weekly bull/bear recap: sept 23-27, 2013

7/28/2019 Weekly Bull/Bear Recap: Sept 23-27, 2013

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| Rodrigo C. Serrano, CFA| SIPA | Columbia University

Master of InternationalAffairs ’14 Candidate

| New York City, NY| 01-305-510-0181| [email protected]

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Lumber'Prices'

Chart: RCS InvestmentsSource: Bloomberg

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Case%Shiller+Index+(Composite+20)+Index! YoY!Change!

Chart: RCS InvestmentsSource: Case-Shiller

Weekly Bull/Bear Recap: Sept. 23-27, 2013

This objective report concisely summarizes important macroevents over the past week. It is not geared to push an agenda.Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation,conservatism, and endowment biases.

Bull

In the U.S.:

Ø The American Chemistry Council announces that economicgrowth is set to continue until at least 2015 as per theorganization’s leading indicator, which hit its highest levelsince June 2008i.

Ø Housing may have hit a bump, but that’s a far cry from arenewed downturn as the bears suggest. Momentumremains quite robust:

o U.S. home prices as measured by the Case-SchillerIndex rise for their 14 th consecutive monthii at theirfastest pace in 7 years on a YoY basis. Rising home values will help buoy consumer spendingiii as a positive wealth effect dominates consumer psyche.

o Furthermore, New Home Sales bounce back in August, rising 7.9% MoM (12.6% YoY)iv,suggesting that housing demand remains resilienteven in the face of higher interest rates.

o Even better, what many think is the primaryheadwind for the housing market is alreadydissipating. Falling interest rates are having a positive effect on demand. Mortgage applications as per the Mortgage Banker’s Association increase for the second week in a row v.

o Need more proof that the housing recovery hasstaying power? Check out lumber prices. Theuptrend continues.

Ø Consumption is set to surprise to the upside in the monthsahead for the following reasons:

o The 4-week average of jobless claims has fallen to levels last seen in June 2007 (pre-recession). Claimshave plummeted at a 27% annualized rate in the



Disclaimer:Pleasefirstconsultyourfinancialadvisorforallimportantinvestmentrelateddecisions 2

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U.S.$Jobless$Claims$

Chart: RCS InvestmentsSource: Deparment of Labor

past 6 months. “The chances of a worker being fired today are almost as low as they have ever been. vi ”This development is leading analysts to increase their estimates for payroll growth.

§ Here’s more, the Bureau of Labor Statisticsannounces in its preliminary annual benchmark revision that the economyactually created 345,000 more jobs thaninitially expected vii.

o Personal Income growth is picking up as per theCommerce Department, hitting its highest YoY growth rate of the year at 3.71% viii.

o Falling gas prices are beginning to act as a tailwind,falling to $3.42, their lowest level since January.ix

o Meanwhile, the Fed’s Flow of Funds report

indicates that household net-worth has hit an all- time high. Furthermore upward revisions to pastreports show that balance-sheets have recoveredmore than expected. “Net worth at a new high,financial assets at a new high, real estate valuesrecovering, debt declining: what's not to like?” x

o Finally, Lender Processing Services reports that the percentage of loans in foreclosure fell to a 4.5-year low xi.

Ø Longer-term trends (such as production costs in Chinacontinuing to rise at a 15-20% clip) lead Harold Sirkin,

senior partner at the Boston Consulting Group, to proclaim that the Manufacturing Renaissance in America will become a major theme in the years to come xii.

In Europe:

Ø European Central Bank (ECB) chief Mario Draghi pledgesmore Long Term Refinancing Operations xiii, indicating thatcontinued monetary stimulus will be applied to easeeconomic contraction. The first LTRO in late Dec. 2011 provoked a recovery from the flash crash; the S&P 500surged roughly 13% after the operation was implemented.

