Four Markers of an Economic Turnaround
Via Barron’s, we learn that Merrill’s David Rosenberg has four markers that he is tracking to identify when the economy is finally making a turn and starting an extended expansion:
• Home prices.
• Personal-savings rate.
• Debt-service ratio
• Ratio of the coincident-to-lagging indicators (Conference Board).
By aggregating those four markers, Rosie calculates we are roughly 44% of the way through the “adjustment” process. While that is a tick up from last month, the improvement, he laments, has been “very modest and very slow.
“We should add that he also stresses that it’s critical for both the economy and the market that payrolls stop shrinking. All the talk about jobless claims “stabilizing” is so much poppycock, he snorts. That number of claims, he notes, is still consistent with monthly payroll losses of around 700,000. As with industrial production, which is also in a vicious slump, employment must stop falling before a recession typically ends
Call us when claims fall below 400,000,” he says, which is his estimate of “the cut-off for payroll expansion/contraction.” Until then, he warns, “the recession will remain a reality. Rallies will be brief, no matter how violent, and green shoots are a forecast with a very wide error term attached to it.”
Rosenberg also points out that the financials and consumer cyclicals have net short positions of 5 billion and 2.7 billion shares — strongly suggesting that a “not insignificant part of the rally has been provided by shorts running for cover.” The Russell 2000 small-cap index is up 36% since the March low, outperforming the S&P by almost 10%. The last time the Russell outperformed the SPX was from late November to early January. Two months later, the major averages made new lows.
One other warning sign: Over the past five weeks, Rasmussen’s investor-confidence index surged 32 points — unprecedented gains in so short a span. This suggests excessive trader optimism for a sustained equity-market rally.”
>
Source:
Don’t Bank on It
ALAN ABELSON
Barron’s, APRIL 18, 2009
UP AND DOWN WALL STREET
http://online.barrons.com/article/SB124000857570530541.html
See also:
Does This Market Rally Have Legs?
PAUL J. LIM
NYT, April 18, 2009
http://www.nytimes.com/2009/04/19/your-money/stocks-and-bonds/19fund.htm
April 19th, 2009 at 10:39 am
BR posted:
“The Russell 2000 small-cap index is up 36% since the March low, outperforming the S&P by almost 10%. The last time the Russell outperformed the SPX was from late November to early January. Two months later, the major averages made new lows.”
can anyone explain to me- is this just incidental or is there a correlation of some kind that I am missing- that the Russell 2000 by outperforming the S&P 500 indicates a likelihood of a downturn
~~~
BR: Russell 2,000 are small cap, much more speculative names. The significant outperformance usually means a great deal of speculative activity — versus long term investing — is taking place.
This typically implies a short term, overbought condition, ripe for correction.
April 19th, 2009 at 10:44 am
Interesting on th investor’s confidence issue…but my question is this:
Didn’t we have unprecedented declines in investor confidence? Why wouldn’t we have unprecedented rises in such confidence as well?
Were investors afraid because they were prescient, or was investor fear of a collapse a self-fulfilling prophecy?
Is the fact that we’re talking about investor confidence rising too much–without also mentioning that investor confidence dropped too much–an example of the Cramer Market Psychology rule? IE: Being bearish is always colored as prudence, while being bullish is always colored as foolishness, independent of circumstances.
April 19th, 2009 at 10:46 am
All along this rally has had no leadership and no volume.
Unless you want to count junky foot-in-the-grave over-shorted hopelessly-insolvent financials as “leaders”, and last-hour tape-painting broker-dealer quant funds as “volume”.
Sooner or later the bulls are going to have to step up and take a stand. But I wouldn’t bet on it.
April 19th, 2009 at 10:53 am
You don’t need no stinking technical indicator to prognosticate another market deep dive. Just think through the smoke and mirrors of recent bank profits and ponder how well they will do in Q2, using only or mostly traditional banking as a revenue generator. Crap you can’t easily wipe off your shoe is coming. Early Q3 will be a new market horrible if real improvements don’t appear soon.
April 19th, 2009 at 10:58 am
Help me, Jesus. I’m starting to channel Roubini. I feel unclean.
April 19th, 2009 at 11:18 am
dh, just eat the grass above your head, and scorce the earth. That’s what Bernanke and company are doing… Happy Sunday!
April 19th, 2009 at 11:25 am
I get so pissed when I hear how providing all this money saved us from certain disaster. Bull-Crap! What we are going to find out from this experiment is that it would have been better to have let everything fail, and start all over again. But alas! Such needed debate (and the debate should mention that the world has never experienced letting the entire world economy collapse without the onset of war.) will never happen once the short memories of the general populace keep drinking their morning coffee…party on Garth!
