Tuesday, May 3, 2011

Where Is The Global Economy Going?

Let's take a look at some economic data, which we have not previously posted, from last week and this week though today (5/3/2011).

U.S. Federal Reserve Texas Manufacturing Survey down to 8 from 24 the prior month.

Brazil is worried about 6.44% inflation through mid-April.

China tells (unofficial report) three largest banks to raise capital adequacy ration to 11.8% and fourth to raise it to 11.7%.

U.S. Case-Schiller (3 month average) 20 City Housing Price Index down 3.3% March.

U.S. Federal Reserve (Richmond) manufacturing survey down to 10 from 20 in prior month.

UK GDP Q1 2011 up 5 tenths of a percent.

U.S. durable goods new orders up 2.5% March (exp 2.0), ex transportation up 1.3%, capital goods non-defense new orders up 2.1%, inventory up 1.3%.

Eurozone banks tighten lending standards.

U.S. GDP Q1 up 1.8% (exp 1.9).

Spain unemployment up top 21.3%; March retail sales down 8.6% year on year, CPI up 3.5% EU harmonized April year on year, national CPI up to 3.8% (2.7% annualized).

Bank of Japan said economy likely fell into recession in March; Japanese industrial production down 15.3% March (earthquake/tsunami) vs February, consumer spending down 5%.

German unemployment down 37,000 to 2.97 million (lowest since June 2009) -- fear of wage demands.

Eurozone inflation up to 2.8% April vs year ago (March was 2.7%)

German retail sales down 2.1% in March, down 3.5% vs year ago on lower food and clothing purchases.

U.S. ECRI Weekly Leading Index down to 7.5% from 7.7%

U.S. Federal Reserve (Chicago) economic activity up to .26 march from .16 February but 3 month moving average down to .20 from .27.

U.S. ISM manufacturing index down to 60.4 April from 61.2, inventory up to 53.6 from 47.4, new orders down to 61.7 from 63.3, prices up to 85.5 from 85, exports up to 62.0 from 52.5, imports down 1.0 to 55.5, employment down 3 tenths to 62.7.  On the whole this is actually very mixed results and trending negative despite exports/imports.

Eurozone manufacturing growth up to 58 April from 57.5

India raised its interest rate 50 bps with the repo rate at 7.25% and from now on pegging the reverse repo at 1% below the repo to fight inflation; headline inflation nearly 9% in March, GDP Q1 estimated at 8.6%.

U.S. factory new orders up 3% (exp 1.9) March and February revised from <.1> to up 7 tenths, ex transportation up 2.6%, non-defense new orders up 4.1%.

Eurozone PPI March up 6.7% vs year ago -- fastest since September 2008 --- driven by energy input prices up 13% (up 31% vs year ago).

China April PMI manufacturing down to 52.9 from 53.4 (exp up to 53.9).

UK PMI manufacturing April down to 54.6 from 56.7 for a 7 month low.

Doug Short is showing charts for the Q ratio at 1.18 with a arithmetic mean of 67%, a geometric mean of 81%, and he is using the Vanguard Total Market ETF (VTI) to adjust the quarterly Flow of Funds report monthly.  This showing the market is significantly over valued.

