Here is the opening for this encouraging report from Bloomberg today:
Factories in the U.S. boosted production in January, capping the biggest back-to-back increases in more than two years, showing manufacturing will remain at the forefront of the expansion. Output (IPMGCHNG) rose 0.7 percent after a revised 1.5 percent gain in December, the best two-month performance since July and August 2009, when the world's largest economy was emerging from the recession, according to figures issued by the Federal Reserve today in Washington. Other reports showed homebuilders turned less pessimistic in February and manufacturing in the New York region grew. Business investment in new equipment and the need to rebuild inventories as sales improve will probably keep factory assembly lines rolling at the start of 2012. Additionally, a more stable residential real-estate market would remove an impediment to the recovery after declines in home construction subtracted from economic growth in each of the past six years. "Factories remain a major supporting element of the economy as we enter 2012," said Richard DeKaser, deputy chief economist at Parthenon Group LLC in Boston. "The latest reading from the homebuilders adds to the steady stream of upbeat news on the housing sector." Stocks rose on optimism that China getting more involved in a solution for Europe's sovereign debt crisis. The Standard & Poor's 500 Index climbed 0.4 percent to 1,355.52 at 11:53 a.m. in New York. My comment - The Weekly View below opens on this theme and I discuss four key reasons for the improvement.
The Weekly View: The Unheralded Revival of US Manufacturing - My thanks to Rod Smyth, Bill Ryder and Ken Liu for their ever-interesting market letter published by RiverFront. It is posted in the Subscriber's Area but here is the opening:
We are long-term stock bulls and Treasury bond bears because of valuations. We believe that stock valuations are cheap and Treasury valuations are expensive because the global economic outlook is uncertain. Greece exemplifies this uncertainty, but we believe good news in the US - a manufacturing giant - trumps bad news in a small economy such as Greece. US manufacturing is delivering exciting news. The following excerpt from a report by ISI Group, one of our research providers, reinforces a point that we have been making: US manufacturing is experiencing a revival that is gaining momentum. Furthermore, ISI observes that last week marked the 19th week of stronger US economic data. We think this far outweighs Greece's problems in its long-term impact on our stock portfolio. The US economy is recovering despite the problems in Europe.
My view - Evidence of a revival in US manufacturing is certainly a more important story for the global economy than Greece's implosion, although the latter event still retains the capacity, albeit diminished by familiarity, to have a negative effect on investor sentiment.
To the extent that US manufacturing employment is now increasing, I see four main contributing factors:
This item continues in the Subscriber's Area.
: chart of the day - Following clear acceleration above its 200-day moving average and a temporary break above the psychological $500 level, ( weekly & daily) saw a 5.4% reversal from its high today, forming a big downside key day reversal. Follow through tomorrow, including a lower close, would provide further evidence that a peak of at least near-term significance has been reached. The outlook is for this wonder company is at least a reversion to the trend mean represented by the MA. Note: if you do not know what a key day reversal is, why not treat yourself to The Chart Seminar? More investors, analysts and traders have attended this two-day workshop, now in its 43rd consecutive year, than any other course on the disciplined art of chart reading. Here are some delegate testimonials. Informative article on graphene - My thanks to a subscriber for this fascinating item, posted in the Subscriber's Area. 50th Annual Contrary Opinion Forum, October 3, 4 & 5 2012 at the Basin Harbor Club - I am pleased to say that I have just accepted Alex Seagle's invitation to speak at this year's Forum, which included this comment:
"I would like to make the 50th Forum special, featuring speakers from past conferences that were particularly well-received…in other words, not too many new folks as speakers, but rather a grateful nod to those who have made the Forum such a unique conference."
This will be my 4th Forum and Mrs Fuller and I certainly look forward to it, not least because of the many opportunities to chat with subscribers. A record number of you attended last year, including a charming family of 12! Save the dates above if you would like a stimulating holiday in beautiful Vermont.
