Post on 06-Apr-2018
8/3/2019 Technical & Macro Update - November 2011
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November 122011
MARKET COMMENTARY BY NAUFAL SANAULLAH
Naufa l Sanau l l ahn a u f a l . s a n a u l l a h @ g m ai l . c o m@ n a u f a l s a n a u l l a h
Technical & Macro MarketUpdate
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Bullish
US data is surprising tothe upside
The US consumer appearsto be back
US corporate profits atrecord highs
Chinese inflation is
easing Political hurdles to
European bailoutdisbursement have beenaddressed
Bearish
US incomes are declining andconsumption is being financedout of lower savings
US corporate margins havenowhere to go but down
Chinese data continues to comein weak
Beijing property prices down5.1% YTD
Still no mechanism to
sustainably keep Italian yieldsdepressed
EFSF paper seeing low demand
Eurozone recession is gettingworse
MARKET THEMES
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Manufacturing indicators are leveling out
Composite PMI remains barely above 50, after contracting from above 60
New Orders are ticking up, and New Orders/Inventories difference sharply
ticking back above zero, signifying tailwinds
Trend direction remains to be seen, but recession calls are looking premature
in light of recent data
Advance Q3 GDP prints at 2.46%
Using BLS-based deflators, real Q3 GDP grew by 2.94% YoY
Wednesdays September wholesale inventory data printed at -0.1% vs +0.5%
expected, causing pervasive Q3 GDP downgrades from 2.3-2.6% to 1.6-1.8%
Consumer improvements in goods & services spending was the biggest factorin the upswing
Real GDP ticked up to 2.9% in Q2 2007, directly before recession began
Import prices from China rose 0.4% MoM, as EM inflation exported
from Fed policy (through FX & trade channe ls) come back home to
roost and boost domestic inflation
US GROWTH
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US GROWTH
Source: Douglas Short
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Is current consumption growthwhich drove
growth in Q3sustainable, considering:
Per-capita disposable income is declining by 2.32%
annualized?
US savings rate is back to pre-recession levels?
Prospects of rising taxes are growing?
Recent consumption data could be mainly due to
easing energy & food prices in Q3?
These same food & energy prices have reversed their
entire Q3 declines in October alone?
US CONSUMPTION
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The gap between incomesand spending isworrisome
This is especially so whenconsidering that morethan 20% of personalincome is fromgovernment transfers
Are incomes set to dropeven further as deficit
worries subsume theWashington debate?
What would be theconsequent impact onspending?
INCOMES
Source: Street Talk Live
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The US savings rate is now
back down below the 4%
level
This level has roughly
demarcated betweensustainable, organically-
financed consumption and
unsustainable,
overleveraged consumption
The savings rate stayedbelow 4% from 1999-2008,
which were years
characterized by excess
debt and unsustainable
consumption
US SAVINGS RATE
Source: Federal Reserve Bank of St. Louis
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Household debt service(mortgage & consumerdebt) and financialobligation (auto & rentalleases, homeownersinsurance, and property tax)ratios to disposable incomeare still plunging
Household deleveragingdoesnt appear to benearing completion
Because of secular natureof current down cycle incredit, these ratios shouldremain near the lower endof their ranges for anextended period of time,even after finally bottoming
HOUSEHOLD DELEVERAGING
Source: Federal Reserve Bank of St. Louis
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Household debt is stillnot growing
Money velocity mayfinally start ticking up
once YoY householddebt growth (see chart)breaks back above the0 level
Until then, rumors ofthe completion ofhousehold deleveragingappear to be greatlyexaggerated
HOUSEHOLD DELEVERAGING
Source: Federal Reserve Bank of St. Louis
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Consumer debt as a ratio ofdisposable income has along way to fall yet
To unwind the greatleveraging of the 1990s-
2000s, this ratio must dropbelow the 1 level
If incomes are set to dropfurther, then debt will haveto decline even moreincrementally in order forany further necessarydeleveraging to occur
This timeframe andnarrative fits well with thethree to four years
HOUSEHOLD DELEVERAGING
Source: Federal Reserve Bank of St. Louis
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ECRI leading index(chart on top) insharply negativeterritory, below mid-2010 lows
Unlike 2010slowdown, ECRIcoincident index
(chart on bottom) isapproaching a breakbelow the 0 level
ECRI INDICES
Source: Economic Cycle Research Institute
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Initial claims continue tohave a difficult timesustaining a break below400k
Without sustained real
GDP growth above 2%,the unemployment ratewill likely not sustain abreak below 9%
Public sector employmentis a big question mark inthe current politicalclimate, especially onstate & local levels
EMPLOYMENT
Source: Federal Reserve Bank of St. Louis
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WILL TOP-LINE CONTRACTION CAUSE
MARGIN COLLAPSE?
