Saturday, May 22, 2010

ECRI Much More Bearish

The Economic Cycle Institute may be quite the market mover. Yesterday on its website, it announced that Thursday it described to its paying subscribers that it had decided thusly:

U.S. Indexes Point to Change in Cyclical Direction.

Here is what it told the public Friday:

With a number of market-moving indicators surprising on the upside in recent weeks, fears of a double-dip recession had largely been put to rest. But, the recent turmoil in the Eurozone has sparked fears of a fresh financial crisis with increased “spillover” potential. ECRI’s latest study, using an array of objective and reliable leading indexes, assesses the outlook for the U.S. economy in that context. Its conclusions offer important insights into the vulnerability of the U.S. economy at a point when cyclical forces are about to shift gears.

The regular weekly news release (every Friday) was clear about the trend:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slumped to 127.3 for the week ended May 14 from 132.0 the previous week.

That was the lowest level since Sept. 11, 2009, when it stood at 127.0.

The index's annualized growth rate fell to a 43-week low of 9.0 percent from 12.2 percent a week ago. That's the lowest level since July 17, 2009, when it stood at 8 percent.

"With WLI growth sinking further to a 43-week low, U.S. economic growth is set to start easing in fairly short order," said Lakshman Achuthan, managing director of ECRI.

ECRI has changed its tone (and tune) markedly. Only 2 weeks earlier, its Friday news release had the title Little Risk Of Renewed Recession This Year and said:

A measure of future U.S. economic growth rose to a more than two-year high in the latest week, bolstering expectations that the recovery is intact, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 134.7 for the week ended April 30 from from 133.6 the prior week, originally reported as 133.7.

That was the highest level since Jan 18, 2008, when it stood at 135.0.

The index's annualized growth rate rose to a four-week high of 12.7 percent from 12.3 percent a week ago, originally reported as 12.4 percent.

"With the forward-looking WLI rising to its best reading since January 2008, there is little risk of renewed recession this year," said Lakshman Achuthan, managing director of ECRI.

While the LEI was also released Thursday and was down a small amount, the Conference Board was upbeat and its language would not have triggered a sell-off:

“We were surprised how strong the increase was in March,” said Ken Goldstein, an economist at The Conference Board. “We only lost a tenth of a point [in April]. It’s a fairly strong signal that this recovery is developing further and will continue through spring and summer.”

In late August 2008, ECRI quickly switched from saying that the U. S. was in a mild recession to predicting ominous deterioration. The stock market started moving downwards from that point onward, falling over 10% in the month before the Lehman/AIG mess.

It would appear that when ECRI speaks, big money listens.

The odds have increased that the stock market has entered the post-recession phase in which rallies should be sold and that so long as the Treasury market remains the default safety play, Treasury sell-offs can be bought. Whether this safety play will continue through another recession rather than a decelerating expansion is unclear.

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