April 19th, 2009 at 11:28 am
Just as I suspected. Anecdotally, on TV I’ve seen more and more overtly bullish pundits who are far too confident it’s “time to buy”. We may get more senseless buying this week but the madness will end someday and end with a loud thud.
April 19th, 2009 at 11:29 am
@Justin:
For a skeptic, you have a lot of blind faith in failure.
April 19th, 2009 at 11:30 am
The only true marker for USA economic turnaround is for American taxpayers to eat more chocolate covered cotton from the big shitpile per collusion between Banking Oligarchs and Wash DC.
April 19th, 2009 at 11:31 am
mmmm- chocolate covered cotton
April 19th, 2009 at 11:32 am
Were investors afraid because they were prescient, or was investor fear of a collapse a self-fulfilling prophecy?
——————–
A houshold making 100K should be saving 15-20K per year to properly finance their retirement.
I’m willing to bet that a huge proportion of those making that type of income were saving much less than that because their house was doing the heavy lifting.
So if their house is now going down 10-20K per year, they realize that they are going to need to save 30-40K per year to realize the retirement they were envisaging. Even if their job is secure!
Imagine millions of households cutting their spending by 20-40K. Is this irrational?
It’s self fullfilling on both sides, up and down. If so many households had been saving 10-20K per year instead of putting all their eggs in real estate, we wouln’t have had such a bubble and its implosion.
April 19th, 2009 at 11:34 am
well guys, atleast the psychology and the indexes and the financials are up these days.
Alot more optimism, only a few bears left like Roubini, even Marc Faber is bullish.
Maybe all this infusion of USD is boosting sentiment.
April 19th, 2009 at 11:38 am
This will eventually turn around in earnest but not yet. Not by a long mile. Too many important indicators still going south. Heard that my wife’s uncle got laid off last night. A former GM employee, who went to Adelphi, got laid off at Adelphi and then luckily got a job another company. In his 50’s. Might be one of the hardest working people I know. Basically lives to work. Never ever misses work. In fact, last year he fell on an ice patch and hit his head so hard, he required several stitches. He still wanted to go to work afterward. These are the kinds of people that are being unceremoniously dumped by our rotten corporate culture every day. An overall really good person. There is clearly something fundamentally wrong with our system.
This is called a “sucker’s rally”. Get out while you can. See you at THE real bottom wherever that may be.
April 19th, 2009 at 11:39 am
And what I find most amusing is that everyone expects to make 8-10% when the economy is growing at a much smaller rate than that.
When you invest in the equity markets you are expecting the employees of the firms to work their butts off for your investment portfolio. So you know you have a problem when everyone is enjoying themselves, sipping wine with their feet up, expecting the others to do the heavy lifting for them.
I guess it was the Chinese.
April 19th, 2009 at 11:41 am
fyi…faber is only short-term bullish…still thinks the worst is to come, roubini is different in that he believes that we will revert to a paleolithic economy before we’re through, trading shiny rocks for mammoth meat in dank, dark caves.
he is talking his book, however, ’cause that’s the demented stuff people pay him to say at each speaking engagement.
that said, why are we being kept from the stress test results? methinks the government likee the rally too much to show us the test scores…
http://thereformedbroker.com/2009/04/19/stress-test-capitalism-without-competition/
April 19th, 2009 at 11:42 am
I guess it was the Chinese and your uncle
April 19th, 2009 at 11:43 am
danm Says:
April 19th, 2009 at 11:39 am
When you invest in the equity markets you are expecting the employees of the firms to work their butts off for your investment portfolio.
comment:
——————
No, I expect to sell to a greater fool at a profit. I couldn’t care less about the employees.
April 19th, 2009 at 11:54 am
@ Dann 11:32
Couldn’t have said it better so I won’t — “I’m willing to bet that a huge proportion of those making that type of income were saving much less than that because their house was doing the heavy lifting.”
Like anybody, I’d love to see real signs of recovery. But the fact is that people undersaved for years believing that their homes would appreciate 10%-15% a year and that their 4o1k’s would appreciate ~10% a year. Therefore there was no real incentive or need to save. Now that they are aware their homes and 401k’s are on a different trajectory, it is the responsible and necessary thing to do to try to save more (if you can). I can’t see another likely outcome. So, a recovery will take place, but what it will look like will probably not be the kin of turnaround that it still seems many are anticipating. At least not for a long time, I suspect.
April 19th, 2009 at 12:05 pm
So I see people on other sites talking about using margin to double down to try and make up their losses from SRS, FAZ, SKF, etc. Make me wonder if these guys can be squeezed a little longer.
April 19th, 2009 at 12:07 pm
• Home prices.
• Personal-savings rate.
• Debt-service ratio
• Ratio of the coincident-to-lagging indicators (Conference Board).
______
I think it’s the ratio of irises blooming in my garden to how often my nose hairs need trimming.
