Eye on the Market I October 15, 2012 J.P.Morgan Topics of the week: the slight upturn in US leading indicators and the implications for profits; the magnitude of the US housing recovery; Europe's prize; and US energy independence We are working on our annual energy issue, which will come out next week. In the meantime, topics that True Believers have written about that we found interesting: assertions that recent improvement in leading indicators heralds better things ahead for the global economy and for profits; an article by Roger Altman arguing that the US housing recovery will contribute to a robust US expansion next year; the belief that the US can become energy independent within 10-15 years; and the view from Oslo that the European Union merited a Nobel Peace Prize. More below. The recent improvement in leading indicators: better news for profits and growth ahead? US and global purchasing manager surveys (PMI surveys) weakened during the summer, but have recently picked up modestly. Some argue that these changes could arrest the decline in earnings growth in sectors like technology and industrials. This seems plausible to us, and we believe it is more likely than another leg down in the global economy, which if it happened, would raise the risk of recession next year. PMI surveys are usually shown as an index level; in the two charts below, we show year on year changes to get a sense for the turns in the cycle. They tend to precede changes in earnings. Technology earnings and Global PMI survey Industrial earnings and Global PMI survey Percent change. YoY (both axes) Percent change, YoY (both axes) 80% 100% 80% 80% Global Technology 800/6 60% - Global Industrial 60% PMI EPS 60% PMI EPS 40% 40% 4- -4 40% - 4- 60% 40% 20% 20% 20% - 20% 0% 0% 0% 0% -20% -20% -20% -20% -40% -40% -40% -40% -60% 2004 2006 2008 2010 Source: Bloomberg. J.P. Morgan Securities LLC. 2012 2004 2006 2008 2010 Source: Bloombe