Thursday, December 29, 2011

Is rail-freight suggesting that a recession is now unlikely next year?

An interesting story on Bloomberg entitled "Rail-Freight Surge Shows U.S. Skirting Recession" is about the first indication that I have seen that the economy is likely to see some strength in the early part of the coming year. That's good news, but not yet good enough to put the last nail in the coffin for a possible recession in 2012.
 
The fact that unemployment insurance initial claims are still trending down is also good news and although it is not an indicator of economic strength per se, it is an indication that economic weakness is not yet upon us.
 
The Chicago ISM Business Barometer report today was decent, but not strong enough to indicate any true strength going into the new year. Basically, it was suggesting more of the same. That will be great if it really means more of the expected +3.6% GDP growth in Q4, but that remains to be seen. My interpretation of the report is that a recession is unlikely in Q1, but we are not facing enough evidence of economic strength (yet) to be overly optimistic beyond Q1, yet. The report showed that more businesses were still seeing increases of new orders than seeing decreases, but it was still a minority of firms seeing increases, 39% vs. 43% seeing the same level and 18% seeing decreases.
 
Overall, this latest data does indicate to me that a recession remains less likely than likely even though ECRI does make a decent case that we may be facing deceleration that would leave the economy vulnerable to a recession if we run into even a moderate shock in the new year.
 
What we really need to see is whether businesses ramp their spending up or down over the next few months. The rail-freight report at least suggested that businesses were not (yet) ramping down.

Investment wisdom

I can't tell you what investments will do great this coming year, but here are a few things I'm fairly confident of:
  • I don't care what "worked" this past year, or any other year; I only care about what will work going forward.
  • Past performance does not guarantee future performance.
  • Things work, until they stop working.
  • Things are hot, until they're not.
  • Jumping around (e.g., through "timing") can work well if you have the right combination of skill and luck, but usually is the surest way to increase your losses, even in a bull market.
  • "Steady and sure" and "stay the course" generally work, over time but not necessarily in any given year or two or three, if you pick solid investments, but "holding" is doomed to fail if you pick the "wrong" investments or if the overall market is down.
My retirement investments are down for the year (so far), by a few percent. I'll be making my 2011 retirement contributions sometime over the next four months (as soon as my taxes are done.) Unless I come up with some brilliant insight/discovery, I'll continue to buy a retirement target date fund, such as the Fidelity Freedom Fund that I currently have (and lost money on this year.) I currently have another 12 or so years until retirement.

Saturday, December 24, 2011

Stock market finally rises above its October peak

The stock market may have finished the week with merely a so-called "whimper", but the Dow did reach two milestones on Friday, breaking out above both the psychological 12,200 level and above the October peak. Both are good news. But, a one-day "whimper" does not indicate a trend, especially when it occurs on a slow, pre-holiday, pre-weekend trading session.
 
This coming week will be another slow period where volatility could be high and "fake", temporary trends might appear and then disappear as quickly as they arise.
 
This new peak may fall as quickly as it rose, or maybe we will see a modest rally into the end of the year, but at least the good news is that we have the positive combination of "higher highs" and "higher lows" which is the hallmark of a bull market even if there are lots of intervening down days.
 
We still have quite a few psychological and technical hurdles ("resistance") to overcome before the Dow exceeds its July and April peaks, so technically the stock market will remain in a trading range for awhile longer. Traders and short-term speculators will have plenty of volatility to trade off of as market participants struggle to cope with conflicting incoming information about the state of the economy and various fiscal authorities in the coming months and year.
 
Ultimately, we are waiting for the stock market to pass judgment on the economy and start telling us where the economy is likely to be in nine months.
 
The bottom line is: 1) the stock market isn't in such bad shape, all things considered, but 2) stay tuned, since anything could happen.

Macroeconomic Advisers still forecasting growth of +3.6% for Q4 GDP

Macroeconomic Advisers (MA) is still forecasting annualized real GDP growth of +3.6% for Q4. They had been forecasting +3.7% growth as of last week. This is still very good news.
 
Unfortunately, this doesn't tell us anything about what Q1 or the rest of 2012 might be like.

ECRI Weekly Leading Index declines, still holding our breath on potential recession for 2012

The ECRI Weekly Leading Index (WLI) declined sharply this week, and although not directly indicating a recession, it does at least highlight weakness that could easily deteriorate into recession in the coming months. ECRI is still forecasting that we are "tipping into recession", although they are still vague on when exactly such as recession did or will start and how long and how bad it might be. ECRI uses additional, longer leading indexes than only their own "short" leading Weekly Leading Index. In other words, the WLI is simply a "teaser" for the full ECRI story, which is available by subscription only.
 
There is significant weekly volatility in the WLI weekly changes, but the smoothed growth rate which dampens that volatility did decline modestly this week, although it had risen the previous two weeks.
 
So, this one report was a negative report, but doesn't yet (by itself) indicate that a recession in 2012 is a slam dunk.
 
The real risk is that the WLI shows that the overall economy is relatively weak (despite a decent Q4) and that a weak economy tends to be prone to falling into recession if even a modest economic shock (e.g., problems in Europe getting worse) comes along.

Unemployment insurance initial claims continue to improve

The latest weekly unemployment insurance report was one of the best in quite some time, with initial claims continuing to fall further below the traditional recession threshold, at 364K vs. the 400K recession threshold. The more stable 4-week moving average of initial claims also continues to decline, at 380,250. This is indeed good news, but we need to see that number consistently below 350K for an extended period of time before we can take much comfort in it as far as indicating whether the economy is "healthy" again.
 