Source: Bianco Research via Barry Rithotlz
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A US recession in 2012 seems possible, given: The implications of an escalating Eurozone crisis on investment
The unclear sustainability of strong consumption growth in the face of asavings rate back below 4%
Political uncertainty and prospects of fiscal consolidation
Weakening EM demand for US exports (mainly from infrastructure spending
that is now being unwound) Any such recession would be likely to be shallow, especially
relative to 2007-2009, given already existing excess capacityand nature of secular deleveraging-driven balance sheetrecessions
With homeownership rates still so high and ineffective policy
responses to address housing woes, a reversal of housingsimpact on GDP is unlikely in the foreseeable future
Without a major housing recovery, the overall recovery could loseits legs, particularly since exports & government expenditure(both facing major headwinds going forward) have been the twomost positive drivers of GDP si nce Q4 2007
For now, a strong auto sector and continued business investment
into software equipment & technology are allowing expansion
RECESSION?
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Inflation (headline CPI almost at 4%, core at 2%) is be coming a
constraint on further Fed QE, at least at the moment
However, the prospects of outright MBS purchas es seem to be
rising, as policy from Congress & the Whi te House are proving futile
Many economists have suggested the Fed engage in nominal GDP
targeting
The implications of such a policy on inflation, as well as the exact
mechanism by which central bank asset purchases can dire ctly
impact NGDP, are impor tant questions regarding NGDP targeting
However, price/level targets as opposed to size/aggregate targets
are much more credible and ef fective monetary policies, as thetransitory effec ts of the various QEs can attest
Stil l , at this point the Fed seems politically constrained from furthe r
action and will be unlikely to step back in unless cond itions
deteriorate substantially further
I f and when the Fed does implement NGDP targeting, the great
inflation may finally begin
FEDERAL RESERVE POLICY
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CEOS ARE LOSING CONFIDENCE
Source: Goldman Sachs
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AS ARE CONSUMERS
Source: Conference Board
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After spending October very closely tracking EUR/USD, the S&P 500
has now decoupled a bit from external macro ris ks
Whether this decoupling can be maintained likely depends on if the
Eurozone crisis can finally be contai ned (unlikely in my opinion)
Bull market leaders showing sharp underperformance and high
volume sel l ing, including breakdowns and fai lures at 55dmas
Unit labor costs bottoming (real unit labor costs at 60 year lows &
wage share of GDP at 50 year lows): corpor ate margins nowhere to
go but down?
Sentiment has shifted dramatically to now being excessively bullish
The market crashed due to the debt ceil ing debacles implication on
potential domestic austerity, as well as immediate threats ari sing
from Italy & Greece
Although political changes have been made, the structural problems
in Europe remain and con tinue to escalate as austerity impacts
growth, suggesting the market may be indicating complacency
US EQUITY MARKET
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Stil l overvalued, as per
Shil lers CAPE index
Secular deleveraging should
return CAPE back to single
digits before a long term
bottom is put in
The key headwinds to multiple
expansion at this stage is
actually probably EM demand,
which is being weighed down
by a combination of stickyinflation and a tightening CB
cycle in response to massive
hot money flows
Overseas demand accounts for
half of the S&P 500s revenue
US EQUITY MARKET
Source: Robert Shiller/Irrational Exuberance
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Currently in consolidation zone between S&P 1220 & 1300
and in between 55dma & 200dma
Whether 200dma provides overhead resistance or is broken
through will likely determine near-term trend direction
For now, cash appears attractive; break above 200dma couldsignal retest of highs, while break below 55dma could confirm
bear market
Tight holiday liquidity could allow for a market ramp into year -
end, but it is difficult to get constructive on the market for
2012
US EQUITY MARKET
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AAII SURVEY % BULLS
Source: Cullen Roche/Pragmatic Capitalism
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S&P 500
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The US equity market priced
in gold remains in a firm,
multi-year bear market
Short SPY/GLD remains an
attractive position After breaking and re-
recovering the 2009 lows,
this ratio is consolidating
and unsuccessfully testing
the 0.83 resistance above Other equity markets, both
developed and emerging,
priced in gold appear even
better short candidates
S&P 500 VS GOLD
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HY/EQUITY DIVERGENCES
Source: Tim Backshall/Capital Context
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Wal-Mart (WMT), Autozone(AZO), and OReilly Automotive(ORLY) have been among thebest market leaders recently
As Mark Smith observes, theseare the same stocks that
ramped ahead of the 2007-09recession
To the right is a cha rt of therelative performance of aprice-we ighted basket of theabove stocks vs the S&P
Large-caps with pristine
balance sheets contin ue tooutper form growth stocks on atrail ing basis
This is a bearish divergence inthe medium term
LEADING STOCKS
http://www.fundmymutualfund.com/http://www.fundmymutualfund.com/8/3/2019 Technical & Macro Update - November 2011
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I tal ian PM Si lvio Berlusconi has now resigned, paving the way for austerity
implementation
Mistimed austerity has thus far only hurt growth; is a new administration a credible
solution to Italys financing troubles?
