Some “Experts” Got Some Splainin' To Do!

The initial GDP estimate for Q4, 2012 came in at -0.1%.  Yes, NEGATIVE! 0.1%.  And the economic world was shocked.  Economists were shocked, commentators were shocked and government officials were really shocked.  It was in a word SHOCKING!  This was truly an economic tremor, because no one, absolutely NO ONE saw this one coming!

Shocking News?  Really?

Well maybe not everyone was so shocked.  And just maybe you might know someone who may have thought this was happening.

From my December 9, 2012 post “A Very Ugly Freight Market”:

“The freight data is consistent with my forecast that the economy is bouncing between 0-2% GDP with no upward momentum.  It appears that we are falling to around 0% (the bottom of this cycle) at the end of the year.”

The Freight Market Doesn’t Lie!

The government economy gurus blamed the contraction on “weather” and decreased government spending.  This is the equivalent of your brother-in-law telling you for the tenth time why he can’t pay you the money he owes you.  It all just sounds like blah, blah, blah, blah at this point.  It is however more reassuring than “We are total morons and we have no clue what we are doing.  We are hoping things get better soon, but don’t expect it.  Check back with us in three months and maybe we will be smarter then.”

While the government was claiming the number was not that bad, some economists say the number could have been lower than -1.0% due to changes in the GDP deflator.  However the trend has been to revise the GDP up from the first estimate, so it would not be a surprise to see a final number around positive 0.3%.

What Now?

The recent January economic numbers have been more positive, so it doesn’t appear we are headed for the mini-recession that I expected at the beginning of last year. It should be noted that no economist on the Wall Street Journal panel forecasted a GDP lower than 0.9% just two weeks ago.  To all those economists who forecasted 2% growth for Q4: You got some splainin’ to do!  Here are the current 2013 GDP forecasts from my economic panel (my 7 favorite economists from the Wall Street Journal Panel):

Q1	Q2	Q3	Q4
1.2%	2.0%	2.3%	2.6%

This looks good to me and I think we can get to 3%in Q4. (So does my favorite economist Jim Meil from Eaton at +3.1%)

Latest Jobs Report

The economy generated only 157,000 in January.  Some commentators had the audacity to say this is positive news and a reason to be optimistic.  Let me put this into terms anyone can understand: this number is AWFUL.  It is TERRIBLE.  It is ROTTEN.  It is APPALLING.  It is ABYSMAL.  It is, okay my thesaurus ran out of words, but you get the idea.  Let’s put this into perspective. If you fill Ohio Stadium with people and then add another 50,000 (half-filled again), that’s how many people went back to work in January.  But there are over 22 million people looking for a “regular” full-time job.  At this pace the unemployment rate becomes a big issue in the NEXT presidential election!

Since my last post on the problems measuring the total unemployment rate, I learned about the SGS Alternative Unemployment Rate calculated by Shadow Government Statistics that attempts to measure just that.  The SGS rate was at an all-time high of 23.0% in January (unchanged from December).  If this is true, it should scare the hell out of us.  The unemployment rate peaked at around 25% during the Great Depression.   And President Obama just disbanded his “Jobs Council”?  Somebody in the government got some splainin’ to do!

Model T Update:

The model is predicting an S&P 500 Index peak of 1550.  If the market has not reached 1550 by May, then consider making a move at that time.  Some commentators are urging people to sell off now.  This is common near the end of a run, but I do think the market has some steam left.  On the other hand, the Model T has shown a variance of +/- 2%, which means an S&P of 1519, could be the top. The market closed at 1512 today, so we are now very close to the bottom of the “sell” range. 

The Unemployment Situation Is A Gooey Mess

I have stated before that unique situations created by the Great Recession have rendered some traditional economic indicators unreliable.  And I believe that the indicator that has been impacted the most is the Unemployment Rate reported by the U.S. Government.

Try Getting Your Hands Around This

This post was initially supposed to be an in depth analysis of the current Unemployment Rate.  Soon after starting my research, I found myself looking at a large pile of goo (if you are unemployed you may substitute “poo” for “goo” or probably a much stronger term).  There have been several articles recently about why the Unemployment Rate is not an accurate measurement of this labor market.  People are constantly trying to adjust the rate based on a single factor.  However there are many factors impacting the job market and these factors are very difficult to measure.
 

