Tuesday, December 03, 2013

Will the sun come out tomorrow?



So yesterday we talked about the things that seem to be looking up on the consumer front. Add to that today's robust vehicle sales numbers which were pretty strong across the board and hit their highest levels since Feb 2007.

Via Bloomberg this chart sums up the grand disconnect that we are seeing in the US. Stocks (the green line) have marched steadily higher for the past 2.5 years as if being levitated by some unnatural force while the estimate for US GDP in 2013 has slowly been cut in half over the same period.

Which brings us back to the original question are stocks spurring economic activity or does the weakness in the economy lead people to expect Fed support and thus, higher stock prices?  Yes, it is insane circular logic but bear with me.

I think we're approaching a point where two unique events could lead to a turn in sentiment.

1) The last bears have shut the door.  There is almost no one left on Wall Street with a negative view.  Some VERY high profile bears have thrown in the towel in the past month.  When everyone gets on one side of the ship, it usually is a set up for something to go terribly wrong.

2) The Fed seems to be realizing that all of their efforts are not impacting job creation.  Despite efforts to spur lending and create jobs, the Fed has merely bolstered bank balance sheets.  They might take a radical step soon to curtail their activities in the market and that would come as a huge shock (low probability but great risk if it happens).

Finally, we talked yesterday about the consumer strength that we've been seeing in recent reports.  However, I want to mention two stories that came out late yesterday and highlight how they could be canaries in the coal mine.

* Potash is the world's largest fertilizer company and they announced yesterday that they were cutting nearly 1,000 jobs because there has been no increase in demand for nearly 6 years while supply continues to grow.  The lack of demand for fertilizer is a troubling indicator.

* RioTinto is the world's second largest mining company and they announced yesterday they were cutting their capital expenditures in half over the next 2 years to just $8 billion.  Large miners like Rio are not known for being terribly nimble.  They have to have very long time horizons and the fact that they've looked at least two years out and decided they can't justify the investment in more capex is very telling.

Tomorrow we'll get a messy reading on the worst piece of data that everyone covers - the ADP report.  We'll see if it provides any unique insight this time.


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