Thursday, January 28, 2010

An Economic Indicator Check Up

It’s time to check the current state of some major economic indicators:


GDP for Q4, 2009 is expected to be 4.5% (this is per the “Ake” index which averages the forecasts of my favorite seven economists. They do the math so I don’t have to!)

The forecast for Q1 is 2.8% and 2.7% for Q2.

What it means: The economy did not really grow at 4.5% in Q4. According to the experts, the number is inflated due to inventory replenishments. The 2010 first half forecasts are predicting a moderate recovery.

What I think: The GDP estimate is less accurate when economic conditions are abnormal and this is about as abnormal as it gets. The economy did grow in Q4, but not significantly (Goldman Sachs says that growth is about 2% when you eliminate the “noise” from the data). Future forecasts are becoming more consistent and accurate as the economy heals.


Housing Starts: Rate of 557,000 per year. Down 4.0% from November. Up 0.2% y/y.

Existing Home sales: Rate of 5.45 million per year (SA). Down 16.7% from November. Up 15% y/y.

Existing Home Prices: Up 1.5% y/y – first increase since August 2007

Home Builder Confidence Index (HAHB) – Fell to 15

What it means: Housing starts remain weak due to the large inventory of upscale existing homes on the market. Existing home sales (and also new home sales) fell because many sales were pulled forward due to the expiration of the tax credit. The increase in prices was unexpected, but next month’s data will be important in determining if this is a blip or a trend. Home builders remain pessimistic about 2010.

What I think: Because housing got us into this mess, people expect housing to lead us out. This has been true of many economic recoveries. There will be no big snap back in housing this time. Housing will take an extended time to recover and so should the economy.

Existing home sales will jump back up in January due to the tax credits being extended and expanded. Sales should plunge again in May due to the credits expiring in April. Therefore, June becomes a critical month. It will be in the peak of home buying season, but the tax credit is gone, mortgage rates will be higher, and there could be even more foreclosed homes on the market.

The Consumer

Retail Sales: Down -0.2% from November (SA), up 5.4% y/y (excludes auto sales)

Light Vehicle Sales: Yearly rate of 11.25 million (SA), third straight monthly increase

Consumer Confidence: The Conference Board Index is low and trending up, the ABC News index is low and trending lower.

What it means: People with jobs are spending more money than they were a year ago. People who need automobiles are buying them. Much of the fear and panic are gone and consumers are starting to behave more rationally. One of the two consumer confidence indexes is wrong. Watch for the University of Michigan Index (a third survey) released tomorrow, to break the tie.

What I Think: Retail sales are doing better, but it is not a steady increase. The low consumer confidence scores tell you the reason why. It does appear that the auto industry is recovering stronger than experts predicted.

Don’t look for consumer spending to take off just yet. As long as unemployment stays high, consumer confidence will remain weak and there will also be less disposable income available. Usually the employment rate is a lagging indicator (improves after the economy does). This time employment could be a coincident indicator (improves as the economy does). As people find jobs, they spend more money and the people that already have jobs feel more confident and spend more money also. This would be consistent with the theory that employment could improve faster than expected due to how and why the layoffs happened in 2008-2009.


Moody’s Survey of Business Confidence - Very positive increase, at highest level since late 2007

PricewaterhouseCoopers World CEO Survey- Significant increase in confidence for 2010

National Federation of Independent Business Optimism Index – Low and staying low

What it means: Large businesses are recovering but small businesses continue to struggle.

What I think: Small businesses are still having extreme difficulty obtaining credit. This should have been the government’s number one priority starting in October 2008 when credit started to dry up. The problem still remains and it is vitally important because of the number of new jobs that can be created by small businesses. There was a plan presented in the State of the Union address to provide $30 billion for small business loans. We will wait and see how fast Congress jumps into action this time.

The Predictive Indicators

The Conference Board Leading Economic Index – Up for the ninth straight month. It predicts steady growth in Q1 and increased growth in Q2.

Economic Cycle Research Institute Weekly Leading Index – Q1, 2010 growth will be slower than Q4, 2009. There will be a slight decrease in growth in Q2, 2010.

What it means: It is good news that both indexes predict the economy will continue to grow for the next six months. This is consistent with the GDP forecasts listed above. One of the two indexes, which strongly compete with each other, is wrong about Q2.

What I think: All of the indicators point to a slow, steady recovery. This is consistent with the GDP forecasts and the Model “T’s” prediction of a long, slowly ascending, curve (or the “UL” recovery).

