May 16th, 2011
by Jeff Miller
Last Week's Data
The important news last week was mostly negative.
Most major economic indicators show that the US economy has returned to its normal state, self-sustaining growth. Many seem to have forgotten that economic growth is normal, including the use of slack resources to expand and to build new businesses. Follow up:
- Mortgage rates hit another new low -- the lowest in six months. The link for this news is Mark Perry's article showing mortgage rates and CPI inflation. His conclusion is that the low rates demonstrate that inflation expectations are contained.
- There were 3.1 million job openings at the end of March. The last two months have had the highest level of job availability since November of 2008.
- Economic growth forecasts remain solid. The ECRI Weekly Leading Index increased to 129.7 from 128.7. The growth index, a widely-misinterpreted acceleration term, edged slightly lower. Mark Hulbert has a nice article discussing this indicator.
- Risk as measured by the St. Louis Fed Stress Index, remains very low. This measure tracks a lot of market data in the eighteen inputs. It is not a poll, nor opinions, nor a collection of anecdotes. We should all pay attention to some real data. The value moved to -0.092, a bit higher than last week's -0.178 (adjusted). These are completely normal readings for a scale measured in standard deviations from the norm. For more interpretation, the St. Louis Fed published a short paper with a very nice chart that helps to interpret this index. The chart does not reflect the recent continued decline in stress, but it identifies the dates for important recent events. The paper also has a longer version of the chart, illustrating past stress periods. I am not going to run the chart each week, but I strongly recommend that readers look at the paper. In the 2008 decline there was plenty of warning from this index -- no sign right now. The scale is in standard deviations, so anything short of 1.0 or so is neutral territory. I am doing more extensive research on this indicator.
NB: The ECRI and SLFSI are actually readings from week-old data.
There was a lot of disappointing news -- all qualifying as "bad" in terms of my weekly update. I look for things that are fresh -- unexpected. I would characterize the data as a slowing in the rate of growth.
- Housing prices moved still lower. The CoreLogic index registered an eight consecutive decline, taking prices lower than in 2009. Check out Calculated Risk for full analysis and the expected fine chart.
- Initial jobless claims remained elevated. There was a decline from the prior week's spike, but initial claims in the 430K range constitute bad news. This is a real-time data series from a good source, probably indicating a poor jobs report for May.
- Small business optimism moved lower (via Calculated Risk). This is somewhat at odds with the improvement in the Monster job index, which is "full of good news" (via Scott Grannis).
- Medicare and Social Security projections worsen. The trust fund "exhaustion dates" have been moved up to 2024 and 2036. This is a complex story, but an important one for taxing and spending.
- Debt limit wrangling became more strident. The market is clearly worried about this issue. I still think there will be a resolution, but it may take weeks of posturing. I explained last week in an investor-oriented guide to the deficit debate -- something that I hope will be more helpful than the headlines.
- European sovereign debt issues, bailouts, and scandals. These headlines get attention, but the effects have not shown up in the SLFSI data.
Commodity and market swings continue in a world where causation is difficult to understand. The key issues seem to be the following:
- Did the change in margin requirements cause the collapse in silver prices? I have been studying this. My first reaction, based both on trading and reactions of traders was "no." There is an intriguing argument from The Streetwise Professor, now added to my list of featured sources. He suggests that volatility-based rules like those currently used and well-understood, can exacerbate volatility. I am not yet convinced, but I am interested in studying this further.
- Why were the commodity moves so large? Taking out stops was probably a factor -- great Reuters piece and HT to Felix. James Hamilton, the go-to economics expert on oil prices, explains why this is silly.
- Do lower commodity prices cause lower stock prices? I think not, and there is support from Goldman Sachs. Last week I explained why this has nothing to do with "demand destruction."
- When will this silly linkage, mostly based upon perceptions, come to an end? I do not know!
Our Own Forecast
We base our "official" weekly posture on ratings from our TCA-ETF "Felix" model. After a mostly bullish posture for several months, Felix has turned much more cautious. We shifted from our neutral posture to bullish five weeks ago, and we continue that posture in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. This is based on improved ratings in the various index ETFs, as well as the general trend. Here is what we see:
- 48% of our 56 ETF's have a positive rating, down sharply from 80% last week.
- 66% of our 56 sectors are in our "penalty box," up from 50% last week. This is an indication of moderate short-term risk, but the picture is deteriorating.
- Our universe has a median strength of -5, down significantly from +23 last week.
The overall picture is much weaker than last week, and I could easily have called "neutral" on our official posture. Felix is positive on the Dow and the QQQ's, but SPY is in the penalty box. Our positions could easily change during the coming week.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. You can also write personally to me with questions or comments, and I'll do my best to answer.]
The Week Ahead
The big stories this week will relate to housing data. Regular readers know that I like to follow buidling permits (which have been very weak) as an early indicator of a change.
I do not expect anything new from the Fed minutes. I do not use the "leading" economic indicators and the regional Fed surveys are important only when there is a huge move.
It is also options expiration week, so any moves might be extended.
David Altig has an alternative viewpoint on housing, suggesting that we may be near a bottom. He is not pounding the table, but merely trying to illustrate all sides.
As I have frequently noted, the housing and employment problems are linked in a very bad way. Job applicants cannot easily move to take advantage of new opportunities. Falling housing prices hurt consumer confidence and overall business conditions. It is not a typical macroeconomic problem.
There are a lot of reasons to be cautious right now. I still like the prospects for the remainder of 2011, but there is a lot of uncertainty to get through in the next month or so.
Weighing the Week Ahead: Another Soft Patch? by Jeff Miller
Real Time Home Price Index Shows Housing Price Strength by Scott Sambucci
CoreLogic Says Home Prices Down for Last 8 Months by Steven Hansen
Cash Investors Supporting Some Real Estate Markets by Keith Jurow
Pending Home Sales Do Not Foretell Housing Recovery Is Underway by Steven Hansen
Strategic Defaults: A Bad Situation That Could Get Worse by Keith Jurow
Is it Time to Invest in Las Vegas Real Estate? by Keith Jurow
Economic Data Points to Growing Profitablity in Residential Builders by John Lounsbury and Steven Hansen
We Could be Near a Housing Bottom by John Lounsbury (Seeking Alpha)
Jeff Miller has been a partner in New Arc Investments since 1997, managing investment partnerships and individual accounts. He has worked for market makers at the Chicago Board Options Exchange, where found anomalies in the standard option pricing models and developed new forecasting techniques. Jeff is a Public Policy analyst and formerly taught advanced research methods at the University of Wisconsin. He analyzed many issues related to state tax policy and provided quantitative modeling which helped inform state and local officials in Wisconsin for more than a decade. Jeff writes at his blog, A Dash of Insight.