Market Talk

Now, as opposed to Yardeni’s sunny view, here’s another take, from the University of Maryland’s Peter Morici, who’s in what seems to be a very small camp of people looking at everything going on in the world, and actually finding it disturbing.

Crises in the Middle East and Japan threaten to thrust the U.S. and global economies into a second recession.

Since the economic recovery began in July 2009, GDP growth has averaged only 2.8 percent, a pace insufficient to bring unemployment down to acceptable levels. And that rate of growth leaves the economy too vulnerable to the slightest hiccup and a deceleration into recession.

Prior to the turmoil in the Middle East, economists were forecasting 3.5 percent growth for 2011, but the surge in oil prices to $110 a barrel and gasoline to $3.62 a gallon will likely shave half a point—perhaps more—from that rosy outlook.

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I found an interesting contrast between this outlook, from Ed Yardeni, president of Yardeni Research, and this one from Peter Morici. What I find interesting is the divergence; two guys who from my reading of them are both in the conservative camp, but with wildly different takes on what’s going on.

I don’t know that I have some brilliant insight into what all this means. I just found it very interesting, and seeing as this is Market Talk, well, here’s some talk.

From Yardeni:

What’s driving the global economy? For the past two years, it has been the boom in global manufacturing, led by demand for manufactured goods in emerging economies. The OECD index of global industrial production rose 0.9% m/m and 6.9% y/y during December to a new record high. It is up 15.3% since the most recent cyclical trough during January 2009. It had plunged 12.2% during the most recent downturn.

It should continue to grow this year. There are certainly challenges confronting global manufacturing. High food and fuel prices may depress the purchasing power of consumers around the world. Concerns about rising inflation are pushing central banks to tighten their monetary policies, particularly in emerging economies. Serious disruptions to global supply lines are already an issue for the auto and technology industries. It is difficult to assess how long these problems will persist.

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This just in: gas costs $3.50 a gallon. If it doesn’t where you live, just wait. It soon will.

The AAA’s daily fuel gauge shows the national average for regular is $3.50. I believe it was $3.47 on Friday. There’s nothing magical about the $3.50 level, except for its psychological effects.

The big problem is that with $3.50 here, the $4 level comes within hailing distance, and it was when gas prices hit $4 in the summer of 2008 that the feta really hit the fan.

Listen, the real fear here isn’t an end-of-the-world kind of thing. Whatever happens in the Middle East, at some point the world will return to something approaching normal, like it always does (which is not exactly the same as normal; when you think about it, we live in a pretty dysfunctional world.) The real fear, for us here in the U.S. at least, Europe, too, for that matter, is that the uprising drives oil prices high enough to derail the recovery.

Crude prices are up more than $2 this morning, pushing Nymex crude futures to near $107/barrel. Brent, the European benchmark that is more directly affected by the events in Libya, is pushing $118/barrel (and lots of people note that a big chunk of U.S. gas prices, being imported, are more sensitive to Brent prices than Nymex.) Given that it takes a few weeks for crude prices to filter through to y0ur local service station, you can expect that prices will keep rising.

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I read another comment from a Wall Street type this morning crowing about the “sustainable” recovery in the U.S. The strategist is quite pleased with earnings, noting they’re exceeding “expectations,” but also pleased that sales are likewise exceeding “expectations.” This is a sign that the recovery is building some kind of momentum.

You don’t say?

Let’s see President Obama tell the nation tomorrow night that it can’t afford the tax giveaways the government, in fact, just gave away, and that he’s going to reverse them. Let’s see the FOMC on Wednesday come out and say it’s going to raise rates and scuttle QE2. Then we’ll see how “sustainable” the “recovery” is.

Any talk of the economy’s fundamental strength is useless when the federal government not only leaves the Bush tax cuts in place, afraid to upset the fragile state of the consumer, but also goes ahead and cuts payroll taxes. When the Federal Reserve has short-term interest rates pinned to the floor with the spilled beer and peanut shells, and is out there pumping $80 billion a month into the marketplace, which acts both as a continuing back-door bailout for the banks and a ready stream of liquidity to feed speculators with easy money.

