August 28th, 2011
by Jeff Miller
Last week was all about headlines and the Fed's Jackson Hole speech making. This week will be quite different. There is a data deluge, culminating in Friday's employment situation report.
Everyone has low expectations for this week's economic news. So do I. An already sluggish economic recovery was thrown off course by the earthquake and tsunami in Japan. Just as that effect was declining, we had the highly-publicized debt ceiling debate. The political process undermined confidence on the part of consumers, businesses, and one misguided ratings agency.
Follow up:There are now two distinct interpretations --- a worldwide economy that is spiraling into recession or an extension of the "soft patch."
The coming week's data will not resolve the debate, since everyone expects more weakness in the numbers. I'll offer my own forecast in the conclusion, but first let us do our regular review of the week's events.
Background on "Weighing the Week Ahead"
There are many good sources for a comprehensive weekly review. I always check out the articles from Steven Hansen at Global Economic Intersection and Calculated Risk. My mission is different. I single out what will be most important in the coming week. 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.
Unlike my other articles at "A Dash" I am not trying to develop a focused, logical argument with supporting data on a single theme. I am sharing conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am trying to put the news in context.
Readers often disagree with my conclusions. (A commenter recently suggested that was proof that I was wrong -- an amazing interpretation!) Do not be bashful. Join in and comment about what we should expect. 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 feel free to disagree. That is what makes a market!
Last Week's Data
In a light week for data, the sluggish growth story still reflects the totality of the evidence.
There were a few bright spots.
- Durable goods orders were up 4%, much better than expected. This was a July number, and it did reflect some rebound in auto production.
- Initial jobless claims clocked in a bit higher, but still in the 400K range when you take the Verizon strike into account. This is still not what we need, but it is better than recent levels and much better than many were forecasting a few weeks ago. It is not a recessionary level, nor a sign of robust growth.
- The money supply rebound continues. This is a major forward-looking indicator that is widely ignored. It is a leading indicator, giving it extra significance. I have been writing about this for several weeks. It is ignored in the trading community. If you understand this point you will realize that the QE II effects are just starting. This interview featuring Bob McTeer, one of our favorite sources, explains the point in a way that anyone can understand.
- More hints of compromise on the Supercommittee. No one is paying much attention to this, nor are they expecting much. It is a source of edge for savvy investors. There are encouraging background reports on committee progress. No one expects much from the debt limit compromise. My contrarian estimate for success is 2-1. We now have one GOP member who does not want to cut entitlements. This is going to be a big story over the next three months, so read this article to prepare yourself for breaking news.
There was some important negative news.
- The Michigan sentiment index is at recession levels. Check out Doug Short for his great historical chart. We already knew this would be terrible based on the preliminary reading. The question is whether it is a reflection of the Washington politics from the debt ceiling or something with a lasting effect.
- The ECRI growth index dropped further into negative territory. The ECRI warns against over-reacting without a persistent change in this indicator, but we are watching with interest.
- Further European Confusion. There was mysterious selling on Thursday, at first linked to various rumors about European stocks. The rumors of a downgrade of German debt or French debt were both denied. Rumors about a change in the European short-selling ban were denied. The only remaining rumor was the ongoing debate about Finland's demand for collateral on Greek debt. US investors had better get used to this rumor-driven trading, since the European story is more than a year away from a resolution.
By the end of the week, few were expecting any big announcements from Jackson Hole. I suspect that many still anticipate some new "QE" before the year ends. As we noted on two occasions last week, the emphasis and expectations for action were overstated.
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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.
As I have often noted in the past, the ECRI and the SLFSI report with a one-week lag. This means that the reported values do not include last week's market action. In my research, I take account of this lag. In my daily monitoring of the market I look at the underlying elements in the SLFSI. I cannot do this with reliability for the ECRI since the indicators are secret. The SLFSI will increase next week, but not to the level that would trigger the "risk alarm."
There will soon be at least one new indicator, and the current choices are under review. In particular, I am considering replacing the ECRI method with the equally effective and more transparent approach from Bob Dieli. The ECRI has a "long leading" series that is available only to subscribers, which they refer to in media appearances.
Investing Blog articles by Jeff Miller
Michigan Consumer Confidence 4th Worst on Record by Doug Short
Economy: Sick but not Dying by Steven Hansen
Gold Trend Lines by John Lounsbury
Do You Want to Ride Through another Bear Market? by MacroTides
It’s Time to Bail on Bank Stocks by Martin Hutchinson
About the Author
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 he 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.