Will ECRI's Call for Recession Prove Accurate?

Sunday, May 13th, 2012

ECRI's Lak­sh­man Achuthan was mak­ing the rounds yes­ter­day, with yet another defense of his firm's reces­sion call – the first claim which came early last fall.  I do think (from mem­ory) he has pushed out the time frame a bit from when the ini­tial call came, but since early this year has claimed we will see it by mid year.  Per­haps the very warm win­ter hurt the call as well – who knows with these black boxes.  Below we have a video with CNBC and there is one nugget in there I did not know.  Con­ven­tional wis­dom is a reces­sion is back to back quar­ters of neg­a­tive GDP… but accord­ing to the NBER (and Achuthan) that is but one of a group of poten­tial signals.

The Com­mit­tee does not have a fixed def­i­n­i­tion of eco­nomic activ­ity. It exam­ines and com­pares the behav­ior of var­i­ous mea­sures of broad activ­ity: real GDP mea­sured on the prod­uct and income sides, economy-wide employ­ment, and real income. The Com­mit­tee also may con­sider indi­ca­tors that do not cover the entire econ­omy, such as real sales and the Fed­eral Reserve's index of indus­trial pro­duc­tion (IP).

10 minute video – email read­ers will need to come to site to view

Tags: Black Boxes, Cnbc, Conventional Wisdom, Economic Activity, Economy, Federal Reserve, GDP, Lakshman, Lakshman Achuthan, Measures, Memory, Nber, Nugget, Quarters, Real Gdp, Recession, Signals, Time Frame, Video Email, Warm Winter
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ECRI Repeats Recession Call Based on Coincident Indicators, Especially Income

Sunday, May 13th, 2012

Once again Eco­nomic Cycle Research Institute's Lak­sh­man Achuthan repeats his reces­sion call, this time say­ing within three months.

His call is based on coin­ci­dent indi­ca­tors, espe­cially income. Accord­ing to Achuthan, income growth in the last three months is lower than at the start of any of the last 10 recessions.

Link if video does not play: Why U.S. Econ­omy is Head­ing Back Into Recession

Once again I tend to agree with him, yet once again I find some things that sound rather disingenuous.

When asked "Can the Fed­eral Reserve do any­thing about this?", Achuthan responded "no".

Specif­i­cally Achuthan replied "It's so ironic. We're all free-marketeers. .... the free mar­ket has indige­nous inher­ent busi­ness cycles which means ups and downs. It's ironic that we think that the Fed or other poli­cies could just stave off a reces­sion".

I agree. How­ever, the state­ment rep­re­sents one hell of an atti­tude change as the fol­low­ing flash­backs show.

Win­dow of Opportunity

Fri­day, Jan­u­ary 25, 2008
ECRI Says There Is A Win­dow of Oppor­tu­nity for the US Economy

The U.S. econ­omy is now in a clear win­dow of vul­ner­a­bil­ity, given the plunge in ECRI’s Weekly Lead­ing Index (WLI) since last spring. Yet there is a brief win­dow of oppor­tu­nity within that win­dow of vul­ner­a­bil­ity to avert a reces­sion. That is why ECRI has not yet fore­cast a recession. ....

This is why, hav­ing cor­rectly pre­dicted the last two reces­sions in real time with­out cry­ing wolf in between, we are not fore­cast­ing one yet.

ECRI Denial

The ECRI laid it on pretty thick, openly mock­ing the "best adver­tised [reces­sion] in his­tory" while claim­ing "This is why, hav­ing cor­rectly pre­dicted the last two reces­sions in real time with­out cry­ing wolf in between, we are not fore­cast­ing one yet."

The irony is the reces­sion was about 2 months old at the time.

Reces­sion of Choice

Fri­day, March 28, 2008
ECRI Calls it "A Reces­sion of Choice"

The U.S. econ­omy is now on a reces­sion track. Yet this is a reces­sion that could have been averted. In Jan­u­ary, given the plunge in the Weekly Lead­ing Index, we declared that the econ­omy had entered a clear win­dow of vul­ner­a­bil­ity. Yet we empha­sized the brief win­dow of oppor­tu­nity within that win­dow of vul­ner­a­bil­ity for timely pol­icy stim­u­lus to head off a recession.

It is a some­what dif­fer­ent story with regard to GDP, because the cycli­cally volatile man­u­fac­tur­ing sec­tor still accounts for 36% of GDP. A mild down­turn in that sec­tor should limit the decline in GDP in this recession.

Ques­tion for Achuthan

If it was a reces­sion of choice in 2008 (after the reces­sion already started), why isn't it a ques­tion of choice now? Of course, it is entirely pos­si­ble Achuthan has changed his mind about what is or isn't possible.

Then again, is that change of heart a new fun­da­men­tal belief or sim­ply a nec­es­sary state­ment because his call is now reces­sion as opposed to no reces­sion in late 2007 and early 2008 (while later tak­ing credit for pre­dict­ing a recession).

It is not my intent to keep bring­ing this dis­crep­ancy up, but Achuthan has come out with yet another rea­son for his call that is dra­mat­i­cally dif­fer­ent that what the ECRI has stated before.

The key point how­ever is the fore­cast, and on that score I side with Achuthan. I also side with Achuthan that he Fed can­not do much to stave off reces­sions. His­tory will show who is correct.

Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

Tags: Attitude Change, Business Cycles, Crying Wolf, Economic Cycle Research Institute, Ecri, Federal Reserve, Flashbacks, Free Marketeers, Irony, Lakshman, Lakshman Achuthan, Last Spring, Plunge, Recession, Recessions, Ups, Ups And Downs, Vulnerability, Window Of Opportunity, Wli
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Earnings Growth—Is It Enough? (Ezrati)

Monday, May 7th, 2012

by Mil­ton Ezrati, Lord Abbett

After two-plus years of exceed­ing expec­ta­tions, earn­ings this year seem poised, at last, to reflect the plod­ding nature of this eco­nomic recov­ery. In 2010 and 2011, even as the real econ­omy man­aged only a pal­try 2.4% aver­age annual rate of expan­sion, the earn­ings of S&P 500^® Index¹com­pa­nies soared, ris­ing more than 47% in 2010 and almost 20% in 2011. Such a pat­tern could not per­sist. And this year, the slow fun­da­men­tals will almost surely assert them­selves. Even so, it would be a mis­take to read mat­ters too pes­simisti­cally. There cer­tainly is noth­ing omi­nous in the pat­tern. It is, after all, well-established his­tor­i­cally that earn­ings should come into line with slower-growing rev­enues in this, the third year of eco­nomic recov­ery. Besides, this year’s prob­a­ble 10% earn­ings growth, though only about half 2011’s pace, is suf­fi­cient to sus­tain the stock mar­ket rally.

This unfold­ing pat­tern of surge and mod­er­a­tion is hardly sur­pris­ing or new. It has, in fact, become a cycli­cal com­mon­place, a reflec­tion of the increas­ingly huge oper­at­ing lever­age of Amer­i­can busi­ness. Every year, busi­ness relies more and more on machin­ery, facil­i­ties, sys­tems, and other forms of tech­nol­ogy, often in place of labor. Because the trend builds a larger pro­por­tion of fixed costs into the pro­duc­tion model, even slight vari­a­tions in rev­enues have an exag­ger­ated impact on the bot­tom line. In the more dis­tant past, when vari­able labor costs were a big­ger part of the over­all pro­duc­tion equa­tion, lay­offs could reduce a sig­nif­i­cant part of over­all costs and so relieve some of the strain on the bot­tom line in reces­sions, and then, when rehir­ing raised labor costs in recov­ery, the prof­its recov­ery was more muted. But oper­at­ing lever­age has intro­duced a more volatile pattern.

The dra­matic effect was clear dur­ing the last reces­sion and in this recov­ery so far. In 2008-09, when the real econ­omy dropped 5.1% peak to trough over 18 months, rev­enues fol­lowed, but because busi­nesses had lit­tle abil­ity to cut costs, the full brunt of the down­turn fell on earn­ings, which, for the S&P 500, plunged from almost $22 a share in the sec­ond quar­ter of 2007 to a loss of more than $25 at the end of 2008. But how­ever much strain the oper­at­ing lever­age imposed in the reces­sion, it has worked in business’s favor in this recov­ery. As this huge array of pro­duc­tive cap­i­tal has come back on line, the fixed costs allowed vir­tu­ally all the addi­tional rev­enue to fall to the bot­tom line. And because prof­its are a small dif­fer­ence between rev­enues and costs, the small per­cent­age rev­enues gain have cre­ated huge per­cent­age changes in prof­its. But now, in this third year of expan­sion, when most of this pro­duc­tive cap­i­tal has at last become more fully uti­lized, the effect of oper­at­ing lever­age should dis­si­pate, forc­ing earn­ings to fol­low slower rev­enues growth more faithfully.

