FMX | Connect – www.fmxconnect.com - (Reported 7/29/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
MUST READS?
We don’t know if this is necessarily the must-read-of-the-day but it is a good read nonetheless – the op-ed article titled “An Unserious Presidency On View” on page A10 of the Investors Business Daily. Also see the front page of the FT and the picture titled “Sandwich Stop” and the article on page 2 of the FT (“Obama Targets ‘Soccer Moms’ to Recapture Old Campaign Magic”) – daytime television shows? All this pre-election populist stuff is really a bit much, no?
Jefferson Smith would definitely not approve of such cynicism (or maybe these are just acts of desperation). Finally, on page B1 of the NYT, we also see “In Price War, New Kindle Sells for $139” …. this is the lowest price yet. Deflation is actually evident across a wide array of cyclical consumer goods and services right now.
THE EMERGING CONSENSUS
In terms of what is driving market sentiment right now, it boils down to three things. First, there is a consensus view that the stress tests in Europe were a game changer and that the crisis has been dealt with. Second, there is a lot of hope that the Chinese government has managed to curb the property and credit bubble and did so by engineering a soft-landing and not a hard-landing and that no further policy restraint is going to be needed. Third, almost everyone is dismissing double-dip risks in the U.S.A., and a whole army of Wall Street research departments are expending considerable resources into dissecting the ECRI and concluding that it is not foreshadowing another recession.
The latest was a report that said that the ECRI was only -1.5 (not -10.5) once the effects of mortgage applications were removed. How about that? Remove housing, and it’s “only” -1.5 (as if that is any good in any event).
This takes us back to 2007 and 2008 when all the research houses (except for the one I toiled at) came to the conclusion that once you strip out the effects of housing, the U.S. economy was just in fine shape, didn’t you know? Housing doesn’t matter, right?
Right. But all is not right! At least not with jobs and housing.
Even though the BLS told us that the U.S. jobless rate fell to 9.5% in June from 9.7%, we know that the rate would be 10.2% if not for the plunge in the labour force over the past two months. Second, we just received the detailed regional data and they showed that the unemployment rate climbed last month in 291 of the 374 areas monitored; fell in 55 and was flat in 28.
BEIGE BOOK BLUES
This goes down as the softest Beige Book of the year. Of the 12 districts, two (Cleveland and Kansas City) reported stagnant growth conditions and two others (Atlanta and Chicago) recorded a slowing in the pace of activity. Suffice it to say that this Beige Book was a far cry from the last one on June 9th when it was declared that “economic activity continued to improve since the last report across all twelve Federal Reserve Districts”.
In the once-hot manufacturing sector, the pace “slowed or activity leveled off” in six or half the regions (New York, Cleveland, Chicago, Atlanta, Richmond, Kansas City – combined, the economies of these areas represent a 72% share of the total). In the prior Beige Book, all 12 Districts reported expansion in manufacturing – that number was cut in half this time around.
The always-reliable Zelman & Associates publishes a sort of diffusion index on the Beige Book and it tanked to 50 from 62.4. We can’t wait to see the next ISM report.
SENTIMENT BECOMING LESS “CONTRARIAN” BULLISH
The latest Investors Intelligence poll put the bulls at 38.2% from 35.6% a week ago and 32.6% two weeks ago; the bear share has moved down to 34.9% from 35.6%. Over the past two weeks, the bull-bear gap has widened by 550 basis points as investors begin to dip their toes back into the risk pool. These readings are far from dangerous in terms of being overly bullish but they do represent a big enough swing that we shouldn’t rely on short-coverings any more to drive this market higher as has been the case over the past 2-3 weeks.
GOLD CORRECTION A BUYING OPPORTUNITY
There is no question that gold’s allure as a safe-haven has taken a bit of a beating with the more confident tone coming out of European markets, but be assured that in a global post-bubble credit collapse, skeletons come out of the closet when you least expect it. The surprises are not over; not by a long shot. And the gold price will ebb and flow, but it is in a secular bull market and will retain its natural hedge against recurring concerns surrounding the integrity of the global financial system. Watering down financial regulation bills in the U.S.A., kicking the can down the road via less-than-onerous Eurozone stress tests and reduced capital stringency as per Basel III does not alter the deleveraging game that much and the rounds of market instability that will come our way.
The investment demand for gold remains quite solid at a time when production growth is still anaemic – the World Gold Council just released data showing that investors bought 273.8 metric tons of gold via ETF’s in Q2, the second highest tally on record (and brings net investment in these finds to over 2,000 tons value at just under $82 billion).
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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