Tags: woods | long-term | homework | curious

We’re Not Out of the Woods

Tuesday, 04 December 2012 10:37 AM Current | Bio | Archive

The latest Institute for Supply Management Manufacturing Survey, which reflects about 20 percent of the American business economy, contracted surprisingly in November, and remained in its downtrend since mid-2011, while, the overall U.S. economy grew for the 42nd consecutive month.

At the same time, the Markit U.S. Manufacturing Purchasing Managers’ Index (PMI) came in at 52.8, which was its best reading in six months, but still substantially below the 59.7 reported in June 2010. It must be highlighted that job creation remained frustratingly low notwithstanding the continuous quantitative easing policy (QE) of the Federal Reserve, a situation that was emphasized on Saturday by Charles Plosser, president of the Federal Reserve Bank of Philadelphia. Plosser stated, “We haven’t gotten the outcomes on employment or inflation that we’d expect.”

That said, it still remains a fact that the U.S. indices continue to point to ongoing weak, if not fragile, growth of the U.S. economy for the foreseeable future. It is also a reality that such rate of growth is by no way robust enough to create better job growth numbers and surely not strong enough to withstand a serious shock like falling of the fiscal cliff would cause.

For now, it’s way too early to know or even have a hint on what politicians in Washington will agree or disagree on or before Dec. 31. Yes, this is a situation that I would call “living dangerously the American way.” Anyway, whatever comes about, taxes will go up and spending will be cut. Believe me, it will hurt.

In the mean time, the JPMorgan Global Manufacturing PMI came in at 49.7 in November, which is still in contraction zone, albeit only by 0.3 notches. But employment still fell for the fifth consecutive month (49.6), new orders still contracted for the sixth consecutive month (49.6), output timidly rose (50.2) and input prices (inflation) continued to rise and reached a seven-month high (55.3). By the way, annual inflation in the Organization of Economic Co-operation and Development (OECD) area rose by 2.3 percent in the year to October, up from 2.2 percent in September. Outside the OECD area inflation was up everywhere, except in China and Russia.

If you ask me, that’s still not the picture that can convince me we’re out of the woods. As I have said before, the United States remains the best place, at least for the time being, in a bad neighborhood.

Unfortunately, all this warns us that we’ll have to face further reduction in international trade flows.

Maybe it wouldn’t be such a bad idea. Long-term investors should ask themselves where sound and sustainable growth is finally going to come from in the coming quarters, while risks to the growth outlook still remain on the downside, largely because of the smoke-and-mirror policies in Europe, but also because of the uncertainty over where U.S. fiscal policy will finally (?) end up.

Long-term investors should also ask themselves if next year could be as curious a year as 2012 has been — where we have seen markets behaving in ways that rarely were in accordance to the underlying and well-known risks.

For example, when a new round of QE by the Fed was broadly expected this summer, we saw the dollar coming under very strong pressure. When the Fed finally launched QE3 on Sept. 13, the dollar index started to rise for two months, from 78.85 on Sept. 14 to 81.26 on Nov. 16.

Also China has been a good example of curious behavior in its markets this year. A majority of market participants now seem to believe the economic slowdown in China has bottomed (I personally don’t agree) and where we saw the Chinese Shenzhen composite and the Shanghai composite indices touching their lowest level in over three years this week.

Again, for now at least, markets seem to pay no attention whatsoever to the continued concerns over Iran’s nuclear capabilities, and we see the price on NYMEX light sweet crude futures now trading down at about 20 percent from their March 1 peak, when it hit $110.55 per barrel. The same is true for Brent crude, which hit $128.40 on March 1 and closed Monday at $110.92.

Yes, I could go on, but I would like say that this kind of curious market behavior could easily continue until we hit a brick wall, which is out there, no doubt about that. Long-term investors would do well not confusing buy-the-rumor, sell-the-events with participating in markets’ wishful thinking or hypes about situations that in reality aren’t exactly as they are painted to the public.

For example, Eurogroup just agreed on an astonishingly low figure for Spanish banks recapitalizations of 39.5 billion euros ($51.6 billion.) It hereby confirms, once again, at least in my opinion, their decision-making process is part of their overall strategy of denial about the real needs for substantial bank capitalizations. Of course, markets are happy, so far.

As always, long-term investors should never forget to do their homework.

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It still remains a fact that the U.S. indices continue to point to ongoing weak, if not fragile, growth of the U.S. economy for the foreseeable future.
Tuesday, 04 December 2012 10:37 AM
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