Sunday, October 31, 2010

S&P500 Vs. Consumer Confidence

The following commentary and chart is excerpted from the October 14, 2010 ContraryInvestor.com commentary.  I find it interesting in a variety of different ways, and it raises a lot of questions with regard to the stock market, consumer confidence, QE1, and QE2...
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"We have not touched on consumer confidence for a good while, but now is the time.  It's time because of the certainty of QE ahead.  Again, absolutely key question being, will QE2 positively influence the real economy?  QE I was a strike out.  And what of QE2?  We believe a key indicator to watch as to whether QE2 will transmit to the real economy is the present conditions component of the headline consumer confidence index.  Clearly the aim of QE2 is to inflate asset prices even further, let's not beat around the bush about it.  QE I inflated financial and commodity prices, but left real world prices of leveraged residential real estate and commercial real estate untouched.  Moreover, QE I did not help headline consumer confidence recover.  We'll spare you the chart, but headline consumer confidence continues to rest at levels historically consistent with recession.  Very quickly, the headline consumer confidence report is driven by two subcomponents that are present conditions and future expectations.  Historically, the present conditions component of the headline number has been highly directionally correlated with the equity market over time.  You can see exactly this in the chart below.  Of course without the Fed overtly telling us this as a driver of their QE2 decision making, they are implicitly hoping higher stock prices (the assumed wealth effect) will engender accelerating consumer confidence, thereby motivating consumers to borrow and spend (or at worst just spend).  This likewise had to be a key rationale of QE I as the Fed is surely aware of this prior cycle linkage between stock prices and confidence in present conditions.




But what stands out like a sore thumb in the chart above is that the present conditions component of the confidence report never recovered at all even as equities experienced one of the greatest 13 month rallies in history under QE I (exactly as we marked in the chart) from March of 2009 through April of this year.  Moreover, and as is also clear, even as heavy Fed POMO was kicked off in August and September that lifted stocks to their greatest September gain in over seven decades, the present conditions component of the consumer confidence survey continued to deteriorate up through the most recent numbers.  Message being?  At least for now consumer confidence is not being bolstered by financial asset price inflation.  A complete anomaly relative to historical experience.  QE2 is clearly a bet this anomaly will fall back in rhythm with historical experience.  So, we need to intently watch the present conditions component of the consumer confidence report ahead for clues as to whether QE2 will positively impact the real economy through bolstering consumer confidence, or otherwise."
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A Special Note concerning our economic situation is found here
SPX at 1183.26 as this post is written

Friday, October 29, 2010

Updates On Economic Indicators October 2010

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The October Chicago Fed National Activity Index (CFNAI)(pdf) updated as of October 25, 2010:



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The Consumer Metrics Institute Contraction Watch:



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The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from the October 28 Release, titled "Latest economic index forecasts weak growth through first quarter" :

"The October update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing to 1.4% in October and then increasing to 2.0% in February and March, as weak housing and employment conditions continue to impede growth."

The ECRI WLI (Weekly Leading Index):

As of 10/15/10 the WLI was at 122.1 and the WLI, Gr. was at -6.8%.  A chart of the growth rates of the Weekly Leading and Weekly Coincident Indexes:



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The Dow Jones ESI (Economic Sentiment Indicator):

The Indicator as of September 30 was at 40.7, as seen below:



An excerpt from the September 30 release:

"Following five months of modest but steady gains, the Dow Jones Economic Indicator (ESI) fell to 40.7 in September, down from 43.2 in August and its largest one-month drop since October 2008.  And while the Indicator has historically declined in September, there are signs that the economic recovery is faltering with a sharp increase in negative economic stories during the last seven days of the month."

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The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, updated through 10-23-10:



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The Conference Board Leading (LEI) and Coincident (CEI) Economic Indexes:

As per the October 21 release, the LEI was at 110.4 and the CEI was at 101.4 in September.