John Hussman continues to find the market over valued and over bought:
It's clear that present conditions are among the most extreme in history. In fact, to capture instances other than today, 1987 and 2007, we have to broaden the criteria. The following are sufficient for purposes of discussion:
"1) Overvalued: Shiller P/E over 18 (presently, the multiple is over 24)
"2) Overbought: S&P 500 within 1% of its upper Bollinger band on a daily, weekly and monthly resolution (20 periods, upper band 2 standard deviations above the moving average), and S&P 500 at least 20% above its 52-week low.
"3) Overbullish: Investors Intelligence bullish sentiment at least 45% and bearish sentiment less than 25% (presently, we have 54.3% bulls and 18.5% bears).
"4) Rising yields: Yields on the 10-year Treasury and the Dow 30 Corporate Bond Average above their levels of 6 months earlier.
"I should note that while present conditions easily fit into the foregoing criteria, we generally use a somewhat less restrictive criteria to define an "overvalued, overbought, overbullish, rising-yields syndrome in practice, in order to capture a larger number of important but less extreme periods of risk. The foregoing set of conditions isn't observed often, but the historical instances satisfying these criteria in post-war data are instructive. Here an exhaustive list of them:
"August 1972, November-December 1972: The S&P 500 quickly retreated about 5% from its August peak, then advanced again into to its bull market peak near year-end (about 6% above the August peak). The Dow then toppled -12.3% over the next 50 trading days, and collapsed to half its value over the following 22 months.
"August 1987: The market advanced about 6% from its initial signal into late August. The S&P 500 then lost a third of its value within 8 weeks.
"June 1997: The only mixed outcome, during the strongest segment of the late 1990's tech bubble. The S&P 500 advanced another 10% over the following 8 weeks, surrendered 4%, followed with a strong advance for several months, surrendered it during the 1998 Asian crisis, and then reasserted the bubble advance. Over a 5-year period, the overvaluation ultimately took its toll, as the the S&P 500 would eventually trade 10% below its June 1997 level by the end of the 2000-2002 bear market. Still, the emergence of the internet, booming capital spending, strong economic growth and job creation, rapidly falling inflation, and dot-com enthusiasm evidently combined to overwhelm the negative short- and intermediate-term implications of this signal.
"July 1999: The S&P 500 advanced by 3% over the next two weeks, then declined by about 12% through mid-October, and after a recovery to the March 2000 bull market high, the S&P 500 fell far below its July 1999 level by 2002.
"March 2000: The peak of the bubble - the S&P 500 lost 11% over the following three weeks, recovered much of that initial loss by September, and then lost half its value by October 2002.
"May/June 2007, July 2007: The S&P 500 gained 1% from the late-May/early-June signal to the July signal, then lost about 10% through August 2007, recovered to a marginal new high of 1565.15 by October (about 1% beyond the August peak), and then lost well over half of its value into the March 2009 low.
"February 2011, April 2011: A cluster of signals in the 2-week period between February 8-22 immediately followed by a decline of about 7% over the next 3 weeks. As of Friday, the market has recovered to a marginal new high about 1.5% above the February peak.
"So not including the cluster of signals we've observed in recent months, we've seen 6 clusters of instances in post-war data (we're taking the 1997, 1999 and 2000 cases as separate events since they were more than a few months apart). Four of them closely preceded the four worst market losses in post-war data, one was quickly followed by a 12% market decline, and one was a false signal over the short- and intermediate-term, yet the S&P 500 was still trading at a lower level 5 years later. The red bars indicate instances of this syndrome since 1970, plotted over the S&P 500 (log-scale).
"Examining this set of instances, it's clear that overvalued, overbought, overbullish, rising-yields syndromes as extreme as we observe today are even more important for their extended implications than they are for market prospects over say, 3-6 months. Though there is a tendency toward abrupt market plunges, the initial market losses in 1972 and 2007 were recovered over a period of several months before second signal emerged, followed by a major market decline. Despite the variability in short-term outcomes, and even the tendency for the market to advance by several percent after the syndrome emerges, the overall implications are clearly negative on the basis of average return/risk outcomes" 

Jeremy Grantham, in his quarterly letter, believes the world is at a paradigm shift in which we having a growing population with less available land and commodity prices have been going up. However, he expects commodities may go down in the next year and, if China stumbles economically (1 in 4 chance) and/or the weather is better than expected (80% probability), they may collapse causing a global crisis.  Given that we have been seeing droughts and catastrophes, it is very possible the overall weather will be better going forward.  In his view, abundant resources and falling prices are a concept of the past.  Energy and finite natural resources will have great difficulty meeting future demands without significant technological changes.

We have already written about copper, gold, and silver, but you can see possible problems with corn, wheat, cotton, cocoa, coffee, etc in the current market despite year to date returns.

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