Ø In Italy, consumer confidence surges to 101.1 from 98.5 inSeptember xiv and has now increased by 17% over the past 4months. Meanwhile that trend is emulated by ISTAT’ssister business confidence survey, which rose to 96.6 from93.4, its best reading in 2 years xv. The worse is clearly overfor Italy, a country the bears were particularly focused onin recent weeks.




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Core%Dur.%Gds%Orders%-%3M%Avg%

Chart: RCS InvestmentsSource: U.S. Department of Commerce

Ø To begin the week, HSBC reported that China’smanufacturing sector remained in growth mode, rising to asix-month high and signaling that a rebound in the world’ssecond largest economy has been gaining steam xvi.

Bear

Ø Without notice it seems, the U.S. economy continues todisplay signs of weakening as uncertainty looms regardinga possible government shutdown as early as next week xvii – not to mention an increasing probability of a governmentdefault on Oct 17 th xviii:

o The slowdown in manufacturing persists. TheRichmond Fed’s manufacturing index prints 0 (astagnant reading) vs. expectations of 17; Markit’s

Purchasing Manager Index (PMI) indicatorunderwhelms as well xix; Durable Goods Orders(both core and headline readings) disappoint xx.

o The bulls postulate on how rising home prices will buoy consumer spending. Shouldn’t consumerconfidence rise as well? That’s not the case as per the Conference Board’s confidence index, whichhits a 4-month low xxi. This result is furtherconfirmed by a couple of other confidenceindicators, the Gallup Poll xxii and University of Michigan’s sentiment survey xxiii. Finally Wal-Mart,a bellwether for consumer spending sounds thealarm xxiv.

o Taking a step back and analyzing the big picture, while job creation is occurring Julia Coronado,chief economist for North America at BNP Paribas, points out that the quality of these jobs isoverwhelmingly of the part-time variety.

o Finally, Richard Koo, Chief Economist for NomuraResearch Institute and an authority on balance-




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Spain&Retail&Sales&

Chart: RCS InvestmentsSource: INE

sheet recessions (think Japan’s), notes that the Fedis now in the throes of a QE trap. The U.S.economy will be in a perennial state of weakness asstronger economic data will increase speculation of

an end to tapering, leading to higher interest rates, which will cause renewed weakness and a shelvingof tapering xxv. A vicious cycle is now in effect. xxvi

Ø A resounding win for Merkel translates simply to more of the same policy prescription, austerity xxvii. Furthermore,German Finance Minister Wolfgang Schäuble’s claim that“The world should rejoice at the positive economic signals the euro zone is sending almost continuously,” is absolute poppycock.

o The French manufacturing sector continues its 18-month string of contraction with Markit’s PMI

falling to 49.5. The country’s service indicator rises to 50.7. All in all, stagnation for the Eurozone’ssecond largest economy, a verdict further solidified by a lackluster INSEE Business Survey result of 97from 99. Is there hope on the horizon? No! The beatings are set to continue xxviii.

o In Italy, the bulls point to consumer and businessconfidence staging a remarkable rebound. Alas thehard data (what really matters) tells a distinctlydifferent tale; retail sales for July fall 0.3% vs.expectations of a rise of 0.3% xxix. Taking a step back

we also see that the fiscal picture of the country with the 3rd largest sovereign bond market in the world, behind Japan and the U.S., has darkenedconsiderably since Berlusconi’s ouster in Nov.2011 xxx.

o In Spain, retail sales plunge 4.5% vs. expectations of a 3.8% drop. This is now the indicator’s 38 th consecutive negative reading.

With austerity set to continue, a judicious analysis of the Eurozone economy and the region’s political trendsforetells continued brewing xxxi unrest as economicstagnation replaces years of contraction…at best.

o Meanwhile, a poor showing in Italian retail sales,coupled with renewed threats from Berlusconi’sForza Italia Party of pulling the plug on EnricoLetta’s government xxxii are marking a turning pointin Italian 10-yr BTP yields. They are back on therise.