Continuing claims were also down, but unfortunately that number is rather useless at this stage since it is unable to tell us how much of the decline was due to people finding work versus people exhausting their unemployment insurance.
 
A recession is still a significant risk for 2012, but at least the unemployment insurance data is not pointing to a recession, as of this time.
 
January and February will be critical months as we see how many of the current jobs were primarily seasonal and go away in January after the post-holiday retail sales season runs its course. The February data will tell us where we really are, whether we see a recessionary jump in initial claims or something more mild and indicative of at least a marginally healthy economy.

Monday, December 19, 2011

Back to work

Just when I was starting to get into my finance blogging on a more frequent basis, now I have a lead on some "real" work, so I'll need to suspend a lot of my blogging until further notice while I pursue this work lead. Sorry about that.

Sunday, December 18, 2011

Extending the payroll tax holiday for only two months is a good thing

Although all manner of pundits, commentators, and politicians are lamenting that Congress was only able to extend the payroll tax holiday for two months, I actually think this is a good deal since there is a lot of uncertainty about the economic outlook for 2012. Q4 has been shaping up quite nicely, so it is actually unclear whether the U.S. economy will need the payroll tax cut in 2012 at all. On the flip side, Q4 may be a "last hurrah" before we slip into a recession, in which case the economy will need a lot more financial medicine than the limited palliatives that Congress was considering this past week.
 
In the former scenario, the expiration of the payroll tax holiday will be just fine. And if the economy continues to improve, the fiscal health of the Social Security program will be enhanced by letting the holiday expire ASAP.
 
In the latter scenario, extending the payroll tax holiday will become a no-brainer, if not as part of an expanded stimulus package.
 
What's not to like with either outcome?
 
Okay, sure, from a purely political perspective, somebody "wins" and nobody wants to be the "loser", but from an economic perspective, it will be a win-win.
 
And even from a purely political perspective, it allows both sides to re-make their political points early in the election season. Another win-win for both sides, although each side will attempt to spin it as a loss for the other side.

Thursday, December 15, 2011

Slightly disappointing industrial production report

The Industrial Production report for November this morning was slightly disappointing, showing a modest decline when a flat report was expected. Yes, this was a disappointing report, but one data point in a data series never indicates a change in trend. Besides, the ISM Manufacturing report for November did show a production gain. Their reporting periods and sampling may not be closely aligned. Which one is more "right" remains to be seen.
 
Incidentally, industrial production is roughly at the level it was in January and February of 2005, so we still have quite a ways to go to get back to a "trend" level of production. Capacity utilization is 2.6% below its long-term average.

Another decent unemployment insurance claims report

We got another decent unemployment insurance claims report this morning, continuing a downwards trend, in both the initial claims and the 4-week moving average of initial claims. Continuing claims were up very slightly, but the 4-week moving average was down slightly and claims were half a million lower than a year ago, although it is not clear how many of those people found work versus saw their benefits expire.
 
Initial claims continue to inch down further below the traditional recession threshold, but are still too close to that threshold for any serious comfort (388K vs. 400K.) Local and state governments continue to shed jobs even as the private sectors is adding jobs, but at a rather meager pace.
 
This was definitely a decent report, but still doesn't tell us very much about what is happening on the net employment front which has been showing modest but sluggish growth for quite some time.

Wednesday, December 14, 2011

Monthly GDP finally makes a new high, completing recovery from the recession

Macroeconomic Advisers (MA), the people who calculate GDP at the monthly level (as used by the NBER Business Cycle Dating Committee), just released their estimate of GDP for the month of October which shows that GDP has now fully recovered from the recession, finally.
 
Annualized real GDP for October was $13.499 trillion, which blows past GDP of $13.388 trillion at the start of the recession in December 2007, as well as the peak for monthly GDP which was $13.448 in June 2008 (due to tax rebate checks in May, June, and July as per the Economic Stimulus Act of 2008.)
 
I wouldn't bill this so much as great news, but simply as a significant milestone.
 
Now, if only employment could recover as much lost ground. Industrial Production and personal income are also still lagging in the recovery from the recession. My own personal estimate is that it may take another three to five years for the recovery to complete, at least on the employment front, although industrial production and personal income will likely snap back more rapidly than employment.
 
MA notes that half of the the sharp rise GDP in October will likely reverse in November, but they still stick with their tracking forecast of annualized real GDP growth of +3.7% for Q4.

Modest recovery after the decline today

Although the morning low for the market did not turn out to be the low for the full day, the market did manage to rise in the last 45 minutes of trading and close a few points above that morning low. That's not super-fantastic news, but it does prove that the sharp decline in the morning was a rather weak, narrow, and technical correction rather than an all-out "rout."
 
Traders and short-term speculators will continuing "testing" and probing the market for renewed weakness (or strength) in the days ahead.
 
The sharp declines of the past three days are kind of normal when the market has an unclear or weak trend and do not tell us definitively whether further declines or a rebound will be seen in the coming days.

Nice mini-correction

It's too soon to be able to tell for sure whether this current "mini-correction" to the recent stock market rally might blossom into a full-blown correction or at least a definitive return to the existing trading range. Traders and short-term speculators will continue to "test" the market, probing for further weakness – or strength.
 
The market may have hit its low for this mini-correction this morning. We'll have to see if that is a definitive low or just an intermediate low with people "taking a breather" (and a little profits) before resuming.
 
I personally won't be betting that it was a definitive low, but it certainly acted like it, especially after two full days of correction behind it. It did look as if the market reached "selling exhaustion", at least on a short-term basis, and now maybe there is at least a mini short-squeeze underway. But, all of that could just as easily fall apart and reverse without a moment's notice.
 
