If you’re trying to figure out why stocks surged today, Mike O’Rourke of BTIG pretty much nails it.
The flood of good news — especially out of the Eurozone, which gets much less attention from the media when things aren’t falling apart — is accelerating.
Here’s O’Rourke, first on Europe…
The virtuous cycle of good news risks becoming an epidemic. Early on there was news out of Europe that Eurozone Finance Ministers are looking to capitalise on the early success of the EFSF and are exploring options to launch a counterattack on the Sovereign Debt Crisis. The latest reports are of an agreement to permit the EFSF to purchase bonds directly from the troubled sovereigns, which would alleviate some of the pressure in the secondary market. Theoretically, such a move should allow the ECB to close or at least minimize the activity of the SMP where it supports the debt in the secondary market. The internal discussion also continue as to whether the debt the ECB has already purchased should be retired at the market price of the purchases and then replaced with new debt. The result will lead to less overall debt outstanding. The constructive dialogue has radiated throughout the market. Who would have thought that Greek bonds would outperform German and French bonds thus far in the New Year but they have. The other place where the strength has materialised is in the resurgence of the Euro, which has gone from loathed to loved in short order. The currency is already 3.2% stronger versus the Dollar this year, erasing half of last year’s loss.
Then on the states
In the U.S., the ISM Manufacturing report was the big story. The reading of 60.8 was the highest since the 61.4 reading of May 2004. After that you need to go back to December 1987 to find the next higher print. Beyond being a strong number overall, it also had the same important characteristic of last week’s GDP report – strong internals that should fuel the next couple of months. The New Orders component hit its highest level since early 2004, while inventories remained in check. The real impressive stat is that the Employment component registered its highest reading since April 1973. Yes, that’s nearly 38 years (another one of those stats that takes you by surprise). There is no doubt that it is positive and impressive progress. The problem is the manufacturing sector has been in decline for essentially 38 years. In 1973, manufacturing jobs were 23% of Nonfarm Payroll Employment. In 2000, they were 13.2%, and today they are only 8.8% of jobs. We believe manufacturing is a notable portion of the structural Unemployment in the United States. Since China joined the WTO a decade ago, it has been a decade long downtrend in which the final washout was forced by the recession. Today’s report represents great progress and U.S. Manufacturing jobs have likely registered a long term bottom during the recession, but a secular growth phase is not in the offing until trade balances begin to even out.