The Bull/Bear Recap (8/27/10)

First of all, welcome to my new website!  This is now the new home of RCS Investments and it feels great to have a centralized location where I can post my weekly recaps along with my quarterly outlooks & “Market Radar”.  Additionally, I created a new category named “A Peak into The Future” detailing possible trends and future thesis topics.   The site is not 100% where I want it to be but overall the content should all be accessible.  I’ll be working hard to get the kinks taken care of.

I am also working on a slate of new commentary focusing on 2011.  I feel it is time to stop covering the imminent double-dip (single scoop?) recession and focus on what happens after the second half of this hurricane passes.  There are a lot of unanswered questions that I will begin to focus on.  Will the Fed keep printing?  Will FASB bite back? Will there be deadlock in the government?  Will the tax cuts be extended?  Will the US and China come to a benign conclusion to the global trade issue?  Will hyperinflation come?  There are lots of questions to be answered, which should make 2011 yet another nail-biting year.  But I I digress….on to the Bull/Bear Weekly Recap.

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Bullish

+ More positive signs from the Asia-Pacific region.  Demand from China continues to fuel exporters.  Global trade is expanding as can be seen in the Baltic Dry Index “exploding higher” over the past 2 weeks…

+ …meanwhile, the Eurozone also has plenty of momentum heading into Q3.  Corporations are indeed in investment mode.  Increased economic activity will temper sovereign debt woes.  The crowd is too pessimistic with regards to the global recovery.

+ Ben Bernanke vows to “strongly resist deflation” and speaks at length about the tools the Fed still has to fight an economic downturn and deflation.  He expects the economy to grow modestly but pick up in 2011.  The announcement from Jackson Hole appeases the markets as they pop higher on assurance from today’s gathering that the Fed will continue to ease monetary policy to assure the recovery.

+ Jobless claims come in lower than expected and may signal a topping out in the pace of firings.  Meanwhile, despite the bears feeding fear of a double dip recession, we are seeing increased demand for labor as per the American Staffing Association.  This indicator shows that demand for labor is indeed there.  The Gallup Poll of job creation is also signaling that the trend in the labor market continues higher.

+ M&A Activity is making a comeback and shows that companies are confident in spending on acquisitions, not fearful of conserving their cash for the next economic storm as the bears suggest.

+ Mortgage rates are at record lows and is an important tailwind for the housing market.  Lower cost of capital will allow households clear out housing supply and stabilize home prices.  (Link Courtesy of Econopic)

+ GDP revision was better than expected with consumption actually getting revised higher.  This shows that the consumption continues to expand despite an increased savings rate.  Balance sheets are being repaired while consumption is steadily increasing.

Bearish

– Existing Home Sales plunged 27.2% in July and is the biggest one-month drop ever.  The sales rate for single family homes fell to a 15 year low and inventories rose back to a 12.5 month supply. The fun didn’t end there as New Home Sales plunged to a record low.  A housing double dip seems inevitable at this point.  The banks must be sweating. (Link Courtesy of ZeroHedge)

– Core Durable Goods orders show vanishing growth rates as the inventory replenishment cycle is complete and it is obvious that end-demand has not shown.  Couple this with declining regional ISM numbers (Philly, Empire, Richmond) and the result = the beacon of the US recovery is rapidly losing steam.  (Link also Courtesy of ZeroHedge)

– Consumer spending has not shown any sign of growth despite being now firmly in the second most important season for retailers, back-to-school.  The same can be seen in recent Goldman/Redbook metrics as well.  The reason?

– Confidence is to blame as the Gallup Poll, University of Michigan, and ABC consumer confidence surveys remain in the doldrums.  Even worse, signs of deflationary expectations are beginning to permeate.

– Markets are showing weakness as “moral hazard” is biting back.  Recent calls for Summers and Geithner to step down are bringing a blanket of uncertainty on policy future.  Investors had become complacent that endless government support would hold up corporate earnings.  It is becoming politically infeasible to continue throwing away taxpayer dollars on now obviously futile efforts to prop up the economy.

– PIIG debt spreads are blowing out once again and the Euro is under renewed pressure.  The Eurozone sovereign debt woes continue to worsen despite the EuroTarp.  The structural issues haven’t been dealth with and its becoming more acknowledged that Greece may be in a debt trap, which will require a debt restructuring anyways.

– The ECRI leading growth index comes in at 9.9% while last weeks result was downwardly revised (again) to -10.1%.  This index continues to point to slowing in the months ahead.

Observations/Thoughts

> Confidence in the equity markets is rapidly vanishing.  I see this as a result of poor monetary policy over the past 10 yrs.  Lower rates were seen as the prescription to any problem that the economy had.  Following this mantra, recessions were never able to fulfill their primary objective; to purge the economy system of excesses and bad investments.  This is how capitalism works and why it is the most efficient economy system out there.  Our officials thought that lower rates were the silver bullet to any economic issue.  We now know that’s not the case.  Furthermore I don’t believe that treasury bonds are in a bubble yet given that they comprise a very low percentage of household portfolios.  Add to that, the sudden hole in household wealth from a decline in their largest asset, their home, and you have lots of retirees finding themselves seeking guaranteed income streams.

> The “impossible” is starting to get more attention.  This is what I expected the cause of the double-dip would be. (Insert Outlooks)

> Things are starting to heat up for Summers and Geithner.  It is now obvious that policies engaging in bailouts and stimulus have not worked.  The Keynesian experiment has failed.  This further supports my view of “political frugality” in that the fiscal side will not be helping the economy out for a while.  Republicans are leading with this issue in the fight leading up to the mid-terms.

> Here’s what I was reading on the political front: (see here and here).  My “Political Frugality” theme is starting to pick up as voters are more worried about frivolous spending and out-sized deficits, while S&P is looking towards the “Commission on Fiscal Responsibility” recommendations early next year to determine whether a downgrade of US debt is more than just a remote possibility. It’s plain as day that Keynesian prescriptions are not working.

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—> Please visit RCS Investments for my expanded and detailed Outlooks (thesis), and my “Market Radar”, what I believe are the main factors affecting the economy and the financial markets.

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