The Bad
Despite the good news on Syria, the economic data were a bit disappointing.
- Retail sales missed expectations. This was a decline and Doug Short plays it straight with a good analysis and his famous charts. Steven Hansen of GEI has a more positive take, pointing to the prior month revisions and year-over-year comparisons. Bespoke leans more toward Hansen, and includes some intriguing tables and charts. The Capital Spectator takes a more balanced view. This is why I read and highlight many sources! If one seems clear to me, that is what I highlight. In this case, you need to read them all to understand the varying interpretations on this key issue.
- Michigan consumer sentiment badly missed expectations. This is disappointing, especially in light of recent gains. I see this as a good concurrent indicator of employment and consumer spending, but it is sometimes distorted by politics, gas prices, or world events. The recent preliminary readings have had later upward revisions. While I take each data point at face value, it is possible that this one will get an upward boost from the Syria news and lower oil prices. Here is the impact via my favorite chart. See Doug Short’s post for full descriptions and context.
- Five-year financial crisis post-mortem. Neil Irwin of Wonkblog has a “complete” list of Wall Street CEO’s prosecuted for their role in the financial crisis. There is no way to summarize, so just take a look.
Good or Bad? Not Sure!
House may cancel September recess planned for the week of the 23rd. House Majority Leader Cantor says that they may need the time to work on a budget resolution to avoid a government shutdown. (See The Hill).
The Ugly
Attempted scams are prevalent and some of them are working. A FINRA study finds that 84% of respondents had been solicited with at least one type of potentially fraudulent activity. (The other 16% must not have an email account!) Older folks and men are especially susceptible, with 4% admitting to have lost money. FINRA thinks that is under-reported since people do not like to admit embarrassing decisions.
Why are they susceptible? See if you would agree with these offers:
“Forty-three percent of respondents were attracted to “fully guaranteed” investments, 42% found an annual return of 110% for an investment appealing and nearly half liked the prospect of a daily rate of return of over 2%.”
Helmets Off!
…to the Colorado football players, staff, and students who helped out those displaced by the terrible flooding. (The game against Fresno will be made up later).
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 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. Dwaine has also developed a market-timing approach which follows ten bear-market signals. His latest installmentprovides detail and a current look.
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. For those interested in gold, he has a recent update, asking when there will be a fresh buy signal.
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 understanding recessions is important for corporate earnings and for stock prices. This attention to actual risk measures has paid off handsomely for anyone our investors, 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. Last week Felix turned bearish. I wrote, “Felix might switch to a neutral posture if the overall market holds its ground.” With the reduced chance of military action against Syria, the market celebrated the reduction in uncertainty. The key change from last week is that the inverse ETFs have dropped dramatically in the ratings. They are now significantly lower than their positive counterparts.
The Ticker Sense poll asks for a one-month forecast. Felix has a three-week horizon, which is pretty close. We run the model daily, and adjust our outlook as needed.
Felix’s ratings improved dramatically over the last week, and the penalty box percentage decreased. 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. Felix is close to bullish territory.
[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.]
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