Still, even as 2012 fails to enjoy the remark­able earn­ings surges of 2010 and 2011, the out­look for this year is not entirely as depress­ing as some media reports imply. Earn­ings can still out­pace the 5–6% expected advance in domes­tic rev­enues because there is still some oper­at­ing lever­age left in the sys­tem and because S&P com­pa­nies gather more than half their rev­enues abroad. Europe’s reces­sion, of course, will weigh against for­eign rev­enue growth, but the emerg­ing economies should more than off­set Europe’s depress­ing influ­ence. Though these economies, too, have slowed, and that fact has attracted a lot of atten­tion, they still out­pace the United States and other devel­oped economies by far. China, after slow­ing, still reg­is­ters real growth of more than 8% and India more than 6%. In nom­i­nal terms (which, of course, is the way rev­enues are mea­sured), those economies should still con­tribute double-digit growth of their part of the 2012 S&P rev­enues equa­tion. Adding to likely 7–8% over­all rev­enues gains, the remains of oper­at­ing lever­age should bring S&P earn­ings up to about 10% in 2012.

That growth, though half last year’s pace, should nonethe­less allow equity mar­kets to hold the gains they have already made and likely rise fur­ther. Even after mar­ket gains of the last six months, val­u­a­tion mea­sures are far from stretched. Price-to-earnings mul­ti­ples, after all, depend­ing on which of the seem­ingly end­less cal­cu­la­tions one chooses, show a mar­ket that at worst is near its his­tor­i­cal val­u­a­tion bench­mark, allow­ing it room to keep up with earn­ings at least. Since, in most other respects, val­u­a­tions are still more attrac­tive, equity price advances should exceed the earn­ings growth. Stocks, rel­a­tive to Trea­sury bonds, offer val­u­a­tions not seen since the early 1950s or even the Great Depres­sion. Next to cor­po­rate bond yields, equity val­u­a­tions look less dra­matic, but still sug­gest con­sid­er­able upside poten­tial. It is note­wor­thy that, even today, div­i­dend yields on many stocks atyp­i­cally exceed the yields on the firm’s own bonds.

Since earn­ings, though slow­ing, are still show­ing sub­stan­tive growth, the most con­ser­v­a­tive inter­pre­ta­tion of val­u­a­tions would sug­gest that equi­ties should hold this year’s gains so far. Any­thing other than the most con­ser­v­a­tive inter­pre­ta­tion sug­gests greater gains.

¹The S&P 500^® Index is widely regarded as the stan­dard for mea­sur­ing large cap U.S. stock mar­ket per­for­mance and includes a rep­re­sen­ta­tive sam­ple of lead­ing com­pa­nies in lead­ing industries.

The opin­ions in the pre­ced­ing com­men­tary are as of the date of pub­li­ca­tion and sub­ject to change based on sub­se­quent devel­op­ments and may not reflect the views of the firm as a whole. This mate­r­ial is not intended to be legal or tax advice and is not to be relied upon as a fore­cast, or research or invest­ment advice regard­ing a par­tic­u­lar invest­ment or the mar­kets in gen­eral, nor is it intended to pre­dict or depict per­for­mance of any invest­ment. Investors should not assume that invest­ments in the secu­ri­ties and/or sec­tors described were or will be prof­itable. This doc­u­ment is pre­pared based on infor­ma­tion Lord Abbett deems reli­able; how­ever, Lord Abbett does not war­rant the accu­racy or com­plete­ness of the infor­ma­tion. Investors should con­sult with a finan­cial advi­sor prior to mak­ing an invest­ment decision.

Investors should care­fully con­sider the invest­ment objec­tives, risks, charges, and expenses of the Lord Abbett funds. This and other impor­tant infor­ma­tion is con­tained in each fund’s sum­mary prospec­tus and/or prospec­tus. To obtain a prospec­tus or sum­mary prospec­tus on any Lord Abbett mutual fund, con­tact your invest­ment pro­fes­sional or Lord Abbett Dis­trib­u­tor LLC at 888–522-2388 or visit us at www.lordabbett.com. Read the prospec­tus care­fully before you invest.

Tags: American Business, Bottom Line, Commonplace, Dramatic Effect, Earnings Growth, Economic Recovery, Forms Of Technology, Layoffs, Lord Abbett, Market Rally, Milton Ezrati, Moderation, Operating Leverage, Production Model, Proportion, Recession, Recessions, Reflection, Stock Market, Trough
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Commodities Back in Bear Territory (Bespoke)

Monday, May 7th, 2012

With Europe mired in reces­sion and eco­nomic data in the US turn­ing soft in recent weeks, the com­modi­ties sec­tor has taken it on the chin recently.  With a decline of close to 2% today, the CRB Com­modi­ties index is once again down more than 20% from its highs in 2011.

Tags: Bear Territory, Commodities, Crb Commodities Index, Decline, Economic Data, Europe, Recession
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PIMCO's Bill Gross – No QE3 Right Away, but a Few Weak Employment Reports Brings It

Monday, April 30th, 2012

PIMCO's Bill Gross has a wide rang­ing inter­view on Bloomberg dis­cussing all sorts of top­ics from more QE, the Fed fol­low­ing the Bank of England's plan to ignore any infla­tion as 'tem­po­rary' so they can con­tinue ultra easy poli­cies, the dys­func­tion in Europe, the poten­tial for reces­sion, among other topics.

9 minute video – email read­ers will need to come to site to view

Tags: All Sorts, Bank Of England, Bill Gross, Bloomberg, Employment Reports, Europe, inflation, PIMCO, Qe, Qe3, Recession, Video Email
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The Economy and Bond Market Radar (April 30, 2012)

Sunday, April 29th, 2012

The Econ­omy and Bond Mar­ket Radar (April 30, 2012)

Trea­suries were more or less unchanged for the sec­ond week in a row. U.S. eco­nomic data offered a mixed bag and the Fed essen­tially stayed the course with regard to mon­e­tary pol­icy. First quar­ter GDP was released on Fri­day and the econ­omy grew 2.2 per­cent, mod­estly below esti­mates. The key take­away from the report is that the econ­omy is not strong enough for the Fed to seri­ously con­sider shift­ing pol­icy but it is weak enough to keep the pos­si­bil­ity of addi­tional QE or other stim­u­la­tive mea­sures alive.

Strengths

• The hous­ing mar­ket con­tin­ues to show signs of life as new home sales and pend­ing home sales trend higher. In addi­tion, months of sup­ply of new homes has fallen to 5.3 months, back to 2006 levels.
• The HSBC China flash PMI index improved to 49.1, still indi­cat­ing con­trac­tion but mov­ing in the right direc­tion and ris­ing for the fourth month in a row.
• With the econ­omy still show­ing tepid growth, the Fed will remain accommodating.

Weak­nesses

• The U.K. econ­omy con­tracted by 0.2 per­cent in the first quar­ter and is now tech­ni­cally back in recession.
• Weekly ini­tial job­less claims remain ele­vated at 388,000 this week, con­tin­u­ing the recent trend of higher readings.
• Con­sumer con­fi­dence indi­ca­tors ticked lower in April even as gaso­line prices fell.

Oppor­tu­nity

• After a dis­ap­point­ing first quar­ter GDP result, the Chi­nese are likely to ease mon­e­tary pol­icy as soon as this quarter.

Threat

• Ris­ing oil and gaso­line prices com­bined with liq­uid­ity impli­ca­tions of global eas­ing, led by Europe, may raise the prospect of a reap­pear­ance of higher infla­tion going forward.

Tags: Bond Market, Consumer Confidence, Contraction, Economic Data, Gasoline Prices, Home Sales Trend, Housing Market, Hsbc, Initial Jobless Claims, liquidity, Market Radar, Monetary Policy, Moving In The Right Direction, Pmi, Qe, Quarter Gdp, Recession, Signs Of Life, Takeaway, Treasuries
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Don't Like the Real Data? Just Pretend!

Thursday, April 26th, 2012

Tags: Bulls, Clue, Conclusions, Confirmation Bias, Corporate Earnings, Credibility, Critical Thinking, Denial, Downside, Earnings Reports, Economic Collapse, Investment Decision, Jeff Miller, Observers, Profit Margins, Rebound, Recession, Recovery Period, Simple Solution, Workforce Reductions
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The Intersection of Bonds and Equities

Tuesday, April 24th, 2012

by Guy Lerner, The Tech­ni­cal Take

Fig­ure 1 shows a weekly chart of the SP500. In the lower panel is an ana­logue chart of our bond trad­ing model. This bond model has been bull­ish for 3 weeks now.

