The March Manufacturing ISM Report On Business in the United States says the Purchasing Managers’ Index (PMI) was 53.4, up from 52.4, with employment moving higher to 56.1, up from 53.2 the month before. This is definitively better than similar data from Europe, China and Japan.
No doubt, this is very good news. Nevertheless, long-term investors shouldn’t overlook the fact that the U.S.’ fiscal-austerity era has yet to begin.
Yes, there are a host of tax cuts and spending measures that are set to expire at the end of 2012, whereby Americans will have to face a fiscal cliff.
I don’t think the United States will fall off that cliff because probably a number of these measures will be extended in one way or another. That doesn’t mean the United States won’t be obliged to confront a fiscal drag that probably will cut growth to between 1 percent and 3.5 percent in 2013.
It’s unlikely that the United States could break out of its current growth channel of 2 percent to 3 percent, which should keep us from getting overly optimistic.
The S&P 500 has rallied more than 25 percent, albeit on very low volume, from the lows in October without a weekly correction of more than 2 percent. But most strong equity-market rallies have been accompanied by corrections of 5 percent to 10 percent.
The ongoing global rallies can be attributed to what’s called the “Bernanke (U.S.)/Draghi (ECB)/King (U.K.)/Shirakawa (Japan) puts.” This implies that if the rally extends further, the risks of a pullback on softer-than-expected economic data, a re-flaring of the eurozone crisis, an escalation of tension in the Persian Gulf or high profile earnings miss(es) appear to be rising.
The “official” (PMI) for China, which reviews 800 firms, rose to an 11-month high of 53.1 in March, up from 51 in February. It also showed a broad rebound in production, with strong domestic demand pushing the new orders sub-index to 55.1 in March, up from February's 51.
However, demand overseas was more muted, with the sub-index for new export orders rising to 51.9, from February's 51.1. In sharp contrast, the privately measured HSBC PMI, which covers 350 smaller and midsize firms, of which many of them dependent on exports, posted 48.3 in March, down from 49.6, signaling a fifth successive month-on-month deterioration (below 50) in manufacturing operating conditions in China. For the first quarter as a whole, the HSBC PMI averaged its lowest reading since Q1 2009.
So, when Chinese leaders scaled their growth target down to 7.5 percent, they seem to have focused more on their small and midsize economy. With China facing a somewhat messy leadership transition, rising energy costs and an ongoing initiative to shift away from an export/infrastructure-led growth model, any further softening of demand could cause a sharper-than-projected slowdown.
I still don’t see China headed for a “hard” landing. But we shouldn’t dismiss the possibility of China bound for a “long” landing. Of course, only time will tell where it is heading. Anyway, investors should remain vigilant. With China critically important to the global economy, any additional marked slowing of growth would have broad implications for all markets and emerging markets in particular.
On Friday, the Eurogroup finance ministers agreed in Copenhagen to raise the aid available to debtor eurozone states from 500 billion euros to 800 billion euros ($666.23 billion to $1.065 trillion), including all loans allocated to date, which makes it way too small to face, for example, a deep Spanish crisis, let alone a deep Italian crisis.
It’s amazing to see how Europe's politicians still fail bluntly to grasp the seriousness of the situation and merely are buying time. At next month's annual meeting of the International Monetary Fund, the euro countries will try to convince with their latest super-minimal gesture and ask the non-European countries to put more money on the table for fighting the eurozone debt crisis. We’ll have to wait and see if they are successful.
Meanwhile, the eurozone PMI came in at a three-month low of 47.7 in March, down from February’s 49.0. It confirms the manufacturing downturn worsened in March with further signs that that manufacturing weakness is spreading from the periphery to the core like Germany and France while cost pressures are building everywhere.
Also extremely worrisome is that eurozone employment continues falling overall at the fastest rate in two years, with the unemployment rate rising to 10.8 percent in February from 10.7 percent. Spain registered the highest rate (23.6 percent) together with Greece (21 percent in December 2011). The lowest rates were in Austria (4.2 percent) and the triple-AAAs the Netherlands (4.9 percent), Luxembourg (5.2 percent) and Germany (5.7 percent).
Besides, 21.6 percent of young persons (under 25) were unemployed in the euro area with the highest rates in Spain (50.5 percent), Greece (50.4 percent in December 2011) and Italy (31.9 percent). The lowest rates were seen in Germany (8.2 percent), Austria (8.3 percent) and the Netherlands (9.4 percent).
Finally, as investors we have all the reasons of the world to fear that Israel could take direct unilateral military action against suspected Iranian nuclear facilities. In case that would happen, oil prices could easily surge to $150 per barrel and even more, which would pose a significant risk to the current economic expansion and likely would weigh heavily upon risk assets broadly.
Related to this, last week we learned that four senior diplomats and military intelligence officers say that the United States has concluded that Israel has been granted access to airbase(s) in Azerbaijan. Former CENTCOM commander General Joe Hoar comments: “That doesn’t guarantee that Israel will attack Iran, but it certainly makes it more doable…”
Taken all this into account, I’m still not convinced the time is right for investing as a long-term investor. Instead, I prefer remaining focused on wealth conservation as wealth destruction could hit at any moment.
For people who want to buy equities, I still would prefer to wait until we see a correction.
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