Last Week’s Data
Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
- It is better than expectations.
The Good
There was some significant good news last week.
- Q2 GDP was revised higher. While this is backward looking, it does provide a positive base.
- Ratings for financial TV continue the recent decline. Ryan Detrick explains why this is bullish. (Think the opposite of 2000).
- Underwater mortgages decline. See GEI analysis of Zillow data. Nice interactive graphics.
- PIMCO changes course! Josh Brown nails it with his discussion of PIMCO’s complaints about the media, noting some hypocrisy given the media blitz by the firm’s top executives. Barry Ritholtz is even more explicit in his post, Proof the Bond Bull is Over: PIMCO Selling Hedge Funds. This is a good discussion of the recent PIMCO moves and the relaxation of SEC restrictions. Can we expect a change in rhetoric from these sources?
- Earnings remain positive. Q2 showed an increase of about 4%. This is a win for earnings guru Brian Gilmartin who forecast 5% or so compared to the 1% loss predicted by Doug Kass, which wedocumented here. We hope they will both have predictions for next quarter as well. Meanwhile, Ed Yardeni notes that estimates for 2014 show an 11% gain over this year.
- Michigan sentiment made a nice rebound from the mid-month levels. I regard this as a pretty good coincident indicator for spending and employment. You can see the relationship to GDP from Doug Short’s fine chart:
- Case-Shiller home prices are up 12% year-over-year. (Via Calculated Risk).
The Bad
In addition to the Syria story, there was some bad economic news.
- Debt ceiling negotiations between the White House and Senate Republicans (the most important dynamic) are “on the rocks.” (See The Hill).
- Personal consumption spending disappointed. (See analysis from Steven Hansen at GEI). Calculated Risk provides this chart:
- Trading glitches. Each of these serves to undermine confidence – perhaps with good reason. The Economist reports on several recent incidents. A new study shows just how costly this can be. Policy changes coming?
- Durable goods orders crashed no matter how you measure the change. Steven Hansen at GEI has the analysis, including this chart:
- Emerging markets continue to decline. Some are suggesting a link between these markets and future world economic issues. These same sources also frequently cite central bank policy as a cause. Ed Yardeni suggests that forward earnings in these countries are more responsible. He also does not see a “panic attack” from the Middle East.
- Pending home sales fell 1.3%, a disappointment. Calculated Risk notes that some signings may have been pushed forward because of mortgage rates. (Contra Todd Sullivan, whose chart suggests normal seasonality).
The Silver Bullet
I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. Think of The Lone Ranger.
This week’s award goes to Derek Thompson writing at The Atlantic. Remember all of those recent stories about how 1/3 of young adults were living at home? It turns out that a dorm room counts as “home” in these measurements. That is only one of the three factors making this into a misleading story.
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.” In this series of videos, 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 the specific recession that concerns them. 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. It has been on my “important but not urgent” list, since I am not currently worried about a recession. 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.
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 almost two years 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. These are showing some recent weakness, so let us take a look at the chart.
We can see that the recent real income data has been weak, and the overall growth has been modest. There is still nothing resembling a business cycle peak and a significant pull back, which is the NBER definition for a recession.
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 bullish position, but it was a close call. While we are currently “neutral,” Felix might switch to a bearish posture if the overall market drifts lower. The inverse ETFs are more highly rated than positive sectors by a small margin, but remain in the penalty box. These are one-month forecasts for the poll, but Felix has a three-week horizon. Felix’s ratings seem to have stabilized at a low level. 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 Felix or 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.]