“Keeping An Eye Out”: September ’10

If you look at this article, it explains how I look for clues that my thesis is either playing out or I am full of hot air. The section is called “Keeping an Eye Out”.  You can find this section on every economic category in my Quarterly Outlook (Q2 being the most recent).  This new category of posts will be “Keeping an Eye Out” for clues that may be supporting or refuting my thesis.  Note that I will be posting bi-annual outlooks from now on.  I will post my next outlook in early January.  Underlined words represent the sub-outlook I am referring to within my overall outlook. (Not making any sense?  Go read my main outlook!)
+ Housing Double dip is beginning, as expected in my housing outlook.  Banks may be in trouble once again. Meanwhile, purchase mortgage applications have not shown a rebound, despite tailwinds such as lower interest rates and a slightly improved job market.  Why?  Homebuying intentions as per the Conference Board are flirting with all time lows down to 1.9 from 2.1.  As home values begin another leg down, consumption will suffer as the consumer balance sheet once again begins to be negatively affected.    (Courtesy of Zero Hedge).

+ Regarding industrial production, we have started to see signs of the inventory bounce ending, starting with increasing Inventory-to-Sales ratios, which has moved up from for all three categories (Manufacturers, Retailers, and Wholesalers).  This is clearly a sign that sales are not keeping up with production.  Additionally there is still no sign that end-demand is coming back in the US.  On the bright side, the dollar has been weakening and this would be a tailwind for the US exporters, however, keep an eye on potential protectionist acts countering this.  Overall, I must admit that industrial production has hung in there better than I thought, however, factors that will affect it in the future are quite negative, which is what my outlook calls for.

+ Consumption remains quite weak and this is due to a still struggling job market.  While we have this area improving, it has been very slow.  A slow recovery in the job market has translated to uncertainty and low consumer confidence.  Wage growth is actually hanging in there, but as long as unemployment remains high and job growth tepid, wage growth won’t rebound in a meaningful way.  The big factor that i’m focuing most on is the housing market.  We just received word that home prices may be double dipping (one of my issues to keep an eye on).  Another leg down in home prices won’t be good for consumption at all and this is one of the primary factors that will lead to a stalling in consumption growth in my view (same thing as 2006/2007). As far as the Bush tax cuts are concerned this continues to be a wildcard. Although I’m leaning towards the tax cuts being extended only for households making under $250,000, I still don’t have a very strong conviction of the result.

+ Is the job market improving?  Yes!  But very slowly.  As long as we do not see a strong job hiring spree, uncertainty will persist as consumption growth remains feeble. However, in the interest of remaining objective, I am continuing to keep an eye on the JOLT survey and temp work demand as both are indeed rising.

+ Regarding my Gov’t Policy Outlook, congress has effectively shut the door on further stimulus for the time being.  This is in-line with my outlook in that fiscal policy will begin to change, into and after the mid-term elections.  While this may change once the economy begins to double-dip as fear begins to take hold, the idea of political deadlock being detrimental to the economy is clearly taking hold.  Furthermore gov’t policy towards China is beginning to pick up on the side of protectionism with the recent bill being passed by the House.  My thesis with regards to Gov’t Policy seems to be firmly on track.

+ Regarding US Monetary Policy, as expected, I still don’t know what will happen on this front.  Fed officials are split on whether continued easing is helping out the economy or not.  Additionally, more and more people are starting to realize what I had postulated in my New Year’s Resolutions.  This subtle change in sentiment and high levels or bearishness as hyperinflationary scenarios scatter the newswaves and blogosphere may have me be turn bullish on the dollar for the first time since early July.  Stay tuned.

+ Regarding the Stock Market,  it seems that the markets have been pricing in another round of quantitative easing. Given that the economy is set to deteriorate in my view (poor fundamentals), we will indeed see another round. This is certainly bullish for the stock market. However, the fiscal side will remain shut until at least the end of the year. The question becomes this, will another round of QE by itself cause a rally similar to the one we experienced most of 2009? From an investor sentiment standpoint, I believe we have the bearish scenario on our hands. I’ve heard reports recently on how the market is in a win-win situation. If the economy improves, earnings will follow in the stock market will rise. If the economy deteriorates, then the Fed will step in with QE and stocks will go up anyways. Investor sentiment surveys are pointing to high levels of bullishness. As far as commodities are concerned China continues to chug along but its economic structure is still mostly dependent on exports. Both my eyes will be focused on the midterm elections,  cause after that event, the Senate will vote on whether to pass the protectionist bill. If a trade war does indeed break out, China will bear the brunt and commodities may see intense selling pressure.

+ On the Global Trade front, have a look at this (especially the end part). Just as I expected, China’s economic structure is still not fit for their consumer to support their economy.  Exports are the country’s main engine and thus they must protect it in the form of keeping the value of the Yuan at depressed levels and not bowing to the US calls for appreciation.  I caught this article by Pettis, sounds a lot like this doesn’t it?  Because of this, protectionism gaining speed.  Iran/Israel has stayed relatively quiet on the bright side.  Certainly most of my issues to keep an eye on have been spot on with regards to my outlook on global trade.

—> Like what you see?  Want more?  Check out RCS Investments for my expanded and detailed Outlooks (thesis), and my “Market Radar”, what I believe are the main factors currently affecting the economy and financial markets.

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