The following ia complete run down of the bullish arguments and the bearish arguments based on the developments from the past week.
+ U.S. economic data remains a major thorn in the bear thesis. It proves that the economy is resistant to a European recession:
- The American Trucking Association’s Truck Tonnage Index reports its second straight gain, up 0.5% in October after a 1.5% rise the prior month. The American Association of Railroad’s weekly metric on rail traffic points to continued growth. The arteries of American commerce signal growth, not contraction.
- The manufacturing sector remains in growth mode and consumption will keep factory activity buoyed. The Richmond Fed manufacturing survey signals that contraction in the region has ended. Meanwhile, the Kansas city region reports that activity remains stable but that expectations remain solid. Growth in car sales is poised to continue, thus resulting in important segments of manufacturing having sustainable demand.
- Existing Home Sales for October unexpectedly rise, while stocks of unsold inventory retain their downward trajectory. The market is undergoing a secular bottom and sentiment is very bearish. Housing has no where to go but up.
- Strong income growth buoyed consumer spending and allowed for an uptick in the savings rate. As long as job growth continues, income growth will persist. With lower gas prices, consumer confidence will improve. So far, national gas prices have averaged 2% less than the prior month and 10% less than September.
- Finally, Deere & Co, an important economic bellwether for the agricultural industry, announces a profit beat and a bright outlook for 2012 on the back of strong foreign demand.
+ The World Bank says that China will head for a soft-landing. Aside from falling inflation (see page 2) and loosening monetary policy, Asian countries also have strong balance sheets and will be able to resort to fiscal stimulus to vaccinate their economies making them resistant to a potential West slowdown. According to the Conference Board, they might not even have to resort to such measures.
+ Profits continue to surprise to the upside. Only in the 1970s and 1980s did we see PE ratios this low when using NIPA (National Income and Product Accounts) profits as the “E” in P/E. Those periods turned out to be fantastic opportunities to buy stocks for the long-term investor.
+ Lakshman Achuthan looks like he’s about to get egg on his face. The rate of growth of the ECRI’s U.S. Leading Indicator has improved for the 3rd straight week. The index’s growth rate improved to -7.3% from an upwardly revised -7.8%. The index is beginning to signal a re-acceleration in U.S. economic growth.
– In Eurozone news, Banco de Valencia is nationalized and signals the first of many more to come in Europe. Belgium, which has not had a government for 18 months now, demands a renegotiation of the Dexia bailout. They demand that more of the weight be put on the French government. Their debt-rating is cut by S&P. A downgrade of France’s credit rating and a scrapping of the current form of the EFSF is practically inevitable. Ireland demands relief in the form of a reward for their sacrifice in bailing out investors in 2008. Greece scraps the original bailout with the EU and is now demanding larger haircuts. The core of Europe has officially been infected as Germany experiences a failed Bund auction. The Bundesbank had to step in and buy 39% of the planned sale due to little demand (is this monetization?). Belgian/German spreads hit new highs; Italy 10-yr yields are soundly above the 7% mark; Austria is finding itself on the edge of a banking crisis (which it will obviously bailout, thus resulting in one less AAA country); and Hungary turns hungry. European credit markets are paralysed. The bulls plead for the ECB to print, however, If they did, then countries would need to become apostates of their sovereignties, that’s unlikely to happen. Preliminary Eurozone PMIs for manufacturing and services sectors continue to report contraction. Germany remains opposed to Eurobonds and ECB printing.
– The deficit committee finally announces the obvious and sets the stage for a feisty but futile attempt to expand the payroll tax and unemployment benefits. The fiscal contraction that would result would be the cherry on top for the recession in 2012. Furthermore another stress-test is in the cards for the banking sector. The scenarios they are using are downright ugly. This is another warning to the sound investor who “reads between the lines”.
– On the U.S. economic front, Q3 GDP is revised downward by 20% to 2.0% from 2.5%. An important leading indicator is pointing to further slowing in the coming months. Business Investment (Core Capital Goods: excluding transportation & defence) takes a sizable hit in the October Durable Good Orders report. It declined 1.8%, while last month’s reading of +2.4% is revised down to a gain of just 0.9%. From an earnings standpoint, guidance for the 4th quarter and 2012 disappoints.
– On the global economy front, China’s HSBC preliminary manufacturing gauge sinks to the lowest in 32 to months on the back of a renewed contraction in new orders. Copper is rolling over as well and is poised to take out its lows next week. These “leading-indicators” of the global recovery are flashing red. Meanwhile, Geopolitical tensions are heating up with a possible showdown in Syrian waters between the U.S. and Russia. Meanwhile, Iran/Israel’s furtive crisis keeps bubbling.
– Treasury yields are raising red flags as well. Yields are back near early October lows and dictate that equity markets have more to fall as they catch up with the asset class that has been right-on in diagnosing the Eurozone crisis. Capital floods U.S. Treasury auctions for the week, indicating a raised sense of fear. Taken together with copper prices and other poorly performing in Asian indices, it’s becoming clear that the global economy has stalled.