Seriously – we’ll be stuck in this nightmare until the US regains its status as a net creditor nation, unemployment is at 4%+- (measured in 1970s metrics), our manufacturing base returns (as evident by the return to making things like cameras, shoes, furniture, and televisions), and everyone involved in the criminal shenanigans – from Joe Blow to the heads of the major bank holding companies – have been indicted tried, and jailed, if found guilty.
or,
We default on our debt and/or inflate our way out.
The latter is more likely than the former.
April 19th, 2009 at 12:09 pm
>>>JustinTheSkeptic Says:
April 19th, 2009 at 11:25 am
(and the debate should mention that the world has never experienced letting the entire world economy collapse without the onset of war.)<<<
Yes indeed. And history will judge this period very harshly for the greed and irresponsibility of taking on enormous amounts of debt left us with such a choice of evils. Either steal from future generations or take our medicine and risk another world war. Alas there are no real good choices but we really need to lean towards the taking our medicine path and not try too hard to cushion the blow. If not we will not learn the hard lessons and take them to heart. Right now I fear we’re trying to take the latter approach and go merrily on our way – until it implodes again.
April 19th, 2009 at 12:16 pm
fyi…faber is only short-term bullish…still thinks the worst is to come, roubini is different in that he believes that we will revert to a paleolithic economy before we’re through, trading shiny rocks for mammoth meat in dank, dark caves.
My sense is that Faber isn’t sure whether we’re heading toward the inflation or deflation route. He seems to think the market may have bottomed nominally providing we head toward the inflationary route, but he seems decidedly undecided.
It seems to me though there may be some political opposition building to that route.
My strategy is to trade the ups and the downs without assuming the market is heading to new lows (though my feeling is we’re still headed toward a final bottom closer to 400 than 666).
April 19th, 2009 at 12:23 pm
BR posted:
“The Russell 2000 small-cap index is up 36% since the March low, outperforming the S&P by almost 10%. The last time the Russell outperformed the SPX was from late November to early January. Two months later, the major averages made new lows.”
can anyone explain to me- is this just incidental or is there a correlation of some kind that I am missing- that the Russell 2000 by outperforming the S&P 500 indicates a likelihood of a downturn
Well I would also point to tech, financials, and REITs also.
I think the idea is that seeing big rallies in narrower more heavily shorted sectors is more indicative of a “clearing rally” during a bear market than the onset of a new bull.
Of course as 2003 showed these kinds of rallies can turn into something much bigger…
April 19th, 2009 at 12:47 pm
I think the next 3-4 months are key -if foreclosures surge and home prices tank further (as Mr Mortgage anticipates) with the end of moritoria, thenwe’re headed for a 1 point landing. Unemployment and foreclosures are the evil twins we can’t contain.
I think Dimon, Jim otping out of Tiny Tim’s Toxic adventure was the coup de grace for that scheme.
Now it’s time to apply lots of lipstick to the stress test pig
April 19th, 2009 at 12:58 pm
I’d like to try to answer Ahab’s question:
Say you’re trying to run a crooked casino with a roulette wheel, you really don’t care whether black or red come up most of the time. What you care about is making sure when the bets get lopsided one way or the other, the majority lose (and the house wins). To me, the out performance of the Russell indicates the bets are getting lopsided to the long side. What I can’t tell you is at precisely what moment the rug gets pulled out from “confident” investors.
I think that an undiscussed aspect of this rally has to do with the short positions, market makers, and the removal of the uptick rule. The spirit of the uptick rule was to make sure that short sales had real buyers on the other side of the trade. With that gone, the market makers books must be clogged with shares that it bought low and must now find suckers to unload them on (that would be you, America).
The reinstatement of the uptick rule (or some bastardized variant) will signal the last gasp of a big bear market rally. I don’t know if it’s this one or not. Anyway, when it happens, there will be a big run-up, followed shortly by new lows. The only question in my mind is when they play that card.
When you hear MSM point out that stocks recover before employment, what they are really telling you is that Wall Street marks up prices when they know people will have they money to buy stocks in the foreseeable future (affectionately known as front-running). Look at the demographics, and the employment picture, there’s no way that this is that moment.
April 19th, 2009 at 1:20 pm
Super-Anon-
Thanks for the feedback on my question- makes sense I guess- any other input out there?
next week will say a lot- slew of earnings coming out- how many good- how many bad- and more importantly how many with no guidance or a negative outlook- we have TXN, CAT, AAPL, UPS, MMM, HON (and of course BAC, MS, COF) and about a thousand others- should be interesting.
April 19th, 2009 at 1:27 pm
Must be time to get liquored up and go long….
April 19th, 2009 at 2:08 pm
Barry, I don’t know if you are personally acquainted with Rosie, but it will be a huge blow to those of us who love reading him every day, when he leaves ML on May 11. I’m based in Toronto & I kinow that once he starts working at Gluskin & Sheff we’ll never, ever hear what his thoughts are.
