Simple trading strategies that make sense of the big picture through just a few important economic statistics can serve retirement investors well. When major institutional investors around the world want to understand what’s happening in the global economy, they turn to ISI Group in New York. Here’s a quick look at their current view of the U.S. economy, in their words — with my summary comment at the end.
Extra uncertainty. The range of opinions of investors surveyed last week at a meeting of Chicago clients was “as wide as we can ever recall.” Best guesses for employment in 2011 ranged from zero to +6 million. The range for house prices in 2011 ranged from -12% to +15%. With opinion divergences this wide, investors are just not seeing eye to eye and that will make for greater volatility if and when one point of view wins and people with the wrong opinion are forced to fold. Lumber prices have gone from +60% to -5% this year alone.
Still in a soft patch that will last 6 to 8 weeks. The keys to watch are: (1) Unemployment claims, which ticked up last week and have been unchanged for three months after plunging for a year. Claims now suggest 3% real GDP growth in the second quarter. To be consistent with ISI’s forecast of +3.5%, they need to start declining pronto. (2) Surveys of retailers, and their reported results, are substantially down from March and appear to be a leading indicator. They must bottom for the soft patch to end. (3) Homebuilders surveys are down materially now that the tax credit has ended. For the soft patch to end, homebuilders’ confidence needs to resume. Other housing-related data has been very weak, including mortgage applications and lumber prices. And homebuilder shares have plunged 30%. (4) First Call’s earnings Revisions Index declined again last week. (5) The ECRI Weekly Leading Index fell under 0 last week, indicating a slowdown in GDP likely lies ahead. (6) Consumer net worth probably declined in the second quarter.
Still plenty of good news too. In 2008 just before the big bear market kicked into high gear, Fed Funds were at 4.25% and the yield curve was inverted, with bonds at 3.6%. Now Fed Funds are at 0% and bond yields are 3.2%. And there’s a big mountain of cash globally that would like to be put to work, funding businesses and buying assets of all kinds, including real estate, debt, gold and stocks.
Eurozone is the biggest risk to the global recovery. Every day we learn more about how closely European banks are connected via loans from one country to another, and the uncertainty of repayment. Now fiscal tightening is speeding up, and even Germany said late last week it will cut its budget deficit “quickly and decisively.” The Eurozone has no leader, which is a problem in a crisis. And while the European Central Bank has a leader, he sees his only mandate as strictly a focus on ensuring low inflation. The decline of the euro is good for trade but it’s destabilizing debt and equity markets as analyst scramble to determine its value vs. peers. And finally, Eurozone auto and retail sales are definitely declining.
Explanation for lower-than-expected May payrolls. Turns out that private employment has weakened every time Census hiring has peaked. It then improves the next month. In May of 2000, with Census hiring of +348,000, private employment fell 120,000 (vs. +217k the prior month). Private employment increased by 241,000 in June 2000. If this scenario plays out again, June 2010 employment will come in north of +175,000.
Employment is improving by other metrics. Even with May’s drop, household employment over the past five months is up 270,000 month over month on average. And more recent encouraging signs are: layoff announcements have made a downside breakout, as shown in the 1998-2010 chart above; temp employment is way up; small businesses say they plan to increase hiring significantly; May employment in Canada, Australia and South Korea were up the equivalent of 440,000 U.S. jobs; apartment rents continue to rise, which is a forward indicator of employment; and corporate cash in the first quarter was reported up 25.5% annualized, which means the corporate cash hoard is now nearly $2 trillion — a level that should encourage hiring.
My summary on this is that as long as stock prices want to go up, they need a proverbial “wall of worry.” And all the concerns listed above should do the trick.
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