If likely successor Mario Monti fails in implementing required austerity or in garnering
the required majority for a coalition government, BTP yields would go right back up
Even if austerity is successfully implemented, how will deficit r atios be brought downwith austeritys impact on growth?
According to Edward Harrison, at 6.5% on t he 10yr, Italy would need a budget surplus
of 5% of GDP (laughable) to keep debt levels simply from rising, let alone falling to
sustainable levels
October Italian PMI at a very low 43.3
Greek PM George Papandreou has also resigned, el iminating the threat of
a Greek referendum rejecting the EFSF bai lout
Societal disruption continues to rise, especially since the introduction of a property tax
to be collected directly through the state power supply corporation
Although the bailout package is now set to be accepted, general elections in February
may bring more hurdles to Greeces inclusion in the EU bailout
EUROPE
http://www.creditwritedowns.com/2011/11/why-questioning-italys-solvency-leads-inevitably-to-monetisation.htmlhttp://www.creditwritedowns.com/2011/11/why-questioning-italys-solvency-leads-inevitably-to-monetisation.html8/3/2019 Technical & Macro Update - November 2011
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Three necessar y and eventual ly inevi table pol icy act ions:
Cut benchmark ECB rates to zero
Expand the ECB SMP ef fectively into an unsterilized QE program
Create a common treasury/fiscal union (possibly by turning the EFSF or ESM into one),
funded by the ECB
A fourth act ion may be to eject some countr ies f rom the euro a l lowing for more
feasible f iscal integrat ion
I ta l ian & Spanish debt rate cei l ings/targets seem to be the only credible way to
f i rewal l countr ies seen as too big to save
ECB bids have helped I ta l ian 10yr y ie lds drop bac k below 7%, but only a perpetual
bid or rate target appear s to be suff ic ient to keep rates f rom r is ing back
Is an ECB bazooka a l l but guaranteed at th is point , conside r ing:
174 billion in periphery bonds bought by the ECB through the end of October? 307 billion in Italian bonds alone to be rolled over in 2012?
Germany & the ECB remain hawkish however
I ta ly owes German banks 116 bi l l ion
Germany will have to choose between a domestic banking crisis and ECB monetization
The only question is: how much worse will things have to deteriorate before the ECB
relents?
