FMX | Connect – www.fmxconnect.com - (Reported 7/26/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
MARKET THOUGHTS
Everyone seems to be basing their view on the economic outlook from what the stock market is telling them – so one week it is a return to recession, and now that the market is surging, we must be in some sort of boom. Coincident indicators out of Europe has everyone convinced that the backdrop is solid and yet the massive fiscal tourniquet has to be applied. Investors are caught in bouts of monthly euphoria and depression – it is amazing that we have all this joy for a market that has made its way back to the middle of the range and a market that is basically flat for the year.
Program trading, algorithms, momentum trading, technicals – all are at play. Meanwhile, the Treasury market has steadfastly refused to budge from a double-dip view, with real rates still under downward pressure, and while the breadth of the market has been decent, this rally has continued to lack volume – down a further 2% on Friday on the NYSE. Meanwhile, we are at another key technical juncture – the Dow and Nasdaq have retaken their 200-day moving averages while the S&P 500 and the Nasdaq are caught between the 50-day and 200-day m.a.'s.
It is amazing that Mr. Market has been able to look through some of the blemishes of the Q2 earnings season, the recent spike in jobless claims, the latest hot spot for sovereign default risk (Hungary), and the ECRI hitting a level that is more negative now than in the worst point of the 1990-91 recession. Even with the recent recoveries, the downdraft in most industrial metal prices since mid-April has been breathtaking – down 18% for aluminum, down 13% for copper, down 27% for nickel, and down 15% for steel. Since China has accounted for 40% of global consumption of base metals over the past year, these price moves would seem to suggest that the economic landing there might be less soft and more hard than is generally perceived
THE FRUGAL FUTURE
Not only have American households paid down a record $258 billion of consumer debt over the past year (or perhaps walked away from it) but there is a move afoot to restore homeowner equity by paying off the mortgage more rapidly. In fact, 33% of refinancings are now 'cash-ins' instead of 'cash-outs', a record since Freddie Mac began tracking the data back in 1985 (see "Doubling Down on Housing" on page B7 of the weekend WSJ).
STRESSED OUT
The reason for the European stress tests, which are truly a charade, was a way for policymakers to calm down the markets. Just the notion that there was going to be a stress test was enough and then, wonder of wonders, only 7 of the 91 banks failed the test. At least in the U.S., in the Geithner-led charade back in early 2009, we had 10 of 19 banks failing the stress test and forced to raise an extra $75 billion of capital. And even though the Eurozone banks are in even worse shape, somehow the 7 who failed the test only have a capital shortfall of $4.5 billion. What would the Mad Hatter say to that?
EARNINGS SEASON MASKS THE SLOWING IN Q2 ECONOMIC GROWTH
Remember– earnings are over a quarter but tell you nothing about how the momentum moved over the quarter. The second quarter included April, and just about everything in the economy in April was hitting a peak … but has since slowed. So it could well be that much of Q2 was “front loaded”. Momentum into Q3 has softened dramatically.
A few examples:
• ISM was 60.4 in April and was down to 56.2 in June and likely down to 54 to start Q3.
• Philly Fed was 31.9 in April; was down to 19.6 in June and down to 5.1 to start Q3.
• NY Empire index was 20.2 in April and was down to 8.0 in June; and down to 5.1 in July to start the third quarter.
• NAHB was 19 in April, fell to 16 by June and was down to 14 as Q3 began.
• Consumer confidence was 57.7 to start Q2 and closed the quarter at 52.9.
• The NFIB index also started Q2 as 90.6 and finished at 89.
ECRI MOVES FURTHER INTO DOUBLE-DIP TERRAIN
To little fanfare, the ECRI just hit -10.5 for the July 16th week from -9.8. It's never been here before without there being a recession. Our in-house logit model actually pegs recession odds at 67%, up from 45% one month ago and 0% at the turn of the year. What is remarkable is that the ECRI was not mentioned in one newspaper over the weekend – outside of in Randy Forsythe's bond column in Barron's where it was once again discredited for exaggerating recession risks. What is even more remarkable is that nobody was talking about how useless this indicator was when it was soaring back in late 2008.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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