Caution Using Economic Indicators

John Hussman offers one of the more thoughtful analyses of leading economic indicators (LEIs) that you're likely to come across. Based on his data, he's pessimistic that recent anecdotal evidence (i.e., downticks in unemployment, upticks in purchasing managers index) are sounding 'all clears' with respect to recession chances.

In fact, Dr J's assessment suggests the opposite: recession appears likely within the next 6 months.

One point I found particularly interesting is that some factors used in LEI analyses tend to 'look good' right up to commencement of a recession. For instance, Dr J notes (see below graph) that payroll growth tends to be positive in 80% of the months where recessions begin! Moreover, payroll growth in the 'recession month' tends to be higher, on average, than the three preceding months.

Obviously, unadjusted payroll growth is not a good standalone predictor of recesssions. Indeed, from the above graph, payroll growth appears to be a lagging indicator of recessions.

Bottom line: be careful what you absorb from the popular press concerning economic indicators and recession potential.

Strong Out of the Gate

The first trading day of the year saw some upside resolution to the reverse head and shoulders pattern forming over the holidays--although a late day pullback drained a bit of glory from the gains.

Would think technicians are eyeing the late October highs of 1285ish as a more definitive indicator that a new leg higher is underway.

By early afternoon, pundits predictably started trotting out the old saws about how the first few trading days of the year often 'forecast' the tape's annual performance. One tidbit I've picked up over the years: Don't succumb to early year urban legends designed to whip the masses into a bullish frenzy.

position in SPX

Durable Rally, or Short Term Relief?

If we were to assign news-related causes to today' 2-3% stock market rally, it would probably be a blend of better than expected Black Friday sales plus the spectre of (another) Euro bailout. Of course, we learned today that a) the IMF had no Italian bailout program in motion, and b) last week's retail sales numbers may be greatly exaggerated.

So perhaps today's move is just one more rally to blow off some near term selling pressure.

Technically, an upside move 'works' to SPX 1220.

Other technical evidence, however, is not in synch with a sustained upside move. After an early move lower, Treasuries recovered most of the day's losses. Bank stocks gave up a big chunk of their early gains. The dollar also closed near even after early selling. Oil closed near its lows.

Hard not to view these 'divergences' with some skepticism about the prospects for big upside from here. Time will tell, of course.

Personally, I did a whole lot of nuttin' today. Will likely put back on some of the incremental short exposure ditched last week should prices continue higher toward 1220. Other than that, I continue to be active in the physical metals market, buying both gold and silver.

position in SPX, gold, silver

Cash Rich, Balance Sheet Poor

Interesting weekly comment by John Hussman, particularly the back half devoted to corporate balance sheets. Many bulls claim that corporations are 'flush with cash' and that corporate balance sheets 'have never been stronger.' As Dr J demonstrates, these claims have little merit.

When compared to the amount of debt on corporate balance sheets, cash has been coming off historical lows. Cash as a fraction of net worth and total assets is also small (in the 5-10% range).

As such, much of the 'cash' on corporate balance sheets comes from debt. Corporations have been building cash in this manner due to cheap financing terms.

Make no mistake, the dominant feature of today's corporation continues to be debt and leverage, not cash.

John also comments on another eye-opening trend: the decline in tangible assets in non-finance corporations. The fraction of tangible assets to total assets is now below half. The remaining assets are financial assets such as debt securities and stocks.

As John notes, "This is striking, in that we presently have a menu of prospective returns on financial assets that is among the most dismal in history."

This is another argument for tangible assets (e.g., commodities) over financial assets, and for companies that are weighted toward more tangible assets.

position in commodities

ECRI Recession Call

Of all the recession forecasting entities out there, the Economic Cycle Research Institute (ECRI) has the best track record by far. Not only that, but ECRI recession calls tend to lead mainstream calls by months.

Last week ECRI told its clients that, based on current levels and trends of its proprietary Weekly Leading Index indicator, the US economy is slipping back into recession.

QE3 Still a Possibility?

A year ago at Jackson Hole, Fed chair Bernanke signaled a major policy initiative aimed at stimulating the stock market, er, the economy, that became known as QE2. That policy lit a fire under the equity markets and they ripped higher--only to come tumbling down over the last month or so coincident with the end of QE2.

Markets were looking for some deja vu today as Bernanke took the podium this year's summer shrimpfest this morning. His speech did not detail a new stimulus program, although he did indicate that he has extended the length of the Sept FOMC meeting to two days so that the committee can amply discuss the various 'tools' at the Fed's disposal for stimulating growth.

