The view presented by the greedometers still indicate April is the top for risk assets and that the economic slowdown of 2012 – 2013 began earlier this year. The US economy will probably slow to the point where it stalls completely and falls back into recession in the current quarter. The book (Greedometer. Dow 5000. Why nobody sees it coming.) will go into a great deal of detail supporting this assertion. The bond market has been pricing-in this view for a while already. The stock market has not yet begun to do this. But it will. Shortly.


Here in the US:

  • Fed Chairman Bernanke did a scheduled press conference after a planned 2-day Fed meeting. Not a lot of news came from it, but with prodding during the press conference Ben continued to threaten the Fed knows how to operate a printing press and will use it if necessary. Risk on! (but for how long?)
  • 1Q 2012 Earnings season had its biggest week in terms of the number of companies reporting.
    • 320 S&P500 companies have reported so far.
    • 70% of companies are beating consensus earnings estimates. This has dropped a great deal from the initial 83% beat figure 2 weeks ago. Given the trend over the past 2 weeks, we’re likely to end up in the 60-65% beat rate this quarter -once all the numbers are in. This is likely to be the lowest beat rate since the recovery in 2009. The long term average earnings ‘beat rate’ is roughly 67%.
    • Profit margin (with 64% of companies reported) is 9.9%. This is almost identical to that of the same week from the previous earnings season. So margins are holding up remarkably well. Long-time clients know the importance of tracking profit margin.

  • This week saw the release of a monthly report from the NYSE that is always eagerly awaited (by me, at least). The use of margin during the month of March was rebounding from the lows 6 months ago. But it was not yet matching the supreme frothiness seen in April last year. This aligns with the fact that equity trade volumes have been anemic this year. The same extreme level of conviction, complacency, and greed is not happening this time. Not in the US equity market, at least. That’s likely because the latest bear market rally does not have a ‘made in the USA’ label on it. The ECB drove this round.

  • 1Q 2012 GDP: I wrote that the BEA’s first estimate would probably be 2%, and that later in the year it would lower that estimate to the 1% range (a la 2011). I also wrote that GDP would be flat outside of what the consumer did.
  • What the BEA announced:
    • +2.2% GDP growth.
    • Almost all of that 2.2% (2.04%) — came from the consumer. Pretty much what I estimated.
    • Wall St expectations were for 2.5 – 3%. A conspiracy of optimism.
    • GDP = Personal Consumption + Private Investment + Government + (net of exports -imports). Here’s how it breaks down :+2.04%(PC) +0.77%(PI) -0.6%(G) -0.01(E-I) = +2.2%
    • This may be more than you want to know, but 0.59 of the 0.77% GDP added from Private Investment continued to be an inventory build. That’s going to swing to a negative number — probably this quarter.
    • There’s a pattern of the BEA lowering previous estimates. One has to wonder when they’ll lower this week’s estimate, and how far.
  • What happens when the consumer begins to pull the reigns in? Nearly immediately, we fall into recession. On that note, here’s the latest retail sales data from the Richmond Fed. It speaks for itself (with thanks to the Fed for this chart)… Unless retail sales pick up in May & June, it is going to be virtually impossible for the US economy to avoid contracting this quarter.
  • The Case Shiller housing report. I previously estimated ‘another small drop in house prices on a national basis’ — and that ‘ the report will likely show prices down 35-36% from the peak and back to late 2002 levels’. That’s what we got. From here, look for house prices to level out for a few months, then roll-over and drop another 7 – 8% next winter. Rinse and repeat 1 more year but with a larger drop to (hopefully) the bottom of house prices — approaching half their peak price — the same as 1999.

  • The yield on the US 10-yr Tnote continued lower this week – for the 6th week in a row. It closed the week at 1.95%. Since bond prices are inversely correlated with yields, the price went higher. I’m still looking for the 10yr T-note yield to drop to the 1.5% range this summer, and for 15-yr mortgage rates to drop to the 2.2% range. On a related note, the yield on 5-yr & 10-yr US inflation-indexed notes was driven below 0. A guaranteed loss (unless you manage to buy it, then sell it when/if the yield is driven further below 0). Clearly, someone’s expecting the currency printing presses to be turbo-charged (other than me).
  • And finally, since the March 2009 lows, each time the Shiller-PE rises to the 23s (where it is now), the US stock market spasms.


In Europe:

  • The European financial crisis is hitting additional headwinds as political risk increases.
  • The Netherlands: Parliament fell apart as agreement on budget austerity could not be reached. The bond market is weighing-in on this transgression: the interest rate premium on Dutch 10-yr Tnotes has blown-out to levels only seen during the extreme points of the global financial crisis in late 2008/ early 2009. The Netherlands has been in recession since late last year. Moody’s is taking notice and warning they’ll cut the prized AAA debt rating.
  • The eurozone retail purchasing managers index dropped to the lowest level since late last year (when the proverbial sky was falling), to a level consistent with recession. France, Germany, and Italy each saw retail sales and profit margins collapse in April. (with thanks for Markit Economics for the graph). A reading under 50 represents contraction.

  • Spain:
    • Recession was announced this week. To be clear, that means the Spanish economy has contracted for the past 6 months. A 1.7% GDP contraction is forecast. There’s not much chance it will be that shallow. The odds continue to build that Spain is entering a decade of hard times (like the rest of Europe and the US).
    • S&P downgraded Spain’s credit rating by 2 notches this week.
    • The unemployment rate rose to 24.4%.
    • The Spanish stock market is re-testing the March 2009 lows.

  • Britain: Recession was announced here too. That makes the list of European countries in recession: the UK, Ireland, Italy, Spain, Portugal, Greece, the Netherlands, Slovenia.
  • Germany: The latest data shows manufacturing continues to contract.


In Asia:

  • Japan:
    • The economy continues to stagnate, and deflation remains a threat.
    • Markets were expecting more ‘powerful monetary easing’ (printing currency to buy assets –mostly Japanese Govt Bonds). That’s what was announced yesterday. Yet the Japanese stock market sold-off with the supposedly good news of more monetary steroids, because a larger dose was expected.
    • But the bond market responded differently. The yield on the 10-yr T-note dropped under 0.9%!!!! When this reverses, its going to be monumentally brutal.
  • India: S&P warned India it would lower the sovereign credit rating unless it begins reducing its budget deficit (5.9% last year). Since India’s current debt rating is the lowest investment grade rating. Only junk lies below.