The Bad
There was a little bad news. Feel free to add in the comments anything you think I missed!
- The CPI headline number was higher than expected. This subject is a huge source of misunderstanding on the part of the average investor. The magnitude of the difference is best understood if you realize that the Fed sees inflation as too low. Their preferred measure is currently showing a lower rate than the CPI. (See Dr. Ed for more). Explaining this is beyond the scope of my weekly article, but those who are interested in predicting Fed behavior should be paying attention. Doug Short has a nice continuing series on inflation which is also well worth reading.
- Gasoline prices are higher, influencing the CPI. The Bonddad Blog points to both higher oil and gas prices, asking “Why?” I think that it is a narrowing of the WTI/Brent spread, as noted by Bespoke (and various other sources). If this explanation is correct, we can expect gas prices to reflect fundamental changes in future months.
- Sentiment remains bullish. Bespoke notes that this contrarian indicator remains elevated after a “trivial” decline.
- GDP estimates are falling. Menzie Chinn at Econbrowser mentions the sequester and the increase in payroll taxes as causes. He also cites several other authoritative sources. Doug Short discusses the forecasts and shows the entire range of the WSJ economic panel in this chart:
- A technical signal from the High Low Logic Index is a warning of another 2007 (via Mark Hulbert). This approach is an element of and inspiration for the Hindenburg Omen, but does not seem to have so many false positive signals. On the other hand (via Mark Hulbert) none of the market timers he follows generate any edge on a long-term basis.
- Leading economic indicators were unchanged. This was below expectations so I am scoring it as “bad.” Steven Hansen at Global Economic Intersection always has an interesting take, often by looking at the long term and avoiding seasonal adjustments. His analysis and charts help to put this report in perspective.
- Housing starts were very weak – much worse than expected. Calculated Risk keeps this in perspective by considering the multi-family effect and also building permits. Bill McBride is the go-to source on this subject, so I have special interest in his conclusion: “Starts are moving up and completions are following. Usually single family starts bounce back quickly after a recession, but not this time because of the large overhang of existing housing units.” I continue to watch this very carefully.
The Ugly
The Motor City. Matthew Dolan of the WSJ has a good story loaded with facts on the largest municipal bankruptcy. $18 billion in liabilities….
The Bond Buyer covers the implications (“ominous”) for the muni market.
And what assets must be sold? Museum holdings? This car (original Mustang)?
Appreciation
My main reason for writing is pretty simple: I have an impulse to share a message that I hope some will find helpful. I did this for many years, partly as a way of communicating with clients. At some point, I started to get some inquiries from potential new clients. Many said that I was so low-key that they did not understand that I had investment services available! I have a good team, but not a special marketing department.
- I appreciate those who send an email with some kind words, or who make an encouraging comment. It lets me know that I am helping and offsets some of the “Miller, you idiot!” messages I get.
- I appreciate those who consider our services, whether they choose us or not.
- Thanks to Brian Gilmartin for his kind words on his excellent blog, Fundamentalis. He gives me too much credit merely for encouraging his efforts. He has a powerful, profitable message and a strong desire to share it. He is a natural writer.
- And thanks also to Insider Monkey for including “A Dash” among the top 100 finance blogs. This is a real surprise. There is a formula for popularity and my relatively infrequent and skeptical long posts do not fit the bill. We are only at #89, but that leaves room for improvement.
The Indicator Snapshot
It is important to keep the current news in perspective. I am always searching for the best indicators for our weekly snapshot. I make changes when the evidence warrants. At the moment, my weekly snapshot includes these important summary indicators:
- For financial risk, the St. Louis Financial Stress Index.
- An updated analysis of recession probability from key sources.
- For market trends, the key measures from our “Felix” ETF model.
Financial Risk
The SLFSI reports with a one-week lag. This means that the reported values do not include last week’s market action. The SLFSI has recently edged a bit higher, reflecting increased market volatility. It remains at historically low levels, well out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a “warning range” that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.
The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events. It uses data, mostly from credit markets, to reach an objective risk assessment. The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.
Recession Odds
I feature the C-Score, a weekly interpretation of the best recession indicator I found, Bob Dieli’s “aggregate spread.” I have now added a series of videos, where Dr. Dieli explains the rationale for his indicator and how it applied in each recession since the 50’s. I have organized this so that you can pick a particular recession and see the discussion for that case. Those who are skeptics about the method should start by reviewing the video for that recession. Anyone who spends some time with this will learn a great deal about the history of recessions from a veteran observer.
I have promised another installment on how I use Bob’s information to improve investing. I hope to have that soon. Meanwhile, anyone watching the videos will quickly learn that the aggregate spread (and the C Score) provides an early warning. Bob also has a collection of coincident indicators and is always questioning his own methods.
Meanwhile, here is the latest take from Bob’s monthly take on the economy:
Bob’s work is crucial to understanding why we are still early in the business cycle. Others look at elapsed time. Bob looks at data.
I also feature RecessionAlert, which combines a variety of different methods, including the ECRI, in developing a Super Index. They offer a free sample report. Anyone following them over the last year would have had useful and profitable guidance on the economy. RecessionAlert has developed a comprehensive package of economic forecasting and market indicators, well worth your consideration. Of special interest is the Leading SuperIndex, which accurately forecast the absence of a summer swoon. Since the weekly data are still mixed, it is important to monitor the index closely. Here is the most recent update and chart:
Georg Vrba’s four-input recession indicator is also benign.
“Based on the historic patterns of the unemployment rate indicators prior to recessions one can reasonably conclude that the U.S. economy is not likely to go into recession anytime soon.”
Georg has other excellent indicators for stocks, bonds, and precious metals at iMarketSignals. These all have recent updates.
Unfortunately, and despite the inaccuracy of their forecast, the mainstream media features the ECRI. Doug Short has excellent continuing coverage of the ECRI recession prediction, now over 18 months old. Doug updates all of the official indicators used by the NBER and also has a helpful list of articles about recession forecasting. His latest comment points out that the public data series has not been helpful or consistent with the announced ECRI posture. Doug also continues to refresh the best chart update of the major indicators used by the NBER in recession dating.
The average investor has lost track of this long ago, and that is unfortunate. The original ECRI claim and the supporting public data was expensive for many. The reason that I track this weekly, emphasizing the best methods, is that it is important for corporate earnings and for stock prices. It has been worth the effort for me, and for anyone reading each week.
Readers might also want to review my Recession Resource Page, which explains many of the concepts people get wrong.
Our “Felix” model is the basis for our “official” vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions. A few weeks ago we briefly switched to a bearish position, but it was a close call. Two weeks ago we switched back to neutral, which was also a close call. The inverse ETFs were more highly rated than positive sectors by a small margin, but remained in the penalty box. Last week we were almost in bullish territory, an amazing change in only two weeks. Last week I wrote that we were sticking with “neutral”, but the bias was to the upside. This week the ratings have improved enough to warrant a bullish forecast.
These are one-month forecasts for the poll, but Felix has a three-week horizon. Felix’s ratings have improved quite a bit. The penalty box percentage measures our confidence in the forecast. A high rating means that most ETFs are in the penalty box, so we have less confidence in the overall ratings. That measure remains elevated, so we have less confidence in short-term trading.
[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.]