Sure, you can still calculate the Unemployment Rate percentage, but it is now just a statistic.  It is not an accurate indicator of the job market.  It is useless to put it on a historical chart.  The recessions of the past occurred primarily in a “blue-collar” labor force.  The recession hit, workers were laid-off.  The recovery begins and people returned to work, often at their previous jobs.  But the Great Recession hit all workers and created some dynamics that are very different.

The Unemployment Rate is greatly impacted by the number of people actively looking for work (the labor participation rate).  Many people have stopped looking for work, but for many different reasons.  For example, Fred the Engineer, age 59, was downsized from his job after 30 years with his company.  In previous recessions layoffs were based on seniority, but in the Great Recession they were based on salary.  Fred looked for a job, but nobody needs an aging engineer in a slow economy, so after exhausting his severance and unemployment benefits, he decides to retire at age 62.  He is not counted as “unemployed”, but he is a “forced” retiree and would gladly be working if a job were available.

The labor participation rate is being impacted by these “forced retirees”, people going on “disability” due to the more lenient government standards, the discouraged workers who have temporarily stopped looking due to the tepid job market.  There are also “mismatched workers” whose jobs were eliminated by new technology and who lack the skills to function in the new economy.  If these people are younger, they may drop out of the labor force to be reeducated, if they are older, they often become the long-term unemployed.  And of course you have the “benefit riders” that ride their benefits out to the end, before seriously looking for work.

The great majority of unemployed people are actively searching for work and hate being without a job.  However, in 2011 a construction worker told me he wasn’t really seeking work because he was on the “Obama Plan” and was enjoying his extended unemployment benefits.  Miraculously, he found a new job just weeks after his benefits ran out.  So yes, it is true as many others have pointed out: If you pay people to be unemployed, you get more unemployed people.

Another factor that is difficult to measure is the thousands of college graduates of the last five years who cannot find jobs in their field of study.  They either have no job or are woefully “under-employed” which may mean a job in fast food.  The underemployed (which aren’t accurately measured) also include the “Fred the Engineers” who are not old or wealthy enough to retire and are working full time at the local telemarking firm.  It is taking some professionals longer than four years to return to work in their field.

Since the Unemployment Rate is currently of marginal value, we are left with the monthly jobs reports (from the government and ADP).  And this measures the number of jobs creted, not the quality of these jobs.  Replacing a manufacturing job with a call center job is not an even swap.

The latest government report said 155,000 jobs were created in December.  This rate of job growth is woefully inadequate to provide for the millions of people seeking work (or better work).  I am hearing about more layoffs and hiring freezes from my local contacts.  And the current plan for creating more jobs is “there is no plan”.  

We need more precise information to better gauge and track the employment/unemployment situation.  Employment surveys need to ask people the reason they are not seeking employment, if they would work if a job was available, and whether they are “underemployed” if they have a job.  There is an opportunity here for a university or survey firm to create a new index.  Hey, that would even create a few more jobs!

 

Sell Your Stocks in May?

A Milestone: 

This is the 100^th posting of Model T Stock Trends blog.  I never would have imaged writing that when the blog debuted in September 2009.  The blog continues to gain readers with over 2,100 hits in over 30 countries in December. This includes a strong following in the United Kingdom, which I greatly appreciate. Ironically this 100th post is the most important one so far.  So enough celebrating, there is some serious work to do!

 

 

A History: 

The Model T (short for Model Transportation) is designed to forecast major peaks (and timing) in the S&P 500 index based on various data from the commercial transportation industry.  It is similar to Dow Theory (in theory) but more precise.  I began building the model in 2000.  I started sharing the forecasts with investment professionals in the transportation industry in 2007.   The Model T gained some “Wall-Street Cred” when it was surprisingly accurate in predicting the market peak in October 2007.  For a more complete description of the Model T, please see: What is theModel T and How Does it Work. 

I started writing the blog to test and refine the model publicly.  Anyone can say they “predicted it” after the fact.  And because I’m not an economist, I’m a marketing analyst; I do not have to worry about harming my professional reputation. 

There have not been any major peaks for the Model T to predict since I started writing this blog, until now.  The peak and correction in 2011 were caused by issues in the financial markets and the Model T does not directly consider financial data. 

The Forecast: 

The Model T forecasts the S & P 500 Index will peak at 1550 this year.  Last May the Model T predicted a peak of 1480 occurring in January 2014.  Of course the economy has been weaker than expected and the stock market stronger than expected, so the model has recalibrated. 

The Model T was 2% too high is predicting the 2011 peak and 2% too low in 2012, so a 2% range equals 1520 to 1580 this year.  How does this compare to the “experts” predictions for 2013?

