Tuesday, October 20, 2009

Surveys of Real People Rather than of Economists Unfortunately Paints an Ugly Picture

The news from real people about the economy just refuses to turn upward in any consistent fashion, despite massive government spending that has to goose up the economic numbers. Apparently larger companies have such high profit margins and those that are international see growth prospects out of the U. S. as more exciting than here that they are currently unwilling to invest for growth; and smaller companies have difficult access to financing and even the ones that carry health insurance are confused about the future cost.

Today (Oct. 20) we had a sudden relapse in two of the Gallup.com poll numbers that I watch daily. The 3-day average index of job creation (hiring/letting go), collapsed after looking stronger the past week, to a dismal -2. This is the number which represents the % of employees seeing their company adding other employees minus the % seeing them shrinking the workforce. Thus, a negative number sees more shrinkage than adding. Zero is not anywhere close to labor force equilibrium, though. When the number was strongly positive--such +20, unemployment was increasing. After all, the workforce is increasing. No matter what massaging of the data the people at the Bureau of Labor Statistics do, the employment situation is miserable. Very likely it will get better, but you know that objectively, the economy is a lot stronger early on in recessions than it is early in significant recoveries.

The other Gallup data with movement in the wrong direction is the U. S. Economic Outlook. Improvement in this number correlated very closely with the stock market up-move in March. The % seeing the economy as worsening has jumped to 60% from a recent low of 50%. The amount seeing it as improving has fallen to 34% from a recent high of 43%.

Separately, the ABC News weekly report of a poll the Consumer Comfort Index came out today and was subtitled "Back in the Dead Zone". Also, click HERE to go straight to the charts.

Last week, I noted that the S&P 500 had finally filled the gap on the chart at 1100 from the major collapse early last October. This theme was picked up by at least one analyst who has had a superb track record the past two years. Given the failure of average people to see any real improvement in the economy essentially two years out from the peak of the economy (most people thought the U. S. was in recession or worse more than 2 years ago), and given the floundering of the recent leading stocks, we are now in a classic time for what is politely called consolidation of gains.

If you click HERE on the two-year chart of GE, you will see that the panic bottom notwithstanding, an obvious downtrend is in force. The rule is that trends continue until they do not. Click HERE, HERE and HERE for similar charts of BofA, Nokia and a 5-year chart) Ford. These are charts that accurately reflect the changing business fortunes of the companies.

Click HERE for the 2-year chart of the S&P 500 (or its ETF = SPY as you prefer). This is the best of the bunch but the 2, 5 and 10 year charts taken together show no trend. Given a dividend yield of 2%, who needs it?

On all of these, the eye can see the downtrend. For all of these, business prospects simply appear to be worse than they were perceived to be in the past. The naked eye can easily see the loss of inventor support revealed by the downtrends.

If you adjust either for gold or for two or ten-year Treasuries, the downtrends are steeper (though in fairness, Nokia pays a good dividend).

Marty Zweig popularized the term, "Don't fight the tape". He was correct.

Yes, I will bravely predict that the above surveys will show rampant optimism in the future. But for now, business conditions are compatible with stock averages much lower than they are now. Federal finances are compatible with interest rates ranging from Japan-style on the low end to much higher. That Team Obama is apparently now planning yet another stimulus package makes me withdraw any optimism for lower rates in the near-term. Things are far too fluid to guess, even forgetting market manipulation.

In the days ahead, we will discuss technical patterns and some fundamental thinking about different asset classes, including individual stocks that may be poised to outperform if past is prologue.

Copyright (C) Long Lake 2009

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