Ask any state treasurer how sustainable the recovery is.

Ask anybody who saw their wages slashed if the “recovery” is “sustainable.” Ask anybody who’s lost their job if the recovery is sustainable. Ask any of the more than, well more than, one million people who have been out of work for more than two years if the “recovery” is “sustainable.”

Hell, ask them if there’s even been a recovery.

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Today’s quote of the day — well, it’s more than a quote, really, it’s like a passage, but nobody says the passage of the day, sounds like a weird Henry James novel or something, The Passage of the Day. So, today’s quote of the day comes from one of our favorite market observers, the stubbornly realistic David Rosenberg of Gluskin Sheff, who’s talking about the illusion of recovery, as opposed to the real thing.

Policymakers have done an admirable job of creating the illusion of recovery, and it has worked because it would seem based on asset pricing that the vast majority of investors have bought into this illusion hook, line and sinker. Doubters are either cast aside as traitors, idiots or stubborn perma-bears who don’t get it…the “it” being that the government will simply not allow another bear market or downdraft in economic growth from taking hold again!

The business cycle has miraculously been repealed, and the shorts have been scared off for good. But you can’t tinker with human nature for very long. What people should put in their back pocket is how surreal this so-called recovery really is. With yesterday’s data, housing starts are now down 9.3% since the recession apparently was stopped in its tracks in June 2009. Go back to every other post-WWII economic recovery, and never before — 18 months into it —were housing starts still down from the point that the recession ended…until now, that is.

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It doesn’t look like the summer of 2008 will repeat itself in the oil market. Nonetheless, it’s tough to ignore oil’s big run over the last few months and how it’s now trading above $90 a barrel.

Surging crude comes as many other commodities have also soared to multi-year highs. But with oil above $90, market technicians are turning even more bullish on its next move. My Technically Speaking column today highlights what chart watchers believe is next for oil:

Market technicians stress this is a significant level because it represents a 50% retracement from oil’s 2008 peak to trough, when it hit an all-time high that summer before bottoming out later that year.

Crude trading above $90 also marks a psychological victory. Investors tend to get giddy when an asset price hits a large round number. Breaking above $90 and holding that level is seen as an important development for bullish oil investors.

“For better or worse, people tend to focus on these psychological numbers,” said Richard Ross, global technical strategist at Auerbach Grayson. “Taking out an important retracement level that coincides with big psychological resistance is quite bullish and has generated a buy signal for crude.”…

Oil demand has been rising slowly during the global economic recovery. Inventories of oil and fuel stockpiles in the U.S., the world’s largest oil consumer, have steadily declined from 27-year highs in September. Demand in Latin America and Asia continues to grow as well.

Rising demand combined with a slower increase in oil prices, as compared with the 2007-08 run-up, have made analysts optimistic that oil prices can keep increasing.

“Momentum is very strong in commodities in general and we don’t see that trend ending anytime soon,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “Crude breaking out for the time being is a definite positive for the overall stock market. There will come a point when higher crude chokes off the economy. But we’re definitely not there yet.”

Detrick’s quote is very telling. There will come a point when rising oil prices will really crimp the consumer and become a deterrent for the economic recovery. That’s what we saw in 2008 when oil surged above $145 a barrel.

The tricky thing is figuring out what level rising oil switches from a positive development to a detriment on the economy.

For now, bullish sentiment prevails regarding rising oil.

US stocks last week suffered their worst weekly performance since Aug 13. But the poor showing doesn’t necessarily mean the rally’s over. My “Technically Speaking” column (subscription required) today looks at how stocks have historically performed following double-digit percentage pullbacks:

If history is any indication, last week’s declines shouldn’t prompt investors to kiss this rally goodbye.