In any case, none of the market activity of the past few days in any way tells us anything about the longer-term market trend, or even the intermediate-term trend (weeks to months.)

Tuesday, December 13, 2011

Dow 12,000 psychological level may still hold

Although traders and short-term speculators did manage to push the Dow down below the magical 12,000 level today, they only did it by a mere 45 points, so I would be careful about concluding too much about the 12,000 level "not holding." Give it another day or two to either bounce back or to see a more substantial pullback.
 
A couple more decent economic reports could do the trick.
 
But, ultimately, it is the longer-term economic outlook for the next several quarters of 2012 that will drive the larger stock market trend.

Recent stock market rally is now on the disabled list

It is still not out of the question for the recent stock market rally to show some life going into the end of the year, but the way the market started with a nice gain and then fell apart to close with a moderate loss today is certainly disheartening. So, the recent rally is now officially on the disabled list, and only extraordinary effort will get it back on track.
 
That said, today was quite typical of the kind of activity one would expect to see when traders and short-term speculators are "testing" a significant rally. After a weak day on Monday, some traders and short-term speculators saw an opportunity to engineer a short squeeze at the open today. Yes, they succeeded, but a lot of people were wise to that move and sold into that early rally, erasing a lot of the early gain.
 
Today was also a Federal Reserve FOMC meeting day, which are notoriously volatile. It can take three or more trading sessions for the market to rediscover equilibrium after an FOMC meeting as traders and short-term speculators overreact to virtually every news item or economic indicator that crosses the wire, for at least a couple of days.
 
In short, today's market action doesn't tell us much at all about the durability of the recent rally, but it at least tells us that a Santa Claus rally is not an absolute slam dunk.
 
Traders and short-term speculators will continue to "test" the market in the coming days

Another day of testing for the market

Sure, the stock market may seem very "confused", diving one day and popping up the next, but there actually is a method to its madness. It is called "price discovery" and "testing." Some people do believe that they can calculate the fair and "proper" value for securities mathematically, but the stock market is designed to "find" the equilibrium price for stocks "the old-fashioned way", by "trial and error." Sure, maybe it does seem  kind of like a drunk or sleepy-head stumbling around in the dark (because it is!), but the magic of it all is that it works. Eventually, or at least on average over time, the market "approximates" the price of stocks based on the actions of all market participants. In practice, this simply means that stock prices move too far one direction and then too far the other direction, rinse and repeat, but if you draw a line through the middle of all of that "action" you will see the equilibrium price over time. So, the decline yesterday was simply the market "testing" if the recent rally moved up "too far too fast", and the rise early today was the market "testing" whether market participants really thought the equilibrium price was somewhere in the middle.
 
Now, the rise today may peter out and maybe even turn into an outright decline, or maybe turn into another "leg up" for the recent rally, but the testing process will continue as market participants incrementally "find" the equilibrium price for stocks, which of course is constantly changing as the real economy is constantly changing.
 
Meanwhile, during all of this volatility, true, long-term investors with money in quality, dividend-paying stocks get to enjoy nice gains simply as payment for tolerating the volatility.

Monday, December 12, 2011

Stock market closes only modestly lower than its opening level

It is always fascinating to see days where the market opens down sharply but ends the day with only a very modest decline below that opening level. NASDAQ closed only 5.06 points below the opening level which was 29.53 points below the previous close. NASDAQ had been as low as another 20.84 points below that closing level as day traders were likely "testing" the market to see if it was ready for a more dramatic correction, but it wasn't, so the market recovered a fair amount of that intra-day loss.
 
Traders made yet another valiant attempt to push the Dow below the 12,000 psychological level, and even managed to push the Dow down to 11,940.86, but there wasn't any real interest in that level of pessimism, so the Dow also bounced back, closing 80.53 points above that intra-day low and a mere 46.09 points below the level shortly after the open. A loss of 163 points for the day is certainly disappointing, but the failure of the "risk off" gang to build substantially on the initial losses was good news.
 
I'm sure traders and short-term speculators intend to "test" the market further in the coming days, which will give us a lot of volatility as they continue to probe for weakness, and to determine whether the market really is ready to sustain another "leg up" or may be so exhausted that trading back down in the trading range may be warranted.

Q4 GDP now tracking for annualized real growth of +3.7%

I missed it Friday, but Macroeconomic Advisers (MA) is now forecasting Q4 annualized real GDP growth of +3.7% as of 12/9, up from their most recent forecast of +3.0% on 12/5. This is great news, but still doesn't clue us in as to how the economy might do in 2012 since there is significant volatility in GDP from quarter to quarter so that no quarter gives you a clue as to the next or any future quarter, even in the best of economic times.
 
They will likely update their forecast a few more times before the official GDP report is issued in late January. Their last forecast before the official report is usually fairly accurate (+/- 0.3.)

Maybe a correction for the market?

Futures suggest that traders and short-term speculators are trying to engineer a correction in the stock market today. Lower futures are not necessarily a bet that the market will close lower today, but merely a bet that the market will open lower. Sometimes a lower open does in fact lead to a lower close, but very commonly the selling at the open quickly runs out of steam and reaches "selling exhaustion", at which point traders and short-term speculators cover their bets and reverse their bets back to "risk on."
 
This is part of the "testing" process. The theory is that if the recent rally really is exhausted, a weak open will be enough for short-term speculators to "throw in the towel" and lead to a decline and full-blown correction, but if instead speculators and even true investors are in fact "buying on the dip", any weak open will quickly blow up in traders faces, and lead to yet another "leg up" for the rally.
 
