- US international trade numbers show a much larger than expected deficit. That will likely result in a negative influence on an already weak Q2 GDP number. The reason for the deficit was due to subdued export growth, = a weakening global economy. Persistent current account deficits usually result in a depreciating currency. The dollar is already at dangerously low levels.

- Chinese inflation numbers point to stagflation as recent increases in interest rates haven’t done enough to temper sticky inflation in their economy. More will need to be done to temper inflation, thereby increasing an already high probability of a hard-landing in the communist nation. This is affecting Australia, where speculation grows that their central bank will need to cut rates.

- OPEC downgrades its oil demand forecast for the rest of 2011 and 2012. While the bulls harp on how lower gas prices will help consumption, the drop in oil is more nefarious as it reflects an on-coming hard-landing in China as well as a drop in economic activity in the US and Europe. Did oil’s plunge in 2008 result in a “second half” recovery? Nope.

- London is experiencing the worst riots in living memory. Many blame the recent killing of an innocent man in Tottenham . However reading between the lines, it’s clear that constant shafting of the poor by cutting their pensions and benefits to save the hide of the wealthy is a secular trend that is approaching a boiling point: in England, in Syria, in Spain, in Greece, and the list goes on.

- AIG sues Bank of America for misrepresentation of mortgage backed securities and has brought forth concern amongst investors as to their true value. B of A’s stock price has plunged recently to sub $7. It doesn’t help that the housing market is in the process of double-dipping adding an additional layer of uncertainty. (I hold a short position on the financial industry ETF).

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Want to know my Macro and Market Forecasts? Check out my Mid-Year Outlooks (a/o June 16, 2011): here and here. They are updated twice a year.

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