Three recent reports on - These are posted in the Subscriber's Area along with my further comments. Additional commentary by Eoin Treacy
China Pledges to Invest in Europe's Bailout Funds, Hold Euros This article from Bloomberg News may be of interest to subscribers. The full article is posted in the Subscriber's Area but here Is a section:
Zhou's comments came a day after Premier Wen Jiabao said the nation is willing to get more deeply involved in resolving Europe's debt crisis, although the continent must send a clearer message to show how it's working to strengthen its finances.
China's willingness to support Europe to cope with sovereign debt problems is sincere and firm, Wen said at a joint press conference yesterday in Beijing with European Union President Herman Van Rompuy. China is ready to get more deeply involved in participating in solving the European debt issue.
Van Rompuy said he welcomed the interest China has shown in investing in European sovereign bonds and the region's rescue fund. Meantime, back in Europe finance ministers are slated today for a teleconference call to prod Greece to do more to qualify for another bailout.
We expect those highly indebted countries to strengthen fiscal consolidation, cut deficits and reduce debt risks in light of their national conditions, Wen said. We hope the EU will soon reach internal consensus, make the political decision and send to the international community a clearer and a stronger message of policy responses.
My view European creditor nations have been slow to sign off on the next €130 billion loan to Greece because they are worried about Greek commitments to implement the agreed reforms. With an election so soon after the next major repayment date, this issue is unlikely to evaporate regardless of commitments by the Greek opposition that they will stand firm to austerity goals. To mitigate their exposure to peripheral bailouts, core Eurozone countries have been shopping for external investors to help shoulder the burden. China has been slow to act but that attitude appears to be softening and this can be viewed as a positive development.
Musings from the Oil Patch Thanks to a subscriber for this edition of Allen Brooks report for PPHB. The full report is posted in the Subscriber's Area but here Is a section on gasoline demand:
What's going on with gasoline demand given the general conclusion from the latest economic data that the U.S. economy is recovering? According to the MasterCard Advisors' Spending Pulse survey during the week ending February 3rd, gasoline demand in the U.S. fell another 2.8% to 8.269 million barrels per day, which marks a 5.3% decline from a year ago. If you focus on the four-week moving average of demand, it fell year-over-year for the 46th consecutive time. For that period, demand was 4.9% lower than a year ago.
The easiest explanation for lower gasoline demand is that people are driving less because of the recession and high pump prices, and when they have to drive they are using more fuel-efficient vehicles. The data for vehicle miles driven support those points. The big question, however, is whether the weak demand is due primarily to the weak economy and continued high unemployment, or whether there might be other factors at work. We believe this topic merits greater analysis and we will be revisiting it, but in the interim one has to conclude that there may be structural shifts underway in the vehicle fuels market. While economic conditions have to be one cause, changes in consumer spending and entertainment habits are other forces that could be negatively impacting miles driven. A comment in a letter to the editor of The Economist on British retailing highlighted these cultural changes. The writer wrote, And if I need to buy books I'll click on Amazon, where parking availability is not an issue. Cultural habit changes are obvious factors, but preliminary data also shows the possible end to the growth in American licensed drivers. Could this be a stealth factor? There is plenty of data to study, but we suspect it will substantiate a permanent decline in the U.S. gasoline market. If correct, there are negative implications for fuel tax receipts, highway spending and new car sales all of which will limit economic growth.
My view It may take time to become apparent but high energy prices cause consumption habits to change. When energy prices are low, the cost of commuting, road trips, air fare, school runs and shopping expeditions tend to be inconsequential factors in planning. However, as prices rise, the impact on personal finances becomes ever more apparent; necessitating behavioural adaption. The correlation between the penchant for green energy and high prices over the last decade mirrors a similar drive during the oil crises of the 1970s.
This section continues in the Subscriber's Area.
Face The Music: Road Back To Prosperity Is Through Shared Sacrifice - This interview of Lacy Hunt by Kate Welling was featured in John Mauldin's Outside the Box yesterday. The chart of US velocity of Money from 1900 is particularly instructive. Here is a section:
Debt and Economic Activity Conventional View
Beginning with Irving Fisher (1933) and A. G. Hart (1938), there is literature on the macroeconomic role of inside debt. Hyman Minsky (1977) and Charles Kindleberger (1978) have in several places argued for the inherent instability of the financial system, but in doing so have had to depart from the assumption of rational economic behavior. Footnote: I do not deny the possible importance of irrationality in economic life: however, it seems that the best research strategy is to push the rationality postulate as far as it will go.