Source	S&P 2013 High
Barclays PLC	1525
Credit Suisse	1550
S&P Capital IQ	1550
Model T	1550
Barron’s Survey Ave.	1562
Goldman Sachs	1575
BMO Cap. Mgmt.	1575

Okay, I like the neighborhood and it looks like the Model T is consistent with some of the much more sophisticated models. 

The Timing 

But the Model T is designed to also forecast the timing of the peaks, so the forecast for 2013 goes like this: 

▶ The S & P 500 Index will peak at around 1550 in May or June.  Often the market is strong for the first half of the years, and then slides the last half.  This forecast would be very consistent with that trend. 

▶ The index will then bottom out between 1320 and 1350 (please note that the Model T has not been as accurate at forecasting market bottoms) 

▶ The stock market will then begin a slow recovery and will finish the year around 1425 (vs.1426 at the beginning)   

Therefore 2013 will basically be a simple rollercoaster ride.  It will go higher, dip lower, but you will exit just about the place where you started. 

Due to the important implications of this forecast, I will issue updates as needed and as addendums when the blog posts are on other economic subjects.  Please bookmark the blog or subscribe (free) using the box at the upper right of the page so you can follow along. 

It is now time to buckle up and enjoy the ride!

Do You Have (Economic) Bowl Fever?

While you are relaxing watching the Russell Athletic Jock Strap Bowl and the Located Some Bad Teams Compass Bowl, don’t forget about watching the economy and your investments in 2013.  To help you along, I am again making my “Economic Bowl Picks” versus my economic expert panel (the average of my seven favorite economists whose forecasts are published by the Wall Street Journal). Here is how I did against the panel for 2012 (the actual numbers are current estimates, but should not affect the final results):

	Don	Panel	Actual	Winner
GDP	3.0%	2.3%	2.2%	Panel
CPI (Inflation)	2.3%	1.8%	2.2%	Don
Unemployment	8.2%	8.6%	7.8%	Don
Housing Starts	720K	674K	780K	Don
Crude Oil Price	$101	$95	$89	Panel

I'm closer on CPI, Unemployment and Housing Starts, so I’m doing a little victory dance celebrating my second straight 3 to 2 win!  Take note of how close the panels’ GDP forecast was.  You won’t get accuracy like that from those other economic blogs!  My GDP forecast was much too high for the second straight year.  I expected the government to “pull out all stops” to stimulate the economy in an election year because no incumbent president could ever be elected with economic growth so weak and unemployment so high. Uh, well it seems like the political indicators are malfunction as much as the economic ones. 

The 2013 forecast differences between the panel and I are much closer than normal this year which means I must be getting better or they are playing way to much golf!  For the record, I do make my forecasts before calculating the panel average: 

Here are the 2013 Economic Bowl Picks: 

The GDP Bowl: 

Minnesota Moderates vs. Rutgers Recession 

Line: Moderates by 2.2%  Range: 1.3% to 2.9% (The Line is the average of the expert panel.  The Range is the lowest and highest individual forecasts of the panel) 

The economy will start off at a very low rate of growth and then improve modestly all year.  We should be running at 3% by year’s end.  My Pick: Moderates by 2.3%  

The CPI Bowl (Consumer Price Index Bowl) 

Pittsburgh Pricers vs. Duke Discounters 

Line: Discounters by 2.1%  Range: 1.8% to 2.3% 

CPI was 2.2% last year.  There are few factors that should push this much in either direction.  This is why the FED can keep interest rates in check for another year.  I will move it up slightly just because I have GDP going up the same. My Pick: Discounters by 2.3% 

The Unemployment Bowl

Louisiana Laborers vs. Fresno Food Stampers 

Line: Stampers by 7.8%  Range 7.7% to 7.9% 

This statistic has been highly questionable for a year.  Just how many people are leaving the workforce and why?  The retiring baby boomers are a factor, but how much?  And then you have the underemployed and part-time worker/full-time seeker factor.  An economy growing at 2% should not generate enough jobs to reduce the current rate and that is why the panel is forecasting no change.  I am only slightly more optimistic. My Pick: Stampers by 7.6% 

Housing Starts Bowl

 

Arizona Allotments vs. Virginia Vacants 

Line: Allotments by 980,000  Range: 810,000 to 1,080,000 

The housing market is coming back and gaining momentum on a more consistent basis.  I (and the panel) am forecasting 25% growth in 2013.

