BULL VS. BEAR: The State Of The Debate Right Now


+  EU leaders agree to use the EFSF/ESM to conduct direct bank recapitalizations.  They also consent to institute a Eurozone-wide banking regulator.  These are the first steps toward fiscal union.  Officials are also finally focusing on a more concerted growth agenda for the Eurozone.  Roughly $150 billion will be allocated to help small business and youth unemployment.  Finally, the seniority issue that would have affected Spanish bailout loans from the ESM has been lifted.  European leaders are resolute in their efforts to end the Eurozone crisis.  Given low sentiment for any progress from the summit, this news will lift sentiment and risk markets in the weeks to come.  Spanish and Italian bond yields plunged after news of the accord.  Now is the time to buy as uncertainty is lifted.  

+ Housing continues to improve, helping job creation, ameliorating consumer confidence, and ultimately boosting consumption.  New Home Sales improve to their best reading in almost 2 years in May and inventory falls to 4.7 months, the lowest since late 2005.  Pending Home Sales, a leading indicator, notches a 2-year high, increasing 5.9% in May and 13.3% YoY.  mum home prices, as per the Case-Shiller index, rise in April for the first time in 8 months the gains are broadbased; YoY rate falls at the slowest pace since 2010.  Lennar posts strong growth trends in home sales.     

+ “Beautiful Deleveraging” is in its latter stages.  Furthermore, government officials understand that fiscal accommodation must continue.  There will be no fiscal cliff, but instead a gradual and delicate withdrawal.  Gas prices are plunging as is inflation in general; the PCE price deflator notches its slowest rate of gain since Jan ’11.  This is a direct help to consumer finances.  Bloomberg’s Consumer Comfort survey just hit a 2-month high.  Bullish economic tailwinds are strengthening.  

+ The global economy is proving more resilient than the bears expect.  In Asia, China’s trade ministry indicates that trade is beginning to stabilise after a rough patch earlier in the year.  Also, the housing crash that the bears relentlessly warned about looks to be delayed, keep waiting bears.  Taiwanese Industrial Production falls much less than expected in May, while Singaporean’s metric rises a higher than expected 6.6% YoY.  

+ Weakness in manufacturing is only a soft-patch, not pervasive, and is stabilizing.  Durable Goods Orders rise more than expected, while the Dallas and Chicago Fed both report improvement.  Seasonally adjusted jobless claims may be elevated, but unadjusted claims are actually 9.4% lower than a year ago, “suggesting that the trend is still one of gradual improvement in the economic fundamentals.”  

+ Even Europe had pockets of good economic news. German and French consumers remain resilient in the face of Eurozone issues.  Reports surface that capital is returning to Greek banks after the election reinforces Greece’s commitment to stay in the Euro.


– The Eurozone is imploding in front of our eyes.  

  • Confidence is vanishing.  With declining confidence, the crisis is becoming a self-fulfilling prophecy.
  • Cyprus is downgraded to junk by Fitch and becomes the 5th Eurozone member to request a bailout (ironically, they assume the EU rotating presidency this coming Sunday).   
  • More mass downgrades for Spanish banks as the country requests a bailout from the Eurozone, all the while capital controls are surreptitiously set up and rumours of Junk status for Spanish bonds swirl about.  
  • 4 days on the job and the Greek finance minister quits.  
  • Merkel and finance minister Schaeuble say “nein” to shared liabilities “as long as they live.”  Meanwhile, Egan-Jones does its best to add even more pressure on Merkel to not succumb to the government troika of beggers in Italy, France, and Spain and damage the county’s credit profile.  Meanwhile, the crisis creeps into Germany’s economy as unemployment climbs more than expected in June.  
  • Italian retail sales plunge the most in “at least 8 years,” cratering 1.6% mum and 6.8% YoY in April vs. expectations of -0.6% and -0.2% respectively.  The LTRO, implemented last year, is beginning to “yield” negative consequences, by accelerating bank insolvency due to dangerous concentrations of toxic sovereign debt. 
  • The cause of the Eurozone crisis is the ongoing policy of austerity aimed to correct trade and budget imbalances.  Today’s announcement solves nothing to this end and is just another band-aid (slated to be ready by 2013, subject to German conditions, and not even big enough).  European leaders are moving at a snail’s pace; Eurobonds are still a ways off.  It is clear that this strategy is fraught with implementation risk.  Finally, a $150 billion stimulus package isn’t going to restore growth for a roughly $16.2 trillion dollar economic bloc with a strong downward growth trajectory.  Economic data will get worse and it will be obvious that European officials won’t have 4 months to take another baby step.     

– Tensions are really heating up in the Middle East.  Nuclear talks in Russia between the West and Iran yield no resolution, leading Netanyahu to remind us that a military strike may occur in the near future.  Meanwhile, Syria downed one (almost another?) of Turkey’s reconnaissance jets last week in international waters leading Turkey to seek a response from NATO and warn Syrian forces to back off its borders or else.  Psst, check out what’s going on in the South China Sea.  

– More indications point to more than just a soft-patch for the U.S. economy.  The Chicago Fed National Activity Index’s 3-month average falls to the lowest in almost 1 year and marks the third consecutive reading below zero.  The Richmond and Kansas City Fed both report weakening manufacturing conditions.  Conference Board’s Consumer confidence index slumps to a 5-month low (confirmed by both the Gallup Poll and UMich = 6-month low).  Jobless claims remain elevated.  

– Earnings are starting to feel the effects of the global slump and economically important companies (not to mention the government) are sounding the alarm, yet investors remain convinced that monetary policy can cure all ills.  Is it really a wall of worry as the bulls claim?

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