Is
it time to get ready for my great big fat Greek default? The window to
closing a compromise deal between Greece and the EU is closing fast. The
Syriza party has successfully boxed themselves into a corner. The party
took control with the promise of austerity abolition. I mean who wouldn’t
like having their debts forgiven? Can you imagine opening up your Amex or
Visa bill and seeing your amount due $0.00 when you know you’ve been feasting
on caviar, Kobe steaks and lobster having just returned from the trip you took
on a chartered jet? Heck I’d vote for that too. Unfortunately you
and I can ask Visa and Amex for a redo all we want and we’ll get the same
response Greece is getting from the EU. Nyet!
China
may be shaping up to be our next NASDAQ laden tech bubble about to burst.
Nearly seventy percent of mainland stocks are trading at near fifty times
earnings, and that’s if we can rely on their unaudited financials. Margin
borrowing is exploding up to $258 billion vs roughly $52 billion a bit over a
year ago. All at a time China is orchestrating a soft landing for its
economy with growth struggling to find its footing and achieve a 7% rate of
growth. At least it sounds a little bubble-icious to me. Now to add
a bit of balance and be fair there is some good news going on. Even at
China’s slower rate of growth it would create an economy the size of Spain
every two years. It would create an economy the size of Italy every three
years. Still pretty impressive. Since we’re talking about
growth let’s see where the US, still the Big Kahuna currently stands.
Gross
Domestic Product-GDP.
US GDP for the first quarter of 2015 came in with an anemic +.2% rate of
expansion. Most are willing to look through this quarter as being
severely impacted by weather and importantly the West Coast ports being shut
down by the dock workers union. The effects of this shut down also was
reflected in the just recently released trade deficit which ballooned 43% from
the prior reading to $51.37 billion. These events combined effects make it very
difficult to get a reading of where we really stand. So, we at GSA do not
write this off until we see evidence that the economy will be able to rebound
from this terrible reading.
Jobs.
The Monthly jobs figure is scheduled to be released this upcoming Friday
morning and the analysts range is for +200,000-+245,000. The real time
employment indicator, the weekly unemployment claims figures support a rebound
in the jobs figure from March’s dismal reading of +126,000. We believe the
weekly claims figures suggest a strong rebound and an upward revision to
March’s release. We’ll be watching closely.
Leading
Economic Indicators-LEI. LEI for March ticked up +.2%. LEI has reached
some pretty lofty levels of late. The rate of expansion reflected in the
most recent releases point to a more moderate expansion going forward.
Factory
Orders.
US Factory Orders rang in at +2.1% after seven monthly declines. The
figure was helped along by a 13 ½% jump in transportation equipment with
tend to be volatile month to month. Order for durable goods(items with a
greater than three year lifespan, think washing machines, refrigerators, ovens)
also rose +4.4%. All in all a solid number.
Institute
for Supply Management Manufacturing Index-ISMM. ISMM for April
came in a +51.5% which was unchanged from March. We saw growth in New
Orders, Production and Exports which should bode well for further domestic
expansion. The Employment and Order backlog indexes both came in a
bit. Lastly, on the positive side of the ledger Inventories were drawn
down leaving plenty of room for future restocking as sale pick up.
Institute
for Supply Management Services-ISMS. ISMS registered in at +57.8% up +1.2%
from March. Here again the positive for future growth were front
and center. The New Orders Index popped +1.4% to +59.2. Production
also showed a strong rebound up +4.1% to +61.6% from +57.5%. Finally the
Employment Index rested comfortably above the 50 neutral figure coming out at
+56.7% up just a tick from the prior reading.
Housing. New homes sales
rose +6.1% in March the best level in over four years. Housing is
benefiting from ultra-low interest rates along with a firming jobs market.
Another positive in the housing sector, housing starts in March rose a
full 2% to an annualized rate of 926,000 new homes. Building permit
applications for new homes dropped to a 1.04 million annual run rate lead by a
steep decline in permitting for multi-family units. Single family permits
rose +2.1%. So, all in all pretty good not great which is about in line
with our current assessment with the economy overall.
Where
we are going:
There
is an old saying in the markets. Technicals chart the course,
fundamentals drive. Technicals in the market are pointing to a market
that is coiling. On the charts we see higher lows and a triple top which
gives the basis for a pie formation (more of a slice of pie). AS of now
the market is churning. We believe there is a breakout coming.
The catalyst may be right around the corner with Friday’s Non-Farm
Payroll figures or Chicago(insert Puerto Rico if you like) defaulting on its
massive debt. It could be the decision by Greece’s ruling Syriza party to do
what’s best for the country and strike a bailout deal and forget about
protecting their cushy seats. For now we’re not overly optimistic on the
Greek situation so we’ll hold off ordering the snails and Ouzo.
In
closing we believe there is a big move coming. We believe in this modest
growth environment with incredibly stimulative monetary policy provided by
nearly all major global central banks the biggest risks to the market is being
on the sidelines. Should Greece fail to come to their senses, or
perhaps Russia resume its push to expand its buffer zone with the west we may
alter our outlook and stance. For now we maintain our aggressive posture
to the markets but will be in touch immediately should we need to adjust to the
changing political and economic environment.
Thank
you again for your patience and confidence in these very challenging times.
Yours
in pursuit of the KWAN.