My Pick: Allotments by 975,000 

Price of Crude Bowl 

Keystone Pipeliners vs. California Hippies 

Line: Pipeliners by $88 (year-end) Range: $80 to $94 

The price of crude (and gas prices) has dropped sharply in December and some experts say it could fall to $80 a barrel.  I think this is based on a weak U.S. and world economy.  By the end of 2013 I expect the U.S. economy to be rolling forward and hopefully the world economy is in better shape also.  My Pick: Pipeliners by $95.

Bet Big on the Pipeline!

Stock Market Prediction: 

The Model T predicted an S&P 500 Index high of 1435 in 2012 and the index peaked at 1474.  Being 2.7% low is not that bad; however in 2011 the forecast was 2.2% high.   

The Model T 2013 forecast is for a high of 1550, however for the first time since I have been writing this blog the Model T is signaling a definite peak to be followed by a correction.  I will present the details in the next post. 

I hope you made some good investments in 2012 and wish you a very prosperous 2013!

A Very Ugly Freight Market

In preparation for my year-end economic forecasts and Model T 2013 stock market predictions, I thought it would be a good time to check the current status of the freight markets.  

Because the economy has been slow and needs some motivation, I have enlisted the cheerleaders from Good Shepherd High School to assist me in this endeavor. Excuse me, there has been a change.  These cheerleaders are actually from German Shepherd High School. 

  German Shepherd High Cheerleaders

Here’s what is happening in the freight world:

Truck Freight 

FTR (Freight Transportation Research) FTR Truck Loading Index

 

Latest Report: Declining 

Trend: Declining.  Index was growing nicely until hitting the wall in Q4. Expected to be at near 0% (year-over-year) at year end. 

Forecast: Skidding at 0% in Q1 before improving.

ATA Trucking Index 

Latestst Report:  Down 3.8%, at the lowest level since May 2011. 

Trend: Decreasing 

Forecast: Modest improvement in Q1

“Okay Cheerleaders, do your thing!”

U-G-L-Y

You ain’t got no alibi. 

You ugly, oh yeah, You ugly 

Rail Freight 

Latest Report:  Carloads – Down 6.1% in October (y-o-y). It’s flat when you factor out declining coal shipments. Intermodal – Up 1.5% (y-o-y)  

Trend: Decreasing 

Forecast: Flat in Q1, before increasing the rest of the year. 

“What do you say Cheerleaders?”

Rickety Rick, Rickety Rack

Your train done run off that track,
You’re Grounded
Yo Mama says Your Grounded!

 

Port Freight Activity

 

Latest Report:  Inbound Freight – Up 5% (y-o-y) in October on the West Coast (Chinese imports), flat at most other ports.  Outbound Freight – Up slightly on the West Coast, down or flat for the rest. 

Trend: Declining 

Forecast: Flat in Q1 

“Cheerleaders?”

You ain’t got nuthin’ to see

Cause you ain’t got no GDP,
You stagnant, oh yeah, you stagnant

Air Freight 

Latest Report:  Down around 0.4% from last year, year to date. 

Trend: Flat/Declining 

Forecast: Very bad Q4, 2013 to be much better 

 

 

Baltic Dry Index (measures world-wide shipping freight activity)

Latest Report:  Down 50% (y-o-y) 

Trend: Declining 

Forecast: Short-term, a modest improvement. Long-term, a 50% increase at the end of 2013. 

“Cheerleaders, help me!”

Two, Four, Six, Eight

You is in an awful state

 

Analysis

 

The freight data is consistent with my forecast that the economy is bouncing between 0-2% GDP with no upward momentum.  It appears that we are falling to around 0% (the bottom of this cycle) at the end of the year.  I still don’t believe there we be a recession because the economy is moving so slowly.  It is the difference between hitting a wall at 5 mph versus 40 mph.  You hit the same wall, but the impact is much different. There just isn’t enough downward momentum to cause a significant recession.  

The freight forecasts suggest that this economic malaise will last through Q1.  The good news is that the rest of 2013 is forecast to be much stronger.  Wouldn’t it be great if we were talking about a new plan for economic growth instead of trying to keep from falling off a self-made cliff?  And just a reminder, while raising taxes is an economic plan; it is not an economic growth plan.

“Cheerleaders, do you have any final thoughts about this blog post?”  

U-G-L-Y

You ain’t got no alibi. 

You ugly, oh yeah, You ugly

“You are talking about the economy, right? Well…..? (sigh) Suddenly I feel like I’m back in high school!”