Ø While the name Edward Snowden has largely disappearedfrom quotidian speak, the effects of his rogue disseminationof National Security Agency secrets are deafening. Brazil’s

Dilma Rousseff, president of the 2

nd

largest economy in the Western Hemisphere, denounces American spying at theUN General Assembly, calling it an offense to the nation’ssovereignty and “totally unacceptable” xxxiii. Insidiousdistrust is infecting global liberal institutions.

i http://www.calculatedriskblog.com/2013/09/chemical-activity-barometer-for.htmlii http://www.investing.com/news/economic-indicators/s-p-case-shiller-home-price-index-rises-12.4-in-july-253040iii http://marketrealist.com/2013/09/case-shiller-home-price-index-continues-march-upward/ iv

http://www.washingtontimes.com/news/2013/sep/25/us-new-home-sales-jump-79-percent-august/ v http://www.fool.com/investing/general/2013/09/25/mortgage-applications-head-higher-for-second-week.aspx

vi http://scottgrannis.blogspot.com/2013/09/the-private-sector-is-ready-to-go.html vii http://www.calculatedriskblog.com/2013/09/employment-preliminary-annual- benchmark.html viii http://www.latimes.com/business/money/la-fi-mo-consumer-spending-personal-income-economy-20130927,0,3808811.storyix http://www.dailyfinance.com/2013/09/27/consumers-boost-spending-incomes-rise-august/

x http://scottgrannis.blogspot.com/2013/09/dramatic-improvement-in-household.html xi http://www.calculatedriskblog.com/2013/09/lps-mortgage-delinquency-rate-declined.html xii http://www.bloomberg.com/video/sirkin-coronado-on-u-s-labor-market-NfXXENuZTv~QOnzXgOFpjQ.html

xiii http://www.ifamagazine.com/news/ecb-ready-for-more-ltros-says-draghi-283569 xiv http://www.bloomberg.com/news/2013-09-25/italy-consumer-confidence-rose-to-two-year-september-high.html

xv http://www.bloomberg.com/news/2013-09-27/italy-business-confidence-rises-to-two-year-high-on-growth-hopes.html

xvi http://www.bloomberg.com/news/2013-09-23/china-manufacturing-gauge-rises-to-highest- level-in-six-months.html xvii http://thehill.com/blogs/floor-action/senate/325165-senate-approves-measure-to-keep-government-operating

xviii http://tv.msnbc.com/2013/09/25/raise-debt-limit-before-october-17-or-risk-default- treasury-warns/ xix http://www.businessinsider.com/markit-us-flash-pmi-september-2013-9 xx http://www.reuters.com/article/2013/09/25/us-usa-economy-idUSBRE98M0KO20130925 xxi http://www.investing.com/news/economic-indicators/u.s.-cb-consumer-confidence-falls-to-79.7-in-september-253047

xxii http://www.zerohedge.com/news/2013-09-25/us-economic-confidence-slumps-six-month- low




xxiii http://www.zerohedge.com/news/2013-09-27/consumer-sentiment-plunges-5-month-lows- biggest-miss-2013 xxiv http://www.zerohedge.com/news/2013-09-25/wal-mart-nails-consumer-recovery-coffin-

shut xxv http://www.marketwatch.com/story/feds-evans-taper-may-be-delayed-until-early-2014-2013-09-27?link=MW_latest_news

xxvi http://blogs.marketwatch.com/thetell/2013/09/26/richard-koo-says-vicious-cycle-taking-hold-as-fed-faces-qe-trap/

xxvii http://www.nytimes.com/2013/09/24/world/europe/vote-for-merkel-seen-as-victory-for-austerity.html?pagewanted=all&_r=0

xxviii http://www.cnbc.com/id/101061276 xxix http://www.rttnews.com/2194052/italy-july-retail-sales-decline-more-than-expected.aspx xxx http://www.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=13411805 xxxi http://www.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=13400332 xxxii

http://globaleconomicanalysis.blogspot.com/2013/09/italy-on-verge-of-downgrade-to- junk.html xxxiii http://us.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=13411590

weekly bull/bear recap: sept 23-27, 2013

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