Fig­ure 1. SP500 v. Bond Model/ weekly

Note how the bond model turned bull­ish back on March 26, 2010 and on March 11, 2011. Not only did these sig­nals coin­cide (more or less) with an equity mar­ket top, but these time peri­ods also sig­naled the end of active mon­e­tary inter­ven­tion by the Fed­eral Reserve. This was the end of QE1 and QE2, respec­tively. Now we have the lat­est incar­na­tion of QE end­ing — Oper­a­tion Twist. Inter­est­ingly enough, the equity mar­ket appears to be top­ping out once again as the bond model has turned positive.

So why is the bond model pos­i­tive? Despite the low yields, bonds could be viewed as a safe haven from a frag­ile macro envi­ron­ment. While this may be true to some extent, I believe the equity weak­ness or bond strength (in this case) is a reflec­tion and early sign of eco­nomic weak­ness. In par­tic­u­lar, the 2011 mar­ket top coin­cided with notice­able dete­ri­o­ra­tion in the eco­nomic data that was clearly point­ing towards reces­sion. Of course, the Fed came to the res­cue with Oper­a­tion Twist and the “dreaded” reces­sion was avoided.

So in sum­mary, a top­ping equity mar­ket appears to be a sign of an econ­omy that has peaked as well. This has been her­alded by strength in bonds. Most likely, this is sig­nal­ing fur­ther quan­ti­ta­tive eas­ing as the Fed­eral Reserve inter­venes in the bond mar­ket to prop up the econ­omy and the equity markets.

Tags: Analogue, Bond Market, Bond Strength, Bond Trading, Bonds, Deterioration, Economic Data, Economic Weakness, Federal Reserve, Figure 1, Guy Lerner, Incarnation, Macro Environment, March 11, Qe, Qe1, Recession, S&P500, Safe Haven, Time Periods
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Europe has its Parti Québécois Moment (Tchir)

Monday, April 23rd, 2012

by Peter Tchir, TF Mar­ket Advisors

I have said and writ­ten that I expect to see more nation­al­ism come into play as the cri­sis con­tin­ues. I may have been a bit early, but we are see­ing grow­ing signs of it, with Marine le Pen’s strong show­ing in yesterday’s French elec­tion being the most obvi­ous exam­ple. The Dutch Parliament’s fail­ure to approve “aus­ter­ity” is another sign of grow­ing skep­ti­cism of a one size fits all Euro solution.

In Canada, the Parti Québé­cois always did bet­ter in tough eco­nomic times. When times are good, peo­ple like to hang out, talk about vaca­tions, what they bought, which was the best Habs team of all time, and why the cur­rent ver­sion of Les Cana­di­ens is under­achiev­ing. In tough times, peo­ple are eager to hear why the prob­lems are some­one else’s fault. Good times are always a direct result of one’s own actions; whereas, bad times tend to be blamed on some­one or some­thing else. Now they can talk a bit about how things would be bet­ter if those someone’s or something’s would change, before mov­ing on to the best Habs player of all time, and what the cur­rent team should change to be like the old teams.

Away from the elec­tion results, more eco­nomic data came out of Europe, and it is all bad. PMI missed. Spain is clearly in a reces­sion. Bank stocks are get­ting ham­mered. The S&P futures are sit­ting just above 1,360. We tested the 1,358 level last week and had a strong bounce. The week before saw one sell-off get as low as 1,355 before bounc­ing. I think the com­bi­na­tion of weak data, strange votes, and the real­iza­tion that the fire­wall has no imme­di­ate impact will weigh on the mar­ket and we will break through and trade below 1,350 before we see another round of support.

AAPL is def­i­nitely a wild­card. It is the cheap­est it has been in 40 days. Yes, that is the prob­lem. The sell-off has been dra­matic, but after a par­a­bolic move higher, we are only back to prices last seen on March 14^th. It was at $455 on Feb­ru­ary 1^st. I will be watch­ing this closely as it is so big in the indices that it could be the cat­a­lyst for a bounce, or the trig­ger for a big­ger sell-off towards the 100 day mov­ing average.

CDS indices are weak across the board. In Europe, MAIN is at 148.5, 5 wider on the day, and bid/offer spread is increas­ing as liq­uid­ity evap­o­rates again. IG18 is rel­a­tively strong, only 2 bps wider at 102, but with fair value being at least 105, there is some room for this index to move wider. I think Europe was just scared to push futures below that 1,360 sup­port, and if we break that this morn­ing, IG can quickly move to 104 bid. If HYG or JNK opens any­where within a ¼ or pos­si­bly a ½ point of Friday’s close, it is a good sale, as they are over­bought, trad­ing at a pre­mium to NAV, and this lat­est round of weak­ness in Europe will put pres­sure on all the credit markets.

French bond yields are actu­ally a lit­tle bet­ter on the day (some­what sur­pris­ing to me given the elec­tion results, but I guess they still cap­ture some “flight to qual­ity” bid, but they are not as strong as Ger­man bunds. Ital­ian and Span­ish 10 year bonds are both weak, hit­ting yields of 5.71% (+6 bps) and 5.96% (+3 bps) respec­tively. They have bounced off the lows, but I think we will see a capit­u­la­tion move lower with Italy get­ting to 6.25% and Spain to 6.5% before any seri­ous ECB inter­ven­tion occurs.

Buy the dip has worked well, almost too well, so I am not going to do that. I believe we break this sup­port level and see one more sig­nif­i­cant down­ward move before we see real sup­port in any of the risk markets.

Copy­right © TF Mar­ket Advisors

Tags: Aapl, Austerity, Bank stocks, Current Team, Current Version, Dutch Parliament, Economic Data, Economic Times, French Election, Good Times, Habs, Les Canadiens, Marine Le Pen, Nationalism, Parti Quebecois, Pmi, Recession, Skepticism, Tough Times, Wildcard
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Dr. Copper, the Economics Ph.D.

Wednesday, April 18th, 2012

It is often stated that cop­per is the metal with a Ph.D. in eco­nom­ics, and the data for the most part bears this out.

Fig­ure 1 is a monthly chart of cop­per (cash data) with NBER dated reces­sions noted by the indi­ca­tor in the lower panel.  With the indi­ca­tor in the down posi­tion, the US econ­omy is in reces­sion; when the indi­ca­tor is up, the US econ­omy is expand­ing.  As can be appre­ci­ated, cop­per does bet­ter dur­ing eco­nomic expan­sions.  The metal typ­i­cally peaks dur­ing reces­sions before head­ing into a down trend (see ver­ti­cal gray bars).

Fig­ure 1. Cop­per v. NBER recessions/ monthly

Presently, cop­per is under per­form­ing the broader mar­ket, and as we can see from the weekly chart (see fig­ure 2, cash data), cop­per gap below its 40 week mov­ing aver­age last week, and it is mak­ing a lower high.  The weak­ness in cop­per should be respected, but there is more to the story.

Fig­ure 2. Copper/ weekly

The next graph (fig­ure 3) is a weekly chart of cop­per (cash data).  In the lower panel, is the “Bull­ish Con­sen­sus” data  for cop­per from Mar­ket­Vane.  Accord­ing to the Mar­ket­Vane web­site, “the Bull­ish Con­sen­sus mea­sures the futures mar­ket sen­ti­ment each day by fol­low­ing the trad­ing rec­om­men­da­tions of lead­ing Com­mod­ity Trad­ing Advi­sors.”  Many investors view the Mar­ket­Vane data (and sen­ti­ment data in gen­eral) as help­ful in iden­ti­fy­ing mar­ket turn­ing points.  For the most part, this is true as we have seen many times how too many investors on one side of a trade often leads to a strong reac­tion in the oppo­site direc­tion.  But sen­tient data also has other uses that few rarely speak of, and this has to do with trend fol­low­ing.  In essence, as prices of an asset rise so does the degree of bull­ish­ness, and as prices fall, investors become more bear­ish.  So what good is fol­low­ing investor sen­ti­ment if it just tracks price?  My research shows that investor sen­ti­ment leads price by about a week or two, so investor sen­ti­ment is a good tool at iden­ti­fy­ing changes in a trend that do not occur at the extremes.  Let me give some examples.

Fig­ure 3. Cop­per v. Mar­ket­Vane Bull­ish Consensus/ weekly

Fig­ure 4 shows how investor sen­ti­ment leads price.  Once again, this is a weekly chart of cop­per (cash data) with the Bull­ish Con­sen­sus for cop­per in the lower panel.  The black dots rep­re­sent swing pivot points.  Now if we look at the cur­rent Bull­ish Con­sen­sus value and com­pare this value to past swing pivot points, we can make the state­ment that a close below three swing pivot points is bear­ish.  As you can see, this was the the case in 2006 and in 2008.  (This also hap­pens to be the case across time and other asset classes.)  When the Bull­ish Con­sen­sus value closed below 3 prior swing pivot points, cop­per dropped rather pre­cip­i­tously.  (As an aside, I am draw­ing upon my research with pivot points, and I have pre­vi­ously pre­sented sim­i­lar find­ings in a SP500 trend fol­low­ing strat­egy; click HERE to go to that arti­cle.)  So a close below 3 pivot points is gen­er­ally bear­ish, and since sen­ti­ment tracks price and as sen­ti­ment often pre­cedes price in time, this is an omi­nous sign.