It is also possible to have a combination of the two, so that a weak open is followed by a mini-rally that also quickly runs out of steam and hits "buying exhaustion", which is a strong signal that the recent rally really is "over" and ready for a more significant correction.
 
I'm not betting on a particular outcome, but volatile trading with a mediocre close (a little up or a little down) is roughly as likely as a moderate rally, with a moderate correction being a slightly less likely outcome. In any case, all of those outcomes are still compatible with an overall upwards trend. Corrections are an important part of any significant bull market, or even a trading range.
 
Although Europe continues to hang over the markets, holiday retail shopping enthusiasm could easily compensate for any dark clouds still looming over the horizon. The stock market has an annoying ability to rapidly bounce between worrying about the short, medium, and longer term outlooks. Traders and short-term speculators, intermediate-term speculators, and longer-term investors can rapidly swap roles as to who is leading and who is following. It is all a matter of how much money any given group is adding or removing from the market on any given day, week, month, or year, or even any hour, minute, second, or millisecond (with high frequency trading.) There can be rallies and corrections at all of these time scales, with significant volatility at time scales shorter than any particular time scale that a particular trader, speculator, or investor may be interested in. Different people (or computers or organizations) can have different tolerances for both degree of volatility and duration of volatility.

Sunday, December 11, 2011

Stiff headwinds ahead for the market

It is truly wonderful that the recent rally has held up as well as it has, but the future of this rally is still a big open question. Sure, we could have a "nice" little "Santa Claus rally" through the end of the year (and maybe even some traditional "window dressing"), but then what? Europe remains a drag, but is still more of a sideshow than a primary determinant of the market trend. There will probably be some trader and short-term speculator interest in how retail sales are progressing during this holiday shopping season, but that's a short-term issue and not an indicator of how 2012 will unfold. The outlook for 2012 is indeed murky and will to some extent be a drag on the market, but as long as the outlook does not worsen appreciably, we can depend on the fact that "a bull market climbs a wall of worry." But if the outlook worsens, that is another matter.
 
Maybe the real bottom line is that as nice as the rally has been, it still has only really been simply a recovery of the losses since the October 28th Dow peak of 12,231. For the rally to really "have legs", it will need to handily hop over that peak (only 50 points away) and then put another couple hundred points and couple of weeks behind it. That is all doable, but any rally built on short-term sentiment rather than the longer-term economic outlook has a very short shelf-life, and is very susceptible to traders and short-term speculators losing patience and flipping over to try o ride the market back down in its trading range.
 
Even if the Dow manages to reclaim the 12,250 psychological level, sustaining the rally much beyond that will depend on some brightening of the longer-term outlook. Surmounting the 12,500 and 12,750 levels will be daunting indeed, but still within the realm of reason.
 
There is still the very real possibility of a significant economic slowdown if not an outright recession in 2012, so it will be interesting to see market participants struggle as they try to resolve all of the various competing narratives about the economic outlook. I personally acknowledge that the potential for a recession (or at least a near-recession) is quite real, but I still feel that a recession does not seem to be imminent.
 
And even if the outlook does hold up or even improve, traders and short-term speculators will insist on periodically "testing" the market, engaging in a little "profit-tanking", and occasionally even some breathtaking mini-corrections, so be prepared for lots of volatility.

Friday, December 09, 2011

ECRI Weekly Leading Index recovers a bit

The ECRI Weekly Leading Index (WLI) rose sharply today, more than recovering from its sharp decline last week, although the smoothed growth rate of the index did not recover all of its decline from last week. Unfortunately, that is too much volatility in too short a period to sense the true trend, but that's the nature of the period we are in. The WLI level is really only modestly above its recent low for the past year which it hit for a second time three weeks ago and its smoothed growth rate is moderately negative, so the bottom line is that this "short leading indicator" is suggesting that the economy will be rather weak in the relatively near future (next month or two or three). The WLI itself does not appear to be solidly forecasting a recession yet, but ECRI reminds us that the WLI is a "short" leading indicator, not suitable for forecasting very far in the future.
 
I watched the Bloomberg interview of Lakshman Achuthan of ECRI yesterday and he insists that ECRI's "call" from late September that the U.S. economy is "tipping into recession" is still "intact." ECRI makes the point that the WLI is a "short leading indicator" while their recession call is based on a variety of "long leading indicators."
 
Although we may not be directly experiencing a recession right now in terms of the latest economic reports, ECRI points out that a lot of the economic measures have "decelerated" since the beginning of the year, which is not a very good sign for the future of the economy in the coming periods.
 
They also point out that the U.S. economy doesn't have a history of being able to muddle along at low levels of economic activity for very long without actually dipping into recession, so they assert that if we continue to muddle, then recession is inevitable.
 
They concede that a recession did not likely start in Q3, and would only say that their call was wrong if the economy did not dip into recession by the end of the second quarter of 2012. In any case, they say that it will be a full year before anybody can definitively say they are wrong with their call because it takes a number of months of data revisions until we have a clear view on what happened in a given period.
 
So, the bottom line appears to be that ECRI is forecasting a recession that may or may not start in Q4 (current quarter) but certainly will start before the end of Q2. Once again they refrained from forecasting the length or depth of the potential recession.
 
I will continue to defer to ECRI since they are the experts on recession calls, so far, but I have to admit that this time around I am more than a little skeptical about the absolute certainty of recession. Sure, there is clearly an elevated risk of recession, but that's as far as I'll go at this time.
 
The thing to focus on in the near term is signs of further deceleration rather than outright decline in level of economic activity.

