Monday, March 18, 2013

We’re Buying Stocks Like It’s 2007


A headline in my Saturday paper said the Dow Jones just wrapped up its best streak in almost 17 years.  The recent 10 straight days of gains was the longest “winning streak” since 1997.  But remember the stock market is not a basketball team.  Basketball teams achieve winning streaks by playing well, the stock market has winning streaks because the fans decide that it’s time to keep cheering.  

Yes, this market is smoking hot!  Articles are speculating about just how high the market could go.  Other articles are encouraging investors to get back in the market big time.  Hot actresses with absolutely no knowledge of the market are talking about buying stocks in interviews.

But there have also been several articles comparing the exuberance about the stock market now to the excitement in the summer of 2007.  The market was also sizzling then.  Everybody was talking about and buying stocks.  There was speculation about how high the market could go. There was extreme investor confidence.  There was absolutely no way this market could fail.

When I instructed my broker in October 2007 to pull my money out of the market, he thought I was crazy.  This was the most contentious conversation that I have had with him in nearly 30 years of the relationship. That’s how hot the market was in October 2007, about two weeks before the crash started.

The stock market can break your heart!
The stock market is as stable as a high school romance.  It can catch fire and burn hot quickly without warning.  He/she loves me and this is going to last forever, that’s until it suddenly collapses leaving you devastated with a broken heart.

Is it Possible 2012 GDP Was Overstated?

The economy grew 2.2% in 2012, or did it?  ECRI (Economic Cycle Research Institute) says its recession forecast in 2012 is correct because when the 2012 GDP numbers are revised, it will show that we were really in recession for part of the year.

Is this possible?  I believe that the economy was so “jumbled” by the Great Recession that many of the usually reliable economic indicators are still giving off false readings.  This includes both the ECRI index and the GDP numbers.  However, if you look at some economic statistics; imports, exports, miles driven, freight, employment, it looks like growth was between 0-1% for the year. 

The two sectors that were strong in 2012 were housing and natural gas.  Housing was growing because its recovery did not start until Q1, 2012.  Natural gas production growth is due to technological innovation (fracking), not an economic cycle recovery.  Even if the economy grew at 2%, if you subtract out housing and natural gas, then the rest of the economy was very tepid.  That’s why many commentators say it still feels like a recession.  You also have to trust that the government accurately estimated GDP with no upward bias in an election year.  I have vowed not be political this year, so you must decide this one on your own.

Economic Growth Has Started (Again)

The economic reports for February have been very positive.  After a few months of 0% growth, the economy is looking much better.  My “expert” panel has raised the Q1, GDP forecast to 2.2%.  However growth will remain “choppy” with the forecast at only 1.6% for Q2.  The recent positive economic news has helped fuel the rise of the stock market and the hope of even higher gains.  However, the stock market has not been in sync with the economy for several months and a 1.6% growth in Q2 is not a positive sign.

Model T Update

The market exceeded the Model T forecast (as was pointed out by several alert readers) of 1550 on March 8.  I have been asked if the Model T needed to be recalculated.  Historically the model varies by +/- 2%, so the upper limit is 1583.  In addition, the timing of the model is more important than the S&P number.  The number is useful in determining if the model is functioning properly.  The model still forecasts a peak in May, however the fact that we are over 1550 (the peak so far in this cycle is 1563) means the peak could come in April.  I am planning to move a significant part of my money out of the market in early May.  Stay tuned.

Sunday, March 3, 2013

Gamblers, Waiters and Strippers – Keys to the Recovery?

No Chance of a Recession Now?

The revised Q4 GDP came in at +0.1% (up from -0.1%) which means we are no longer in danger of going into recession! Booyah!  It also means that my December prediction of “near 0%” is still smoking hot, even if the economy is not.

Budget Cuts (or really just a decrease in the rate of growth)

The economy is still struggling in 2013 partially due to the ending of the 2% Social Security tax cut.  With your taxes 2% higher this year and gas prices on the rise, you now have between 2-3% less to spend.  So if government spending were reduced by, let’s just pick a number, say 2.4%, you would expect politicians and government officials to just tighten their belts like we are all doing without whining, complaining or threats.  For the past couple weeks it has sounded like you are taking candy bars away from six year olds.  These people are addicted to spending your money and the power that comes with it!

We are adjusting our household budgets because we have 2-3% less and the government should have to do the same.  Oh wait, I forgot.  The U.S. Senate doesn’t have a budget.  They haven’t had one for four years.  This means that every payday you send your taxes to someone who doesn’t have a budget.  They just grab the money and spend it! And when they don’t have enough money, they borrow more.

What About Now?

How is the economy doing in Q1, 2013? Let’s look at a few “different” economic indicators.

Non-Tradition Consumer Spending Economic Indicators:

Coupon Index - People are trying to stretch their money by using more coupons.  This is logical but according to the Internet Coupon Index (from, coupon usage has spiked just as it did right before the Great Recession began in December 2007.  Not a good sign.  Indicator: Negative

Restaurant Performance Index – This was actually up in January after four months of decline.  This is surprising since many restaurant related stocks are not doing well.  In my locale, the restaurants that survived the recession are busy but new restaurants are not opening.  This means capacity is still less than the 2008 level.  Indicator: Negative but improving.

Retail Advertising – I have noticed a reduction in Sunday sales flyers, coupon magazine thickness and junk mail in 2013.  Retailers are cutting back on spending and so are their customers. Indicator: Negative

Charitable Contributions – These are reportedly down, but it should be expected that people would cut spending here first.  However, it will be a very positive sign when giving increases.  Indicator: Neutral

Gambling – The new Ohio casinos are reporting that revenue is considerably under forecast.  But all the factors listed above for charitable contributions apply here.  Indicator: Neutral

Some Unusual Economic Indicators:

The Hot Waitress Index – This indicator says that the waitresses are more attractive during economic downturns since these women turn to restaurant jobs when they cannot find jobs in other fields.  I have previously stated that this indicator (if accurate) is only relevant in New York, Los Angeles or other big cities with entertainment industries.

However, I have noticed that there are more guys working as waiters than normal.  This is probably the result of the lack of factory and other higher-paying industrial jobs that would be more attractive to this demographic.  If this is true, as the job market improves, the ratio of waitresses to waiters should increase. Indicator: Negative

The Stripper Index – This indicator says that “gentlemen club” spending is one of the first cuts made in an economic downturn.  Reportedly more clubs are closing than opening around the country.  Conversely in Canada, where economic conditions are much better, clubs are having problems recruiting enough “entertainers”.  The obvious solution would be to export U.S. strippers to Canada.  I don’t think this will happen because President Obama says there is a shortage of meat inspectors in the U.S. due to the recent spending cuts.  And you know how picky Canada is about imported beef.  Indicator: Negative

Bottom Line: The Q1 GDP forecast of 1.2% still appears to be solid.

Model T Update:

The S&P 500 Index is at 1518, 2% below the Model T peak prediction of 1550.  Because the Model T’s track record has been between +/- 2%, the high of 1530 in February may well have been the peak.  Unfortunately the Model T does not take into account sequestrations or a possible government shutdown in April.

A possible scenario would be that another budget compromise in March results in stock market gains in April and May.  This could boost the S&P to 1550 or more and would then set the stage for a major correction.