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Rosenberg On Financial Pundit Chatterboxes And The Best Leading Economic Indicator
Some good observations from David Rosenberg's earlier letter to clients:
We see no shortage of market commentators claiming that investors should be buying into this rapid selloff. Of course, these commentators never saw a correction coming in any event. Our advice is to be patient and disciplined and let the market do the talking.
We need two solid up-days in a row (a follow-through after a big bounce is vital) with some major volume attached to show participation (October 18-19, 1990; October 20-21, 1987; October 14-15, 1998; October 10-11, 2002; March 10-11. 2009 — we can’t help but notice how October usually shows up as the capitulation month!). This may be technical turnaround talk, but bottoms and tops in the market are typically technical events, as history suggests. There is not one general piece of data, sentiment indicator or government intervention that rings the alarm bell at the peak or the trough. Again, it is best to let Mr. Market do the talking. For example, anyone who was watching closely enough could see a classic ‘neckline’ emerging in what was is hindsight a very clear ‘heads and shoulders’ pattern developing since late year (peak and trough formation, as an aside, is a process and not an exact point in time). But we should always be aware of ‘double tops’ forming — June and August of 1987; January and June of 1990; April and July of 1998; March and September of 2000; July and October of 2007 all serve as classic examples.
And here are some observations on the ECRI leading indicator as a far better "economic clock" than the much overhyped ISM:
ECRI AS AN INVESTMENT STRATEGY TOOL
Many in the past have used an ISM clock (while on Wall Street, I did the same several years ago) but the problem is that the ISM is a perfect coincident indicator. It leads nothing. But the ECRI leading index does look ahead six months and is now pointing to GDP growth of little better than 1½% at an annual rate through the second half of the year, which is anaemic enough to regenerate ...
- A new peak in the unemployment rate (jobless claims have stopped falling and at current levels are consistent with net job loss 75% of the time in the past);
- A new low in housing prices (see page 16 of the weekend FT — the venerable Lex column — for true Bob Farrell-type mean reversion, U.S, home prices still have downside risk of up to 40%!);
- And new concerns over consumer credit quality (we say this as we see the S&P/Experian consumer credit default rate index hit a new high of 9.14% in April — the proportion of credit card debt going bad is rising sharply and this is not receiving the attention it should but is a yellow flag for consumer-oriented lenders and businesses).
This is not necessarily a double dip scenario as much as a growth relapse -- as we saw in 2002, still not exactly an ideal atmosphere for taking on long risk positions.
The ECRI not only leads but is also more timely than the ISM since the data are released weekly and the index covers the whole economy, not just manufacturing.
What we did was divided the ECRI into four different quadrants:
- From the trough to zero (coming out of recession).
- From zero to the peak (sweet spot of the cycle -- from the end of the recession to the cycle peak in growth).
- From the peak back to zero (past the peak in growth; economy slows but not back in recession).
- Zero back to the negative trough (heading back into recession).
- From late 2008 to the fall of 2009, we were in stage 2. Since last October, we have been in stage 3 and it looks like we could be here for a while.
In stage 3, historically, the S&P 500 has provided tiny positive returns (average price appreciation of +1.3%). Tech, industrials and energy are the top performing cyclicals and health care and staples are also outperforming sectors in the more defensive area. This cyclical-defensive barbell works well — basic materials, consumer discretionary, financials and utilities tend to lag the most.
In the credit market, this is a period to be focussing on reducing duration and scaling into quality -- Baa spreads tighten, on average, by 11bps but widen in the high-yield space by an average of 13bps.
Nothing is to say that we will automatically revert to stage 4 just because we are in stage 3 right now but we are only nine-percentage points away, even with policy rates still close to 0%. Then again, this was a credit cycle, not a rates cycle. It was credit that created the 2003-07 boom, and it was credit that created the 2007-2008 bust. A 5.5% peak in the funds rate was hardly the culprit, and we know that it was not a 0% rate in late 2008 that triggered the 2009 renewal in economic activity and investor risk appetite but rather the Fed’s massive expansion of its balance sheet and the government’s willingness to push the fiscal deficit to record peace-time levels. In this sense, any analysis that relies on the classic post-WWII recession-recovery experience -- even this one -- has to be viewed in the context of a secular credit contraction which began two years ago.
In stage 4, the S&P 500 on average declines 6.3% with eight of the 10 sectors declining — a barbell of being long energy on the cyclical side and consumer staples on the defensive side has worked well. Consumer cyclicals, technology, industrials and financials are crushed in this segment of the ECRI cycle; telecom, utilities and health care do not perform as well as staples but are areas where at least you don’t typically get beaten up (for relative-return folks). The CRB is down an average of 3% but gold and oil tend to be supported by a weaker U.S. dollar. The yield on the 10-year note rallies an average of almost 40bps; as with equities, corporate bonds are hurt in this quadrant -- Baa spreads widen about 60bps and high-yield by close to 100bps. We have to be mindful that this can very well be the next phase of the cycle even without the Fed raising rates.