Europe muddles on

Although there is some preliminary relief after some agreement was reached at the EU summit, this is not the end of the story, but merely the latest episode in a long and slowly-unfolding drama. Now they (we) move on to the next step in the process, whatever it might be. It's not that they don't know what needs to be done, but it is mostly a political issue rather than simply a technical finance issue. The politics in Europe are rather complex and can be rather slow-moving. Whether the market will be truly placated by this latest move or whether markets will react negatively that a more complete packaged solution has not been put in place remains to be seen.
 
There is a fair chance that we might see an initial pop, but with a lot of "sell into any rally" sentiment that turns it into another decline. OTOH, there may have been an excess of selling yesterday in expectation or worry of an even worse EU summit outcome, so we could see a relief rally from that, especially if there were an excess of short selling as the Dow breached the psychological 12,000 level right near the close yesterday, which could fuel a modest-sized short-squeeze rally.
 
But as important as Europe is to the U.S., people will ultimately still be placing bets as to what they perceive the economic outlook to be in 2012. Europe will likely be a drag, but Europe is not everything. Besides the U.S. has been getting quite a boost from foreign tourism, especially here in New York City.

Thursday, December 08, 2011

Finally a decent correction after the rally

Some may blame the market decline on news or lack of news from Europe, but the simply truth is that traders and short-term speculators were itching to incite a little profit-taking after the big rally last week. After moving sideways for a few days, there were only two directions to go and there wasn't a lot of incentive to go up, so traders and short-term speculators took advantage of anxiety over Europe as their trigger excuse. The real killer was probably the combination of an exhausted rally, a mind-numbing two-day summit in Europe, and the impending weekend. A decline was "the path of least resistance."
 
Technically, the psychological resistance level of 12,000 for the Dow was breached, but only by a hair (11,998), and right at the close, so the Dow is now right on the razor's edge. Technically, a further decline might be obvious, but if too many people think it is that obvious, then the best trade is to bet against the crowd.

Will the Dow 12,000 support hold?

Traders and short-term speculators would love to push the Dow below its 12,000 psychological "support", but they may not have the "juice" to do it today. It's still possible, but unless they are able to do it, the market could rally as the shorts flip and try to engineer another short squeeze.

Unemployment insurance claims decline again

The weekly unemployment insurance claims report was yet another welcome positive economic data point. The headline initial claims number was down "sharply" (-23K to 381K), although still a little too close to the traditional 400,000 recession threshold for much comfort. Continuing claims were down by a healthy amount, but we can't tell how much of that is simply due to people exhausting their benefits. Still, these were positive numbers. It is also worth noting that claims are well below the level of a year ago, so we are making real progress.
 
I wouldn't get too excited by these numbers since the seasonal adjustment is significant at this time of year. For example, actual, unadjusted initial claims were way up at 523K, although that is still well below the 585K level of a year ago. And continuing claims rose by 513K, although once again the level is well below that of a year ago.
 
Finally, although improvement in unemployment insurance claims is a very good thing, it actually doesn't tell us a lot about what is happening on the hiring front. Still, elevated unemployment claims have been a significant drag on the economy over the past couple of years, so improvement will be a positive factor for the economic outlook.

Wednesday, December 07, 2011

Another sideways session for the stock market

Although the Dow has inched up in the past two days, the overall market is still drifting sideways, with some selected stocks continuing to rise while some of the hotter momentum plays are seeing a little profit-taking. People are basically waiting for the market to "resolve itself", and either start another decisive leg up or roll over and start trading down in its trading range. The upcoming EU summit is a convenient excuse, but just that, an excuse, not a definitive cause for the sideways "consolidation" of the market.
 
Thursday will give us another snapshot on the job market. Traders and short-term speculators can sometimes get overly excited by the weekly unemployment insurance initial claims number, but it is more important to watch the 4-week moving average of initial claims. It is currently hovering slightly below the traditional recession threshold of 400,000, but with no clear trend, although it almost appears to be drifting lower, a little, sometimes. But at least so far, it hasn't been spiking up in a way that would suggest "tipping into a recession."
 
Speaking of "tipping into a recession",  Lakshman Achuthan of ECRI is scheduled to talk with Tom Keene on Bloomberg TV  sometime shortly after noon hour on Thursday about ECRI's recession call. Back at the end of September ECRI "made the call" that the U.S. economy is "tipping into recession." More than two months later and with quite a number of semi-decent economic reports passing by, people are wondering where that recession is or went or when it really will start to show up. ECRI does have a very respectable record with its recession calls, but this time even I am wondering why we aren't seeing at least some evidence that a recession is unfolding. Maybe it won't happen until January or later in Q1 or the remainder of 2012; ECRI hasn't been clear as to when the decline of the recession will really commence.

Payroll tax cut may be more of a political football than an economic godsend

During a recession the idea of economic stimulus such as a payroll tax cut makes sense, but in truth it is more of a political salve to show that politicians are "doing something" even though the actual, real, practical effect of the alleged stimulus may be quite meager at best. Right now, I am ambivalent about the economic value of the payroll tax cut. If it happens, fine, I'm okay with it, but if it doesn't happen this time around I'm okay with that too. Either way, I won't lose any sleep, nor will I jump with joy.
 
The U.S. economic outlook is weak enough that the payroll tax cut may make a (barely) noticeable difference in 2012, but I can't say that I am fully convinced of its efficacy. I think I would rather see a narrowing of the budget deficit and a strengthening of Social Security than a meager, one-time only gain in GDP.
 
The political value of the payroll tax cut is much more significant. Democrats want it so they can claim that they are "helping the middle class." On the flip side, Democrats would also like to see passage of the payroll tax cut fail so that they can use it as a club to convince the electorate how "mean-spirited" and "out of touch" Republicans are.
 