EUROPE
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Political turmoil in Athens & Rome is making a larger EFSF less
likely anytime soon
An attempted 5 bill ion, 15yr issua nce had to be modified to 3
bill ion, 10yr paper du e to poor demand and liquidity for EFSF paper
It is becoming clear that the EFSF in its current form was an ad -hoc
policy response that does little more than buy time
EFSF yields remain at record wides
S&P has warned of ratings cuts to several European na tions, the
most notable of which is France
A French downgrade would render the EFSF moot, as Germany would
become the sole backstopper left
This could be the catalys t for unlimited ECB intervention
Lots of bearish economic data recently:
German Industrial Production down 2.7%
Eurozone retail sales down 0.7%
Spanish GDP growth has stalled
EUROPE
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Contagion is spreading, withSlovenia now seeing yieldsabove 7% as well
Non-EU eastern Europeannations could become threatsto financial stability due to
cross-currency liabilit ies onEurozone bank balance sheets
Fitch & S&P have both warnedof downgrades to Hungarysdebt
CHF/HUF is back near itshighs (see chart to right),
unwinding the entire SNB ratetarget selloff, making thecross-border funding problemsan imminent danger to analready sticky situation
EUROPE
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October European Manufacturing PMIs showed surprises to
the downside
Italian PMI was 43.3 vs 47.2 consensus vs 48.3 prior
French PMI was 48.5 vs 49.0 consensus vs 49.0 prior
German PMI was 49.1 vs 48.9 consensus vs 48.9 prior
Eurozone PMI was 47.1 vs 47.3 consensus vs 47.3 prior
German PMI is at lowest level in two years, dragged down by
declining export demand, and now in contraction territory
Italian PMI is at sharply recessionary territory and bodes
poorly for any attempted increase in government revenues Austerity is clearly bringing about a sharp European recession,
causing a feedback loop by making deficit ratios even higher,
forcing further fiscal consolidation and so on
EUROPEAN PMIS
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WHY THE EURO ITSELF IS THE PROBLEM
Source: JP Morgan
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Currently being driven mainly by political and event risks,
which are near-term bullish due to Greek & Ital ian PM
resignations
1.40 level remains the line in the sand
If the ECB continues re fusing to step in, Europe could befacing a deflationary outcome that could boost the euro
However, I expect ECB intervention and see EUR/USD as a
medium- and long-term sell
If Italian yields jump back up despite Berlusconis departure,
1.29 could be in the cards within the next few months
Sustained trend direction will likely not develop until after
holiday liquidity tightening gives way to the new year
Below 1.35, EUR/USD appears a solid sell
EUR/USD
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EUR/USD
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Risks from overheated
property sector and
overreliance on Chinese raw
material demand may expose
themselves in 2012-2013
China bear theme finallygetting MSM exposure
Q3 housing prices print -2.2%
YoY growth, as per ABS
Household debt/liquid asset
ratio at around 170% as of Q22011 (chart to the right)
AUSTRALIA
Source: Australian Bureau of Statistics
Household debt/liquid asset
ratio
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Real housing prices Housing prices per GDP per head
AUSTRALIAN HOUSING MARKET
Source: Steven Keen
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AUSTRALIAN HOUSING POPPING?
Source: Steven Keen
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Currently bouncing off of support around parity
1.07-1.08 should present significant resistance
I doubt AUD/USD will recover to new highs in the
next few yearsA breakdown below the channel support trendline
(see next slide for chart) could catalyze muchmore selling
Below parity = game overAUD/USD above parity may prove to be a
generationally attractive short opportunity
AUD/USD
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AUD/USD
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Rebalancing permanently altering Chinas growth trajectory is a theme picking
up momentum among market part ic ipants
The copper crash could have signif icant impacts on rampant commodity
col lateral f inanced credits and the pert inent bank counterpart ies
CDS spreads for Chinese banks have spiked in recent weeks
Chinese October PMI came in at a 50.4 print (anal ysis in fol lowing sl ide)
A new tax to hel p fund social safety nets is l ikely going to lead to expatriate
labor costs r is ing
A bipart isan bi l l in the US Senate may act to mit igate the effects of Chinese
trade pol icy, which would be damaging to global t rade as it would set of f
further protect ionism
Inf lat ion has eased to a mid- 5 handle, but growth has been hit sharply as a
result The easing of inf lat ion could set the stage for some easing, but I suspect this
would be the last attempt as:
In this event, inflation would rise right back, perhaps to new highs
