by Jeff Miller
The long list of government stimulus and assistance programs were all intended to be temporary. As the programs gradually end, one question is paramount:
Will there be a successful transition from government stimulus to a self-sustaining economic recovery?
Some economists are maintaining solid growth forecasts for the remainder of the year. They see the current slowdown as the result of follow-on effects from the Japanese earthquake and tsunami and from higher gasoline prices. If these effects are temporary, the moderate growth should improve. Follow up:
Follow up:Economic growth expert Michael Mandel, another of the impressive group of Kauffman Conference participants, notes that the expected transition from government stimulus to business investment is not yet showing up. Here is one of several key charts. See the full article for his fine analysis of this problem.
I do not yet see a "double dip" recession from the slowing data, but the lower trajectory of growth leaves less room for error. Check out Econbrowser's analysis of economic forecasts and you will see that mainstream economists embrace this position. One reason is that the effect of the end of QE II buying has been overstated by many investment analysts.
Background on "Weighing the Week Ahead"
There are many good services that do a complete list of every event for the upcoming week, so that is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
Readers often disagree with my conclusions. That is fine! Join in and comment. In most of my articles I build a careful case for each point. My purpose here is different. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but some will disagree. That is what makes a market!
Last Week's Data
The news last week was mostly negative.
These are all items that are either important right now, or bear watching -- a little bit of good news.
- State tax collections are up 9.1% over last year. The Rockefeller Institute at SUNY-Albany (HT Calculated Risk for the pointer) monitors 47 early-reporting states. Revenues are still 3% lower than peak levels, but the story is improving nicely.
- University of Michigan Consumer sentiment improved by 2 points, beating expectations. The results were probably helped by lower gas prices. The general level of confidence is still lower than we need for a good recovery.
There was a lot of disappointing economic news.
- Initial jobless claims of 424,000 -- too high to expect solid job growth.
- Housing data was even worse than expected. This week's bad housing data were the pending home sales. As Calculated Risk points out, this suggests weaker sales data in the months ahead.
- The "minor" reports were very bad. This included industrial production and the GDP "internals."
- European sovereign debt issues, bailouts, and scandals. The headlines included the lack of a solution in Greece and more negative credit watches. The IMF still has not chosen a new head. These headlines are still getting attention, and the effects have not shown up in the SLFSI data. Some see this as the biggest market threat, although the linkage to US markets is always a little vague. I am certainly watching, and you should be, too.
The Very Sad
The unexpected death of CNBC's Mark Haines is a loss felt by everyone in the investment community. Mark has been a part of my morning for over twenty years. His interviews reflected his preparation and legal background. While he had a viewpoint, the interview subject always had a fair chance to make his case.
We will all miss him, and our team extends condolences to his family and CNBC colleagues.
The Indicator Snapshot
It is important to keep the weekly news in perspective. My weekly indicator snapshot includes important summary indicators:
- The ECRI Weekly Leading Index and the derivative Growth Index
- The St. Louis Fed Stress Index
- The key measures from our "Felix" ETF model.
There will soon be at least one new indicator, and the current choices are under review.
The indicators show continuing modest growth at a slowing pace, with little indication of economic risk. The market fears, as usual, are greater than one might expect from the data.
Felix is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. We have a long public record for these positions. This is our first bearish forecast in a long time.
[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
There are some very important economic reports this week, especially the ISM index and the monthly jobs report. Payroll employment growth, still much lower than needed, has actually done better than one would expect from the rest of the economic data. With higher jobless claims and weak consumer confidence, I am not expecting a strong report. I'll do my regular preview at mid-week.
Case-Shiller home price data will probably also be weak.
In trading accounts last week we pulled back on the asset allocation to the 40% range, including only utilities (XLU) and consumer staples (XLP). The index inverse ETFs have small positive ratings, but are currently in the penalty box.
For investors, it is attractive to invest when fears are worse than fundamental conditions. Having said this, we continue to exercise caution in establishing new positions.. There is no rush and a lot of uncertainty. We always try to find good entry points.
Weighing the Week Ahead: Keeping Turmoil in Perspective by Jeff Miller
U.S. Macroeconomic Overview by MacroTides
Overview of the Markets by MacroTides
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.