An excerpt from the October 21, 2010 Press Release:

“Says Ken Goldstein, economist at The Conference Board:  “More than a year after the recession officially ended, the economy is slow and has no forward momentum.  The LEI suggests little change in economic conditions through the holidays or the early months of 2011.”

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I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

A Special Note concerning our economic situation is found here

SPX at 1183.78 as this post is written

Wednesday, October 27, 2010

Market Overview - Part V: Stock Market

(this is the fifth in a series of five posts concerning the markets)

Lastly, a couple of charts showing the S&P500...

First, one that shows the S&P500 on a weekly basis, LOG scale, since 2007.  I continue to find this chart interesting for a variety of reasons.  It shows that resistance has become support, as seen in the blue trendline.  As well, it shows the retracement levels near the middle of the chart, in gray.  Of note, the April high of 1220 is very near the 61.8% retracement:

(click on chart image to enlarge)(charts courtesy of StockCharts.com)



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This 1220 level on the S&P potentially has other significance as well.  This next chart shows what may be a large C&H (Cup & Handle) chart pattern, denoted by the bright green line.   While the price action may not exactly satisfy the requirements for  a classic C&H pattern, the behavior seems to.  As such, I view it as an important consideration, one that would seem to support further strong price appreciation, at least in the short-term:



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A Special Note concerning our economic situation is found here
SPX at 1184.00 as this post is written

Tuesday, October 26, 2010

Market Overview - Part IV: Stock Market

(this is the fourth in a series of five posts concerning the markets)

Starting with my June 2 post I wrote of my expectation for a near-term stock market advance despite what I viewed as highly problematical future conditions.  I continue to maintain this view, albeit with the dangers discussed in the post of October 13, "Comments On The Next Crash".

Before displaying charts of the S&P500, there are a couple of VIX charts that I find especially notable.  The first, as shown below, is a chart that shows the 10-year Daily VIX chart, LOG scale.   The 20-level continues to serve as an important demarcation, as seen when one compares the VIX in red to the S&P500 below.  As this post is written, the VIX is at 19.85 and has been struggling to stay below this 20-level recently:

(click on images to enlarge charts)(charts courtesy of StockCharts.com)



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This next chart is a weekly view of the VIX from 2003, on a LOG basis.  I find this chart very notable.   The VIX is shown in red, with the S&P500 shown at the bottom.  I have added a few technical indicators to provide perspective.  Perhaps most interesting is the MACD, which is depicted between the VIX and S&P500.  The MACD shows a notable positive divergence (shown by the  red line annotation) since mid-2009:



Now onto Part V, the S&P500…
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A Special Note concerning our economic situation is found here
SPX at 1185.62 as this post is written

Market Overview - Part III: Bond Market & Interest Rates

(this is the third in a series of five posts concerning the markets)

The bond market is believed by many to be an asset bubble.  I agree with this assessment, and have written a few posts on the subject.  I discussed when it may "burst" and other considerations in an October 5 post.

The chart below shows the 10-Year Treasury Yield from the mid-90's on a monthly LOG basis.  As one can see, the yield has been less than 4% since the latter part of 2008:

(click on image to enlarge charts)(charts courtesy of StockCharts.com)



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The next chart shows a one-year daily chart with the 50- and 200-day MAs (Moving Averages).   At 2.55%, the rate is just at the 50-day moving average (shown in blue) and considerably below the 200-day MA shown in red.  From this view, it appears as if there may be some mild upward pressure on rates:



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When one takes a slightly different view, by using a 13 and 34 day EMA (Exponential Moving Average) and adds the MACD indicator, however, it appears as if there may be considerably more upward pressure:



A pivotal question at this point is what impact will additional QE (Quantitative Easing) measures have on lowering rates.  As I have previously commented, "One question that looms large is whether any rate-suppression effect that additional QE may have is already “priced into” the market, as additional large doses of QE has been widely expected for a while now."