The current growth slowdown is global and export growth would not off set the rise in
inflation
Chinas housing and overall fixed asset bubbles may be permanently popped
CHINA
http://ftalphaville.ft.com/blog/2011/03/31/530726/why-the-chinese-copper-financing-scheme-is-a-big-deal/http://ftalphaville.ft.com/blog/2011/03/31/530726/why-the-chinese-copper-financing-scheme-is-a-big-deal/http://www.economist.com/node/21530141http://www.economist.com/node/21530141http://www.economist.com/node/21530141http://www.economist.com/node/21530141http://ftalphaville.ft.com/blog/2011/03/31/530726/why-the-chinese-copper-financing-scheme-is-a-big-deal/http://ftalphaville.ft.com/blog/2011/03/31/530726/why-the-chinese-copper-financing-scheme-is-a-big-deal/8/3/2019 Technical & Macro Update - November 2011
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October headline PMI print of 50.4 vs 51.8 consensus vs 51.2
prior
New Orders decreased to 50.5 from 51.3 prior
Inventory increased to 50.3 from 49.9 prior
Input Price decreased to 46.2 from 56.6 prior
New Export Orders decreased to 48.6 from 50.9 prior
Lowest PMI since early 2009
The seasonality factor in Septembers strong PMI observed by
Also Sprach Analyst seems to have been proven true with
Octobers weak report
The global growth slowdown is negatively impacting Chinese
exports demand
Chinas PMI has not been below 50 since February 2009
CHINA OCTOBER MANUFACTURING PMI
http://www.alsosprachanalyst.com/economy/china-september-pmi-improves-for-second-month.htmlhttp://www.alsosprachanalyst.com/economy/china-september-pmi-improves-for-second-month.html8/3/2019 Technical & Macro Update - November 2011
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Real estate investment is driving 12% of Chinese GDP, up from 5% a
decade ago and 9% in 2008
Whether or not inf lation expectations become unanchored, PBoC wil l have
to return to tightening by H1 2012 to get real deposit rates back above 0,
according to Nouriel Roubini
Weakening US & European consumer de mand (already occurring) could
lead to underwhelming export f igures going forward
The Eurozone is Chinas biggest trade partner and peripher y austerity
measures bode very poorly for external demand for Chinese goods
Allowing for sharper RMB appreciation may turn out to be the only way to
successful ly f ight inf lation, but this in turn wi l l further hurt Chinese net
exports, and with investment f inal ly being curbed, government expenditure
would have to increase signif icantly or Chinese GDP would be at r isk of
slowing sharply
A new Bank of Japan report compares the current Chinese rebalancing to
Japans in the 1970s with some alarming conclusions:
The main factor behind the rebalancing was decline on the return of capital
Liberalization of bank lending rates occurred in Japan during the 70s and likely
to occur in China in the 2010s
CHINA
http://www.boj.or.jp/en/research/wps_rev/wps_2011/data/wp11e05.pdfhttp://www.boj.or.jp/en/research/wps_rev/wps_2011/data/wp11e05.pdf8/3/2019 Technical & Macro Update - November 2011
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Hong Kong is teeteringon the edge ofrecession (chart toright)
South Korea andVietnam are seeingsharp slowdowns inexport demand
India is getting hit hardby the European
slowdown India & Brazil have
inverted yield curves
EMERGING MARKETS
Source: Also Sprach Analyst
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INDIAN INFLATION STILL RISING
Source: India Ministry of Labour
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The Economic Surprise Index
crossed below the zero l ine in
late April , just as the market
was topping
Since, it has recovered back to
the zero line and implyingbullish momentum
However, the Eurozone-
specific index is in sharply
negative territory
The US-spe cific index hasclimbed dramatically to
almost 50, but whether this
consumption-driven boost can
be sustained remain s to be
seen
CITIGROUP ECONOMIC SURPRISE INDEX
Source: Bloomberg
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US fins have come under a lotof stress lately
Balance sheet exposure toEuropean govys is a primaryculprit
Declining net interest income
has also been a beari sh driver,especially now that the Fed ispancaking the yield curve(which should lead to evenlower NII)
TLGP rolls could weigh heavilyon bank capital ratios and
expenses as interest expenserises
Large spike in maturities Q42011-Q2 2012 (see char t tothe right)
US BANKS
Source: Tim Backshall/Capital Context
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California revenue came in $1.5 bill ion (6.5%) lower than
expected year to date
This may trigger automatic spending cuts
If this becomes a more pervasive phenomenon, especially if
the US recovery loses its legs, public sec tor employment maysee sharp headwinds
Increasing social inequality and unrest is also a likely
consequence of any austerity on the state & local level
States dont have monopolies over currency issuance, like the
federal government, as they are currency users
STATE & LOCAL BUDGETS