Republicans are lukewarm about the payroll tax cut. Many of them do see political value with being seen as "helping the middle class", but a significant fraction of them see greater value with being "fiscally responsible."
 
In short, Republicans could go along with a payroll tax cut deal that both costs them little and even gives them something in return, but since they gain political bonus points for being fiscally responsible (which includes refraining from excessive taxation) they stand to gain from failure to reach a deal.
 
So, ultimately, it comes down to how badly the Democrats want the payroll tax cut. They can have it if they want to pay for it politically, but they may decide that it simply isn't worth the price and that the economy will limp along well enough and that the "club" value of Republican "obstinacy" is worth its cost in terms of failing to "help the middle class."
 
Me? Right now, I'd prefer to see the "gimmick" of a payroll tax cut go away. If anything, I would rather see both an increase in the payroll tax rate and an increase in Social Security benefits. I think the latter would provide an economic stimulus as well as being "good for society."

Market indecisiveness may continue

The market continues to struggle with the question of whether the recent rally is ready for "the next leg up" or has "run out of steam" and is getting ready to "roll over" and trade back down in its trading range. Flip a coin, literally. The latest rumors out of Europe are simply background noise and at best merely "excuses" for traders and short-term speculators to justify their attempts to manipulate the market. Ultimately, it depends on "real investment" money flows; even if the recent rally was due to substantial inflows of "real investment" money, the open question is whether such money will continue to flow into the market or not. And those potential flows depend critically on what outlook investors are betting on for 2012.
 
As has been usual lately, the equal probability outcomes for the market are: 1) weakness and indecisiveness all day long, with no big change, 2) a modest rally that turns into a "sell into any rally" decline, possibly quite steep, and 3) weakness or a mini-correction that turns into a short-squeeze and a healthy gain for the day.

Tuesday, December 06, 2011

Indecisive market

The stock market was rather indecisive today. The Dow was up a little, but NASDAQ was down a little. Some stocks were up, while others were down. Some of the uneven action was due to some of the less-hot issues catching up, coupled with some of the hotter issues being hit by a little profit-taking as antsy traders and short-term speculators lost patience with the slowed pace of the rally. The market remains in a elongated "moment of truth", as market participants try to discern whether to maintain "risk on" or flip to "risk off."
 
Some of this bated-breath  indecisiveness is people waiting to find out the outcome of the upcoming EU summit on Thursday and Friday. It's difficult to say whether the market will "rally in relief" if the summit is successful or "correct in disappointment" that the summit didn't meet the more wildly misguided expectations of some euro critics. We could see some defensive profit-taking before the meeting. And we could some some volatile trading after the meeting on Friday. Plus we have the usual issue of speculators closing positions in advance of a weekend. In this case, speculators may choose to close positions before the EU summit and weekend combined.

Financial Times and EU talks about debt crisis

It was amusing to see the market pop when The Financial Times posted a report that the EU is having "talks" to increase the size of the "rescue funds." This really wasn't significant new news in that it is already "baked into the cake" that the EU will make whatever moves need to be made to address their debt situation, and there have been many rumors and leaked proposals in recent months, so this so-called "news" was not a major disclosure. That said, I'm sure that there will be no shortage of traders, short-term speculators, and cynical journalists and pundits who will continue to act "shocked" that the EU actually makes progress.

Q4 GDP now tracking for annualized real growth of +3.0%

I missed it yesterday, but Macroeconomic Advisers (MA) is now forecasting Q4 annualized real GDP growth of +3.0% as of 12/5, up from their most recent forecast of +2.8% (which earlier in November (11/17) had been +3.2%.) This is good news, but doesn't clue us in as to how the economy might do in 2012 since there is significant volatility in GDP from quarter to quarter so that no quarter gives you a clue as to the next or any future quarter, even in the best of economic times.
 
They will likely update their forecast a few more times before the official GDP report is issued in late January. Their last forecast before the official report is usually fairly accurate (+/- 0.3.)

Moment of truth for the market

Right now market participants have to make the difficult decision as to whether the recent rally has "run its course" and may be poised to reverse and trade down in its trading range or "break out" for another "leg up." The market may spend the day "fluttering", undecided between taking a dive and rallying further.
 
Traders and short-term speculators will be trying to judge whether "this market" has the "juice" to break  out above the recent peaks of the Dow, at 12,170 and 12,231, and the summer peaks around 12,725, with the intervening psychological levels at 12,100, 12,250, and 12,500. It would appear to be unlikely that there is that much enthusiasm for such a substantial rally, but you never know, and that's what these guys have to judge. The short-term guys may indeed take a negative bias ("risk off") and simply wait for the market to prove them wrong.
 
Meanwhile, traders and speculators with a longer view are trying to decide whether there may be some light at the end of the tunnel six to nine to twelve months down the road, and if so then now may be a decent entry point, or at least "buying on weakness" as the rally wavers but doesn't completely fall apart.
 
Cynics may passionately believe that Europe and the euro are "doomed to fail", but just because they want that outcome doesn't mean it will occur. A lot of the difficulty in Europe right now is more political and even personal (big egos and face) rather than strictly technical or economic in nature. There are a number of paths they can pursue to "dodge the bullet" and it is simply a matter of letting the drama and theater of the personal politics play out before letting the pieces of the puzzle fall into place, not for some grand, ultimate solution, but simply "good enough" to muddle through to the next stage.
 