Now onto Part IV, the stock market...
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A Special Note concerning our economic situation is found here
SPX at 1185.62 as this post is written

Monday, October 25, 2010

Market Overview - Part II: U.S. Dollar, Japanese Yen & Gold

(this is the second in a series of five posts concerning the markets)

I would like to start by featuring a couple of long-term charts of the U.S. Dollar.

U.S. Dollar weakness is a foremost concern of mine.  As such, I have extensively written about it.  I am very concerned that the actions being taken to "improve" our economic situation will dramatically weaken the Dollar.  Should the Dollar substantially decline from here, as I expect, the negative consequences will far outweigh any benefits.  The negative impact of a substantial Dollar decline can't be overstated, in my opinion.

First, a look at the monthly U.S. Dollar from 1983.  This clearly shows a long-term weakness, with the blue line showing technical support (until 2007) that has now turned into (technical) resistance:

charts courtesy of StockCharts.com (click on images to enlarge charts):



Next, another chart, this one focused on the daily U.S. Dollar since 2000 on a LOG scale.  The red line represents both a trendline as well as a relatively good visual "best-fit" line.  The gray dotted line is the 200-day M.A. (moving average).  As seen on this chart, the U.S. Dollar looks vulnerable to continuing its downward trend that has been interrupted since early 2008:



Lastly, a chart of the Dollar on a weekly LOG scale.  There are some clearly marked  channels here, with a large, prominent triangle featured.  Triangles are thought of as "continuation" patterns.  In this case, it would be a continuation of the Dollar downtrend since 2002:



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Next, onto the Japanese Yen.  Up until 2-3 years ago, it was widely believed and (commented upon) that a rising Yen was a sign of danger.   This belief seems to have diminished; however, the strength of the Yen has not.  Is the rising Yen still a signal of danger in the markets?  I believe that it is.

Here is the daily chart since 2005 as depicted on a LOG scale.  The 50-day M.A. is shown in blue.  As one can see, there has been a continued string of strong uptrends, and the Yen pricing action is increasingly "parabolic" in nature:



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Lastly, a Gold chart.  I have written many posts about Gold.  Of course, the most common question that arises with regard to Gold is whether it is in a bubble, which I have discussed previously.  Certainly, the price action since 2001 would support such a claim.  However, there is much more that should be considered before one can conclude that Gold is in a bubble.

Here is a monthly chart since 1980, as depicted on a LOG scale.  It is interestingly to compare how Gold's rise has correlated with U.S. "reflationary" efforts over the last 10 years:



Now onto Part III, a look at the bond market and interest rates...
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A Special Note concerning our economic situation is found here
SPX at 1183.08 as this post is written

Market Overview - Part I

This series of blog posts (5 posts) represents a periodic Technical Analysis of the markets.  In this series I will discuss currencies (US Dollar and Japanese Yen); Gold; The Bond Market & Interest Rates; and the Stock Market.

I feel that this is an important juncture in investing for many reasons.  Many markets have experienced strong gains recently, adding to what has been in many cases very strong performances since early 2009.

Perhaps the main question at this point is whether such performance will continue across these markets, i.e. is such performance sustainable?  I continue to be of the opinion that it is not.  As I have commented previously, I view the stock market as experiencing a strong "bear market rally," one that won't and can't continue.   This dynamic of strong yet unsustainable performance is seen duplicated across many different asset classes.  Further, as I have previously commented, my analysis indicates that many asset classes (on a worldwide basis) are full-fledged asset bubbles.  This is admittedly an opinion held by very few.  However, the ramifications of such are immense, both for markets and the economy in general.

While this series of posts will focus on Technical Analysis issues, I will also provide reference links to previous comments I have made on these markets from both fundamental and technical perspectives.

