UNCOMMON INDICATORS - SAME RESULTS

I found an interesting video on CNBC (yes, all fluff and they try to make all things positive).  The CNBC gang interviews Nick Colas who tracks internet searches on Google to attempt to find trends that might indicate where companies and the economy are going.

Clearly everything in the economy is not roses as he responded several times, "that's a tough one" meaning that because the search term was showing up more and more that didn't mean that things were getting better.  Essentially this interview highlights one of my issues with the CNBC hosts, they enter into the interview with the thought that these indicators are to reveal bullish information, hence the panelist is in a position to defend the data and almost apologize if the data is negative.  Truthfully, it isn't hard to figure it out, you just examine the results, question it, and then accept it.




Here are the search trends he follows;

GOOGLE SEARCHES FOR HOME BUYING - I get this one, I hadn't thought about that.  I would state though that I'm hearing more and more complaints from realtors and mortgage lenders that they can't get buyers that can get financing.  In my city this is really blowing up potential deals and causing slow sales. 

SEARCHES FOR USED CARS  - He doesn't share with us the numbers for used cars, but this would be useful to see if folks are going to try to buy new cars or buying used.  I keep hearing lots of optimism from the auto industry about their growth prospects and how things have changed.  I wanted to examine these indicators for myself and so I used the Google Automotive Search Index results as a high level "smell" test.  Interestingly the index values show a couple of striking things.  First, we are currently at a level that is much higher than last year, which was horrible.  This is wonderful and you can see how the executives at the manufacturers are excited that things are looking up.  Despite the good news, we see that this is also a level that is similar to 2007, which wasn't exactly awesome.  On top of that you must account for a growing number of searches as people are using media and search more, much more than they did 4 years ago, so this too should make us pause a little.  Finally, we have just exited the typical peak point in sales and searches in terms of seasonality.  Last week I posted a chart on GM, I'm not getting long anytime soon. - GM CHART FROM 7/22/11.  Take a look at the Google Search Index for Autos below.

SEARCHES FOR GUNS -
I'm not exactly sure that guns are a great indicator of improving financial health as Nick tried to spin this.  His angle is that guns are a $300 to $500 durable good like a washing machine or refrigerator.  Somehow I'm not thinking that gun searches are a marker that citizens feel confidence in an improving economy.  I believe that folks feel like the system is breaking down and the government cannot protect them.  Perhaps folks aren't looking to prepare for Mad Max times, but their search for the best gun for them may mean that they are concerned about the increasing risk of break-ins and their security.  Oh yes, if you are in the market for guns you might consider the Mossberg 500 or 590 and the Glock 23 as a starting point in your research.

SILVER AND GOLD -
We've discussed this at great length, people across the world are buying gold and silver as the un-currency and as an inflation hedge.  If "investors" are looking to buy gold and silver, they don't have a lot of confidence in traditional investments. 


FOOD STAMPS -
The Goatmug Blog tracks food stamp usage every month, but I like the idea of watching these trends to see how many searches are being performed in real time. This approach may give us insight into what numbers will look like several months in advance.  Regular readers know that we report these dismal figures in the monthly update and last month's figures show that almost 45 million people are on the roles and as the panelist described one in five families receive food stamps.  How disgusting!

GOOGLE TRENDS

If you have a desire to check out some of these you can look at Google Trends to examine word searches and also you can use this link in Google Finance - http://www.google.com/finance?q=GOOGLEINDEX_US:AUTO

I did searches for durable goods and other items and many of the results show how poor the us consumer is right now in terms of discretionary spending.  Durable goods searches are at 7 years lows, but it is beginning to tick up compared to last year's horrible totals in year over year trend!  Wow! 

At the end of the day I like this approach it may give us a view of coming changes in trend in a real time format.  At least Google's spying is good for something right?

GOATMUG

 

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/



September Update
Last month’s analysis called for a further move up in all asset classes and the markets have served up healthy results. As we’ve marched into the highs made on August 25th in the S&P 500 at 1038 the index retreated to where it stands at todays close right at 1000.
30% to 40% of the rally has been a result of simply removing the catastrophic collapse option from the system. The remaining 10% or so can be understood as growth based on feelings of improvement in the economy.