In short, we could see either a correction or another leg up, and with roughly equal probability due to the murkiness of the economic outlook for 2012. In truth, in theory (Dow Theory), the market itself is supposed to be the primary "barometer" for where the economy is headed nine months from now.
 
From a practical perspective, the two main daily market scenarios are: 1) start the day with a pop but see it fizzle and turn into a decline due to "sell into any rally" sentiment, and 2) start the day with a modest pullback, but see that negative sentiment quickly run its course and reverse into a rally for the day due to short covering. But if sentiment really does flip to "risk off" or a stronger sense of "risk on", then we would see stronger moves down or up.

Monday, December 05, 2011

S&P Europe warning on downgrade as expected

S&P issued its rumored report which warned of downgrading European sovereign debt after the market closed. Technically it didn't "downgrade" European sovereign debt yet, but put it "on CreditWatch with negative implications", meaning that they estimate that there is greater than a 50% chance that any of the sovereign debt countries will be downgraded within 90 days. Specifically they said:
Standard & Poor's Ratings Services today placed its long-term sovereign ratings on 15 members of the European Economic and Monetary Union (EMU or eurozone) on CreditWatch with negative implications.
As I said earlier, no significant new news here. Europe has problems that they need to address in reasonably short order.
 
S&P will make a decision as to doing any actual downgrading after they complete a review "as soon as possible following the EU summit scheduled for Dec. 8 and 9, 2011."
 
How likely is a downgrade? S&P's methodology says: "Standard & Poor's will place a rating on CreditWatch if we determine that there is at least a one-in-two likelihood of a rating change within 90 days." So, at least a flip-a-coin chance.

No real news in the leaked S&P warning on Europe

S&P hasn't actually made a public announcement, but the article in The Financial Times based on a leaked copy of a purported imminent S&P report concerning downgrades of sovereign debt of the major European countries is actually not really much in the way of new news at all. Sure, it is negative and therefore fits the bill for traders and short-term speculators looking for negative "news" to trade off of and an excuse for "profit-taking", but I think just about everybody is already wary of the sovereign debt crisis in Europe, including its potential ramifications for even France and Germany. If anything, this may only reaffirm how out of touch the ratings agencies really are.
 
In short, the story/report doesn't really tell us anything of substance about Europe that we didn't already know.

Probably another seesaw day for the market

Even if the intermediate-term market trend is indeed upwards ("risk on"), we could see occasional "correction" days where the trend seemingly reverses and rapidly goes the other way, but then within a day or two or three just as quickly makes up for any lost ground and then some. Traders and short-term speculators will continue to be mindful of seeking to "fill the gap" for the gains of Monday and Wednesday last week", in a process they refer to as "testing." That's normal even during a strong rally. As they say, "the market doesn't move in a straight line."
 
The equal probability paths for most days in the near-term are: 1) a pop at the open with some initial buoyant enthusiasm that flips to an evaporation of that enthusiasm into a decline through the day, 2) a decline at the open followed by a "throw in the towel" day of profit-taking, 3) ambivalent weakness at the open with a semi-volatile seesaw up and down but gradually evolving into a rise for the day, or 4) enough strength at the open that bearish traders and short-term speculators throw in the towel and go along with "the trend is your friend", at least for the day. I would vote for a volatile seesaw market, but the overall direction for the day is uncertain, even if the intermediate trend in up.
 
Negative or positive news can certainly bias the open, but not necessarily "rule" the entire day. Europe will continue to oscillate between "good" days and "bad" days in a seemingly random manner. Ditto for the U.S. economic outlook, with traders and short-term speculators (as well as the media) seemingly randomly flipping between optimism over the near-term Q4 outlook and the outlook for various points in 2012.
 
Today is another checkpoint for validating whether the rally from last week is "durable" and the gains can be held. Even so, the bulk of the rally was simply recovering the losses from the preceding seven trading sessions, so it does remain to be seen if this mini-rally is a true "risk on" trend or just short-term range trading.

Sunday, December 04, 2011

ECRI Weekly Leading Index weakens

The ECRI Weekly Leading Index (WLI) fell sharply this week, erasing almost five weeks of gains, and its smoothed growth rate declined modestly for the first time in six weeks. One data point in a series does not indicate a definite trend change, but it certainly is a disappointment. The real bottom line is that the WLI level remains hovering only modestly above its low of the year, which is more an indication of economic weakness than of strength. Unemployment insurance initial claims were up a little this week and mortgage applications were down sharply. The Thanksgiving holiday and Black Friday retail frenzy may have skewed the week measured by these numbers.
 
ECRI is scheduled to talk with Tom Keene on Bloomberg on Thursday, December 8 to discuss ECRI's recession call that they made in September. I don't expect any startling revelations relative to past interviews, but hopefully they will try to pin down ECRI as to when the purported recession is supposed to start, whether it is right now, before the end of the year, Q1, by mid 2012, late 2012, or whenever.
 
The bottom line is that ECRI is still standing by their recession call, namely that the U.S. economy is "tipping into a recession", but with no specificity as to when such a recession might start, how long it might last, or how severe it might be.
 
Q4 may well turn out to be a decent quarter (+2.8% GDP growth according to Macroeconomic Advisors), but the outlook for Q1 of 2012 and beyond is murky indeed. About the only certainty is that the Federal Reserve will continue to pump money into the economy, which is a very positive factor even if it does not absolutely assure economic growth. Congress will likely pass a renewal of unemployment insurance extension and the payroll tax holiday, but it is unclear how much of an economic boost that really provides. Obama's "Jobs" bill remains DOA where it always has been.