Before displaying some charts, I would like to make a couple of disclaimers.   First,  an extensive overview of all of my Technical Analysis observations would be very lengthy, and it would also infringe upon some facets I consider to be proprietary.  As such, I will limit my observations, but I think most people will still get an overview of my thoughts.  Second, I am aware that many people don’t believe in Technical Analysis.  Even though I use Technical Analysis extensively, I will readily admit it is not infallible.  As readers of this blog are aware, the majority of my focus is on fundamental aspects of the markets and the economic situation.

Now, on to Part II - - a discussion of the U.S. Dollar, Japanese Yen, and Gold...
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A Special Note concerning our economic situation is found here
SPX at 1183.08 as this post is written

Sunday, October 24, 2010

What's Ahead For The Housing Market - A Look At The Charts

There has been much written as to the future of residential real estate prices.  The consensus appears to be for very slight appreciation for years.  This consensus is echoed in the MacroMarkets September 2010 Home Price Expectations Survey Press Release (pdf).  Here is a chart from that survey that shows the past history (green line) as well as future expectation (red line):


click on chart to enlarge image

As one can see on this chart, real estate prices (here measured by the S&P/ Case-Shiller U.S. National Home Price Index) really started their ascent in the mid-90's.

Here is another chart, reflecting the CoreLogic House Price Index of July 2010.  The chart is courtesy the CalculatedRisk blog with annotations by John Lounsbury, as noted:


click on chart to enlarge image

In this chart it is again seen that the pronounced ascent in real estate prices began in the mid-90s.  As well, as seen by John's annotations, the market has experienced a roughly 30% fall from its peak, and a price reversion to the trendline from January 1976 would represent a further 15% decline.

I have written extensively about various facets and dynamics of the residential real estate market.  My analysis indicates that this is a market that is exceedingly complex, due to a variety of hard-to-predict factors.  These factors include such issues as strategic default trends, "shadow inventories", redefault rates, and the relatively new confusion concerning foreclosure propriety.  As well, there is immense direct and indirect government intervention in this market, which presents further complexities.

Assessing the future path of real estate prices can be done in a variety of fashions; as well, many different measures can be taken into account.  There are reams of data on a myriad of statistics.

For purposes of this post, I would like to focus on the price trends as shown in the two charts above and raise four issues with regard to the future of home prices.  Although I don't necessarily agree with the methodologies employed by these indices,  they have common acceptance.

The first issue I would raise is whether trendlines can be used to assess the trends of house prices.  The issue is debatable.  Whereas trendlines have proven validity in stock price movements, I would question as to whether such validity exists with regard to home prices.

The second issue is whether such trendlines (assuming their use in housing trends is valid) will serve as "support."  I would offer that if the housing market is in a continuation of its long-running bull market, the trendline would serve as support.  However, whether we are continuing a long-running bull market in housing is deeply contentious.  My own view on the matter is that the housing market peaked as shown and is now on a decline.  As such, a trendline would likely not hold as support.

The third issue is that of ultimate support; i.e. a price floor.  Some believe that the "pre-bubble" price levels would serve as such a floor.  For example, if one believed that the real estate bubble started in earnest in the mid-90's, such a level would serve as the ultimate price floor.  This seems logical as, in theory, the price inflation during the bubble's excesses would be eliminated if the price were to return to the pre-bubble price levels.  However, I think this is erroneous logic on many fronts.  From a "technical perspective" it fails to consider a "reversion to the mean" that would result in a "price undershoot" to a level significantly below that of the prices of the mid-90's.

The fourth issue is one of "bubble dynamics."  Of course, the almost universal belief is that the housing bubble has "popped."  I don't agree.  As I have previously written, I believe the roughly 30% decline experienced to date, although incredibly damaging, is a "deflation" of the huge bubble as opposed to its "popping."  Further supporting this idea is that each index has only fallen to levels last seen during a latter year of the bubble, approximately the 2003 period.

This "deflation" vs. "popping" nomenclature is more than semantics.  If the bubble has only "deflated," as I believe, then the "popping," and its pronounced accompanying damage, still awaits.

