Tuesday, September 8, 2015

Bull Case Hinges on US (excerpt)

The bear case is fairly compelling right now. However, it seems always to be compelling because it plays to our basic instinct of fear, which can often trump greed--the other basic instinct driving stock prices--fairly quickly and unexpectedly. This could turn out to be a good year for bearishly inclined chart technicians, but that’s after getting it mostly wrong for the past six years. I track Death Crosses and other technical indicators, but I don’t give them as much weight as I do the economic and earnings fundamentals.

The bull case hinges on whether the US economy and earnings can continue to grow even if global economic activity continues to weaken. Of course, that’s the bull case for US stocks, and consistent with our Stay Home investment theme. It might even be bullish for Eurozone stocks as long as the region continues to muddle along. However, it’s hard to make a bullish case for the stocks, bonds, and currencies of emerging markets, especially given the fairly convincing case for the unwinding of the global carry trade, particularly if the Fed does start to raise interest rates.

Here are the highlights of the latest economic indicators out of the US and the Eurozone:

(1) Boom in US labor market. Believe it or not, there still are economists arguing that the US labor market needs to make more progress before the FOMC starts to raise interest rates. Indeed, some of them are members of the FOMC, and one of them heads up the IMF. However, Friday’s employment report for August was overwhelmingly strong, on balance, in my opinion.

My Earned Income Proxy, which closely tracks the trend in private wages and salaries, rose 0.7% m/m last month, and 4.9% y/y. Granted, August’s payroll gain was only 173,000, but it is bound to be revised higher as were the previous two months in Friday’s report. In the household survey, August’s full-time employment exceeded the previous record high, set in November 2007. The unemployment rate was 5.1% last month, the lowest since April 2008.

(2) Crawling along in the Eurozone. The volume of retail sales in the Eurozone rose 0.4% m/m during July to the best level since February 2011. The bad news is that German factory orders declined sharply during July. However, German industrial production (including construction) rose 0.7% that month.

(3) China is the muddle kingdom. China may be slowing, but it isn’t falling into a recession, in my opinion. The plunge in China’s share prices since June 9 may be an ominous leading indicator of a worsening economic situation. More likely, it is the bursting of a bubble that has been inflating for a very short time, i.e., since November of last year.

I suppose we can all breathe easier knowing that Nouriel Roubini is optimistic about China. The 4/9 Telegraph reported: “Nouriel Roubini has cast aside his mantle as the lugubrious ‘Dr Doom’ of the global economy, scathingly dismissing market panic over China as ‘manic depressive’ behaviour by ill-informed investors. ‘China is not in free-fall,’ he told the Ambrosetti forum of world leaders on Lake Como. Mr Roubini, a professor at New York University, described the alarmist reaction to the Shanghai stock market rout as ‘excessive, unreasonable and irrational’.”

Today's Morning Briefing: Quant Guys: Fair-Weather Friends? (1) The Omega Man. (2) Risk-parity strategy didn’t pare losses for All Weather Fund. (3) Blaming “price-insensitive” traders. (4) Flash crashes now and then. (5) Spike peaks in VIX. (6) September curse played out in August? (7) Bull/Bear Ratio so bearish, it’s bullish. (8) Five fears on the Bear List. (9) The bulls need the US to do well--so far, so good. (10) Earned Income Proxy at another record high. (11) Roubini says China is okay. (12) “No Escape” (- -). (More for subscribers.)

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