The ECRI bottomed this cycle a good four months before the equity market did and for those folks that paid attention, like Jim Grant, kudos to them. Because from the trough to zero — stage 1 — the equity market rallies on average by 12% with all 10 sectors in the green column, led by tech, consumer discretionary and basic materials. Energy, telecom and utilities tend to lag behind. Financials are basically market performers. The government bond market is still rallying in this segment and the curve is steepening — that along with a slight softening in the U.S. dollar provides a positive liquidity backdrop, which in turn is conducive to spread narrowing in the credit market (average tightening of around 50bps in investment-grade and 200bps in junk).
The market really takes off once the ECRI crosses above the zero line on the way to the peak, which is stage 2 or the “sweet spot”. In this phase, risk-taking works best with the S&P 500 rising 22% through this interval and every sector is up double-digits in terms of average price gains. Financials, basic materials, industrials, technology, and consumer discretionary typically provide the greatest alpha in this most intensely pro-cyclical phase of the cycle — utilities and telecom lag the most as does energy within the economic-sensitive space (energy tends to be a stage 3 and 4 outperformer). Again, the credit market mirrors the positive backdrop in equities — Baa spreads come in by more than 30bps and by nearly 170bps in the high-yield space.
Full Rosenberg letter:
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OT - another government agency trying to give the SEC a run for it's money.
http://news.yahoo.com/s/ap/20100525/ap_on_bi_ge/us_gulf_oil_spill_washington_12
OK -- now my 2 cents: when THAT BITCH from Arkansas finally stands down and the rest of her BITCH COLLEAGUES wise up and start licking the hand that feeds them by constructing a bill that is so totally impotent that no one on the Street even bothers to glance at it, then, and only then, will the bid reappear.
Yep
I agree. The market is a coercive tool now, you'd be better off following obscure committee meetings.
Insane satire? Or truth?
12:40 PM - Bernie Sanders brings Audit The Fed Amendment to the Senate floor for debate.
2:00 PM - Market drops 1,000 points in minutes
Bernie Sanders guts Audit the Fed Amendment.
Market Recovers....
Of all the people I know, only TWO are trading stocks now.
In 2008, almost everybody I know was trading.
Robot vs. robot?
It's all so rigged now that I am putting any income that comes my way into cash and gold. And my new hobby: Beretta and Kalashnikov.
Oh, and taxes going up next year.
I recommend Glock and Springfield Armory.
SA FTW.
Agreed.
Out of the market with all assets I can, but what are people doing with IRA and old 401K's. Are there any good options?
If you have the luxury of picking other funds outside of what your plan offers, I highly recommend the Direxion 2x short funds.
Otherwise - the best you can do is sell off your holdings and either 1) buy gold funds or 2) sit on cash.
just look to the google and yahoo blogs. the talk is drying up. Only shorters are up, and that are mostly seasoned investors, not retail.
I must admit I like Amanda Drury better than Erin Burnett. CNBC should leave B-Cups in China where her small breasts fit in nicely with those of the women in that country.
Rosie's on CNBC tonight with MS Lee.
oh, come on Brett, Erin is cute. And there is more to life than lady lumps. There's....there is...ummm, there is.............
Never mind.
Nothing wrong with pert B's.
Less of the fluff for brains would help her more though...
I never said I'd kick Erin out of bed, but, in addition to her small breasts, I don't think she's good at her job.
Have you seen any of her "Reports" from China? The one I saw had her asking the question of whether China is experiencing a bubble.
She goes on to say that people she interviewed weren't short on opinions, but, the one interview that was shown had a Chinese guy saying "Prices too high."
While the guy was brief and to the point, we, as viewers, we led to believe we were gonna get some depth.
Just another example of CNBC being a whole lotta nuthin'
That's why big breasts among the female hosts is so crucial.
Maybe this could do with an update.......
http://cnbcsucks.wordpress.com/cnbc-bra-sizes/
I wouldnt kick her out of bed either unless she wanted to do it on the floor..
+100...Mmmm Mandy
The obligatory image....
http://dealbreaker.com/_old/images/thumbs/Picture%201644.png
I feel obliged to give it to her every which way to Sunday
Historicals in today's environment mean little. Looking at what the past level of the ECRI did or didn't do and try and compare with today is a pretty insane exercise. At best it tells what is currently going on not a veru good predictor as to how this thing will eventually shake out. There was nothing really in March that should have changed the economy except people were ok with leveraging the US to the moon. I myself doubt those policies will work........we as a country don't have enough fire power (energy) to kick the can that much further down the road....it's getting shorter and shorter.