The Standard & Poor’s 500-stock index shed 2.2% last week, ending a string of five consecutive weekly gains. Yet the weekly drop came after a four-month rally for the broad index in which it completely retraced its 16% price correction from late April to early July.

That may seem like a quick run-up, especially since the bulk of those gains occurred in September and October. But historically it’s right on par with other recoveries following double-digit percentage pullbacks.

Sam Stovall, chief investment strategist at S&P, said the S&P 500 has experienced 18 corrections — considered declines of 10% to 20% — since 1946. On average, those corrections required only four months before the index was able to return to break even, meaning the current rally is on target with previous recovery rallies.

Once those corrections returned to break-even levels, the index went on to average an additional 10% gain in the following four months before encountering at least a 5% pullback, according to Stovall.

“Obviously, some recoveries made it no further than breakeven, such as in 1955 and 1997,” he wrote in a note to clients. “Still others just kept going, and going, and going, such as in 1954, 1961, 1976 and 2003, when all lasted more than 250 additional calendar days.”

The S&P 500 topped at 1227 on Nov. 5 before retreating last week. But the declines shouldn’t shock anyone, especially considering the precipitous rally stocks have endured throughout the last few months.

“You could say that the market [was] just catching its breath after eclipsing its April high, like a marathon runner who slumps in exhaustion after crossing the finish line,” Stovall said. “Yet if history is any guide, for it’s never gospel, this market advance has further to run before succumbing to another meaningful decline.”…

Check the rest of the column here.

US stocks surge, as does just about every “risk” asset, after the Bank of Japan tries again to arrest the yen’s rising, the most note-worth move among several from different central banks, including those in Australia and Brazil as well as the looming bond-buying program from the Fed, that have “currency war” written all over them.

DJIA jumps 193 (1.8%) to 10945, its highest close since May 3. S&P 500 rises 24 (2.1%) to 1161, Nasdaq Comp surges 55 (2.4%) to 2400.

It’s not just stocks: gold, crude, the euro all rise sharply, as investors are betting on a widespread bout of competitive devaluations among central banks. That’s good for nominal asset prices right now, but seems to us it’s bad for everybody in the long run.

It isn’t clear why the Fed seems so intent upon launching into all this dollar bashing, unless they think the economy is weaker than they’re letting on. If the recession’s over, and the economy’s recovering, why do something so dangerous destabilizing?

The Chicago Fed’s Charles Evans today said the central bank should do “much more” for the economy. Why’s that? “In the last several months I’ve stared at our unemployment forecast and come to the conclusion that it’s just not coming down nearly as quickly as it should,” he said. “This is a far grimmer forecast than we ought to have.”

This Friday’s jobs report will be an interesting one. While the sell siders and White House tout the private-sector jobs created, the fact of the matter is that over the past three months, the economy on the whole has shed jobs. Now, the jobs market doesn’t have to disgorge half a million workers a month for it to be bad. The economy needs to create at least 100,000-150,000 some-odd jobs just to keep up with population growth. To get the unemployment rate down, it’ll have to be closer to if not more than 200,000. So losing 54,000 may not sound so bad, but it is, because it just means the the employment picture is slipping for another month.

If we’re not creating jobs, it also stands to reason that wages aren’t growing, since there’s no upward pressure on employers to keep employees. If you ask me, the Fed’s afraid that this situation will slowly drag the economy back into recession. Coming as it would with an economy that hasn’t recovered from the first recession, the worst in our lifetimes, and coming as it would with a nasty bout of deflation to boot, it appears the Fed has plenty to worry about.

- Facebook and Skype are poised to announce a major partnership that integrates SMS, voice chat and Facebook Connect, Kara Swisher reports at All Things D, . Move is a “big win” for Skype and makes sense for Facebook, especially since it helps its international push and overall goal “to mesh communications and community more tightly together,” Swisher says.

- Some unintended consequences come from the Fed making it clear it won’t abandon its ZIRP policy anytime soon, Yves Smith writes at naked capitalism. “I’d feel a lot better if we’d forced more clean-up of bank balance sheets, in particular write-down and restructuring of loans, so that we would be on a path to getting the banks off the official dole.”

