Europe May Finally Be In A Position To Surprise Economists To The Upside

NOTE: This post was originally published on Friday, May 24.

This may be an unpopular suggestion, but those with a contrarian view of the world will surely appreciate the logic here. The chart below from Goldman shows the consensus economic forecast for 2013 GDP growth of the large Eurozone nations. Again, this is not the actual GDP, but a forecast over time.

It shows that the "herd" of forecasters following each other in the realization of how dire the recession has been across the area. But keep in mind that these are some of the same forecasters that 18 months ago were calling for a "shallow" downturn in these nations (see discussion). Many weren't even talking about a possible recession. And now they are continually downgrading their predictions - after the fact?

Sober Look

Today we got the latest PMI numbers from the Eurozone. France is clearly struggling and Germany's growth has been slower than many had hoped - due primarily to global economic weakness. But take a look at the rest of the Eurozone. While still in contraction mode, it shows an improving trend.

Sober Look

Spain printed a trade surplus last month (surprising some commentators), which may be a signal to rethink how valid some of these forecasts really are. Nobody is suggesting we will see Spain or Portugal all of a sudden begin to grow at 5%. But given the extremely pessimistic sentiment of many economists (a contrarian indicator), it is highly possible we are at or near the bottom of the cycle. People should not be surprised if we start seeing some positive growth indicators - especially in the periphery nations - in the next few quarters.

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Rail Traffic Confirms That The Economy Remains Sluggish

The good news from this week’s rail traffic report is that we’re not sliding into consistently negative readings that might lead us to a far less constructive position on the economy. The bad news is that the 12 week moving average has slid down to 2.4% and is consistent with an economy that remains sluggish.

Here are the details on this week’s data from AAR:

“The Association of American Railroads (AAR) reported an increase in traffic for the week ending May 18, 2013, with total U.S. weekly carloads of 285,679 carloads, up 1.9 percent compared with the same week last year. Intermodal volume for the week totaled 250,156 units, up 3.5 percent compared with the same week last year. Total U.S. traffic for the week was 535,835 carloads and intermodal units, up 2.6 percent compared with the same week last year.

Five of the 10 carload commodity groups posted increases compared with the same week in 2012, led by petroleum and petroleum products, up 38 percent. Commodities showing a decrease compared with the same week last year included grain, down 28.3 percent, and metallic ores and metals, down 7.1 percent.

For the first 20 weeks of 2013, U.S. railroads reported cumulative volume of 5,530,177 carloads, down 1.7 percent from the same point last year, and 4,791,035 intermodal units, up 4.3 percent from last year. Total U.S. traffic for the first 20 weeks of 2013 was 10,321,212 carloads and intermodal units, up 1 percent from last year.”

Chart via Orcam Investment Research:

Pragmatic Capitalism

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The Economy May Be Able To Escape The Dreaded Economic 'Soft Patch'

Sam Ro | May 24, 2013, 9:17 AM | 629 | The month of May started with a wave of economic data that suggested the U.S. was heading for an economic slow down, or "soft patch," in Q2.

However, this week was met with a string of better-than-expected data.

Just this morning, we learned that durable goods orders jumped 3.3% in May, crushing expectations for 1.5%.

Non-defense capital goods orders excluding aircraft, which is a key measure of business investment, jumped by 1.2%, which was much stronger than the expectation for a modest 0.5% gain.

Gennadiy Goldberg of TD Securities is encouraged by this.

"Stronger core durable goods orders suggest that the order pipeline that will drive future investment and inventory growth continues to improve, helping to fuel the transition out of the current soft patch," wrote Goldberg.

"The details of the report offer room for encouragement, with all major sub-components showing monthly gains following the March pullback. Machinery orders rose 1.9% in April, bucking a 2 month declining trend as orders for computers and electronics also rose at a very strong 3.6% monthly rate. The inventory/shipments ratio rose to 1.66 from 1.65 in March, though the rise came as a function of weaker shipments."

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El-Erian's 6 Rules On Running Your Portfolio

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Mohamed El-Erian's Six Rules For Running Your Portfolio (The Reformed Broker)

PIMCO'S CEO Mohamed El-Erian spoke at the PIMCO 2013 NYC Investment Summit New York. El-Erian gave his rules on how investors should run their portfolio. Josh Brown sums it up.

1. "Protect yourself against the haircuts that come from not-strong balance sheets, weak income statements and bad management."

2. "Don't give up all of your liquidity just to be 'in.'"

3. Manage your risks. Just diversifying is not good enough.

4. " Be reasonable about your return expectations."

5. "Beware backward-looking labels." There was a time when peripheral European countries were considered to have interest rate risk, not credit risk because they were developed countries, while emerging countries like Brazil and China were seen to have credit risk. This no longer holds true.

6. "Be Resilient and Agile. The world is changing."

Why Brian Belski Is Sticking With S&P 500 1,575 (BMO Capital Markets)

The recent stock market rally has seen analysts hiking up their S&P 500 targets. Brian Belski at BMO Capital Markets however is sticking with 1,575. Here's why: "Over the past 12 months, we have gone from defending our bullish stance with price targets at one point well above both market levels and consensus expectations to reconciling near-term caution. To be frank, we believe forecasts should be defined by analysis and process. And yes, we enjoy rising stock prices. However, we believe too many investors are currently expecting higher stock prices tomorrow just because they were higher today. As such, our model is telling us that stocks are well ahead of both fundamentals and macros. Therefore, the inputs of our model need to markedly improve for us to change our conclusions."

