The bulls are running as fast on the Street as they have ever run in Pamplona. Nowadays, bad news has always been priced in but good news, even hints of good news, has not. Thus it’s the opposite of early 2009. As I think I noted almost four years ago in my blog, a sign that at least an intermediate bottom was in or about to be in that winter came when fears about the ongoing flu season were enough to send stock prices sharply lower (there was a new strain of flu going around but it was already clear that it was no big deal whatsoever). I recall that this marked almost the exact bottom in stock prices. The last weak hand folded and the brave ones bought or just held on.
Of course, given inflation and economic growth, even in a bubble-prone economy, it is much more difficult to call stock market tops than bottoms. This post is not a top-calling post.
Internationally, ongoing negative news about (for example) Britain’s economy appears not to affect the bull market in the FTSE, which tends to be unchanged on days with bad news and up on days with either some good news or no news at all.
Britain’s possible third recession in five years in fact appears to be gathering force (LINK):
British factory orders fell unexpectedly in January as export orders fell to the weakest level since December 2011, according to the Confederation of British Industry (CBI).
The CBI survey of 389 manufacturers showed that the total order book balance dropped to -20 this month from -12 in December, confounding expectations of a reading of -11.
This was driven by a sharp drop in export orders, as this balance slumped to a 13-month low of -29 in January from -11 in December.
However, despite the drop in orders, the balance of manufacturers expecting to increase their output over the next three months climbed to +8 in January from 0 in December and -9 in November, with +14 expecting total orders to rise over the next three months.
Manufacturers also expect to increase their headcount over the next three months (+13), as well as investment into the sector.
It appears that as with numerous regional Fed surveys of manufacturers here in the U.S., Britain also is suffused with hopium that magically tomorrow will be better, perhaps much better, than today.
As part of the ongoing reporting yours truly has been engaged in, here is the latest Fed regional survey from Richmond this morning that continues to demonstrate a perplexing though in some ways impressive optimism about tomorrow, and tomorrow, and tomorrow (LINK):
Business contracted in January despite mild weather. This joins the New York and Philadelphia regions, where mild weather there was also associated with declining pace of business and similar optimism about conditions in July. Operating margins worsened. Inventories continued to accumulate even though orders and backlogs declined. Thus, hopes for improvement in economic performance that are at variance with today’s conditions are also likely present in stock prices. This is all consistent with Value Line’s optimistic expectations for 2013 but much more restrained guess at the level of stock prices. Despite their assumptions which include no increase in long-term AAA corporate bond rates, their predictive formula suggests an average Dow for all of 2013 of 13,440. Thus I remain cautious about prices while disclaiming any idea about the pace of business in the months and years ahead.
As reported here recently by quoting a member of Steve Leuthold’s team, stocks have now become expensive enough for the public to want to own more of them. L.O.L.
This embedded optimism is not present in Russia’s small stock market, which is dirt cheap and over-discounts all the many issues there (so it would appear). The small-cap Russia stock fund, symbol RSXJ, sells at an average P/E (trailing, reported earnings )of 4.77, 2/3 of book value, 3.3X cash flow, and 50% of sales. Of course, Russia is “risky”. Few citizens there would think of entrusting their retirement savings to other people’s companies, in which they were minority powerless “owners”. Not so America, where everyone knows corporate governance is stellar, disclosure of risks is impeccable, and no broker-deal/money manager ever simply vaporizes your account money with no prosecution if the CEO is well-connected. I spent a little bit of time on the Moscow Times website a few days ago (English language version), looking at their business section. What impressed me the most was that despite discussion of corporations, there was absolutely no discussion of or even data about their stock market. Apparently they actually focus on the news, rather than prices moving up and down. This is a Good Thing! Given that Jim Rogers is bullish for the first time on Russia, I am in with him (though in a restrained way). Other international markets are also much cheaper than ours and all their corporations must do is grow as fast as those in the U.S. and investors should come out better in these cheaper markets.
An interesting follow-up on its widely-maligned recession call came from the ECRI folks a few days ago. Apparently they are at least somewhat standing by this call. ECRI is not just any other organization. They are essentially the successor organization to the team that invented the leading economic indicator system in the late 1940s. They passed the LEI on to the Conference Board, which maintains and updates the LEI (and is not calling a recession), and developed what they assert is an improved tool, LEI 2.0 if you will at ECRI. They famously made a recession call in September 2011, saying that they U.S. was either in, just beginning, or soon to “tip into” a recession. They stuck to this stance and finally, last summer, stated that they believed a recession had actually begun in July 2012. When earlier in 2012 they forecast a recession as likely to begin in May or June, they said that this would be a mild recession and it would not be clear that it was (had been) a recession until December, as data would need to be revised to show that. Thus it is unclear if a July start date implies that they think we may have to wait until Jan-Feb to know there was (had been) a mild recession, if they are correct in this highly-unconventional judgment.
Late last week, they posted a public intro to a members-only analysis, and in conjunction with their front page of their website continuing to highlight their recession call, it appears they continue to assert that a recession in the U.S. began last summer. Here is what is publicly available from their members-only analysis:
What Lies Ahead for the U.S. Economy?
With some of the coincident indicators used to determine official recession dates rising above their mid-2012 highs, there is a popular perception that the U.S. economy avoided recession in 2012, and is poised to improve in the months ahead. Furthermore, growth in ECRI’s Weekly Leading Index has climbed to a three-month high. Does any of this negate ECRI’s recession call.
ECRI’s latest report analyzes the implications of the recent data releases, including the rise in the WLI and our recession call.
Indeed, it is also notable that, in the face of unprecedented quantitative easing by the Fed and other central banks, the Fed’s own measure of the economy’s “stall speed” plunged below its recessionary threshold in the second quarter of 2012 and then kept falling. Combining such indicators with a detailed analysis of ECRI’s large array of leading indexes, ECRI’s latest report provides unique insights into the U.S. economic outlook.
ECRI is prominent enough to have spawned a cottage industry of economists and other financial types who have seized on one specific indicator that it makes public (of their many indicators), and who have savaged its recession call. An alternative view of this recession call (LINK) with some harsh commentary follows:
Here is a chart that clearly illustrates why ECRI’s weekly indicators are of little value: The smoothed year-over-year percent change since 2000 of their proprietary weekly leading index. I’ve highlighted the 2011 date of ECRI’s recession call and the July business cycle peak, which the company claims was the start of a recession…
Meanwhile, ECRI’s public indicators continue to undermine their insistence that we’re in a recession. I think an ECRI retraction is way overdue.