- Pundits seem fixated on picking out the next Black Swan event, and Josh Brown at The Reformed Broker, frankly, sounds tired of it. “Sometimes, it’s just an ordinary Black Duck,” Brown says. “A negative event or possibility that is processed and dealt with, that doesn’t necessarily lead to contagion, panic and meltdown.” Don’t dismiss warning signs, he says, but “the more we learn not to get hysterical over every Black Duck, the better the chances are that when the real things comes along, we will be cogent enough in our reaction to them.”

- The unofficial start to earnings season is around the corner, but Forbes blogger Sy Harding notes the 3Q earnings “warning” period — already underway — isn’t providing positive clues. Harding notes 112 of the 500 companies in S&P 500 have issued pre-announces — 34 have said their results will beat analysts’ estimates, while 78 have said they won’t. “That 2.3 to 1 ratio is running considerably more negative than the second quarter earnings warning period,” Harding says. If the trend carries over, it could be one disappointing reporting season.

- Non-voting Fed member Charles Plosser said additional asset buying won’t speed up a recovery in the labor market and, conversely, could actually damage the Fed’s credibility. “If one thing is for certain, the debate in the Fed leading into the November FOMC meeting will be heated over the decision whether to continue to push the envelope with monetary policy,” says Peter Boockvar, a Miller Tabak equity strategist. “While Plosser’s comments are welcome from my point of view, the voting members have a much more dovish slant.”

- There’s a reason this “recovery” doesn’t exactly feel like a true recovery; it’s merely a “statistical illusion,” Mish says. He notes government spending extracted from GDP doesn’t paint a recovery picture. “All this talk of a ‘recovery’ is nonsensical. Careful analysis shows the alleged recovery is nothing more than an illusion caused by unsustainable deficit spending.”

- With 3Q earnings season kicking off next week, Bespoke Investment Group notes the financial sector is expected to see biggest quarterly earnings growth. Financials earnings estimated to rise 48% from last year, while industrials, tech, energy and materials also are expected to outpace the broader S&P 500.

- “Despite what we hear — the recession is over and the upside is ‘easy’ — let me tell you something you already know: it’s not easy and it ain’t over,” Todd Harrison writes at Minyanville. “I consider myself an optimistic realist, meaning I hope for the best but call it as I see it. I foresee another side of the financial storm before the epitaph is written on this Great Recession.”

- Goldman Sachs (GS) CEO Lloyd Blankfein issued a veiled warning today that GS could sidle out of Europe if regulatory crackdowns get too harsh, FT reports.

- Google (GOOG) must do whatever it takes to buy Twitter, Henry Blodget writes, in his long-standing advocacy for such a deal. “Whatever it costs Google to buy Twitter today is worth it.”

Wow, that one stings the nostrils

Friday’s September ISM manufacturing report should be intriguing.

Similar to last month, the September regional manufacturing reports from the various Fed districts, frankly, have stunk. There’s been spotty improvements, at best, in some readings, but weak reports overall.

If you recall, those lame regional gauges led to tempered expectations for August ISM manufacturing, which then inexplicably surprised on the upside. That eased double-dip concerns and helped spark the rally that’s taken stocks back to their highest levels since May.

The latest dud manufacturing report comes from the Richmond Fed, with the headline September reading actually slumping into contraction territory. This one’s awful, citizens, with everything tumbling (except future expectations) sharply. The headline -2 reading is the lowest since January, and second-lowest since April 2009. Lowlights include:

Shipments: -4 from 11 in August

Volume of orders: goose egg from 10

Capacity utilization: goose egg from 14

Average workweek: another goose egg from 14 (was 16 in July)

Wages: 8 from 13

All ugly, but Richmond Fed puts on a brave face on this stinker, with the following headline:

“Manufacturing Activity Pulled Back in September, But Expectations Upbeat”

Nice take. Feel better now?

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