Thursday, January 21, 2010

Welcome to the Kingdom of Employvia

The Iz and the Uns

Once upon a time there was a kingdom called Employvia. Two classes of people lived in the kingdom, the Iz and the Un. The Iz were the preferred and more respected class. They had much greater access to the many riches of the kingdom and thus could consume more goods and services.

Almost every Un wanted to become an Iz. Under normal conditions 95% of the people were Iz and 5% were Uns. People moved from one class to the other due to personal or situational factors in the everyday life of Employvia. In good times it wasn’t difficult for an Un to become an Iz. An Un still had do exert some effort to become an Iz, but the transition period was relatively short. Under these conditions the great majority of the people were happy and the kingdom thrived.

Then one day it was discovered that some greedy men had been manipulating the kingdom’s resources for their own gain. This caused a great panic among the people. This panic resulted in terrible conditions in Employvia. Many people involuntarily went from being an Iz to an Un. Worse yet, no matter how hard the new Uns tried to turn back into Iz, the great majority remained Uns. And so the number of Uns continued to grow.

This situation alarmed the people so much that they demanded action by the king to increase the number of Iz. So the great King "O" (not much of a stretch) waved the royal stimulus wand that was supposed to magically transform the Uns into Iz (even less of a stretch). But alas, this did not work. Iz continued to become Uns.

The fear and panic had caused another problem. Many Iz were afraid they might become Uns. They knew of many family, friends and neighboring cubicle dwellers who once were very successful Iz who had suddenly been turned into Uns. Because of this fear, they started behaving more like Uns than Iz. They started to consume less goods and services. Ironically this change in behavior resulted in even more people becoming Uns.

Now the king and his royal advisors must restore confidence in Employvia so that the Iz return to acting like Iz. This will result in more Uns becoming Iz and as the number of Iz grows, it will provide even more opportunities for Uns to become Iz.

Recovery or Healing

While we all talk about an economic "recovery", it will resemble more of a healing. It is similar to an athlete who suffers a serious hamstring injury. The injury is a traumatic event with much pain and suffering. Immediately after the injury it is difficult and painful to even walk. You can take medication to reduce the pain, but there is little you can do to accelerate the healing process, it just takes time. At some point you can walk again without pain. But athletes need to run, not just walk.

There is a psychological barrier that needs to be overcome in the transition from walking to running. The leg feels different than before and the pain from the injury is still very fresh in your memory. But you jog, and then you trot, and one day you run again. And that is a great day. Our economy has been injured. It will take time to heal, but someday we will run again.

Thursday, January 14, 2010

A Story, an Attitude Check, and a Warning

A Model “T” Allegory

Once there was a car that was travelling down the road very fast. Its maintenance staff kept it running with high-octane, but poor quality, fuel. As the quality of the fuel deteriorated, the engine started to sputter and smoke. The car began to shake so violently that it left the road and went down a large hill before coming to rest.

Two expert mechanics were called to repair the car and get it back running again. We will call the mechanics Ben and Timothy. They changed the fuel, made repairs to engine and then restarted the car. The engine ran, but it was apparent the car did not have enough power to make it up the hill and back on to the road. Let’s call the road “Recovery”.

So Ben and Tim decided to push the car up the hill with the engine running. They told the owner of the car, Barry, to get in the driver seat and steer the car back on to Recovery while they pushed.

Ben and Tim pushed the car harder than it had been pushed in a long time. The car started up the hill, but moved slower than expected due to several obstacles. Barry attributed some of the problems to the car’s previous owner, George, who he said did not maintain the car properly.

Because Ben and Tim were pushing so hard it was difficult to determine how much of the car’s power was being generated by the improving engine performance. Barry bragged about the gain in horsepower to onlookers, but could still be heard shouting, “Push Tim, Push Ben”.

But the car is not yet back on the road and Ben and Tim are getting tired. Soon they will no longer be able to push the car very hard. At that point the car will be reliant on the engine alone to make it the rest of the way.

There are three possible endings to the story:

1. The car keeps traveling at a good speed up the hill, gets back on to the road and then accelerates. Call it the Mazda ending, Zoom, Zoom, Zoom.

2. The car continues to climb the hill, but at a slower pace than when it was being pushed. It eventually gets back on to the road, but takes a long time to get there. Once back on the road, it may even take some more time to accelerate due to the energy exerted climbing the hill. Call it the grandma drives a Buick ending.

3. The car’s engine sputters, it loses power and starts to roll backward down the hill. It will not reach the previous low point due to Barry pushing the brake pedal through the floor and Ben and Tim throwing themselves under the car (if they fail to do this, they will end up thrown under the bus). Call it the clunker (hey somebody got cash for that!) ending.

Hope for number one, plan for number two and recognize that number three is possible.

