image FMX | Connect – www.fmxconnect.com - (Reported 7/23/2010)

 

 

 

 

 

 

Excerpt from MARKET MUSINGS & DATA DECIPHERING

WHAT ARE THE BULLS LOOKING AT?

  • Congress extending jobless benefits (yet again).
  • Polls showing the GoP can take the House and the Senate in November.
  • Some Democrats now want the tax hikes for 2011 to be delayed.
  • Cap and trade is dead.
  • Cameron’s popularity in the U.K. and market reaction there is setting an example for others regarding budgetary reform.
  • China’s success in curbing its property bubble without bursting it.
  • Growing confidence that the emerging markets, especially in Asia and Latin America, will be able to ‘decouple’ this time around. We heard this from more than just one CEO on our recent trip to NYC and Asian thumbprints were all over the positive news these past few weeks out of the likes of FedEx and UPS.
  • Renewed stability in Eurozone debt and money markets – including successful bond auctions amongst the Club Med members.
  • Clarity with respect to European bank vulnerability.
  • Signs that consumer credit delinquency rates in the U.S. are rolling over.
  • Mortgage delinquencies down five quarters in a row in California to a three-year low.
  • The BP oil spill moving off the front pages.
  • The financial regulation bill behind us and Goldman deciding to settle –more uncertainty out of the way.
  • Widespread refutation of the ECRI as a leading indicator … even among the architects of the index! There is tremendous conviction now that a double-dip will be averted, even though 85% of the data releases in the past month have come in below expectations.

 

CAN YOU HANDLE THE TRUTH?
The suggestion that somehow generating 3% real GDP growth a year after a bottom is bullish ignores the deep the hole we are still trying to climb out of. Normally, two years after a recession starts, nominal GDP is up 16% and real GDP is up 7.5%. Currently, nominal GDP is up 1.1% while real GDP is down 1.5% from pre-recession peaks.

According to earlier White House projections, that $800 billion fiscal gorilla unveiled last year was supposed to pull down the unemployment rate to 7% by now. Instead, we are at 9.5%. In fact, it's really even worse than that, for if the participation rate had stayed constant at the April level, than unemployment rate would be 10.2% today.

What about jobless claims? They lead employment. Below 400k, you can have a bullish stance. Above 500k – the opposite, and recession risks rise materially. Well, that rise in the past week to 464k from 427k was even worse than it appears because the non-idling of auto plants this summer has given a temporary downward skew to the claims data – the underlying number is now closer to 475k. The upcoming seasonal factors that are "looking for" a decline are actually going to end up boosting the adjusted claims data and a test of 500k in the weeks ahead is a good bet.

What would that trigger?

Answer: more talk of a "double dip". Claims back above 500k would be horrible for the markets (not bonds though).

The earnings news has, on net, been positive but not a slam dunk. The stock market is responding well to the Q2 reports but remember that the quarter was skewed by a strong start – after all, April was when the ISM hit its peak (in other words, it would be reasonable to assume that much of the Q2 earnings growth was "front loaded") . The economic data are interesting because they reveal a serious loss of momentum as the quarter drew to a close and there does not appear to have been a pickup in July at least based on the limited amount of survey data at hand.

Housing is still in disarray – existing home sales are a bit of a lagging indicator but even with the extension of the tax credits to deals signed but not yet closed, turnover still dropped 5.1% last month ( -10% was expected) taking sales back to March levels.

Of course, we also had the "official" leading indicator come out and verify what the ECRI has been saying – when the financial market components are stripped out, the decline goes to -0.4% (as opposed to -0.2%) which is the second decline in the past three months. And the coincident/lagging ratio, a favourite among some pundits (like a book-to-bill ratio for the entire economy) dipped for the first time since February of this year.

 

David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919

 

Source: Market Musings & Data Deciphering

 

 

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