http://www.bloomberg.com/news/2011-11-10/california-revenue-collection-1-5-billion-below-budget-controller-says.htmlhttp://www.bloomberg.com/news/2011-11-10/california-revenue-collection-1-5-billion-below-budget-controller-says.html8/3/2019 Technical & Macro Update - November 2011
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Fiscal consolidation continues to be the na me of the game in Western
economies, exacerbating the underlying economic weaknesses in the
non-government sectors
European leaders are seeing sharp decl ines in voter approval, as is
Obama in the US
Jeffrey Gundlach summarizes the 2012 election perfectly, saying thereare two parties:
Taxes are too damn low party
Spending is too damn high party
Global geopolit ics is becoming increasingly important
Bin Ladens death saw a resulting spike in terrorism in the Af-Pak region
Al-Awlakis death is likely to carry even more revenge risk, especially in
Western nations and of homegrown varieties
The US war of words with Pakistan is escalating and could turn ugly
if/when the US shuts off remaining funding and prohibits remittances
(both of which are tactics being deliberated in a Congressional bill)
Israel and Iran are heating up their rhetoric against one another
POLITICAL ENVIRONMENT
http://www.thereformedbroker.com/2011/09/29/notes-from-the-doubleline-lunch-with-jeffrey-gundlach/http://www.thereformedbroker.com/2011/09/29/notes-from-the-doubleline-lunch-with-jeffrey-gundlach/8/3/2019 Technical & Macro Update - November 2011
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The Arab Spring has resulted in power vacuums that entities
like Al-Qaeda and the Muslim Brotherhood are trying to take
advantage of
Europe is seeing a variety of administration shifts:
Greece & Italy have seen their PMs resign Germanys Merkel is losing voter support and has lost her coalition
Frances Sarkozy is polling very poorly and set to lose reelection bid
The USs Obama continues to suf fer a high disapproval rating
In the current backdrop of a global growth slowdown and
acute crisis in Europe, regionally and globally coordinatedpolicy is paramount
This spells a lot of uncertainty and risk going forward,
especially if exogenous crises manifest
2012: YEAR OF THE POWER VACUUM?
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The supercommittee is tasked with deciding on $1.2 trillion indeficit reduction by the November 23 deadline
If no agreement is reached, automatic spending cuts kick in inJanuary 2013
S&P has affirmed that a stalemate will not likely lead to another
credit rating downgrade If no agreement is reached, Congressional disapproval and voter
polarization will only increase
The automatic spending cuts are designed to come half fromdefense and half from public programs
Government austerity remains the biggest threat to US growth,especially at this time
If the US economy starts faltering in Q4 2011 into early 2012,the prospects of austerity in the pipel ine in 2013 will be a bigdamper on investor expectations
DEFICIT SUPERCOMMITTEE
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Occupy Wall Street appears to have three main focal issues: Corporate influence on democracy
Growing wealth disparities
Lack of legal repercussions in fallout of financial crisis
The main fallout from OWS is that the status quo is increasinglyseeing disapproval and systemic changes are being demanded
This negatively impacts both President Obamas reelectionhopes, as well as some of the more traditional GOP candidates
However, it does serve to boost Democratic Congressionalapproval (especially relative to GOP), as poll s indicate
It serves to boost more radical candidates, as well as those whowalk the line between the GOP & third party
Occupy Wall Street has gone global
97% of Americas 99% a are part of the global 1% of topincome earners
OCCUPY WALL STREET
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The annual US income share of the
top 1% of Americans is coming off
of a 2007 high around 24%
This 24% level was last reached in
1928, r ight before the 1929 crash
and ensuing Great Depression
Financial izat ion of the economytends to increase income
disparit ies
The share of the top 1% bottomed
in 1971, the year Nixon took the US
off of the gold standard
Although a return to the gold
standard may not be the best
course of act ion, the lack of checks
and balances to the Federal
Reserves l iquidity extensions could
have played a major role in the
capital al locat ion shif ts that led to
such high income disparit ies
INCOME DISPARITY
Source: Wikipedia
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REQUIRED WORK HOURS TO BUY S&P
Source: The Chart Store
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I am a 21 year old recent univers ity graduate who is always
interested in receiving comments, insight, analysis, and
commentary from market participants, observers, and
reporters
As such, feel free to contact me via: Email: naufal.sanaullah@gmail.com
Twitter: @naufalsanaullah
CONTACT ME
mailto:naufal.sanaullah@gmail.comhttp://twitter.com/naufalsanaullahhttp://twitter.com/naufalsanaullahmailto:naufal.sanaullah@gmail.com