Lastly, one should keep in mind how supportive (ultra) low interest rates have been to real estate prices.   While such low interest rates are widely believed to be stable for the foreseeable future, a substantial uptick in rates would likely prove a significant headwind against the possibility of rising prices.

In summary, while many people have an optimistic view regarding future residential real estate prices, in my opinion such a view is unsupported on an “all things considered” basis.  Furthermore, as discussed, there exists outsized potential for a substantial price decline, unfortunately.

A Special Note concerning our economic situation is found here
SPX at 1183.08 as this post is written

Friday, October 22, 2010

4 Confidence Charts - October 2010

Here are four charts reflecting confidence survey readings.  These are from the SentimenTrader.com site.

I find these charts valuable as they provide a long-term history of each survey, which is rare.

Each survey chart is plotted in blue, below the S&P500:

(click on each chart to enlarge image)


Conference Board Consumer Confidence, last updated 9-28-10:



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University of Michigan Consumer Confidence, last updated 10-15-10:




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ABC News Consumer Comfort Index, last updated 10-7-10:



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NFIB Small Business Optimism, last updated 10-21-10:



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As one can see, these charts continue to show subdued readings, especially when viewed from a long-term perspective.

These charts should be interesting to monitor going forward.  Although I don’t believe that confidence surveys should be overemphasized, they do help to delineate how the economic environment is being perceived.

A Special Note concerning our economic situation is found here
SPX at 1180.26 as this post is written

Wednesday, October 20, 2010

Conference Board CEO Confidence

On October 1, I wrote a post about the Business Roundtable’s CEO Economic Outlook Survey and the Duke/CFO Magazine Global Business Outlook Survey.

Subsequent to that post, the Conference Board released its 3rd Quarter CEO Confidence Survey.   The overall measure of CEO Confidence was at 50, down from 62 in the second quarter.

There are a variety of notable survey results.  Here is an excerpt I find particularly interesting:

"Less than one-third say conditions have improved compared to six months ago, down from about two-thirds last quarter. In assessing their own industries, business leaders’ appraisal was also considerably less positive. Now, only 38 percent say conditions are better, compared with 61 percent last quarter.

CEOs are much more pessimistic about the short-term outlook. Only 22 percent of business leaders expect economic conditions to improve in the next six months, down from 48 percent last quarter. Expectations for their own industries are also downbeat, with about 28 percent of CEOs anticipating an improvement in the months ahead, down from 43 percent last quarter."
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A Special Note concerning our economic situation is found here

SPX at 1173.71 as this post is written

Tuesday, October 19, 2010

The October 2010 Wall Street Journal Economic Forecast Survey

The October Wall Street Journal Economic Forecast Survey was published October 15, 2010.  Most of the survey dealt with how the economists view the impact of further Quantitative Easing (QE).

I found a few items of interest in the survey.  Perhaps the most interesting facet was the statement, "Though economists don't expect robust growth, they see just a 20% chance of another recession in the next 12 months."  This 20% figure is very similar to previous months' responses.

The current average forecasts among economists polled include the following:

Ten-Year Treasury Yield:
for 12/31/2010: 2.58%
for 12/31/2011: 3.55%

CPI:
for 12/1/2010: 1.2%
for 12/1/2011: 1.8%

Unemployment Rate:
for 12/1/2010: 9.6%
for 12/1/2011: 9.0%

Crude Oil  ($ per bbl):
for 12/31/2010: $79.78
for 12/31/2011: $83.18

GDP:
full-year 2010 : 2.5%
full-year 2011 : 2.8%

(note: I comment upon this survey each month; commentary on past surveys can be found under the “Economic Forecasts” category)
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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.
_____
A Special Note concerning our economic situation is found here

SPX at 1121.9 as this post is written

Monday, October 18, 2010

NFIB Small Business Optimism - September 2010

The September NFIB Small Business Optimism was released on October 12.  The headline of the Press Release is "Small Business Optimism Index Remains at Recessionary Level."