It’s Bad; Although Fundamentals Continue to Be Less Bad
The rally we’ve witnessed has been the result of pricing all assets as though the end of the financial world was at hand (it was). Since the not so invisible hand of the government intervened to save the system, we’ve ridden the wave of excess government liquidity back to levels not seen since last September. Throughout the impressive rally bears have doubted the fundamentals and conviction of the bulls and have been the fuel source, pushing us to these levels.

Economic Updates

Employment
Employment in August is still sour as we lost 216,000 jobs, however this rate of job loss is significantly lower than the 650,000 losses we faced a few months ago. Our current unemployment rate is officially 9.7% as provided by the US Bureau of Labor Statistics. When you include job seekers that have given up searching or are “under employed” in part-time jobs, our unemployment rate is over 16%. The unemployment data is difficult to trust simply because the government doesn’t count folks that have stopped looking for jobs. These are the people that would probably work, but the prospects are so bad they simply quit the search.

Rails
Railcar shipping data through the August 29th shows some improvement in shipping rates, but comparisons to last year still reveal how much of a downward shift we’ve seen.

Transportation data often gives us a leading indication of recovery especially when you drill down to components like crushed stone and lumber. Last week’s information reveals that there has not been a recovery in these products. Shipping of these building inputs show that commercial and residential construction is not improving.





(Source of Rail Charts - http://railfax.transmatch.com/ )
We will probably begin to see further improvement in rail traffic as we see restocking of automobile inventories sold in the Cash for Clunkers tax money give away. The trick will be not to read too much into this data as we’ll see those cars sit on lots for an extended period of time.

Financial Conditions Index -
The Bloomberg Financial Conditions Index combines yield spreads and indices from the Money Markets, Equity Markets, and Bond Markets into a normalized index. The values of this index are z-scores, which represent the number of standard deviations that current financial conditions lie above or below the average of the 1992-June 2008 period. A value over 0 indicates an expansion and an end to the recession. Values under 0 show recessionary tones in the economy.

The Financial conditions index continues to improve suggesting that credit concerns have abated. As you can see from the chart, data in mid October of 2008 revealed how bad financial markets were at the time. We are still below zero and can’t proclaim the end of the economic turbulence and liquidity crisis.

WLI - http://www.businesscycle.com/resources/
Data provided by the group ECRI tabulates their Weekly Leading Indicator index. In crisis, the WLI turned down in October right before the decline and up in February before the market’s swing higher. The WLI continues to improve suggesting that the economic rebound is real. In addition, their data indicates that inflation is not currently present.

Dow Jones Sentiment
The Dow Jones Economic Sentiment Indicator moved higher for the sixth straight month to the 35.5 level. Data under a level of 50 indicates there is danger of an economic slowdown which we are clearly in at this time. We need to continue to watch this upward sloping data.
http://solutions.dowjones.com/economicsentimentindicator/


AAII Sentiment
The movement of the market last week helped to remove some of the bullishness and euphoria in the market. The AAII sentiment ratio was close to the 30 line last week indicating that everyone was happy. As usual, we would use this indicator to take the opposite side of the trade. When everyone is feeling one way, it is usually safer to bet against the crowd. Given the return to the mid range, we don’t glean much from this chart other than a confirmation of our feeling that the market was overbought.
Chart courtesy of http://tal.marketgauge.com/dvmgpro/charts/charts.asp?chart=AAIISR

CFO Survey – Like the market recovery the June release of the CFO Survey backs up what we have witnessed in the economy so far. CFO’s are feeling better than they were, but still reserved in their outlook. Because this data is from the June release, we’ll be carefully watching for the next quarterly update to see if the trend continues.

Commercial Real Estate – TBI Data
Source - http://web.mit.edu/cre/research/credl/tbi.html




MIT Center for Real Estate has supplied us with information about the first and second quarter pricing on commercial real estate transactions. In the graph below, we continue to see the pricing waterfall as deals are getting done at lower and lower levels. Second quarter data shows a pricing drop of 18.1% from the previous quarter and almost 39% lower prices from the peak in 2007. We must continue to watch this data as commercial real estate is the wound that could still kill the patient in terms of this recovery. At the local level, community banks are impaired because they are facing losses on their commercial real estate loan portfolios. Bankers over emphasized these loans and are paying the price for their over zealousness. We will continue to see banking failures and the pace will hasten. Larger regional players like Zions Bank and Regions Financial are in serious trouble and have disclosed serious asset impairment. I will not be surprised to see an arranged marriage of these two banks with larger national institutions backed by the FDIC soon (your tax dollars to absorb the losses of course). We do not see any improvement in these trends and in fact the downward pressure on CRE pricing will accelerate.

