Sunday, February 12, 2012

Market Thoughts for Week of Feb 13

As I am typing the post, Greek austerity vote has passed. It is hard to believe that here we are two years into this crisis and yet European leaders are still in total denial. This time even some Greek politicians said enough is enough. Six resigned before the vote and 43 were thrown out by their own parties during the vote for opposing! Did this just happen in EU member country?!! I have been discussing the European debt crisis ever since I started this blog in June of 2011. I have been right many times and wrong very few. Let me say this again: Troika is beating a dead horse. Greece is not only going to default, but may also eventually leave the EU. But what I heard today is plain out scary. This is no longer just a financial market issue for me (and I am sure for other macro traders). This is how civil wars break out in small countries and suddenly engulf the whole continents. I am not predicting one, just reciting the European history (which I know all to well by being from Europe originally). When parliament members can not vote their conscience, therefore not being able to represent their constituents, there is no need for parliament, it becomes a totalitarian state. Public outcry will be resounding and prolonged, this is not the end. We are now witnessing violent protests on the streets of Athens. In Portugal over 100,000 people protested austerity measures over the weekend. This will only get worse, and unfortunately is all due to lack of growth in the region. Euro Area is going into recession at the worst possible time, with no pro-growth measures adopted by its deeply indebted governments. Especially hard hit are PIIGS. Unemployment rates there are skyrocketing and GDP growth is going into negative column - this is an equation for economic disaster and civil disobedience. I am afraid that European Spring has begun! Enough said...

Here at home, in U.S., most of the investors are now focusing on our ability to decouple from EU debt crisis and accelerate our growth going forward. I can see such happening currently, and much of the econodata released lately has been supporting this popular view. However, I would like to discuss two data series (coming out this week) which concern me greatly.

I have been watching the decline in U.S. Industrial Production (USIP) growth rate with trepidation. This report does not get enough attention. I am not sure why investors overlook this very important data. USIP is the most cyclical-based indicator for turns in the economy. Simply put, it is a factory output which depends on current business and consumer demand. Very interesting and extremely important is the fact that prolonged periods of decline in USIP growth rate have led U.S. stocks into bear markets and the economy into recessions. Well, USIP growth rate has peaked in the first part of 2010 and has been declining ever since. Watch the report on Wednesday.

Another very important report coming out this week is Retail Sales.
I have pulled up a long-term chart to show how retail sales growth rate tends to recover nicely after bear markets and recessions, but is unable to surpass prior recovery peaks, tops at lower peak levels and begins prolonged declines to much lower levels of growth. This speaks volumes about how overextended and "tired" consumers are. We may be witnessing such time currently. Retail sales growth rate hit a post-recession peak in March of 2011 and has been on a steady decline since. Let's not forget that consumer spending is 70% of U.S. GDP. Watch the report on Tuesday.

And now let's quickly discuss something which is going to be realized by the market very soon (if not already). President Obama is looking more and more likely to be reelected in November. I say this due to two reasons: Mr. Romney's inability to quickly clinch the GOP nomination, hence not energizing the party soon enough to rally for elections, therefore all the complications deriving from that, like lower republican turnouts and (to my opinion) his inability to eventually convert the independents.
And the second, and perhaps the most important reason is declining unemployment rate. I know that many folks are still unemployed, and U6 was still at astonishing 15.1% last month. Nonetheless, weekly claims are at the lowest level since Mr. Obama was sworn in January of 2009, and the official UE rate is now less than 1% higher. Watch for market to start its positioning due to this development accordingly. Weekly claims are out every Thursday.


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