Psychological Factor Update

Because psychology plays a significant role when entering and exiting a recession, it’s wise to keep track of the key consumer and business confidence surveys.

The University of Michigan Index of Consumer Sentiment
- Up 7.6% in December to 72.5. First increase after two months of decline, but still very low.

The Conference Board Consumer Confidence Index
- Up 2.3 points in December to 52.9. The second consecutive increase, but still very low.

ABC News Customer Comfort Index (weekly index)
- Down six points (big drop for this index) last week to -47 after significant gains the last few weeks.

Chief Executive Magazine CEO Confidence Index
- Surged 9.2 points in December, after two consecutive declines

What it means –

All three consumer indexes were reported to be influenced by the latest jobs data. The two monthly indexes by the positive November employment numbers and the ABC survey by last week’s disappointing December report.

It appears that consumer confidence is very fluid and dependant on the latest job news. This can be unsettling since unemployment is a lagging indicator and should increase some even as the economy improves. People were expecting a better employment report in December after November’s pleasant surprise. However, the economic recovery is not going to be a smooth one. Expect data on unemployment, retail sales, etc. to fluctuate in the short-term. The increase in CEO confidence is still a good sign.

Follow Up From Last Week’s Post

The Model “T” has written something on Don Ake’s Facebook Wall:

“Oh, so you think my forecast of a 48% drop in the stock market is too low? The current edition of the Economist says stocks are overvalued by 50%. I pity the fool who takes too much risk.”

Sounds more like Mr. Model “T” to me.

Disclaimer Statement

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.

The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

Thursday, January 7, 2010

It’s a Brand New Day

Let’s start off with some advice from that great economist Sting:

Turn the clock to zero, honey
I’ll sell the stock, we’ll spend all the money
We’re starting up a brand new day (or year, or decade, for that matter)

Actually not bad advice if you expect the stock market to tank and inflation to rise.

What will happen to the stock market in 2010? Seldom has there been such a wide divergence of opinion as we begin a new year. You can be certain the market will go up, unless of course it goes down, or maybe it will just “move sideways” (I love that expression). Let’s look at some predictions:

The Stock Market Will Go Up

The market is up over 60% from its low last March. It has momentum and will continue to rise as the economy continues to grow. There are many respected analysts predicting stocks will increase 10-20% in 2010. One of the most optimistic is the team of Brian Wesbury and Bob Stein ( They are predicting a 24% increase in stocks this year and were very accurate in forecasting the 2009 jump.

The Stock Market Will Go Down

The stock market is very “over-bought” and prices are much too high. The fundamentals are bad. Sales volumes have been too low. The economy will slump once the fiscal and monetary boost provided by Treasury and the Fed fades, taking the stock market down with it. There are many respected analysts predicting a drop of more than 15% in 2010. One of the most pessimistic is David Tice (Federated Investors) who predicts a 40% decrease in 2010.

The Stock Market Will Go Down ----- Then Back Up

Stock market prices are too high after the 2009 rally. The market will dip (10-15%) in the first half of the year. Later, continued economic growth will boost the stock market and it will finish the year with a gain of 10-15%. This scenario is favored by Shaeffers Research and Dennis Keade.

What the Model “T” Says

The Model “T” is still forecasting an S&P bottom of 580. This would be a 48% drop from 2009 year-end and significantly lower than most of the pessimistic forecasts. It is apparent now that the commercial transportation industry (which is very connected to the housing industry) declined much more than most industries during this recession. Because the Model “T” is based on the transportation market, it is probably reading too low at this point.

There is also a timing factor to the Model “T”. Current graphs of stock price trends would indicate a long-term rally has begun. So is this a real recovery or just an artificial upward bending of the curve causing by the extraordinary actions taken by the Treasury and the FED to stabilize and prop up the economy? At this point, no one knows.

The Model “T” however indicates the recovery is premature. It says the real recovery should begin in Q4, 2010. This would mean a significant drop in the market for the first nine months of the year, with a recovery beginning in Q4.

What I Think

Using the most optimistic and pessimistic predictions from the experts, I can confidently forecast the S&P 500 index will end the year between 670 and 1390. Amusing, no doubt, but I did this to make a point. With this much uncertainty, now is not the time to make any bold moves. It is probably wise at this point to reduce your risk since it is likely that there will be some pull back on stocks in the first half of the year.

Because the recent rally was largely fueled by optimism, it will be interesting to see what happens if the optimism fades. If this were a movie, it would be fun to watch. Unfortunately it is more like reality television and everyone with stock investments is a participant in this show.

Turn the clock to zero, boss
The river’s wide, we’ll swim across
Starting up a brand new day

Disclaimer Statement

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.

The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).