Retail Sales Data for July Release in August – Source BLS http://www.census.gov/retail/
Retail sales continue to falter. Total sales decreased .1% from the previous month and were -9% from last year in July.

USD Index & Commodities – From Bloomberg
The US dollar continues its slide. As it goes lower, the world adjusts asset values higher to compensate the erosion of value in the home currency. In other words, (in a perfect world) if the dollar goes down 1%, the value of companies (stocks) should rise 1% to compensate for the dollar’s decline. The same can be said for gold, oil, and other commodities priced throughout the world. Prices seem more expensive to US consumers because they are losing purchasing power. The dollar’s impact on pricing of the stock market and the commodities market is so influential now and I would suggest that much of the moves in the markets are almost based on the fall of our currency.

Consumer Credit Data - http://www.federalreserve.gov/releases/g19/Current/
July consumer credit outstanding was released this week and noted that consumer credit outstanding dropped $21.6 Billion for the month. This is concerning because our government’s plan to revive our economy centers on the resurgence of the US consumer. Rescue packages like the $8,000 home purchase tax credit and Cash for Clunkers are significant pieces of the revival plan. The destruction of consumer credit is driven by several key components. First, consumers with jobs are paying down debts as fast as they can. Second, consumers are refusing to spend using credit cards and loans (if they have access to them). Third, consumers are just not spending and delaying purchases or becoming accustomed to a new life style without instant gratification. Finally, there is another growing segment of consumers that are jobless, without credit, and without means to buy even if they wanted to.

Investing Strategy for September & Coming Months
As we pour through the economic data above you might get the feeling that the economy has had its better days. Facts show that consumer credit outstanding is still declining; unemployment is still rising, retail sales dropping, and rail shipments of construction inputs are still in a flat-line. Despite these sour tones, there are hints of recovery. ECRI data shows that the Weekly Leading Index is still heading higher, the rate of job loss is slowing, and company leadership also states that there are improvements coming. Americans that are working are more productive than ever and there are available stimulus plans to propel purchasing in targeted areas.

Given the prospects of further improvement in the economy, we continue to feel that there are opportunities in various markets in the short run. I hear daily that the market is “priced to perfection”, and in some sense those comments are correct, yet they are not factoring in new data. I agree that for the information we have, we have moved up significantly. Remember though, we were pricing in the apocalypse. As more information reveals the continuation growth, I suspect that we’ll see more moves to the upside as the market is caught off guard. An example of this is the following chart; again from ECRI. The orange line suggests an upturn in pricing in the housing market. A few more weeks of good data here will underpin more upside as this will show that housing may be bottoming. No doubt we'll see more foreclosures and a release of inventories that are building up on bank balance sheets. However, our focus in this discussion is on the next month or so rather than the next six months.

We continue to favor weak dollar plays in the market. If you have the ability to short the dollar or go long other currencies, there is no reason to fight an obvious trend. Stabilization of the dollar is important for the health of our economy, but until we see real intervention from the Fed or the Treasury to prop up the dollar, we must assume that they are paper tigers. As we’ve said often, the FED is motivated to have consumers spend every dime they have and also are committed to devaluing the dollar so that our debt is worth less. In response to the weak dollar, we will see equities move higher, metals, oil, and emerging markets. We will revisit these trades monthly, but as long as the dollar falls, these trades will be effective. Areas to avoid continue to be in the financial and commercial real estate sectors. No matter how far these run, they will be the center of the next liquidity event that may happen in the winter or early next year. Don’t mistake our short term view with a positive long term outlook. We still are of the opinion that the early months of 2010 will bring significant challenges for the markets and the overall economy.

If any significant changes happen in the dollar environment, do not hesitate to move to cash or if you are in mutual funds to US Government Securities that have short term maturities. This is a toppy market so you must be nimble. Establish thresholds for maximize loss before you enter trades and exit those trades if you exceed your limit.

By the way, I know there are folks following on Twitter, I noticed that there is a follow me button here on this blog. Please use that to know when I post each month or intra-month.


Goatmug