Here are some especially notable excerpts from the Press Release:

"The Index has been below 93 every month since January 2008 (32 months), and below 90 for 26 of those months, all readings typical of a weak or recession-mired economy.

“The downturn may be officially over, but small business owners have for the most part seen no evidence of it,” said NFIB Chief Economist Bill Dunkelberg."

also:

"September is the 22nd consecutive month in which more owners reported cutting average selling prices that raising them.  Widespread price cutting contributes to the high percentage reporting declining sales revenues."

also:

"A near record low 33 percent of all owners reported borrowing on a regular basis.  Reported and planned capital spending are at 35-year record low levels, so fewer loans are needed.  The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 14 percent (more owners expect that it will be harder to arrange financing), unchanged from August.  The Fed is holding rates at historically low levels, but this is not improving the outlook for the ease of financing expansion."

In conjunction with this September NFIB Small Business Optimism Survey, the CalculatedRisk blog of October 12 had three charts that depicted various facets (the Index itself; hiring plans and Poor Sales) of the Survey, as shown below:

(click on charts to enlarge images)






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My previous post concerning the environment and challenges for small businesses was on April 15.
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A Special Note concerning our economic situation is found here

SPX at 1176.19 as this post is written

Thursday, October 14, 2010

IMF Outlook For World GDP

On October 7 The Wall Street Journal had a story titled "Debt Crisis Dims IMF Outlook."

A couple of excerpts from the story:

"All told, the IMF predicted the world economy will expand 4.8% in 2010 and 4.2% in 2011."

and:

"The risks for economies to backslide are still high amid the fragile economic recovery, the IMF said. "The financial sector is still vulnerable to shocks and growth appears to be slowing as policy stimulus wanes," predominantly in advanced economies, the IMF said."

A related article, titled "The IMF's New Growth Projections" shows the forecasts broken out by country.
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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.
_____

A Special Note concerning our economic situation is found here

SPX at 1178.10 as this post is written

Wednesday, October 13, 2010

Comments On The Next Crash

I am aware of no recent warnings by others of a possible stock market crash in the near term.

In the past I have commented that I view a future crash as certain.  Like that of 2008, such a crash would include not only equity markets but many others as well.

Pinpoint timing of crashes is always very difficult.    However, I have been seeing various signs of such a crash coming together.  I have commented upon the direction of the stock market in posts on May 19, June 2, and September 16.

I am awaiting a few more signs confirming such a crash event before making any prediction as to its timing and extent.  However, this next crash should be accorded great importance as it is likely to be severe, i.e. outsized by historical standards.

I will likely elaborate upon this crash issue as conditions warrant...

A Special Note concerning our economic situation is found here

SPX at 1169.77 as this post is written

Tuesday, October 12, 2010

Stock Market Projected Earnings 2011

In the October 11-October 17 2010 issue of Bloomberg BusinessWeek, it had an article titled "The Corporate Profit Engine May Be Slowing."

The article contains a variety of information concerning earnings.  An excerpt:

"For the first time in more than a year, Wall Street analysts cut their forecasts for Standard & Poor's 500-stock index earnings during the course of a quarter, casting a shadow over the stock market outlook. Analysts reduced their estimates for S&P 500 companies' combined 2011 profit to $95.21 a share as of Sept. 30, down from an August high of $96.16 and $95.50 on June 30, according to more than 8,500 forecasts tracked by Bloomberg. The last time analysts' earnings estimates fell during a quarter was in the three months ended June 2009. The figure has since rebounded to $95.97 a share.

Even the lower level would represent a rise of 14 percent from 2010 and a record for U.S. corporate profits."
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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.
_____


SPX at 1155.71 as this post is written

Monday, October 11, 2010

Thomas Hoenig Story

The September 27-October 3 2010 issue of Bloomberg BusinessWeek has an interesting story titled "Thomas Hoenig is Fed Up."

