Stocks -Risk appetite back – Home sales Stagnating despite stimulus…more

Posted by David Rosenberg - Gluskin Sheff

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IN THIS ISSUE

• Risk appetite back with a vengeance
• Global data mixed, but overall constructive
• Mortgage delinquencies hit a new high
• Industrial activity recedes sharply
• Jobless claims point to worrisome employment picture
• Home sales stagnating despite record stimulus

Investor risk appetite is back with a vengeance today:

• The world MSCI index is up 0.7% so far, the third advance in a row.

• Asia-Pac rallied 1.2% today.  Emerging market equities pulled in a net $2.1bln in fund flows this past week (15 weeks in a row of inflows); this followed a $2.5bln inflow the week before.

• Gold just hit a three-month high of $973/oz (up 1.4%) and silver is coming of its best month in 22 years.

• Oil has broken above its 200-day moving average; energy stocks do not appear to be priced for a sustainable $65/barrel crude price (U.S. oil inventories have declined for three straight weeks — last week’s 5.4 million barrel draw was far larger than expected, though we hear that a large amount of crude is being stored in tankers ready to come to port — see page C6 of the WSJ).

• Commodity currencies are on a tear, with the Aussie leading the pack.  The sharp rally in the CAD along with the weak U.S. consumer is a dead-weight drag on Canadian manufacturers.

• Despite the heightened risk appetite, government bonds are rallying (off massively oversold levels) — yields are down 7bps in the U.K. and Germany and down 3bps in the U.S.A.  This week’s Treasury auctions went fairly well; the next crucial test will be the 10- and 30-year auctions in early June (for some reason, supply concerns don’t seem to affect other markets — there has been a huge $20 billion of new junk bond issuance so far in May with hardly a peep about it in the business media).  As a contrarian, I just love it when I see headlines like this (page C10 of the WSJ) — Deflating the Bubble in U.S. Treasuries.  The Treasury market was never in a ‘bubble’, folks.  Nothing that is fully guaranteed and pays a coupon semi-annually with no call or prepayment risk goes into a ‘bubble’ just because it was expensive at the yield low.  Sentiment never got wildly bullish; the public never became enamoured of Treasuries; there was no widespread ownership or ‘new paradigm’ thoughts.  At the lows in yield, there were legitimate concerns over a depression-like economic backdrop and deflation.  That was the story for the bond market — it never ever met the classic characteristics of a bubble as was the case with the dotcoms or housing.

• One of our long-standing themes has been the deflation that has hit the labour market in a way that we have not seen in the last six decades.  For more on this file, have a look at Still Working, but Forced to Make Do With Less on the front page of the NYT.  Also take a read of Paul Krugman’s excellent column on page A23 (The Big Inflation Scare).

Short-covering still a major source of buying power for the equity market.  Indeed, according to Bloomberg data, short interest in the S&P 500 fell an additional 1.7% in the first half of May.

For all the talk about how foreign central banks, led by China, would impose a buyer’s strike against U.S. bonds, we see that in the week ending May 27, total custodial holdings of Treasuries at the Fed rose $8bln to $1.191trln.

Intel was the latest to post a decent bottom line — beating estimates by a penny per share (at 24 cents) — but like so many others, missed its revenue target.  Sales dropped 23% YoY to $12.3bln versus the $12.7bln consensus
estimate.

KEEP AN EYE ON THE U.S. DOLLAR:

IT IS BASIS POINTS AWAY FROM SEEING THE 50-DAY M.A. (83.8) CROSS BELOW THE 200-DAY M.A. (83.6). THE ‘SPOT’ INDEX IS 79.9.  IN THE EVENT OF THE ‘CROSSOVER’, WHICH LAST OCCURRED THREE YEARS AGO, THE COMMODITY COMPLEX ANDPRECIOUS METALS WILL LIKELY RECEIVE AN EVEN LARGER PUSH TO THE UPSIDE.

ON THE DATA FRONT, MIXED NEWS BUT OVERALL … CONSTRUCTIVE:

• The U.K. is pulling out of its morass.  GfK consumer confidence hit a year-long high in April and is up now three months in a row (to -27 from -30).  The Nationwide home price survey showed a 1.2% pop to home prices in May — the best result since December 2006 (but still down 11.8% YoY).