Fig­ure 4. Copper/ weekly

Now let’s move our chart for­ward in time and look at the past 2 years.  See fig­ure 5.  At point #1, the Bull­ish Con­sen­sus value closed below 3 swing pivot points.  Rather than sell off, this marked the low point for cop­per before it reversed strongly higher.  8 weeks later, Fed­eral Reserve Chair­man Bernanke men­tioned QE2 at his speech at Jack­son Hole.  At point #2, this break­down nearly marked the high point for cop­per back in April, 2011.  Point #3 was the break down back in Sep­tem­ber, 2011.  Rather than lead to a break down in price, this also marked a bot­tom.  This also hap­pened to coin­cide with the Fed­eral Reserve’s Oper­a­tion Twist and with the Euro­pean Cen­tral Bank’s LTRO.  Lastly, turn your atten­tion to the “?????”.  The Bull­ish Con­sen­sus has closed below 3 swing pivot points.  While this nor­mally would be inter­preted bear­ishly, one could eas­ily spec­u­late, based upon the recent past, that cen­tral bank inter­ven­tion is imminent.

Fig­ure 5. Copper/ weekly

So what have we learned from Dr. Cop­per today?

One.  Cop­per gen­er­ally peaks dur­ing recessions.

Two.  Cop­per is cur­rently putting in a lower high and is trad­ing below its 40 week mov­ing aver­age; cop­per peaked over 1 year ago.

Three.  Investor sen­ti­ment not only tracks price but it often pre­cedes it by a cou­ple of weeks.  The cur­rent price struc­ture for the Bull­ish Con­sen­sus is bearish.

Four.  Recent bear­ish pat­terns in the price struc­ture of the Bull­ish Con­sen­sus have been bull­ish owing to cen­tral bank inter­ven­tion.  In essence, cen­tral banks have pre­vented a reces­sion from unfolding.

Five.  It should noted that each cen­tral bank inter­ven­tion has pro­vided less and less ben­e­fit to the mar­kets.  When look­ing at cop­per, we see that Oper­a­tion Twist did not pro­duce gains that were seen dur­ing QE2.  It’s as though the mar­kets have become resis­tant to the effects of mon­e­tary stimulation.

Lastly and most impor­tantly.  What’s next for cop­per and the mar­kets?  The break­down in the price struc­ture of the Bull­ish Con­sen­sus for cop­per strongly sug­gests lower prices for cop­per, which in all like­li­hood implies a reces­sion.  Cen­tral bankers have been timely in their imple­men­ta­tion of recent quan­ti­ta­tive eas­ing, and we could eas­ily make the case that their inter­ven­tions have thwarted the onset of a reces­sion on more than one occa­sion.  Cop­per will need to reverse from the cur­rent lev­els and investors will need to embrace that risk.  This will be her­alded by a rever­sal in the Bull­ish Con­sen­sus.  Will cen­tral bankers be able to save the day again?

Tags: Bullish Consensus, Commodity Trading Advisors, Copper Gap, Copper Metal, Down Position, Down Trend, Economic Expansions, Figure 3, Futures Market, Gap, Gray Bars, Investor Sentiment, Market Sentiment, Market Turning Points, Marketvane, Nber, Recession, Recessions, Sentiment Data, Strong Reaction
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Gary Shilling Still Looking for a Recession in 2012 Part I

Wednesday, April 11th, 2012

Gary Shilling has been more dour than most on the under­ly­ing econ­omy the past 3–4 years, and that could be argued was a rel­a­tively good call.  Despite never before seen lev­els of fed­eral gov­ern­ment and cen­tral bank inter­ven­tion, the econ­omy con­tin­ues to limp along at what I call a "meh" pace.  Nor­mal recov­er­ies sans mas­sive inter­ven­tion should have had some sus­tained peri­ods of 4–5%+ type GDP growth; we're happy with 2–3% nowa­days.  Gary's long U.S. Trea­suries call has been against the grain, and mostly right the past few years, and he's had quite a few other pre­scient calls as well.  Shilling posted 2 arti­cles on Bloomberg, stat­ing the case for a reces­sion in 2012 – which is now again an out­lier view.  We'll look at part 1 today, and look at part 2 which focuses on the labor mar­ket tomorrow.

Here are some of his views as he looks at the main pil­lars of the economy:

• For sev­eral months, I’ve been fore­cast­ing a reces­sion in the U.S. this year, argu­ing that weak­ened con­sumer spend­ing – the key to the eco­nomic out­look — would tip the econ­omy back into a down­turn.  But what about recent pos­i­tive data and markets? Do they affect my forecast?
• Con­sumers Are the Linch­pin: The U.S. econ­omy is being fueled these days by strong con­sumer spend­ing, which increased in Feb­ru­ary by 0.8 per­cent, its best show­ing in seven months, after ris­ing 0.4 per­cent in Jan­u­ary. Retail sales rose 1.1 per­cent in Feb­ru­ary — the fastest pace in five months — while same-store sales advanced 4.7 per­cent. These num­bers cor­re­late with recent gains in con­sumer con­fi­dence and sentiment.
• I don’t see this pace con­tin­u­ing. Personal-income growth con­tin­ues to be weak — up just 0.2 per­cent in Feb­ru­ary — mean­ing this recent exu­ber­ant con­sumer spend­ing is being fueled largely by increased debt and tap­ping of savings.
• At the same time, pay per employee is ris­ing slowly and con­tin­ues to fall in real terms. So increased job growth remains the key to any increases in real house­hold after-tax income, which declined in Feb­ru­ary for a sec­ond straight month and gained a mere 0.3 per­cent, com­pared with Feb­ru­ary 2011.
• Spend­ing, Sav­ing and Debt: The sup­port that con­sumer spend­ing has received from less sav­ing and more debt appears tem­po­rary. House­hold debt – includ­ing mortgages,student loans, and auto and credit-card loans — has fallen rel­a­tive to dis­pos­able per­sonal income, though. In my analy­sis, this is largely because of write-offs of trou­bled mort­gages. Nev­er­the­less, revolv­ing con­sumer credit, mostly on credit cards, is no longer being liquidated.
• Non-revolving con­sumer credit con­tin­ues to rise in response to grow­ing sales of vehi­cles — most of which are financed — and in stu­dent loans, as the poor job mar­ket keeps stu­dents in school or sends them back. Tuition increases encour­age more bor­row­ing, while inter­est costs on past-due loans mount.  [Mar 8, 2012: What Drove Yesterday's Surge in Con­sumer Credit? Mas­sive Upswing in Fed­eral Stu­dent Loans]
• It would seem, then, that con­trary to my stead­fast belief that con­sumers are being forced to save more and reduce debt to rebuild net worth, they have been doing the oppo­site lately.
• Con­sumer Retrench­ment: The data so far aren’t con­clu­sive, but evi­dence of U.S. con­sumer retrench­ment is emerg­ing. Con­sumer con­fi­dence has moved up recently but remains far below the lev­els of early 2007 before the col­lapse in sub­prime mort­gages set off the Great Recession. Real per­sonal con­sump­tion expen­di­tures growth has been volatile in recent months and falling on a year-on-year basis. Voluntary depar­tures from jobs, another mea­sure of con­fi­dence, may be decreasing. And con­sumer spend­ing will no doubt have a big slide if my fore­cast of another 20 per­cent drop in house prices pans out. (Mark's note: that seems aggressive!)
• Hous­ing activ­ity remains depressed, with the only signs of life com­ing from the mul­ti­fam­ily com­po­nent, which is being dri­ven by the appetite for rental apart­ments as home­own­er­ship declines.
• What Oil Threat?: Recently, there has been great con­cern about $4 per gal­lon gaso­line and whether, as in 2008, those high prices will act as a tax on con­sumer incomes and force dras­tic cut­backs in other pur­chases.  These con­cerns are overblown. Amer­i­can con­sumers have reacted to ris­ing gaso­line prices as you would expect in tough times: by con­sum­ing less. Demand (DOEDMGAS) in the mid-February to mid– March four-week period was down 7.8 per­cent from a year ear­lier, mainly due to more effi­cient vehicles.
• As a result, the recent surge in gaso­line prices has had a rel­a­tively small impact on con­sumer pur­chas­ing power. The $14.8 bil­lion increase from Octo­ber 2011 to March 2012, com­pared with the year-earlier period, amounts to about 0.3 per­cent of con­sumer spending.

