Friday, July 10, 2009

Is ECRI Backing Off of Its Optimism?

The Economic Cycle Research Institute has been a valuable predictor of turns in the economy. On March 19 of this year it notified its paying customers: The end of this recession – the most severe downturn since World War II – is finally in sight. This is the clear message from ECRI’s array of leading indexes of the U.S. economy.

Undoubtedly, its optimism helped fuel the large rebound in stock prices and the 'green shoots' thinking.

Over a month ago, the ECRI went public and predicted that the economy would bottom this quarter, potentially by Labor Day, with hints of perhaps more strength and an earlier turn than the gloomsters were thinking. A hint was made that stocks were a "buy". Today, ECRI stated in its weekly Reuters news release:

ECRI Managing Director Lakshman Achuthan holds that recovery is imminent before the year's end, as long as economic data continues to weaken at a slower pace.

This appears to be a weakening of ECRI's bullishness. This occurs after a quick $10 or so fall in the price of a barrel of oil, an almost 20% fall in the price of an ounce of silver in about a month, and other types of data pointing to a 'withering green shoots' environment.

Perhaps ECRI's Long Leading Indicators are weakening. With the S&P 500 now below its 200 day moving average, which is still declining, we are looking at evidence that the big money is less sure of an economic recovery worthy of the name.

In that regard, the financials had an ugly day today, with classic signs of distribution occurring. The major indices had a small up-move at the end of the trading day, but major stocks such as JPM and GS closed right by their lows of the day. And of course, Citi and AIG have re-entered their own private Hells. Family Dollar had no follow-through strength, and, worse, Wal-Mart and Costco have broken down and threaten to set new 52-week lows. The best commodity stocks such as POT have also suddenly broken down.

Interim counter-moves notwithstanding, portents are for a challenging period ahead. Even "cash" may not be safe, given Sweden's move to institute negative interest rates for demand deposits. This may be the most challenging time for investors in modern history. Stay tuned.

Copyright (C) Long Lake LLC 2009

1 comment:

  1. Good catch -- I was taken aback when I read it too (I'm on vacation at the moment) and from ECRI's vantage point our summer recovery call has only strengthened since we made it in April.

    It seems we have a bit of editorializing from the Reuters staff. Specifically, I never said, "ECRI Managing Director Lakshman Achuthan holds that recovery is imminent before the year's end, as long as economic data continues to weaken at a slower pace."

    I did say, "It is increasingly evident that, despite widespread misgivings based on backward-looking economic data, the end of recession is at hand," and if you think about it the two statements don't make that much sense together.

    I will send them an email now and ask for a correction.

    Lakshman Achuthan