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New "Scare of the Week" Masks Good Economic News
By Louis Navellier
Despite the chaos in Europe, there is a strong economic recovery underway in Asia, India and Latin America, as well as in the U.S. and Canada. Additionally, the technology boom is showing no signs of abating. In fact, semiconductor demand remains strong and was revised significantly higher last week. However the "avalanche of good economic news" that I have been predicting over the last year is being regularly trumped by "scare of the week" media events: Greece, the Gulf, Israel, Korea and now Hungary.
Hungary Trumps Greece and the Gulf
Last week, the financial news media was finally talking less about Greece, due to mounting concerns over the Gulf oil leak. However, Hungary briefly took the "crisis of the week" spotlight away from the Gulf Coast last Friday, when Hungary's new government warned that their economy had been left in a "grave situation" by their predecessors, and that talk of a sovereign debt default was "not an exaggeration."
These remarks put added pressure on European banks with exposure to Hungary, weighing on European stocks and exacerbating a weak day on Wall Street, following Friday's jobs report (see below). The euro crashed through the $1.20 support level and the U.S. dollar rallied as an oasis for international investors.
The lack of confidence in the euro has become so bad that the Iranian central bank announced last week that it would sell 45 billion euros (about $55 billion) from its foreign exchange reserves to buy U.S. dollars and gold. This marks a stark reversal from Iranian President Ahmadinejad's order last September that the Iranian central bank shift more of Iran's hard-currency reserves out of U.S. dollars and into euros.
On Friday, I mentioned on Bloomberg television that the crisis in Hungary and Greece is really a banking crisis, since French and German banks have tremendous exposure in Greece, while Austrian and German banks have extensive exposure in Hungary. Due to these exposed loan positions, the European Central Bank (ECB) issued an alarming report last week that warned that banks could face a "second wave" of potential loan losses that could reach 195 billion euros (approximately $235 billion) within 18 months.
I suspect that Hungary will get out of its current mess because, unlike Greece, Hungary has its own currency (the forint), which (unlike the euro) can be devalued, boosting Hungary's exports and GDP. In addition, Hungary's budget deficit is lower (relative to GDP) than budget deficits in Britain and the U.S.
Domestically, the big story is that the Gulf Oil spill has spread from Louisiana wetlands to Alabama's Dauphin Island and is now starting to wash up on Florida's formerly-pristine beaches. On Wednesday, President Obama proposed rolling back $35.5 billion dollars in "tax breaks" for oil companies over the next decade, using this money for clean energy research and development. So it looks like all the oil-related companies will be punished for BP's perceived mistakes in the Gulf of Mexico.
The good news is that less is getting done in Washington D.C., which ironically helps the private sector expand. In other words, the oil spill is helping to shut down new legislative drives for federal government expansion. The U.S. economy is on the road to recovery, regardless of what happens inside the Beltway.
Global Growth Continues to Expand on All Continents
On Saturday, the G-20 finance ministers and central bankers said that the global economy is recovering faster than expected, but admitted that financial market turmoil poses a significant challenge. The G-20 said in a communiqué at the end of a two-day meeting in Busan, South Korea that "The global economy continues to recover faster than anticipated, although at an uneven pace across countries and regions."
I mentioned on Bloomberg television on Friday that the economic boom in China, Latin America and elsewhere is increasingly looking like a technology-led boom as consumers crave smart phones and 3G/4G technology, causing semiconductor demand to soar. A Thursday report by Gartner Inc., a leading technology research group, revised its 2010 forecast for worldwide chip sales to $290 billion, a 27% increase from 2009's total chip sales of $228 billion. Previously, Gartner projected a 2010 rise of 19.9%.
The U.S. is leading the economic recovery in North America, as the Fed recently predicted 3.2% to 3.7% GDP growth for this year. Due to its own improving economic growth, Canada raised key interest rates 0.25% to 0.5%, as the Bank of Canada said economic growth was now returning "as expected." Even the anemic euro-zone GDP expanded by a 0.6% annual pace in the first quarter, according to Eurostat.
Latin America is also in the midst of steady economic growth as a growing middle class keeps driving domestic consumption. China continues to lead the world in GDP growth, even though China's growth rate is moderating. The China Federation of Logistics and Purchasing managers index fell to 53.9 from 55.7 in April, but any reading above 50 is still indicative that Chinese factory activity is still expanding.
Stat of the Week: Same-store Sales Up 5% in May
The U.S. economy is in the midst of a natural business cycle recovery that is going to persist regardless of political rhetoric and external worries. Surprisingly strong same-store sales, auto sales and rising factory orders last week were all evidence that we are in a normal business cycle recovery. Additionally, a low inventory-to-sales ratio will likely continue to spur more economic growth in the upcoming months.
Outside of Friday's jobs report, the economic news was largely positive last week. Also on Friday, we learned that same-store sales were up 5% in May, while May vehicle sales rose 19%, surprising most analysts. It was the eighth-straight monthly increase and the longest winning streak since June 2000. In addition, Ford announced that it would raise its third quarter production 16% to 570,000 vehicles.
All of the major automakers posted sales increases, ranging from 7% (Toyota) to 35% (Subaru) in May:
Subaru 35%
Chrysler 33%
Kia 28%
Nissan 24%
Ford 22%
Honda 19%
GM 17%
Toyota 7%
Thanks to an improving manufacturing sector, the Commerce Department announced on Thursday that orders for factory goods rose 1.2% in April, led by a tripling in orders for civilian airplanes and parts. Also positive is that March factory orders were revised higher to a 1.8% increase, up from its previous estimate of 1.1%. Overall inventories fell 0.2% in April, with an inventory-to-sales ratio of 1.24, the lowest since July 2008. Today's low inventory levels will require more future manufacturing activity.
The Institute for Supply Management (ISM) announced that its purchasing managers' index was at 59.7 in May. (Any reading above 50 is a sign of expanding manufacturing activity.) This means that economic activity is improving and consumer spending will likely remain strong for the next several months.
On Friday, the Labor Department announced that May payrolls rose 431,000, due mostly to the fact that 390,000 census workers were added. This was the best month payroll report in over a decade, but the private sector added only 41,000 jobs in May, significantly worse than Wednesday's ADP report, which said that the private sector added 55,000 jobs in May. Additionally, the March and April payroll reports were revised lower by 22,000. The best news is that the unemployment rate declined from 9.9% to 9.7%.
There was also good news this week on the housing front as pending home sales rose 6% in April, and 22.4% more than a year ago. There is no doubt that the expiration of a popular tax credit distorted April's home sales, but the summer home shopping season may be boosted by today's low mortgage rates.
Looking forward, I expect that investors will start to focus on the upcoming second quarter earnings announcements and the overwhelmingly positive economic statistics. Specifically, I expect positive earnings revisions coming from the analyst community before earnings season resumes in mid-July.
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