Gold Has Never Stayed Below The 'Stairway To Hell' For Very Long (Citi)

Despite the blow to gold prices this year, Citi's Tom Fitzpatrick writes that on a "medium-to-long-term basis" he is very bullish on the precious metal. And this he says is because of fundamentals. 

"As can be seen from the chart [below], Gold has never stayed below that “stairway to hell” for very long," he wrote referring to the statutory debt limit.  "Given that the debt limit number is going to continue higher, a re-emergence of Gold strength looks inevitable.  A lot of “considered opinion” suggests that by the end of the present electoral term (end of 2016 when new presidential elections take place), that the US debt limit will be at around $22 trillion USD."

How To Help Clients Ride Out Market Volatility (The Wall Street Journal)

During times of tremendous market volatility many investors panic and sell low. Dan Crimmins of Crimmins Wealth Management told the Wall Street Journal that he had a two-part plan to help clients learn to understand and accept risk. First, he went over their investment policy statements to help the clients "understand how their investments will help them meet their goals," according to the WSJ. Second, he took them through a "fire drill". To do this he showed them how long typical bear markets run, how much the market falls. "I wanted to make them understand that this is very normal," he told the WSJ.

AIG Owned Advisor Group Announces Lay-Offs (Investment News)

Broker-dealer Advisor Group announced lay offs this week that affected under 5% of its workforce. Advisor Group is operated by AIG and has four broker-dealers, namely, Arizona-based SagePoint Financial, New York-based Royal Alliance, Georgia-based FSC Securities Corporation, and Minnesota-based Woodbury Financial Services. Most of the layoffs are reported to have come from Woodbury Financial Services.

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ROBERT SHILLER: Neuroeconomics Will Reshape The Finance System

Economist Robert Shiller has argued in favor of the "genuine beauty" in finance.

He believes that financial instruments can contribute to a better society because humans have an innate tendency towards generosity.

In an interview published by Credit Suisse he says that that finance recognizes "the egotistical side of human nature. This presents potential for conflict."

But these are things that he argues neuroeconomics will help shape in coming decade. Here is an excerpt from the interview:

You want to use financial instruments to contribute to a "good society," a better world. That sounds, diplomatically speaking, rather bold.

Not at all. During the last two years, many innovations in the sector have served to support the "good society." Social impact bonds in the UK, for example. Let's take the Peterborough Prison in northern London, which has extremely high rate of recidivism. The non-profit organization Social Finance reached an agreement with the government for a payment of six million British pounds if recidivism declines to a clearly defined level within a certain period of time. Social Finance then issued a bond. Using the capital raised, measures were taken with the goal of reducing recidivism. If the goal is met, the six million will be distributed to investors. That is a private solution to a public problem. There are numerous other examples.

Traditional theories of economics assume a rational, utility-maximizing person. One who is not necessarily interested in "good society.

Decades ago, the economist Kenneth E. Boulding showed how far removed we are from homo oeconomicus. People are much more dependent upon each other than the pure utility function would indicate. Generosity also seems to be an inborn trait, as Ernst Fehr at the University of Zurich has shown. People are generous and kind to people who they perceive as such. We want a society that reflects the golden rule: "Do unto others as you would have them do unto you." Of course, people aren't always good, but when generosity is fostered, they become better. Financial instruments can help with this, too.

Your wife is a psychotherapist. How do your ideologies differ?

She always thinks I need therapy (laughs). Seriously, my original understanding of economics has significantly changed and now includes more psychological components. We have been married for 36 years, we spend a great deal of time together, and we tend to read the same books. Right now, we are very interested in neuroscience, in particular in the subdiscipline of neuroeconomics. These approaches will shape our ideas in the coming decades.

...For example?

Ernst Fehr*, whom I just mentioned, scanned the brains of people playing an aggressive game. He found areas of the brain that are active during the feeling of schadenfreude. Many things are preprogrammed in our brains; we function much more automatically than we would like to think.

Back in 2011, Robert Shiller wrote of a coming Neuroeconomic Revolution. Neuroeconomists, he said, tried to develop economic theory by linking them to specific structures in the brain.

It appears he's increasingly convinced that this will be a very important area of study.

*Ernst Fehr is Professor of Microeconomics and Experimental Economics at the University of Zürich. He is known for his contribution to neuroeconomics and behavioral finance.

Click here to read the entire interview >

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The Reason Why Solar Costs Are Falling Is The Same Reason Why They're About To Go Back Up

Rob Wile | May 22, 2013, 12:50 PM | 992 |

We recently told you why we're long-term bullish on solar: there's a Moore's Law-esque effect in installed capacity, and there are huge investment opportunities. 

But there's also been a lot of short-term euphoria, and this chart from PowerClerk tells part of the reason why: the cost of panels themselves have fallen precipitously in the past few years.

Unfortunately, it's not going to last.

For years now, a feedback loop has been running in the solar market: demand has spiked in Europe, thanks to huge incentives for residents to switch.

That, in turn, created an enormous glut of solar panel manufacturing in the Middle Kingdom. 

MJ Shiao of GTM Research told us that trend is going to slow — and possibly cause prices to go back up — as manufacturers consolidate: 

We're starting to see uncompetitive manufacturers bow out, and also more importantly see the Chinese government take an active role in consolidating the Chinese manufacturing market — calling on manufacturers to stop increasing their productive capacity to alleviate pricing pains.

So in the near term there's a lot of uncertainty, and in times of uncertainty you start to see pricing stabilize. We actually have seen pricing for panels go up.

But longer term, prices will still come down, he says, thanks to ever-advancing technology that will allow panels to keep more heat.

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