Buy Equities?

The S&P 500 has had a pullback, and I wonder whether I should be buying. After all, I think that US equities are likely to go up for the foreseeable future. If the US economy is strong, that will be good for earnings; and if it is weak, then that will usher in QE3, and hence equities win either way. However, two things make me wary of this particular pullback. First, economic data have not been surprising to the upside as yet, as economic forecasters have finally caught up with the improving reality and then slightly overreached themselves. Second, my equity coincident index — composed of trailing EPS and credit spreads — has pulled back of late, as credit spreads have widened a little and trailing earnings have flatlined for a little longer than usual. I expect continued earnings growth, but I am cautious of jumping into a pullback that my coincident index indicates is justified by the fundamentals.

China Trade Balance

China’s trade balance has moved back into surplus after showing an enormous deficit last month. Various analysts have drawn various conclusions, but I am drawing only one: China’s data are even more unreliable than usual at present, and all one can do is continue to keep an eye on the situation.


Nightwatch has a piece ( on the situation in Iran. It says that the single most effective measure against the regime so far has been the Belgian government’s decision to block Iran’s access to the SWIFT international payments system, which is preventing the country from making foreign purchases. The Iranian regime has taken various measures to reduce the pressure on its population, such as banning the import of 600 different goods, building up its grain reserves (international food purchases being allowed under the US sanctions legislation), and spending hard-currency reserves — partly on maintaining the food and fuel subsidies that Ahmadinejad was previously trying to remove. However, Iranian crude production is reportedly down to 700k b/d and could get to 300k b/d in July; and inflation ran at 21% in 2011 (and consumers’ inflation experience is probably higher, given the importance of food and fuel to many consumers). Nightwatch speculates that hyperinflation may be on the way, and that is something that would be very likely to provoke widespread protests and, potentially, regime change.

The important question from a macro point of view is: how high will oil prices go? The economic sanctions are reducing the likelihood of war, oil prices appear to have stabilised and the Saudis have said they will pump as much as is needed (and, whatever one’s doubts about their spare capacity, they certainly have some). I wonder whether the Iran issue is fading as a big risk to risk assets in 2012.


  • Initial claims 357k a.e. Rate of improvement has slowed.
  • French trade deficit widened unexpectedly towards its extremes, Feb. Europe is not dealing with its imbalances.
  • Non-farm payrolls 120k vs. 207k e. Mar. This was a big shock for the markets.
  • Unemployment fell to 8.2%, b.e. I think that the unemployment rate may well fall faster than economists forecast for a given rate of economic growth.
  • Consumer credit growth fell back to a level that was merely high, d.e., after three months of very strong numbers. Feb.
  • Vehicle sales fell MOM, Mar. This is bad news for PCE on durable goods, a key leading indicator. However, this followed a strong February number and the series is still up on January.
  • Australian trade balance had its second negative month, Feb.
  • Japan current account surplus rebounded strongly, ~a.e., Feb.
  • China CPI 3.6% vs. 3.3% e. Mar. Downward trend intact.
  • China trade balance returned to a small surplus, Mar.
  • German trade balance 13.6bn a.e. Feb.

This Week

  • Beige Book (Wed)
  • Australian employment data (Thu)
  • UK trade balance (Thu)
  • Trade balance (Thu)
  • China rash of data including GDP, fixed investment, IP (Fri)
  • CPI (Fri)
  • Prelim Michigan Sentiment (Fri)