Macro Overview

As we noted Monday, the soothing soothsayers have latched onto the few decent econo-data points amongst all the awful economic news as proof the economy is fine.

We’ve also heard the claim that the sudden increase in market volatility and global market turmoil were not signalling anything

These are a bit "head-in-the-sand" for my tastes.

A review the of the Macro data
suggests recession odds remain a much higher possibility than many realize. (And no, I do not mean a "33% chance").

My pal Nouriel notes the good and bad news:

Good Economic news:


The February manufacturing ISM surprised on the upside going back to a 52.3 level that is the critical contraction level of “50”;

• Existing home sales were up 3% in the last month;

• January personal incomes went up 1% while personal spending went up 0.5%;

• Mortgage applications were up 3% in the last week.

• The Conference Board’s January index of consumer confidence unexpectedly rose to a level of 112.5.

The Not-so-Good Economic news:

• The Q4 GDP growth estimate was revised from 3.5% to 2.2%

• Based on the Q4 growth revision all of the four components of investment fell in Q4: residential investment, business investment in software and equipment, non-residential investment in structures, inventories investment

• Inventory to sales ratios remain high – in spite of the Q4 inventory adjustment – so that further cutbacks of production to reduce inventories will be necessary in Q1 and Q2.

• Durable goods orders were sharply down in January including, most importantly, capital goods orders and shipments, good proxies for current and future investment. At current rates, real investment in software and equipment could be down 10% in Q1 alone. The sharp and unexpected fall in durable goods orders was a crucial trigger for the US stock market sell-off on Tuesday.

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There’s a full parade of horribles to check out, at RGE; these are the first four  negatives of 15 or so — check out the rest for more details . . .


Hard Landing Recession Ahead
Nouriel Roubini
RGE | Mar 02, 2007

Category: Economy, Federal Reserve, Inflation, Markets, Psychology, Real Estate

Media Appearance: Kudlow & Company (3/7/07)

Category: Media

The Forecast for 2007 Housing: SUCK

Category: Corporate Management, Real Estate

Category: Economy, Federal Reserve, Real Estate

Large 5-day declines and subsequent market performance

Category: Data Analysis, Markets, Psychology, Technical Analysis, Trading

Not Yet!

Category: Markets, Psychology

Barron’s picks up “Selloff Reawakens Market Volatility”

Category: Media

50th Anniversary of the S&P 500

Category: Index/ETFs, Investing, Markets

The Value of Fundie Analysts?

Category: Data Analysis, Earnings, Investing, Psychology

Blame the professors: Just as the option backdating scandal started with academic researchers noting mathematical anomalies, so too might the next brewing scandal: the I/B/E/S Analyst ratings back dating scandal.

According to a Barron’s article by Bill Alpert (buried on page 39), several professors have discovered what they describe as 54,729 non-random, ex-post changes out of 280,463 observations — a little over 19.5% of analyst recs (abstract below):

"The professors found
almost 55,000 changes that had been made in the I/B/E/S database of
stock-analyst recommendations maintained by Thomson, the Stamford,
Conn., firm that is a leading vendor of financial data. The alterations
made Wall Street’s record of recommendations look more conservative –
hiding Strong Buy recommendations and adding Sell recommendations from
1993 to 2002. That is a period for which Wall Street has drawn heat and
government sanctions for touting Internet bubble stocks.

As a result of the changes, the stock picks shown in
the database would have created annual gains that were 15% to 42%
better than the originally recorded recommendations, using a trading
strategy based on analysts’ recommendations."

The firms were the most significant participants in the data backdating were also the firms who had the closest relationship between banking and research and were the hardest hit by the Spitzer enforced settlement.

From page four of the academic working paper notes exactly how significant this was:

"Why do the historical data now look different than they once did? The contents of the database changed at some point between September 2002 and May 2004, a period that not only coincided with close scrutiny of Wall Street research by regulators, Congress, and the courts, but also saw a substantial downsizing of research departments at most major brokerage firms in the U.S.

The paper outlines four types of data changes: 1) non-random removal of analyst names from historic recommendations (€œanonymizations€); 2) the addition of new records not previously part of the database; 3) the removal of records that had been in the data; and 4) alterations to historical recommendation levels.

The net result of this was to make many specific trading strategies appear better in retrospect than they actually were.  Buying top rated stocks and shorting lowest rated stocks, based on the changed data, now perform 15.9% to 42.4% better on the 2004 revised data than on the 2002 tape, the professors state.

Read More

Category: Corporate Management, Data Analysis, Earnings, Markets, Psychology