• Real retail sales in Germany came in as expected, at +0.5% (inflation- adjusted) in April — the third increase in a row (but still down 0.8% YoY).

• Despite all the good economic news, pricing power is tough to come by as Eurozone inflation hit zero last month for the first time in at least 13 years.

• There was a slate of data out of Japan today, and what investors are fixated on is the massive 5.2% surge in industrial production in April on top of the 1.6% pickup in March (expectations were for a 3.3% gain); and, the government (METI) says that output should bounce 8.8% in May and 2.7% in June too.  The Japanese government raised the economic outlook last week just in the nick of time.  Or so it seems.  While export-led activity is improving after what was a data-detonation in January, domestic spending indicators are still quite moribund.  Housing starts in April were down 32.4% YoY, the fifth month in negative terrain.  Household spending also contracted 1.3% YoY, and the labour market is imploding there as it is in the U.S.A. — the unemployment rate hit 5.0% in April from 4.8% in March and the key job offers to-seekers ratio fell to 0.46 from 0.52.

• One of our long-standing themes has been the deflation that has hit the labour market in a way that we have not seen in the last six decades.  For more on this file, have a look at Still Working, but Forced to Make Do With Less on the front page of the NYT. Also take a read of Paul Krugman’s excellent column on page A23 (The Big Inflation Scare).

Short-covering still a major source of buying power for the equity market. 
Indeed, according to Bloomberg data, short interest in the S&P 500 fell an
additional 1.7% in the first half of May. 
For all the talk about how foreign central banks, led by China, would
impose a buyer’s strike against U.S. bonds, we see that in the week ending
May 27, total custodial holdings of Treasuries at the Fed rose $8bln to
$1.191trln. 
Intel was the latest to post a decent bottom line — beating estimates by a
penny per share (at 24 cents) — but like so many others, missed its revenue
target.  Sales dropped 23% YoY to $12.3bln versus the $12.7bln consensus
estimate.
KEEP AN EYE ON THE U.S. DOLLAR:  
IT IS BASIS POINTS AWAY FROM SEEING THE 50-DAY M.A. (83.8) CROSS BELOW THE 200-DAY M.A. (83.6).  THE ‘SPOT’ INDEX IS 79.9.  IN THE EVENT OF THE ‘CROSSOVER’, WHICH LAST OCCURRED THREE YEARS AGO, THE COMMODITY COMPLEX AND PRECIOUS METALS WILL LIKELY RECEIVE AN EVEN LARGER PUSH TO THE UPSIDE.

ON THE DATA FRONT, MIXED NEWS BUT OVERALL …CONSTRUCTIVE:

• The U.K. is pulling out of its morass.  GfK consumer confidence hit a year-long high in April and is up now three months in a row (to -27 from -30).  The Nationwide home price survey showed a 1.2% pop to home prices in May — the best result since December 2006 (but still down 11.8% YoY).

• Real retail sales in Germany came in as expected, at +0.5% (inflation- adjusted) in April — the third increase in a row (but still down 0.8% YoY).

• Despite all the good economic news, pricing power is tough to come by as Eurozone inflation hit zero last month for the first time in at least 13 years.

• There was a slate of data out of Japan today, and what investors are fixated on is the massive 5.2% surge in industrial production in April on top of the 1.6% pickup in March (expectations were for a 3.3% gain); and, the government (METI) says that output should bounce 8.8% in May and 2.7% in June too.  The Japanese government raised the economic outlook last week just in the nick of time.  Or so it seems.  While export-led activity is improving after what was a data-detonation in January, domestic spending indicators are still quite moribund.  Housing starts in April were down 32.4% YoY, the fifth month in negative terrain.  Household spending also contracted 1.3% YoY, and the labour market is imploding there as it is in the U.S.A. — the unemployment rate hit 5.0% in April from 4.8% in March and the key job offers-to-seekers ratio fell to 0.46 from 0.52.

….full report HERE. Scroll to the top of page 3 and read to 8 with headlines below:

• Mortgage delinquencies hit a new high

• Jobless claims point to worrisome employment picture

• Industrial activity recedes sharply

• Home sales stagnating despite record stimulus

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Decline_in_Home_Prices

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