Ben S. Bernanke (2000). Essays on the Great Depression, pages 42-43.
Vs. New View
The U.S. economic recovery has been weak. A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery. King (1994) provides a detailed discussion of how differences in the marginal propensity to consume between borrowing and lending households can generate an aggregate downturn in an economy with high household leverage. This idea goes back to at least Irving Fisher's debt deflation hypothesis (1933).
Federal Reserve Bank of San Francisco Economic Letter January 2011. Atif Mian University of California Berkeley, Haas School of Business and Amir Sufi , University of Chicago Booth School of Business.
Debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare. But, when it is used imprudently and in excess, the result can be a disaster. For individual households and firms, overborrowing leads to bankruptcy and financial ruin. For a country, too much debt impairs the government's ability to deliver essential services to its citizens. Debt turns cancerous when it reaches 80-100% of GDP for governments, 90% for corporations and 85% for households.
The Real Effects for Debt by Stephen G. Cecchetti , M. S. Mohanty and Fabrizio Zampolli . September, 2011. Bank for International Settlements, page 1.
My view My comments on money supply and the velocity of money from October 7th are now available in the public archive for subscribers and pre-subscribers to peruse at their leisure. At the time the majority of investors were concerned with the threat of a global economic slowdown. Central banks were equally worried, particularly by deteriorating velocity of money indicators, and responded with a massive increase in money supply. This helped drive the impressive rebound in risk assets over the last four months.
This section continues in the Subscriber's Area.
Email of the day- on yesterday's response to the email on options:
I trust you are well & as ever enjoying these interesting times. I think there may have been some confusion in the exchange with a subscriber about using options to replicate your short in . If you sell puts you are in effect creating a synthetic long position in that you need the shares to rise. If you have sold puts it will cost you money if the shares fall below the puts' strike. The way to replicate an outright short using options is either to sell calls or BUY puts. This is obviously very simplistic and as you know there is also time value to consider when using options."
My comment Thank you, and a number of other subscribers, for alerting me to this error. Yes, of course, selling calls was the correct strategy and I have amended the copy accordingly. This options primer, generously forwarded by a subscriber, may also be of interest.
Speaking engagements in the USA - I have accepted invitations to speak to a number of associations and groups while in the USA for The Chart Seminar. My schedule is still filling but here are the details so far:
San Diego MTA chapter in the first week of April. Time and venue yet to be arranged. Los Angeles MTA chapter on April 11th venue to be arranged but will be in the Long Beach area.
To Hoard or to Horde: risks and opportunities from participating with the crowd. Will be the topic of my talk to both these associations.
CFA Institute San Francisco April 12th 3pm. The venue has yet to be finalised but the topic will be Differing patterns of development, comparing the USA & UK with China & India.
The TSAA-San Francisco April 13th. Venue and time have yet to be confirmed by the topic will be Investment implication of competing inflationary and deflationary forces.
If you would like me to speak to your local chapter or organisation in California or New York please contact your respective chairperson and ask them to contact me.
The Chart Seminar 2012 - Following a sell-out tour to Singapore and Australia last year, The Chart Seminar will be held in San Francisco, New York and London this year. Please be aware that the early booking rate for non- subscribers at the US seminars expires on January 31st. We are currently taking bookings for our San Francisco and New York dates in April as well as London seminars in May and November. Anyone interested in securing a place at any of our events should contact Sarah Barnes at . [email protected] The date and venues for my seminars so far in 2012 are: San Francisco - April 16th &17th 2012 Nikko Hotel New York - April 23rd & 24th 2012 at The Manhattan Club (above Rosie O'Grady's) at 800 7th Avenue London - May 25th & 25th 2012 at the Radisson Edwardian Hampshire London - November 22nd & 23rd 2012 at the Radisson Edwardian Hampshire The full rate is £950 + VAT. (Please note US delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on January 30th for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.
Please note I will be in Guangzhou and Shenzhen next week and will return to the office on February 27th.