The story chronicles various views of Thomas Hoenig and how these views differ from those of others prominent within The Federal Reserve.

I found one line, referring to Hoenig's views, particularly noteworthy given current (and likely future) Federal Reserve policies and reactions to them:

"The hard truth, in his view, is that there just isn't much more the Fed can do to help, and we all ought to admit that."
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SPX at 1165.15 as this post is written

Friday, October 8, 2010

Bonds Safe As Cash?

I have written a few posts about the bond market bubble, with the most recent being the post of October 4 titled "Thoughts On The Bond Bubble."

There are many aspects of the bond market that support the conclusion that it is in an enormous bubble.  I ran across the following from the SentimenTrader.com daily commentary of October 7 that I find notable.  It is further evidence that risks in the bond market are being ignored or not properly heeded.  Here is the commentary:
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Individual Investor Bond Allocation

The latest asset allocation survey from the American Association of Individual Investors (AAII) was just released, and it shows a continuation of an odd development.

Investors' allocation to stocks was unchanged at 55%, but they increased their allocation once again to bonds, while sacrificing their cash cushion.

Their bond allocation jumped 4% to 25% of their total portfolio, while cash dropped 4% to 20%.

The odd thing about it is that historically, there has been a very positive correlation between investors' allocations to bonds and cash.  Basically, it's a "fear trade" - when they're concerned, they pull money out of stocks and put it into bonds and cash.  When they're confident, they pull money out of bonds and cash and put it into stocks.

But not lately.  Over the past year and a half, the correlation has completely broken down, and investors are now using the bond market as their safe haven.  When they reduce stock exposure, they put it into bonds, and not cash.



Yes, the interest rate on cash is nearly nil.  But it was also extremely low during periods prior to 2010, and yet the AAII folks still didn't consider bonds to be the only safe haven.

The thing that's a little disturbing is that by using the bond market as a default safe haven, investors neglect to remember that long-term bonds do carry the risk of losing one's capital unless held to maturity, which can be a very long ways off.

Looking at the other sentiment indicators on the Bond page of the site, we can see a smattering of other extremes, like sentiment surveys and the positioning of traders in bond futures.  Put/call ratios are exceptionally low, but they have been an inconsistent predicator of future market performance.  Rydex traders have seemingly given up trying to time that market.

The chart above is very long-term, and it may be nothing to be concerned about.  It just struck me as unusual - and not positive for bonds - that it now seems to be considered as safe as cash."

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SPX at 1159.99 as this post is written

Thursday, October 7, 2010

Consumer Metrics Institute Readings: From Bad To Worse

This post highlights current readings from the Consumer Metrics Institute.  Previous posts solely concerning the Consumer Metrics Institute (CMI) can be found on August 23, July 27 and March 31;  as well CMI data is included in the monthly “Updates On Economic Indicators.”

Here are a couple of charts concerning the CMI's Daily Growth Index, as seen at Doug Short's site on 10/5/10:

(click on charts to enlarge images)


This chart shows the CMI Daily Growth Index vs. GDP and the S&P500.  I would like to highlight two notable items (among the many that I have commented upon in the aforementioned posts of August 23, July 27 and March 31).  First, as one can see the CMI Daily Growth Index is now (at -6.13) below the low experienced in 2008, which I view as highly notable and disconcerting, especially on an "all things considered" basis.  Second, another notable item is how the official (as defined by NBER) recession period, seen in gray, contrasts with the CMI's Daily Growth Index, especially after June 2009, the official end of the recession.


The second chart, as seen below, contrasts the Daily Growth Index's movements and durations from its 2008 and 2010 declines:



As seen in this chart, there are various disconcerting dynamics.  Perhaps most troubling is that the 2010 contraction appears significantly more pernicious than that of the 2008 decline  - with little if any indication that the current contraction will soon reverse.


