The Bad
There was a little bad news. Feel free to add in the comments anything you think I missed!
- The House will not act on immigration before the August recess. See The Hill for the story.
- Rail traffic is down. See Global Economic Intersection for the full story and a helpful chart pack.
- Larry Summers as Fed Chair? My Kauffman Conference friend Ezra Kauffman broke the story in a carefully measured article. I am scoring this as “bad” for my regular reasons – the market reaction. Even the rumor was enough for some to attribute higher interest rates and lower stock prices to the news. The market sees Janet Yellen as a more dependable dove. For thoughtful commentary on the likely policy impact of either choice consider these viewpoints (all Kauffman friends and colleagues except for McBride). It is pretty one-sided.
- Cardiff Garcia with a comprehensive a thoughtful analysis of records.
- Scott Sumner’s strong argument against Summers.
- Brad DeLong’s handicapping and emphasis on the need to pick one of the two.
- Bill McBride on the “premature pivot” to austerity by Summers.
- The WSJ list of pundits. My favorite quote is from another Kauffman friend, Bob McTeer, who has a great sense of humor. “He [Summers] knows how smart he is, that’s a negative, but on the other hand he’s real smart, which is a positive.”
- Felix Salmon with another strong opinion against Summers.
- Mike Konczal (last but never least) on why this is so important. (Hint: no consensus on post-Bernanke actions).
- Existing home sales missed expectations as Diana Olick reports for CNBC. She notes the effect of distressed sales. Olick continues to have a downbeat take on housing, and this report was a miss by standard criteria. Calculated Risk has a contrary view, emphasizing inventory rather than sales. (See also the new home sales chart above).
- China’s PMI fell to 47.7, the lowest in nearly a year. Prof. Hamilton is concerned, so we should be as well. His concern is not the “modest decline” in the growth rate, but rather credit conditions, so that is what we should monitor.
The Noteworthy
Maria Bartiromo might be leaving CNBC. Fans will certainly be able to see her somewhere, but it is “no comment” all around so far.
Meredith Whitney states (during a CNBC interview, on the day of the publication of her op-ed in the FT, that she does not want media exposure.
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.
James Picerno asks, Can the Fed Prevent the Next Recession? He interviews Bob for part of the answer, but also adds his own look at the data. He is asking the right questions in this thoughtful analysis.
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.
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.
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. Here are his latest observations:
“Here are two significant developments since ECRI’s public recession call on September 30, 2011:
- The S&P 500 is up 44.9%, hovering just below its most recent all-time high.
- The unemployment rate has dropped from 9.0% to 7.6%.
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. Three weeks ago we switched back to neutral, which was also a close call. Last week Felix turned bullish, again by a small margin. The indicators are more positive this week.
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 somewhat elevated, so we have a bit 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.]