Con­clu­sion:

• Con­sumer spend­ing is the only major source of strength in the U.S. econ­omy this year. State and local-government spend­ing remains depressed because of deficit woes and under­funded pen­sion plans. Housing suf­fers from excess inven­to­ries and may face a fur­ther 20 per­cent drop in prices. Excess capac­ity restrains cap­i­tal spending. Recent inven­tory build­ing appears involuntary. So con­sumer retrench­ment will tip the bal­ance toward a mod­er­ate and over­due recession.

Tags: Bloomberg, Central Bank Intervention, Consumer Confidence, Downturn, Economic Outlook, Federal Government, Five Months, Gary Shilling, GDP, GDP Growth, Market Tomorrow, Massive Intervention, Personal Income Growth, Pillars, Recession, Retail Sales, Sentiment, Seven Months, Tapping, Treasuries
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The Outlook for Earnings (Brown)

Tuesday, April 10th, 2012

by Dr. Scott Brown, Ph. D, Chief Econ­o­mist, Ray­mond James

April 9 – April 13, 2012

The stock mar­ket has risen nicely this year, partly on improv­ing eco­nomic data, but are such gains jus­ti­fied by the earn­ings out­look? The level of the S&P 500 Index does not appear to be out of line with earn­ings expec­ta­tions, but there may be some pres­sure on prof­its over the longer term. As the elec­tion approaches, we may hear more about class warfare.

In the late 1990s, share prices rose more than was jus­ti­fied by the earn­ings out­look. In hind­sight, the mar­ket was clearly in a bub­ble. In the last decade, the mar­ket rose roughly in line with earn­ings. How­ever, the Great Reces­sion sent earn­ings sharply lower, and the stock mar­ket fol­lowed. Since the reces­sion has ended, earn­ings have more than recov­ered. Bottom-up earn­ings esti­mates for more than a year out, com­piled from ana­lysts’ fore­casts of indi­vid­ual com­pa­nies, still look a bit giddy, but that’s typ­i­cal. Top-down esti­mates, pro­vided by econ­o­mists and strate­gists, are more mod­er­ate – and con­sis­tent with some slow­ing in cor­po­rate earn­ings rel­a­tive to the last few years. That’s to be expected. Much of the rebound in earn­ings has reflected the bounce-back from the reces­sion. Firms have a ten­dency to cut too many jobs and overly cur­tail cap­i­tal expen­di­tures near the end of the down­turn and there’s some catch-up as con­di­tions begin to improve.

Click here to enlarge

Part of the strength in cor­po­rate prof­its in the recov­ery has been due to the restraint in labor costs. Given the large amount of slack in the labor mar­ket, wage pres­sures are rel­a­tively sub­dued. More­over, since the labor mar­ket slack is expected to remain ele­vated for some time, cor­po­rate prof­its are likely to stay rel­a­tively strong. As a per­cent­age of national income, cor­po­rate prof­its are very high and labor com­pen­sa­tion is rel­a­tively low. The share of national income going to prof­its and the share going to labor cycles back and forth over time and at some point the pen­du­lum seems likely to swing back in the other direc­tion, but prob­a­bly not any­time soon.

Click here to enlarge

It’s hard to have an intel­li­gent dis­cus­sion about the dis­tri­b­u­tion of income. One side sites “cor­po­rate greed,” the other sites “class envy.” For the most part, econ­o­mists have gen­er­ally shied away from income dis­tri­b­u­tion issues. This is mostly a ques­tion of pol­i­tics. It’s dif­fi­cult to say what an “appro­pri­ate” dis­tri­b­u­tion of income should be and what steps should be taken to achieve it.

How­ever, there’s no doubt­ing that the dis­tri­b­u­tion of income has widened sig­nif­i­cantly over the last thirty years. Real wages have stag­nated. A lot of that is due to the decline of union mem­ber­ship. In the early 1970s, 25% of private-sector jobs were union jobs. Now unions account for less than less than 7% (note that 37% of public-sector jobs are union, but many of these are teach­ers and the dynam­ics are a lot dif­fer­ent). In the late 1960s and early 1970s, we typ­i­cally had more than 300 work stop­pages per year, involv­ing mil­lions of work­ers. We had 19 last year, involv­ing 113,000 workers.

It’s unclear what role the dis­tri­b­u­tion of income will take in this year’s elec­tion, but investors should pay attention.

Tags: Capital Expenditures, Chief Economist, Class Warfare, Corporate Earnings, Corporate Profits, Downturn, Dr Scott, Earnings Estimates, Economic Data, Hindsight, Individual Companies, Labor Compensation, Last Decade, Raymond James, Recession, Share Prices, Slack, Stock Market, Strategists, Wage Pressures
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AdvisorAnalyst.com's Top 20 Stories for March-April 2012

Friday, April 6th, 2012

Here are this month's Top 20 Sto­ries accord­ing to you:

1. Inter­est Rates: The Mar­ket Has it All Wrong (Jakobsen)

2. James Paulsen: Does Gold Still Glitter

3. Sprott: Invest­ment Out­look (April 2012)

4. Jef­frey Saut: How to Posi­tion Port­fo­lios for 2012

5. Twelve Steps to Mak­ing Your Busi­ness Fun Again

6. "This Time its Dif­fer­ent?" — David Rosen­berg Explains the Melt Up and the Latent Risks

7. Ray Dalio: Ugly = Beau­ti­ful / Beau­ti­ful = Ugly

8. Defin­ing Risk: War­ren Buffett's Three Kind of Investments

9. Why War­ren Buf­fett is Wrong About Gold (Koesterich)

10. Bill Gross: Invest­ment Out­look (April 2012)

11. A Sim­ple Method to Improve Your Client's Invest­ment Performance

12. A False Sense of Secu­rity (Hussman)

13. David Rosen­berg: The Record Quarter

14. John Huss­man: Invest­ment Out­look (March 19, 2012)

15. A Warn­ing From War­ren Buffett's Top Eco­nomic Indicator

16. Doug Kass Says The Mar­ket is Now Overvalued

17. ECRI: Why Our Reces­sion Call Stands

18. Are Record ECB Mar­gin Calls Impair­ing Gold

19. Fig­ur­ing Out ECRI's Reces­sion Call

20. Shift­ing Winds, Tur­bu­lence Ahead (Sonders)

Tags: David Rosenberg, Doug Kass, Economic Indicator, Ecri, False Sense Of Security, Glitter, Gold, Gross Investment, Investment Outlook, Investment Performance, Jakobsen, John Hussman, Latent Risks, March 19, Ray Dalio, Recession, Record Quarter, Sense Of Security, Sprott, Twelve Steps, Warren Buffett
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Buy Commodities, Sell Brands (Smead)

Wednesday, March 28th, 2012

by William Smead, Smead Cap­i­tal Management

We saw War­ren Buf­fett quoted the other day say­ing, “We like com­pa­nies which buy a com­mod­ity and sell a brand”. We thought it would be very help­ful to unpack his thought and put it into the con­text of today’s cir­cum­stances. We at Smead Cap­i­tal Man­age­ment believe these cur­rent cir­cum­stances are framed by the his­tor­i­cal over-pricing of com­modi­ties, the com­ing eco­nomic con­trac­tion of China, the suc­cess­ful cleans­ing of the income state­ments of US house­holds and the inevitable rebound in hous­ing in the US. We will look at the makeup of our port­fo­lio com­pa­nies which buy a com­mod­ity and sell a brand to con­sider their upside poten­tial in this inter­est­ing environment.

When non-economic investors load up on invest­ments in any­thing which has had a big run up, please cir­cle the wag­ons. When com­modi­ties were at their low point in 1999, it was hard to find any insti­tu­tional investor or finan­cial advi­sor rec­om­mend­ing expo­sure in com­modi­ties for investors. As of the end of 2010, insti­tu­tions are ded­i­cat­ing as much as 52% of their port­fo­lio to alter­na­tive invest­ments. This includes com­modi­ties, gold and energy. These invest­ments are made today for diver­si­fi­ca­tion pur­poses and are sim­ply bets on ris­ing prices. These bets look good in a rearview mir­ror as we’ve had a once in a gen­er­a­tion move into this asset class. We believe that com­modi­ties have never been more over-priced in the US and are enter­ing a decade-long bear market.