Friday, December 02, 2011

SmartyPig.com is dropping its interest rate down to 0.70% APY

I have been using SmartyPig.com as a third choice for my cash, with their current interest rate at 1.10% APY, but as of next Friday they are dropping that rate to 0.70% APY. Ouch. I may not move my cash immediately, but I'll certainly start looking around. OTOH, a lot of my cash in that account is reserved for my January estimated income taxes, my 2011 retirement contributions, and my monthly expenses for the next few months while I'm looking for new work, it may not make much sense for me to shuffle that cash anyway.
 
My main two choices for cash, where I keep my main Rainy Day fund, are a bank in Texas that pays 2.27% APY and a bank in Ohio that pays 2.01% APY. I found those two using CheckingFinder.com. Currently, for my zip code, CheckingFinder.com lists a bank in Binghamton, NY paying 1.50% APY and a bank in Toledo, IA paying 1.51% APY. Unfortunately, you need to use the debit card 10 to 15 times every monthly statement cycle to get these rates, so adding a third bank is a little inconvenient for me.
 
Another choice for me is Ally Bank, which is currently paying 0.89% APY for savings. I already have an account, but with other a minimal amount since it is currently my fourth best rate. I suspect that I'll start using this account more after SmartyPig.com drops its rate. You can get a 2-year CD from Ally that pays 1.18%, but my needs are for cash that I may need to use over the next three to twelve months, so a CD is not appropriate.
 
At these low rates, it isn't really worth a lot of my time to be doing much shuffling of cash between accounts. I suspect that a year from now I may not bother if rates ratchet down at the pace that they have been over the past eighteen months.

End of a decent bounce-back week

For all the hoopla, the market managed to "claw back" in five days roughly what it had lost in the preceding seven trading days. That was a lot of work for a net gain of... nothing. Unless you were a brokerage firm and collected the commissions for all those trades. Still, it was good to see that the market was able to score and keep a significant gain for the week. Maybe, just maybe, the stock market and the economy are not in as bad shape as many of the cynics complain.
 
Friday played out roughly as expected, with a pop at the pop due to the semi-decent employment report, followed by a slow bleed of those gains through the day, as short-term speculators took profits ahead of the weekend when anything can happen. The good news was that the market managed to end flat for the day rather than with a heavy loss.
 
Friday was just the first major checkpoint, holding the gain from Monday and Wednesday. What I really want to see is if the market can hold these gains on Monday, in a fresh week when everybody has a fresh perspective after the weekend, and the cynics have a whole week of trading ahead of them to try to manipulate the market.
 
We could see a few more tentative, "consolidation" trading sessions this coming week as traders and short-term speculators wait (im)patiently for either "the next leg up" or for the rally to "run out of steam", reverse, and head back down towards the lower end of the trading range.

Another semi-decent economic report: employment and the unemployment rate

We're clearly not back to "happy days are here again" yet, but today's monthly employment report for November showed a semi-decent rise in payroll employment and a modest decline in the unemployment rate. We still have a long way to go to get back to full employment and a fully healthy economy, but we aren't facing an imminent recession, yet.
 
It's a Friday after a week of big gains with a lot of uncertainty out there, so it would be natural for traders and short-term speculators to do some profit-taking ahead of a weekend when anything can happen. That said, if the bias is now really "risk on", we could see more of those lingering bears get caught up in another short squeeze and forced to buy to close out at least some of their remaining short positions.
 
So, we are back to roughly equal probability of two scenarios: 1) a pop at the open that hits the wall of "sell into any rally" and dwindles as the day goes on, or 2) a gradual building on gains as the day progresses. In both cases trendless volatility could be prevalent throughout the day, although that would be moderated if in fact "risk off" is the new trading bias among a majority of traders and short-term speculators.

Thursday, December 01, 2011

Nothing more than a little consolidation in the stock market

As expected, today was basically a consolidation day for the stock market. With a modest amount of volatility, the market was sometimes up and sometimes down, leaving the Dow closing down a little and NASDAQ closing up a little. No clear sense of direction. Traders were taking advantage of the volatility. Meanwhile, short-term speculators were not quite willing to add to their "risk" , but not quite willing to take too much out of the market as well.
 
The good news is that the bulk of the gains from earlier in the week have held up. The bad news is that traders and speculators get antsy when the market goes "sideways" as it did today, and their limited patience will eventually lead them to take bigger profits or even reverse their bias to "risk off" unless some major players step into the market.

A decent ISM Manufacturing report

The ISM Manufacturing report for November was reasonably decent, with the PMI, New Orders, and Production all up and "growing faster." Employment continues to grow, but at a slower pace. The backlog of orders continues to contract and at a faster pace. This report indicates that both the manufacturing sector and the overall U.S. economy are "growing faster" than in October (except employment in manufacturing which is growing but at a slower pace.)

Another consolidation day for the stock market

Today will likely be another consolidation day for the market after the big gain yesterday. The two likely scenarios are either a weak open followed by a modest to moderate decline through the day or a weak open with some initial decline but with recovery and modest strength later in the day. After the big gain yesterday it would not be surprising to see some significant profit-taking, but we could just as well see further gains on a more moderate scale.
 
The unemployment insurance initial claims report was a modest disappointment, but was actually quite decent with only a modest rise within the range of volatility for this data series while the 4-week moving average remains under the 400K recession threshold. That is good economic news. Traders may treat the report as negative as an excuse to try to fabricate a "risk off" bias in the market, and may be successful, for a little while, but ultimately this was not a truly "bad" report or an indicator of bad-ness to come.
 
Europe is roughly as it has been, an ongoing saga, but it is worth nothing that demand for an auction of 5-year notes of Spain was double the amount offered, which is actually quite good news.