by Jeff Miller
There are plenty of questions. Will Ben Bernanke have the answers?
For several weeks we have considered the issue of the economic tipping point. To get ready for the FOMC announcement and the second press conference by the Fed Chair, here is your need-to-know background.
Economic recovery trends are very modest. You can see the story in this four-chart summary from the St. Louis Fed. These are the main indicators followed by the NBER, which does the official recession dating.
Thoughtful and objective observers embrace the “continued slow growth” conclusion. The latest to join the list documented here over the last several weeks is Bill McBride of Calculated Risk. In a careful, data-based analysis that you should read in its entirety, he cites the improved contribution from residential investment, concluding as follows:
So for now I’ll stick with my general forecast for 2011: growth will remain sluggish, but I expect 2011 to be better than 2010 for both employment and GDP growth.
At The Bonddad Blog, New Deal democrat compares this year’s mid-year slowdown to last year’s. He includes a number of useful charts and looks at several key variables — great stuff. Like us, he notes that the worries of some are not showing up in risk indicators, concluding as follows:
In summary, the driver of the current slowdown appears to be primarily high Oil price and low wage growth, with an assist from Japan’s earthquake and contractionary policy emanating from Versailles.
His colleague, Hale Stewart, does a similarly thoughtful review with this conclusion:
Overall, there is no reason to see a double dip. But neither is there a reason to see a pace of strong overall strong growth. It’s quite likely that for the next few quarters the economy will grow just enough to stave off a recession, but not fast enough to create a self-perpetuating, demand driven state of strong growth.
The Fed’s Beige Book provides the economic summary, district-by-district, that will be in front of FOMC members during the meeting. Since you will not take the time to read the Beige Book, you should instead read the carefully prepared summary at The Bonddad Blog, where the good stuff keeps on coming! Bonddad includes some tidbits about the NY and Philly Fed districts having the worst stories. (This was out before the Empire Index and the Philly Fed. There might be a trade there next time.) Another bright spot is the increase in bank lending. Here is the conclusion from Part IV of the series:
Overall, the macro level numbers are good. A majority of districts reported an increase in loan demand, and the demand appears across a variety of loan types: residential, construction and commercial and industrial. In addition, credit standards are easing across a variety of loan types.
The Fed Story is crucial for the coming week, but as usual let’s review last week.
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 story about the Greek bailout dominated the news, making it difficult to interpret the effect of economic data. The stories were a mixed bag.
There was a little good news.
- Leading Economic Indicators were surprisingly strong. I have not been a big fan of the LEI, but some swear by it. Mark Perry has a nice chart and description.
- Shipping from the port of LA hit a new record for May, suggesting both US and global economic strength. (Again, nice job from Mark Perry).
- Employer hiring plans are positive — stronger than last year, but still not at levels needed for robust growth.
- Building permits were up 8.7% in May. Unlike other housing stories the building permit data provides a forward look. Most of the permits were multi-family, however, so it is positive for construction work but not so much for individual home sales.
- Technical levels are holding, at least for the S&P 500. Charles Kirk, in his fine weekly chart show (modest subscription required and well worth it), sees a modestly bullish picture. As usual, he highlights specifically what would cause him to change his mind during the week.
The bad news included some more important indicators .
- Initial jobless claims of 414,000 — still too high to expect solid job growth. Some attribute (see here) the recent levels to unusual seasonal factors and the Japanese supply chain effects. For the moment, I am taking the results at face value.
- CPI data showed worse than expected inflation. Doug Short has the expected charts and analysis.
- The Empire State and Philly Fed Indexes were terrible. I do not put much stock in the regional reports, but big unexpected changes move the market. Steven Hansen of GEI has good coverage here and here.
- Michigan Sentiment was weaker than expected. As Doug Short reports, the index is significantly below normal levels, not at all what we would expect in a recovery.
The worst images of the week did not come from New Hampshire. I watched the GOP debate with great interest. While we all have our favorite choices, there are many hoping for some new entrants to the field. The candidates were photogenic and some made great headway.
The ugly news came from Greece where there was a new round of protests about austerity threatened the bailout program. There is some brinksmanship going on in Europe. In a multi-party negotiation, it does not pay to show weakeness.
For investors, the sad part of the story is that news sources think that the big story is how you personally could lose, even in your money market account! There are those who see another 2008 everywhere, and they get plenty of attention on blogs and in the press.
In the face of this I wrote a viewers’ guide, showing what to watch for. I did not then know for sure that there would be (yet another) delaying compromise. Anyone following my checklist, however, would have been able to act profitably in real time. (Twitter people can follow my updates where I try to stay on mission.)
[rant on]The story is continuing and is also like many others. A more detailed review is on the agenda, but for now it was yet another false scare, something that chased many individual investors out of the market. There are so many who profit from this — from selling gold, selling structured products or annuitites, selling page views, selling candidates, selling Nielson ratings. It is not newsworthy to step up and say that you should probably not be worried about this. Showing the same loop of film all day is part of the problem.
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 is often the case, 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.
[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
The coming week is another light one for data. There is continuing attention to the jobless claims and whether there will be a decline as auto production recovers from the post-Japan supply chain issues. Not much is expected for existing home sales.
The biggest story will be the FOMC policy announcement and the second Ben Bernanke press conference. Here is what I expect:
- No policy change
- No change in language about low rates for an extended time
- A reduction in the Fed’s target economic growth rates, reflecting recent events, and an increase in the unemployment estimate
- No announcements of any QE’s
Briefly put, the Fed does not share the pervasive market fear about the recent weakening in economic data. The Fed also understands that while the purchases of securities under QE II is ending, the program itself is not. Until the Fed balance sheet is reduced, there is a powerful stimulative effect on the money supply. This effect takes time to show up, and it is a longer lag than usual when bank lending is sluggish.
The big question for the meeting is not so much what the Fed will do, but how convincingly Ben Bernanke can explain it.
In trading accounts last week we added a third inverse ETF positions, so we are net short 60%. I do not expect this to last long, since there are ETFs moving into the buy range.
As I have noted in the last two installments in this series, the psychology and method of the investor should be different. It is attractive to invest when fears are worse than fundamental conditions, as they are now.
You can see this in the weekly indicators when the SFLSI and the ECRI are both in normal ranges, but the market sentiment is negative. I am getting a number of questions about retirement planning, which now seems to be the biggest fear for a large group of investors. In case you missed it, I wrote an article emphasizing the investment approach last week.
Weighing the Week Ahead: An Economic Tipping Point? by Jeff Miller
The Double/Triple Doji: Have We Been Warned? by William Kurtz
Forecasts: What and How Do Business Economists Thinks? by Menzie Chinn
June 2011 Econbomic Forecast by Econintersect
Investor Sentiment Leads Price by Guy Lerner
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 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.