Hondo: """Historicals in today's environment mean little."""
this sentence says it ALL and deserves to be in Bold Underlined
its the sad Truth, been about 2 years now, and how many of us have had to toss away the Fundamentals, even the Technicals, and relegated to what many I know have labeled "Follow The Crooks" attempts at trading....the rigging is obvious, Blatant, and the more one knows and experienced with the market, the more obvious this is
this cabal's game is to take everything from everyone not part of their group, and they have all the fire power to do this with and doing so as quickly as they can
slow grinding up doesn't seem to be a kind of capitulation this should be.
'We see no shortage of market commentators claiming that investors should be buying into this rapid selloff. Of course, these commentators never saw a correction coming in any event.'
Its like John Nadler at Kitco, screaming gold is over valued after every 50 buck rise.
"Of course, these commentators never saw a correction coming in any event. Our advice is to be patient and disciplined and let the market do the talking."
Of course Rosie never saw the run-up so eventually he would be right. This is a correction, not catastrophic. Buy the dips here, big hedge funds are still srewing with you.
Short squeezes are the cheapest way to juke the market up and I don't think the PPT has thrown in the towel. Mr. Ben & Co. simply have to stay the course.
The CNBC Hedge Fund know as "Fast Money" had their representative in Las Vegas this past week at a conference reporting that the sky was indeed falling.
I assume that means that hedge funds are trying to shake out a few more shares ahead of the next leg up.
Otherwise, if this market remains sour, the Oconomy is going further into the Shittier (a French crapper).
Another thing I like about ZH: you get to learn new words, foreign ones even...
Meanwhile, it looks as though the market might actually close green!
That slow creep upward reminds me of a fisherman jigging the lure through the water seeing if he can catch any bites...
Green? The Ministry of Truth will simply declare "red is green" along with "the bailouts are working", and "the recovery is on track".
There we go. 10,000 broken. BUY BUY BUY.
Yep, nothing fishy about that.
This is one of the few places I can turn to for the real news. Reform??? I can't stand the BS anymore Market run by and for GS etal
Nothing short of a revolution will fix this.
The problem with revolutions, to quote the Who, is that the new boss may look a lot like the old boss, or worse. No, we could very easily fix the markets by simply pulling our capital. If you're not doing that, why would you expect anything to change? Pull your liquidity. Stop buying the crap they're peddling and things will get fixed in a hurry.
I must admit that even I am impressed by the performance of the PPT today.
Asain markets down overnight. European down 2-3%. We open at lows of the day and proceed to drift higher. Now almost positive!
And, they've successfully created the illusion of "support" around 1050 on the S&P. You know, 1050. The point where the FlashCrash magically stopped three weeks ago. Sure, plenty of support there. Look at the chart, they'll say.
Let's see, the risk trade is off so everything is being sold, even the precious metals. But US stocks are headed higher! Standup comedy, all of it. Sickens me what has become of our "free" markets.
And brought it all the way back without gold moving $2 bucks either way, nice balancing act..
So did you ignore Prechter and Rosie and buy the dip? LOL!
As a matter of fact, yes. Already long junior golds, bought calls on GDX, GDXJ, WFC and CREE this morning. WFC and CREE are just hedges against the longer-dated puts I'll be adding when they get back up toward their 50 and 20 day averages. I don't think this market's quite ready to rollover completely, getting there, though.
+1
even if ecri is better than ism they are both flawed in that they fail to recognize that the heavy hitters on the sp500 derive so much economic activity overseas....so while the indices may work well for sp500 predictions they do not work well for the economic forecasts....there is a rapidly widening cleavage between the sp500 and the usa economy....that is what globalism is all about charlie brown.
Can't speak for others but I sure am glad this morning's big ass gaps filled.
Short term bottom is in.
Agreed, and if the ECB cuts rates tomorrow, then Timmy can discuss other options with his European counterparts when he meets them tomorrow.
Although it always concerns me when we close right at support. I'm looking forward to another episode of Fantasy Futures tonight. De plane, boss, de plane.
I would have liked to see the A/D line go positive, from neagtive 3-1 to positive 2-1, oh well.
Both ECRI and Conference Board include stock prices as a component of their leading economic indices, so there's risk of a circular reference...
does ECRI use oil spills data in their measurements?
ECRI's long leading indexes do not include equity prices.
Rosie, obviously you are a new subscriber to Lakshman's excellent service.
My guess is that as long as the Fed keeps interest rates low, the odds favor that all the money being printed up will prop the stock market higher. So buying the corrections is the long term response under that condition. However I favor sectors emphasing real assets.