We believe the rea­son com­modi­ties have been in a bull mar­ket for so long is the unin­ter­rupted eco­nomic boom in China. When a coun­try with 1.3 bil­lion peo­ple grows at over 10% for a num­ber of years with­out an occa­sional reces­sion, it ends up rely­ing on fixed asset invest­ments for growth. When fixed asset invest­ments dom­i­nate your GDP num­bers, bor­rowed money pre­pares to turn sour and ulti­mately lead to a recession/depression. This is some­thing that “get­ting rid of cable” can’t cure.

The Fed­eral Reserve came out with their house­hold debt ser­vice ratio (HDSR) last week. It shows that by the end of 2011, Amer­i­can house­holds had brought the ratio down below 11% to 10.88%. This matches up with the lev­els seen in the early 1980’s reces­sion and the “ane­mic” eco­nomic recov­ery of 1990–93. These ear­lier read­ings pre­ceded two of the best mod­ern eco­nomic growth peri­ods since World War II. While the doom­say­ers moan about absolute debt lev­els, we feel they are miss­ing the story on the health of the income state­ment of the aver­age house­hold. This has boded well for the econ­omy his­tor­i­cally. Also, if we con­tinue to be slow to buy houses and cars, this HDSR could put dis­cre­tionary spend­ing into its most favor­able posi­tion in decades.

Lastly, this cur­rent “ane­mic” eco­nomic recov­ery has been severely retarded by the boom com­mod­ity prices of the last two years, in our opin­ion. We’ve had to work off a huge num­ber of fore­closed and short-sale hous­ing inven­to­ries, while the deep reces­sion tem­porar­ily crip­pled house­hold for­ma­tion (Jeff, Who lives at Home). It is rebound­ing as 20-somethings get sick of liv­ing with the par­ents and the par­ents get sick of liv­ing with Jeff. As Mr. Buf­fett said recently, “even­tu­ally hor­mones take over” and as Brett Arends pointed out in Smart Money,” rent­ing is more expen­sive than buy­ing in about 75% of Amer­i­can cities.” You add high lum­ber, cop­per, iron ore and oil prices to this mix and you get the worst depres­sion in hous­ing and blue-collar employ­ment since the depres­sion. All these head­winds are about to become tail­winds, in our vision, over the next five years.

There­fore, bet­ting on the US econ­omy and the US con­sumer looks very favor­able to us, espe­cially where the rebounds in employ­ment and con­sumer con­fi­dence have an impact. In fairy tales, peo­ple are asked to spin straw into gold. We like to own com­pa­nies which spin milk and cof­fee (SBUX), cot­ton (JWN and CAB), inter­net access (EBAY and ACN), tax returns (HRB) and chem­i­cals (MRK, AMGN, BMY, ABT, PFE and MYL) into gold. Profit mar­gins on commodity-related com­pa­nies and com­pa­nies reliant on emerg­ing mar­ket growth could plum­met in the near future. Just ask the folks at BHP Bil­li­ton. They announced March 20th, 2012 that they are see­ing in a big drop off in demand from China. In turn, we believe mar­gins could go up for any­one who is pos­i­tively impacted by lower energy prices and/or com­mod­ity prices in gen­eral. This is espe­cially true if you “buy com­modi­ties and sell brands”.

Best Wishes,

William Smead

The infor­ma­tion con­tained in this mis­sive rep­re­sents SCM’s opin­ions, and should not be con­strued as per­son­al­ized or indi­vid­u­al­ized invest­ment advice. Past per­for­mance is no guar­an­tee of future results. Some of the secu­ri­ties iden­ti­fied and described in this mis­sive are a sam­ple of issuers being cur­rently rec­om­mended for suit­able clients as of the date of this mis­sive and do not rep­re­sent all of the secu­ri­ties pur­chased or rec­om­mended for our clients. It should not be assumed that invest­ing in these secu­ri­ties was or will be prof­itable. A list of all rec­om­men­da­tions made by Smead Cap­i­tal Man­age­ment with in the past twelve month period is avail­able upon request.

Tags: Alternative Investments, asset class, Asset Investments, Bear Market, Bets, Capital Management, Circle The Wagons, Commodities, Commodity, Diversification, Economic Boom, Economic Contraction, ETF, ETFs, Generation Move, Income Statements, Institutional Investor, Portfolio Companies, Rearview Mirror, Rebound, Recession, Warren Buffett
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Investor Sentiment Remains Elevated

Monday, March 26th, 2012

Cen­tral bankers have done their part flood­ing the world with liq­uid­ity, and investors have caught on as well by tak­ing asset prices higher. Cen­tral bankers have their backs, but there is no rea­son to think that some new vir­tu­ous cycle has been cre­ated.  By lift­ing global mar­kets, cen­tral bankers have averted a reces­sion and cush­ioned any future fall in asset prices.  So what if the SP500 drops 10%?  That would take the SP500 down to its 200 day mov­ing aver­age.  What a buy­ing oppor­tu­nity that would be for the always bull­ish crowd.  So while it may not be a vir­tu­ous cycle, we can say, “mis­sion accom­plished”.  I don’t think the “all clear” is ever war­ranted and just when investors get com­fort­able with one thing, the mar­ket has a way of chang­ing its tune.  Pre­dict­ing when this will hap­pen is dif­fi­cult, but it is more likely to hap­pen in the cur­rent mar­ket envi­ron­ment when bull­ish extremes in investor sen­ti­ment per­sist.  If you are a buyer now, you may not make any money, but that is the risk you take when buy­ing high with the expec­ta­tion to sell higher.  So while cen­tral bankers can claim mis­sion accom­plished, for the aver­age investor it is going to boil down to mar­ket timing.

The “Dumb Money” indi­ca­tor (see fig­ure 1) looks for extremes in the data from 4 dif­fer­ent groups of investors who his­tor­i­cally have been wrong on the mar­ket: 1) Investors Intel­li­gence; 2) Mar­ket­Vane; 3) Amer­i­can Asso­ci­a­tion of Indi­vid­ual Investors; and 4) the put call ratio. This indi­ca­tor shows extreme bull­ish­ness.  As stated last week: “If we look at the “dumb money” indi­ca­tor in fig­ure 1, we know that as long as the indi­ca­tor stays above the upper band (see green arrow on chart), prices should con­tinue to go higher – albeit in a grind­ing fash­ion at this stage of the rally.  This is the syn­drome I call “it takes bulls to make a bull mar­ket”.  If the indi­ca­tor closes below the upper band, then the best time to sell is usu­ally one week after this occur­rence.  In this instance, the mar­ket is rolling over and those late to the party are buy­ing that dip.  The data shows that this is the opti­mal time to sell.  But these are opti­mal sce­nar­ios, and I should cau­tion that opti­mal and stock mar­ket are rarely spo­ken of in the same sen­tence.  The mar­ket is just too unpre­dictable.  Who saw the May, 2010 “flash crash” or the 20% drop over 3 weeks in 2011 com­ing?  If you hang around too long, you could be one of those casu­al­ties.  Alas, there are no right answers or guar­an­tees.  These are just sign­posts that help us bet­ter under­stand the price action. ”

Fig­ure 1. “Dumb Money”/ weekly

Fig­ure 2 is a weekly chart of the SP500 with the Insid­er­Score “entire mar­ket” value in the lower panel. From the Insid­er­Score weekly report: “Insider sell­ing lev­els con­tin­ued at ele­vated lev­els, how­ever, vol­ume began to dimin­ish as some com­pa­nies began clos­ing trad­ing win­dows ahead of the quiet period strad­dling the end of one quar­ter and the begin­ning of another.”

Fig­ure 2. Insid­er­Score “Entire Mar­ket” value/ weekly

Fig­ure 3 is a weekly chart of the SP500. The indi­ca­tor in the lower panel mea­sures all the assets in the Rydex bull­ish ori­ented equity funds divided by the sum of assets in the bull­ish ori­ented equity funds plus the assets in the bear­ish ori­ented equity funds. When the indi­ca­tor is green, the value is low and there is fear in the mar­ket; this is where mar­ket bot­toms are forged. When the indi­ca­tor is red, there is com­pla­cency in the mar­ket. There are too many bulls and this is when mar­ket advances stall. Cur­rently, the value of the indi­ca­tor is 68.16%. This is the sec­ond week in a row that the indi­ca­tor has turned down week over week. Val­ues less than 50% are asso­ci­ated with mar­ket bot­toms. Val­ues greater than 58% are asso­ci­ated with mar­ket tops. It should be noted that the mar­ket topped out in 2011 with this indi­ca­tor between 70% and 71%.

Fig­ure 3. Rydex Total Bull v. Total Bear/ weekly

Copy­right © The Tech­ni­cal Take

Tags: American Association Of Individual Investors, Asset Prices, Best Time, Current Market, Dumb Money, Extremes, Figure 1, Global Markets, Green Arrow, Investor Sentiment, liquidity, Market 1, Market Environment, Market Timing, Marketvane, Moving Average, Put Call Ratio, Recession, S&P500, Virtuous Cycle
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Figuring Out ECRI’s Recession Call

Friday, March 23rd, 2012

I am writ­ing this post in response to the arti­cle “Why Our Reces­sion Call Stands” of March 15, 2012 by Lak­sh­man Achuthan and Anir­van Banerji of the Eco­nomic Cycle Research Insti­tute (ECRI).