SPX at 1160.75 as this post is written

Tuesday, October 5, 2010

Thoughts On The Bond Bubble

Lately there has been much commentary on whether the bond market is in a bubble.  While many believe such a bubble exists, others - including many prominent investors and commentators - disagree.

As I have previously written, I believe that there is a bond bubble encompassing the entire bond market.  While for many reasons one might not expect the bond market to become a bubble, nonetheless such a bubble has occurred and it is now simply enormous.  This bond market bubble stands out from other bubbles in history in both size and duration.

As one can see in the chart below, from Doug Short's site on 10-4-10, the 10-Year Treasury Yield (blue line) has been on decline since the early '80s:


click on chart to enlarge image

This decline in bond yields has been exceedingly munificent to the economy in many different ways.  As well, the bond bubble has been very beneficial to a range of asset classes.   On the above chart, one can see the performance of the S&P500 in green during this period of falling interest rates.

Of course, if one believes the bond market is a bubble, then a pivotal question becomes when will the bubble "pop?"  This question is difficult to answer, as there is a complex interaction between various factors fueling this bubble.

One important factor is that of additional Quantitative Easing (QE).  Many believe that such efforts will further depress interest rates.  Various estimates seem to generally support the idea that $2 Trillion of additional QE would depress 10-Year Treasury rates (currently at 2.48%) by approximately 100 basis points.  While I believe that such an effect may be possible, it is likely such an impact is overstated.

For many reasons, it is tempting to conclude that the bond bubble will last for years.  In fact, I am not aware of anyone who is predicting its imminent demise, i.e. "popping."  However, I believe, from an "all things considered" basis, that the "popping" of the bond market will happen in the short-term (i.e. likely within 6 months, and possibly even yet in 2010).  I make this judgment based upon many different factors.  Such a bursting of the bond bubble will have immense ramifications on many levels; I have already discussed the threat of rising interest rates in an April 6 post.

Another critical issue with regard to the bond bubble is the following:  If one believes that there is a bond bubble that is serving to unduly depress interest rates, what might be the "natural" interest rate - i.e. one that may endure after the bond bubble pops?  I may discuss this, as well as further define the timing of the bond market "top", in future posts...

SPX at 1137.03 as this post is written

Monday, October 4, 2010

The Value Of The Dollar - Since 1913

In the November 25, 2009 post I commented upon how Ron Paul has repeatedly mentioned that the dollar has lost over 95% of its purchasing power since the founding of The Federal Reserve in 1913.

This fact lacks recognition, as does its implications and consequences.

Recently I came across a feature on the Minneapolis Federal Reserve site titled "What is a dollar worth?"  This calculator is based upon CPI.

For instance, a couple of examples, with inputs in light blue and the output in dark blue:

"If in 1913 I bought goods or services for $1.00, then in 2010, the same goods or services would cost $22.19."

as well:

"If in 1980 I bought goods or services for $1.00, then in 2010, the same goods or services would cost $2.67."
_____


SPX at 1146.24 as this post is written

Friday, October 1, 2010

CEO & CFO Surveys

On September 28 the Business Roundtable's CEO Economic Outlook Survey was released for Q3.  The Duke/CFO Magazine Global Business Outlook Survey was released on September 15.

Both surveys are well worth looking at, and in general highlight a weakening outlook among executives.  In the CEO survey, of particular interest is the CEO Economic Outlook Index, which dropped to 86 from 94.6 in Q2.  As stated in the report, "In terms of the overall U.S. economy, member CEOs estimate real GDP will grow by 1.9 percent in 2010 – down significantly from the 2.7 percent increase in the previous survey."

In the CFO survey, I believe the Optimism Index chart, as seen below, is notable:


click on chart to enlarge image

It should be interesting to see how well the CEOs and CFOs predict business and economic conditions going forward.   I discussed various aspects of this, and the importance of these predictions, in the July 9 post.

SPX at 1141.20 as this post is written