Over the past month, I’ve enjoyed a verbal sparring with my peers over my bullish stance. I began to consider the bull case at the beginning of the month after reviewing employment related data, and finding myself surprised at the robustness of the data set.
My macro thesis is simple: the first step in returning to positive employment is having your existing workers work more. This started in the latter half of 2009, with manufacturing making a heroic V-shaped recovery after being tossed over a waterfall. The aggregate weekly hours index bottomed & subsequently rebounded strongly in late 2009, and average weekly hours of transportation & warehousing finally recovered (rather strongly) in January of 2010. The latter suggests consumer demand returning.
Confirming these charts: Industrial production sharply reversed upwards in mid-2009 after strong decline since late 2007.
The previous charts mostly represent a rebuilding of inventories. To go higher, we’re going to need to see companies coming out of their cash-rich shells, and consumers back to work. The key here is consumer credit, and there are signs that it is “hooking”. In the graph below, y/y consumer credit has followed through every time it has hooked since the 40s:
This will depend on a number of factors:
- The corporate cash hoard reinvesting into people & machinery
- Improving economic data to close the lending gap from the financial institution side
- Jobs market stabilising to close the lending gap from the demand side
My take on the following data is that is exactly what is happening:
Finally, payrolls have very distinctly reversed back upward. Looking at the graph, that is a signal which has very few failures since the series started in 1940.
This is evidence that the engine has finally started to sputter to life. There is definitely enough fuel on the balance sheets of corporations & banks to start the cycle. The only question I have: were prices able to go low enough & savings high enough to spin up a new cycle, or will we be soon bumping into the same economic limits that took us down the first time? In some ways, central bank & government policy has been aimed at continuation from the previous cycle, rather than embracing economic evolution.
Future equity performance is all about earnings & expectations. The current Q2 earnings season has been a heroic odyssey of beats & sandbagging: corporations are setting themselves up for success for Q3 earnings season with overly conservative guidance.
Backwards looking valuations are all over the map:
Forward earnings still look cheap:
Of course, forward earnings are based on analyst estimates, and those analysts could be overly confident – something they’ve been guilty in the past. However, if the macro thesis plays out, these estimates will get smoked.
Finally, a few other graphs to whet your appetite for bear meat….