ECRI said: “How about forward-looking indi­ca­tors? We find that year-over-year growth in ECRI’s Weekly Lead­ing Index (WLI) remains in a cycli­cal down­turn (top line in chart) and, as of early March, is near its worst read­ing since July 2009. Close observers of this index might be under­stand­ably sur­prised by this per­sis­tent weak­ness, since the WLI’s smoothed annu­al­ized growth rate, which is much bet­ter known, has turned decid­edly less neg­a­tive in recent months. The unusual diver­gence between these two mea­sures of growth under­scores a wide­spread sea­sonal adjust­ment prob­lem that econ­o­mists have known about for some time.”

The last sen­tence of the above para­graph must be treated with some cir­cum­spec­tion. What they call “the unusual diver­gence” is in my opin­ion noth­ing but a math­e­mat­i­cal diver­gence. Let me take you through their cal­cu­la­tion of the smoothed annu­al­ized growth rate as I fig­ured it out. ECRI cal­cu­lates a lin­ear smoothed time-weighted index for every week based on weekly WLI val­ues over the past 52 weeks, where each fol­low­ing week car­ries pro­por­tion­ately more weight than the pre­vi­ous week. The weekly per­cent­age change of the time-weighted index is then cal­cu­lated and annu­al­ized. My cal­cu­la­tion of the WLI smoothed annu­al­ized growth rate is vir­tu­ally a per­fect fit of that of ECRI with an r-squared of 0.99.

Sources: ECRI; Plexus Asset Management.

It is there­fore plain logic that the WLI smoothed annu­al­ized growth rate will lead the WLI year-over-year growth rate.

Sources: ECRI; Plexus Asset Management.

It fol­lows that even if the smoothed annu­al­ized growth rate starts to fall in com­ing weeks the year-over-year growth rate will start to turn less negative.

ECRI also com­mented that “In spite of the efforts of mon­e­tary pol­icy mak­ers, actual U.S. eco­nomic growth has slowed, while WLI growth has barely budged from a two-and-a-half-year low.”

In pre­vi­ous calls ECRI empha­sized the smoothed annu­al­ized growth rate of the WLI but its focus has clearly changed to the year-on-year growth rate. Will the improved year-on-year growth rate of the WLI in com­ing weeks change their mind and cause a big hooray about ECRI‘s change in stance or are they hop­ing or wish­ing for a major fall in the mar­kets? It would seem the “unusual diver­gence” ECRI refers to and its change in focus to year-on-year growth from smoothed annu­al­ized growth are used to sub­stan­ti­ate their call on the econ­omy, whether it may turn out to be right or wrong.

ECRI also said “It is notable that the WLI, which is sen­si­tive to the prices of risk assets that have been sup­ported by mas­sive world­wide liq­uid­ity injec­tions, has hardly been swayed from its reces­sion­ary trajectory.”

In ana­lyz­ing the WLI I con­cen­trated on three major assets, namely the S&P 500, US 10-year Gov­ern­ment Bond Yield and the Econ­o­mist Met­als Index. My analy­sis indi­cates that ECRI again focused on year-on-year growth rather than on smoothed annu­al­ized growth rates when they made the statement.

The U.S. stock indices may have a major impact on the cal­cu­la­tion of the WLI. This is evi­dent when the year-on-year growth of the S&P 500 Index is com­pared to that of the WLI. The growth rate of the S&P 500 Index bot­tomed at zero per­cent and is on the rise. This should impact pos­i­tively on the WLI.

Sources: ECRI; I-Net; Plexus Asset Management.

The smoothed annu­al­ized growth rate of the S&P 500 Index is clearly exert­ing upward pres­sure on the smoothed annu­al­ized growth rate of the WLI.

Sources: ECRI; I-Net; Plexus Asset Management.

The prices of mate­ri­als could have a major impact on the WLI and the Econ­o­mist Met­als Index is prob­a­bly a good proxy for the prices of mate­ri­als. The year-on-year growth rate of the Met­als Index is cur­rently impact­ing neg­a­tively on the year-on-year-growth rate of the WLI.

Sources: ECRI; I-Net; Plexus Asset Management.

The smoothed annu­al­ized growth rate of the Econ­o­mist Met­als Index is clearly exert­ing upward pres­sure on the smoothed annu­al­ized growth rate of the WLI.

Sources: ECRI; I-Net; Plexus Asset Management.

The U.S. bond mar­ket could have a major impact on the WLI and the 10-year Gov­ern­ment Bond Yield is prob­a­bly a good proxy for the U.S. bond mar­ket. The year-on-year growth rate of 10-year bond yield index is cur­rently impact­ing neg­a­tively on the year-on-year-growth rate of the WLI.

Sources: ECRI; I-Net; Plexus Asset Management.

The smoothed annu­al­ized growth rate of the 10-year bond yield is clearly exert­ing upward pres­sure on the smoothed annu­al­ized growth rate of the WLI.

Sources: ECRI; I-Net; Plexus Asset Management.

It would seem that the WLI is in fact cur­rently swayed AWAY “… from its reces­sion­ary tra­jec­tory” (ECRI’s quote), espe­cially due to the fact that the smoothed annu­al­ized growth rates lead year-on-year growth rates.

ECRI said: “The unusual diver­gence between these two mea­sures of growth under­scores a wide­spread sea­sonal adjust­ment prob­lem that econ­o­mists have known about for some time.”

I assume the “wide­spread sea­sonal adjust­ment prob­lem” ECRI refers to is the mar­kets’ reac­tion to the sea­sonal adjust­ments that per se influ­ence the WLI. Surely, sim­i­lar pre­vi­ous reac­tions or, put dif­fer­ently, price and yield move­ments due to adjust­ments, have been taken into account in all the data series and were included in ECRI’s pre­vi­ous calls?

I am an invest­ment pro­fes­sional and not an econ­o­mist and regard the WLI and ECRI’s calls on the econ­omy of great value and indis­pens­able. Whether I agree or dis­agree with their cur­rent reces­sion call is not the point, but I urge them to stick to the orig­i­nal inter­pre­ta­tion of their WLI and not to be selec­tive in the inter­pre­ta­tion that may be viewed as jus­ti­fy­ing their view on the econ­omy. After all, mar­kets are extremely well informed and their antic­i­pa­tion of future eco­nomic trends is nearly per­fect, hence the con­struc­tion of ECRI’s WLI and the great value it offers to non-economists.

Tags: Anir, Annu, Asset Management, Banerji, Circumspection, Divergence, Economic Cycle Research Institute, Ecri, Gence, Ized, Lem, Percentage Change, Perfect Fit, Prob, Rate Sources, Recession, Ter, Tors, Weighted Index, Wli
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The Second Differential of the ECRI

Monday, March 19th, 2012

Last week the Eco­nomic Cycle Research Insti­tute (ECRI) affirmed their call made last fall that the U.S. econ­omy would soon be in reces­sion.   The ECRI’s main busi­ness focus is to try and pre­dict the ups and downs of the busi­ness cycle, and they have had an out­stand­ing record over the years.  Right now the absolute level of the index may sug­gest eco­nomic weak­ness, but the sec­ond dif­fer­en­tial has sug­gested an improv­ing stock mar­ket is also in the cards.

The ECRI has devel­oped a weekly indi­ca­tor where they have com­bined var­i­ous eco­nomic sta­tis­tics into a series that they pub­lish.  Details are not pro­vided on the spe­cific of the com­po­si­tion of this index, but they include broad mea­sures of out­put, employ­ment, income and sales.  When describ­ing the weekly ECRI index, they always empha­size that these met­rics are based on lead­ing indi­ca­tors rather than coin­ci­dent indi­ca­tors, so their data should carry more weight. No argu­ment here, as we’d agree with this assessment.

In an arti­cle writ­ten last week, they reit­er­ated their call that a U.S. reces­sion is forth­com­ing.  Con­fi­dence in this call was based on the year over year analy­sis of the weekly ECRI index, as it was again sig­nal­ing weak­ness.  Year over year sta­tis­tics help alle­vi­ate sea­son­al­ity in the num­bers, which has been a com­mon com­plaint over recent months.  Again, we are not debat­ing the merit of this argu­ment, as this seems like solid rea­son­ing.   But what we would say, is that investors may be bet­ter served to remem­ber that the ECRI is pre­dict­ing the econ­omy, and not the stock mar­ket. These two are highly cor­re­lated, but cer­tainly do not always move in the same direc­tion together, except per­haps when you take the 2nd dif­fer­en­tial into con­sid­er­a­tion.  The 2nd dif­fer­en­tial is another way of say­ing, “less bad” data.  Less bad data (aka Green Shoots) is arguably what started the rally off the bot­tom in March 2009.

