We’re Buying Stocks Like It’s 2007

Streaking!

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.

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.com), 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.

Who Can Afford the Affordable Healthcare Act?

Recently I visited a church I hadn’t been to for years.  I was very impressed at the improvements they had made.  The music was better, the sermon was better and the entire experience was much better.  Churches are notoriously slow to make these types of changes.  So what was at work here?  Was it the “unseen hand” of God?  No, it was the “invisible hand” of competitive markets as described by economist Adam Smith in 1759.

Adam Smith was one smart guy!

This church made these changes because a large, very popular, mega-church in a near-by city decided to build a satellite church two miles down the road.  When faced with this strong competitive threat, the church quickly made the improvements necessary to retain, and even grow, its congregation.

Competition is an essential part of our free markets.  Promoting competition   is a key factor in the U.S. economy being the largest in the world.  Americans love competition. That is why billions are spent on professional sports.

Companies compete aggressively for consumers’ dollars.  This results in better products, better service and lower prices.  When competition is reduced, you get lower quality products, poor service and higher costs.

When government provides services, competition is reduced and usually product/service quality suffers and costs (which are the taxes that pay for it) increase.  The best example of this is education.   The idea of providing standardized education to all children was a great and noble concept that worked well for years. But in the absence of competition:

-        Product quality diminished

-        There is a lack of innovation

-        There is strong resistance to change

-        People have figured out how to “scam” the system for their financial gain

-        Costs have skyrocketed (can we just pass another levy?)
 

We have tried to increase competition in education by way of vouchers.  So far the public schools have spent more time and money trying to thwart the new competition rather than trying to improve their product.

The Affordable Care Act (ACA) now gives government a larger role in the healthcare markets.  The ACA is supposed to help limit the growth of healthcare costs, but I see nothing in the law that actually does this.  Usually more government control means less competition and less competition always leads to higher costs.

In addition, the current government healthcare programs (Medicare and Medicaid) waste large amounts of money from both illegal fraud and “legal” gaming of the system.  It can be assumed that the ACA will result in similar waste as soon as people figure out how to take advantage.

Whenever proponents of the ACA admit that costs will go up for individuals, their answer is that the higher costs will be offset by government subsidies.

This would be fine if the government was sitting on a big old pile of money that needed to be spent on something.  But we are broke. It’s really the Unaffordable Care Act and who do you think is going to end up paying for all the expensive promises the government has made?  The costs are going to start rising next year and I’m not sure they are ever going to stop.

And the economic law of “Unintended Consequences” continues to impact the ACA.  The benefits and number of new people getting insurance is greatly overestimated.  The estimates were based on companies just accepting the new rules without responding.  But businesses are cutting employees hours, limiting hiring and doing whatever is necessary to control costs. 

Nobody knows exactly how this will all play out because people are finally reading the entire law and getting legal clarification of all the confusing details. More onerous, costly, provisions are suddenly being “discovered”. This could get very, very, ugly.

The best solution to the healthcare problem is to increase supply and competition so that the cost of healthcare is reduced to the point where it is truly affordable, with government having a limited role in managing the process. 

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!