I’ve even tried to bribe him with a lunch invitation when he’s back here in Toronto for good – I don’t think it’s working.
Is there any chance you can maintain a pipeline to be able to pass along his thoughts occasionally (she asks hopefully)?????
~~~
BR: I do know Rosie personally — I met him through Josh, who is an occasional commenter here.
I will find out if we can occasionally pass along his work. I wanted to get him for the June BP conference, but it is his 1st week of work.
There is a project I have in the works that he would be great for . . . we shall have to see if he/we/me can squeeze him in . . .
April 19th, 2009 at 2:20 pm
IMO investment markets are ponzi scheme played by OPM thats why so much swing(unless its a bull market…)
when it starts going up nobody cares for the fundamentals…even the govbenmint likes it.
my bullish argument would be: (which can last 6-8 months).
1. If somehow economic activity is restored even to 70% of past, markets are over sold compared to return from cash/safe investments, and of course who doest not like a roaring bull market….media, the white house, J6P…i can see them with wide smiles….when DOW goes up above 12k.
2. Long term(7-10 years) we are in deep shit because right now we are simply trying to inflate our way out, but i would not bet that it will not work in short term.(how hard is it for insolvent banks to become profitable when all the risk gets subsidized by gobenmint).
3. Govbenmint can print/borrow couple of trillions to start hiring big time to pick up slack from private…which can stop the current deflationary cycle…..and restart corporate hiring…..it may not last longer than couple of years since there is only so far you can cheat the savers.
in other words, i am not going to bet my money saying….reflation will not work at all. because the chinese/exporters will be happy to fund more if we want to buy their stuff….its much easy for them to do that than go for socially good, local economy..which nobody in the world has been able to perfect yet.
but my bear case will be:
1. huge inflation in commodities due to china moving out of dollar and into commodities.
this itself will be the big factor to stop govbenmint from movging forward with its reflation game….which is the only factor IMO helping the recovery…..inflation will also kill whatever spending power the population has.
if not for above…who cares if national debt goes upto 13 trillion from 10 trillion?? if dollar buying power is reduced upto 30% by printing…the debt will take care of itself.
saving is a sin, we should figure out a way to borrow and play…..and declare bankruptcy when things go south.
April 19th, 2009 at 2:36 pm
There is a big difference between an economic turnaround and a stock market turnaround. The main issue right now with the rally is everyone’s waiting for it to fail.. and that story usually plays out longer than most wish or expect. There are plenty of excuses and causes for concern but it has not broken the market yet. The real test of this rally is a legit pullback. Traders who have already been too quick to write this off as a bear market rally may also be quick to pile back into the shorts if we get a pullback that lasts longer than one day. If that happens, what if it is a just a pullback and not another trip to new lows?
http://moneyneversleepsblog.blogspot.com/2009/04/week-ahead.html
April 19th, 2009 at 4:32 pm
Many parallels to what’s happening today in almost every facet of our culture (e.g. politics, corporations, Wall Street, etc.) can be drawn from this show. Everything everywhere seems so gamed by those in power for their own benefit. Great Moyers interview…..
http://www.pbs.org/moyers/journal/04172009/watch.html
April 19th, 2009 at 4:45 pm
Judging by past bear markets, there is little correlation between the end of a recession and the start of a new bull market. Go back to 2002 – the economy started pulling out of the recession by late 2001 yet it took almost another whole year before the stock market made the ultimate low. This go round is there any reason the market couldn’t turn up well before the economy?
Economists generally make for terrible stock market traders. I don’t find Rosenberg’s argument particularly compelling.
April 19th, 2009 at 5:54 pm
dead hobo Says:
April 19th, 2009 at 11:43 am
No, I expect to sell to a greater fool at a profit. I couldn’t care less about the employees.
—————–
Exactly.
April 19th, 2009 at 6:49 pm
TheReformedBroker Says:
April 19th, 2009 at 11:41 am
fyi…faber is ………………………………………….
that said, why are we being kept from the stress test results? methinks the government likee the rally too much to show us the test scores…
http://thereformedbroker.com/2009/04/19/stress-test-capitalism-without-competition/
The markets were stress testing the bank stocks last fall before the government stepped in.
So why do the stress test now when you prevented the stress before ??
April 19th, 2009 at 7:41 pm
good point royrogers, but the problem is that the natural stress tests, combined with no uptick rule and free-for-all for naked shorts and hedge fund manipulators almost took us to game over
im all for the market being “fair” with punishment of Citi and BAC, they were crap banks with bad management and dumb decisions, but I dont think BONY, JPM and US Bancorp shouldve been allowed to get whacked out just because the SEC was a toothless tiger about enforcing its own rules
if that continued, we would have ALL failed the stress tests