That 'potential' for future Fed intervention was perhaps all markets needed today, as early market losses were quickly reversed as Bernanke spoke and the indexes sprinted higher for gains of 1% or so.

Hope springs eternal for the addict.

position in SPX

S&P Downgrades US Credit Rating

After markets closed on Fri, S&P announced that it was downgrading the United States from the top shelf AAA credit rating to AA+.

In its report, S&P based its rationale on the recent turmoil surrounding the debt deal which the agency said reduces clarity on US capacity for reducing spending and controlling debt.

The chatter that I have heard this weekend in the wake of the downgrade has been bearish. e.g, 'expect another 6-10% down in markets over the next couple of weeks.' Indeed, that could occur.

On the other hand, it is possible that some of the decline that we saw last week was market participants pricing in the downgrade. In such case, it shouldn't be surprising that we actually rally now that the news is out.

In any event, all eyes will be watching the action early in the week for more clues.

position in SPX

Jim Rogers Checking In

The alway interesting Jim Rogers has been making the rounds recently, here at WSJ and here w/ a raspy Maria. JR has little doubt that the US is headed for crisis much larger than the 2008 edition. His time window for arrival seems to be between 'this fall' and 'the next 5 years.'

He's offsetting his longs in commodities, Chinese stocks, and select currencies (including the USD for a trade) with shorts in emergining markets and US tech.

When speaking w/ Maria, JR also revealed that he's short 'one major American financial company.' When pressed for more details, he admitted that 'it's the bank that hasn't gone down as much as the others.'

Any guesses on which bank he's short? I have mine...

position in commodities, SPX

Inflation Explained

Last fall, a video that explained QE2 went viral. A brilliant explanation on what is going on, it seemed to me.

Now, the creator has developed a video that explains inflation. Another homerun, it seems to me.

Those scratching their heads over the widening chasm between rich and poor should make sure they understand what is being said here.

Monetizing the Debt

Two years ago, politicians and media were quick to recognize the ponzi scheme run by Bernie Madoff at the expense of his investors.

Today, however, a much larger Ponzi scheme is being run by the US government at the expense of US citizens. The US Treasury sells bonds to banks. The banks then turn around and sells those bonds to the Federal Reserve. The Fed buys those bonds w/ freshly printed dollars.

This is sometimes referred to as 'monetizing the debt.' But it is a Ponzi scheme, pure and simple. And this scheme is built with an inflationary engine.

btw, nice work for those banks that serve as middlemen, as they are privy to free money for brokering the pyramid.

You may or may not agree with this policy. But as investors, you need to make sure you understand the financial and economic implications.

no positions

Jim Rogers Video Clips

During class we discussed Jim Rogers. I pulled a few snippets from youtube in case you want to get a sense of the guy and how he thinks.

Bloomberg interview on commodities--oil, gold, silver, ags, and offsetting that w/ short exposure. He's also long the US dollar for a trade.

My friend Jeff Macke interviews JR on the Fed and other matters.

Part 1 and Part 2 of CNBC interview Japan disaster and investment.

Last week, Kudlow interviews interesting panel including JR.

There are plenty more if you have interest...

position in commodities

Buffett's Annual Letter

Each spring, Berkshire Hathaway (BRK.A, BRK.B) chairman and CEO Warren Buffett pens a letter to shareholders. It's been said that reading his archived letters provides more value that obtaining an MBA.

Not sure about that, but I do know that reading Buffett's annual letters always offers some insight--even if I don't always agree with Mr Buffett's point of view.

The most recent 2010 letter, along with previous years' archived letters, can be found here.

no positions

Bearish Macro Analysis Example

Money manager Doug Kass serves up his macro analysis. He appears to be weighting the macro factor highly in terms of its impact on stocks.

You may not agree with it, but 'see it' in the interest of understanding both sides of the trade...

Single Best ETF?

Is there one best exchange trade fund (ETF) for young investors to own? Here are some thoughts from a few people who think that the answer is 'yes.'

Of course, there are those who think the answer is 'no.' People have different risk profiles and investment goals, for example, that would preclude any vehicle that is appropriate for all investors.

Food for though either way...

Is Inflation Priced In?

David Rosenberg of Gluskin Sheff thinks that inflation expectations may be pretty well priced in by the markets. He offers some interesting evidence to support his thesis.

As we have noted in class, when consensus builds on a subject that has helped to trend markets, then a trend reversal may be pending...

Defining Profit

As observed here, there are many possible meanings for 'profit.' The same can be said for 'earnings.'

Imprecise meanings increase potential for misinterpretation. Be careful when processing information about profits and earnings. You and the information provider may not be on the same page...