If you look at the chart above, the trends are fairly clear.   It’s not the absolute level of the data being pos­i­tive or neg­a­tive, it’s the trend of the num­bers.   The mar­ket is not as for­ward think­ing as most investors believe.   It moves up on data that is ‘less bad’ or bet­ter than it was pre­vi­ously, and moves down on ‘more bad’ or worse than the prior data before.

So it seems to us that the weekly  ECRI data series should be viewed dif­fer­ently when think­ing about the econ­omy ver­sus the stock mar­ket.  The absolute num­bers accu­rately reflect the over­all econ­omy, and the 2nd dif­fer­en­tial is a bet­ter reflec­tion of the direc­tion of the stock market.

Tags: Absolute Level, Business Cycle, Business Focus, Coincident Indicators, Composition, Confidence, Differential, Economic Cycle Research Institute, Economic Statistics, Economic Weakness, Ecri, Employment Income, Leading Indicators, Metrics, Rally, Recession, Seasonality, Stock Market, Ups, Ups And Downs
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ECRI: Why Our Recession Call Stands

Friday, March 16th, 2012

Why Our Reces­sion Call Stands

Tags: Coincident Index, Concoction, Consumer Spending, Current State, Downturn, Economic Data, Economic Growth, Economic Indicators, Ecri, Employment Income, GDP Growth, Gold Standard, Lakshman, Personal Income, Q3, Recession, Recessions, Straight Answer, Three Quarters, Usci
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Another Country in Europe to Avoid (Koesterich)

Tuesday, March 13th, 2012

While Greece is now cleared to receive a sec­ond bailout and Spain and Italy are fac­ing lower bor­row­ing costs, Europe is not yet out of the woods. Greece, for instance, still has unsus­tain­ably high debt lev­els, and Portugal’s ris­ing yields are becom­ing increas­ingly wor­ri­some.

Given these lin­ger­ing issues, I recently advo­cated that investors avoid Spain and Italy, mar­kets that are cheap for a rea­son. Now, I’m adding another coun­try to the list of Euro­pean mar­kets to con­sider under­weight­ing: the United King­dom, a mar­ket that has its own issues sep­a­rate from those of the euro zone.

Cur­rently, equi­ties in the United King­dom appear over­val­ued, espe­cially when you con­sider the numer­ous signs that the coun­try is tee­ter­ing on the brink of another reces­sion. As of this writ­ing, UK stocks are trad­ing at a rel­a­tively rich val­u­a­tion of 1.7x book value, higher than the 1.5x book value aver­age for devel­oped countries.

At the same time, eco­nomic con­di­tions in the United King­dom are dete­ri­o­rat­ing. Expec­ta­tions for UK growth have decreased over the last six months, and UK cor­po­rate sec­tor prof­itabil­ity has dropped since the end of last year. In addi­tion, UK mort­gage rates have increased and unem­ploy­ment remains at a 17-year high, head­winds for an econ­omy where house­hold spend­ing accounts for roughly 2/3 of gross domes­tic product.

While UK infla­tion is declin­ing, it’s still ele­vated at 3.6%, a level well above both the Bank of England’s tar­get rate and UK wage growth. Thanks to the United Kingdom’s rel­a­tively high infla­tion, it appears unlikely that the Bank of Eng­land will pro­vide fur­ther quan­ti­ta­tive eas­ing in the near term, mean­ing the UK econ­omy will have less growth sup­port. Finally, the United King­dom may be try­ing to reign in its deficit too quickly by rais­ing taxes and cut­ting spend­ing, poten­tially rais­ing the risk of another recession.

So where should investors con­sider invest­ing in Europe? I con­tinue to believe that much of North­ern Europe rep­re­sents a good value for long-term investors and I par­tic­u­larly like Ger­many, the Nether­lands and Nor­way (poten­tial iShares solu­tions: NYSEARCA: EWG, NYSEARCA: EWN, NYSEAMEX: ENOR).

Tags: 7x, Bailout, Bank Of England, Brink, Corporate Sector, Debt Levels, Developed Countries, Economic Conditions, Euro Zone, European Markets, Gross Domestic Product, Headwinds, Household Spending, Profitability, Recession, Target Rate, Uk Economy, Uk Inflation, Uk Mortgage Rates, Uk Stocks
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What "Seasonal Adjustments" Actually Mean and Do For Data (Tchir)

Tuesday, March 13th, 2012

Via Peter Tchir of TF Mar­ket Advi­sors,

There has been a lot of talk lately about “sea­sonal adjust­ments” and what they actu­ally mean and do for the data.

Report­ing today’s fore­cast in “sea­son­ally adjusted” terms would not be incor­rect. The tem­per­a­ture today is almost 30 degrees higher than the aver­age March tem­per­a­ture in NYC, so report­ing it as 30 degrees higher than the annual tem­per­a­ture is fine. You instantly know that today is abnor­mally warm for the time of year. It doesn’t nec­es­sar­ily help you choose what to wear unless you know the monthly and annual aver­ages. It isn’t wrong, but the infor­ma­tion isn’t per­fect either. If you only had national aver­age tem­per­a­tures, how would you sea­son­ally adjust today’s NYC tem­per­a­ture? That gets more complicated.

We like “sea­son­ally” adjusted num­bers because it “smooths” the data. We don’t get big jumps due to the time of year and we can apply trend lines, etc. to the graphs. There is noth­ing wrong per se with that, but the adjust­ments can also mask things in the data. On unem­ploy­ment, is the BLS adjust­ment bet­ter or worse than what other peo­ple model? What vari­ables does it account for? Does it prop­erly account for poten­tial effects of how long a reces­sion has been going. How often does “sea­son­al­ity” change. In the­ory, the mar­ket could see a –200k num­ber and real­ize that if nor­mally this time of year it would have been –400k, then it is a good num­ber. It would be a good sign, but it is only +200k for exam­ple if the sea­son­al­ity is con­sis­tent. Any­ways, enough on that sub­ject. Sea­son­al­ity isn’t bad, and is use­ful in many ways, but so is the raw data and try­ing to fig­ure out if the adjust­ments make sense or need to be mod­i­fied a lot due to the par­tic­u­lar cir­cum­stances at the time (like great warm weather).

The mar­kets are almost all doing well so far this morn­ing. Cor­po­rate and finan­cial credit in Europe is sig­nif­i­cantly tighter, with Main 3 tighter, XOVER 11 tighter, and the Finan­cials CDS index 4 tighter. Partly on the back of some Ger­man con­fi­dence num­bers (which don’t seem to be a lead­ing indi­ca­tor) and hopes that the EU is becom­ing less aus­tere. Spain has been told to get to a 5.3% bud­get deficit, rather than the 4.4% one they reneged on last week. Both sides are main­tain­ing the farce that the 3% tar­get for 2013 will be met.

Span­ish bond yields are higher again, and CDS is unchanged – about the only asset that doesn’t seem to be doing bet­ter today. Accord­ing to Bloomberg, the EFSF will be releas­ing money to Greece, €5.9 bil­lion in March, €3.3 bil­lion in April, and €5.3 bil­lion in May. That is good, because the ECB has €4.7 bil­lion of GGB bonds matur­ing in March, and €3.3 bil­lion of GGB bonds matur­ing in May.

After a flurry of early num­bers, we can all wait for the Fed state­ment. If there was ever a day designed to be wait­ing for the Fed state­ment sit­ting out­side at Bryant Park or some­where, today would be that day. But inside, star­ing at screens, the mar­ket will be closely watch­ing the state­ment. There is some con­cern the Fed may acknowl­edge that infla­tion is actu­ally a con­cern for the first time, reduc­ing chances of fur­ther QE. As the elec­tion gets closer, it will become harder for the Fed to move on QE with­out com­pellingly bad data (not just bad in the eyes of the Fed, but to gen­eral per­son track­ing the econ­omy). There is still hope that the Fed has been down­play­ing growth in order to jus­tify QE and will sig­nal its inten­tions to move before it is too late, and the bank stress tests may be another rea­son the Fed can jus­tify QE, espe­cially in the mort­gage mar­ket, where the Fed insisted on sce­nar­ios worse than most investors expected.

Tags: Annual Temperature, Average Temperatures, Circumstances, Europe, Graphs, Mask, Raw Data, Recession, Seasonal Adjustments, Seasonality, Time Of Year, Trend Lines, Unemployment, Variables, Warm Weather
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