All Signs Point Towards Economic Stabilization

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (May 4th):

...[W]e continue to believe the bear-market “lows” are behind us; and that the worst of the recession is in the rearview mirror (except for employment numbers). In previous missives we have stated that we are watching Personal Consumption Expenditures [PCE] closely, for this is how recessions end. If the “real” PCE has stabilized, we have noted, then the end of the recession is not far off. Last week the two-month “string” of positive PCE reports became a trifecta as the real PCE for March was reported at a positive 0.2%.

Yet there are other signs that the economy is stabilizing. Friday’s ISM report, while still weak, was better than April’s. As our economist Scott Brown states,

“There may be something to the inventory clearance story. This is still a weak report, consistent with declining overall activity, but certainly not as bad as in recent months. Much of the positive surprise was likely already baked in the cake following Thursday’s stronger-than-expected Chicago Purchasing Managers’ data.”

There has also been improvement in the Long Beach Container Exports figures and the Architecture Inquiries Index, as well as the Richmond Fed Manufacturing Index, the Present Situations Index, and the UoM Consumer Confidence report. Even the S&P/CaseShiller 20-city composite survey of home prices suggests that the rate of decline in home prices is slowing.

As for the ubiquitous questions about swine flu, which we encountered in our speaking tour last week, this is NOT a repeat of the Spanish flu epidemic that lasted from 1918 to 1920. That epidemic killed an estimated 50 million people worldwide. Worth noting is that penicillin was not invented until 1928 and there were obviously no drugs like Tamiflu. Nope, we view the current situation more like that of the 2003 SARS crises. SARS was the first pandemic scare in a long time and eventually infected 8,500 people, killing 813 of them.

However, even a “mild” pandemic can have economic consequences. According to a 2008 World Bank study the Hong Kong flu pandemic, like that of 1968-9, would reduce global growth by 2%. Whether the current swine flu turns out to be the “out of the blue” piece of bad news that derails the current buying stampede remains to be seen, but we are cautious. For more on the swine flu situation please read the attendant outline prepared by David Krisel of our Retail Liaison Department, as paraphrased from last week’s conference call with Henry Miller M.S./M.D. from the Hoover Institute at Stamford University.

Speaking of swine flu, in a past life I wrote fundamental research on hog producer, and pork processor, Smithfield Foods (SFD). Therefore, I was very interested when I received this email from a particularly bright financial advisor in our retail branch system. To wit:

“Hey Jeff, I wanted to run something past you. I started buying an ETF ticker symbol COW a week or so ago based on conversations I had with 2 clients that have a lot of knowledge in the hog and cattle industry. The ETF merely tracks the price of beef, and pork, and was near its 52 week low last week. Obviously it is making new lows with the swine flu crisis. The fundamentals in the beef, pork, and poultry industry are extremely compelling now; and, I’d like to think if this swine flu mania blows over it will have just made this an even better buying opportunity. Just a couple bullet points and then if you have any comments, or interest in discussing this situation, you can let me know. Firstly, for the first time in 35 years beef, pork, and poultry production is down year over year. Demand is down as well, but has been down temporarily numerous occasions in the past, yet production NEVER went backwards (it just slowed the rate of increase). When equilibrium is reached, and prices start to recover, the producer will have to hold back animals that would normally be going to market to replenish the breeding herd further reducing supply at the time demand is increasing. Living in Iowa, I see the expansion and contraction cycles firsthand; and, I haven’t seen this type of despair in the hog industry for 20 years, which by the way led to a multi-year expansion in prices. What do you think?”

My response was that I totally agree and so does Curt Thacker in this week’s Barron’s. Accordingly, we suggest participants consider a position in iPath Dow-Jones AIG Livestock Total Return Sub-Index ETN (COW). As always, the details should be checked before purchase.

The call for this week: The longest “buying stampede” chronicled in my notes is 41 sessions. Today is either session 39, if you measure from the intraday low of March 6^th (666 basis the S&P 500), or session 38 if you measure from the March 9th closing low of 676.53. In either event, we have made a lot of money over the last eight weeks and continue to think the trick from here will be to keep that money. Longer-term, we are pretty optimistic. Near-term, we are cautious. If I had to buy something today it would be the emerging markets like Brazil since most of the emerging markets didn’t make new reaction lows in March like the S&P did. Moreover, I think they will be the leaders in the next bull market.

Comments

[Larry House:]

It is pretty risky to hang your hat on one point in time. We need months of data to see clearly.

May 05 10:01 AM

[oldman:]

who needs the additional credit risk of an ETN? Bad idea!

May 05 03:01 PM

[Maxe Paul:]

All signs point to a bear market rally, your weak analysis of the current situation and lack of any key stabalisation points in this article just backs up my case.

I think you should take in some more economic data and come back to us if you still come to such a conclusion.

May 19 09:45 AM