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The Economic Cycle Research Institute (ECRI), a New York-based independent forecasting group, released its latest readings for its proprietary Weekly Leading Index (WLI).

For the week ending March 30, 2012:

  • WLI is at 126.5, up 0.7 from the prior week's revised reading of 125.8.
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth rose to a positive 1.0%, up from last week's flat reading of 0.0%.
  • The lowest reading for WLI growth on record was -29.9% on December 5, 2008. It turned higher months before the stock market [S&P 500 (SPY)] bottomed on March 6, 2009, at 666.79.

(click to enlarge)

WLI - 34-week high: It has not been this high since August 5, 2011, when it was at 128.5.

WLI growth - 33-week high: This is the first positive WLI growth reading in 33 weeks when it was positive 1.1 for the week ending August 12, 2011.

See charts below for WLI and WLI growth vs. GDP Growth:

(click to enlarge)

Three weeks ago, in an article "Why ECRI Stands By Their Recession Call", ECRI explained why it remains bearish on the US economy and continues to predict a recession.

Friday I asked Lakshman Achuthan, ECRI's co-founder and chief operating officer, about the lastest data on the US economy, specifically positive WLI growth matching a three month upturn in the Ceridian-UCLA Pulse of Commerce Index. Achuthan said year-over-year (y-o-y) growth of WLI has barely improved from its lows and remains "solidly in negative territory." In addition,

Please note that PCI growth y-o-y is still -2.2% and even q-o-q is -4.9%.

With y-o-y growth in all the coincident indicators (GDP, industrial production, personal income and sales) all staying in cyclical downturns, and y-o-y payroll job growth, which had been the only holdout, now rolling over -- as we had predicted a few weeks ago -- it's pretty clear that for now U.S. economic growth is worsening, not improving.

Looking Ahead:

Since ECRI releases WLI numbers for the prior week, and the stock market is known in real time, you can sometimes get a clue for next week's WLI from the weekly change in the S&P 500 or its exchange traded fund, SPY. Notably, in the lead-up to the last two recessions, the WLI turned down months before the stock market did.

Chart of S&P500 vs. ECRI's WLI

(click to enlarge)

With the S&P500 lower now than last week and only 1 point higher than two weeks ago plus Friday's poor jobs report, the recovery in WLI may be running out of gas. Will the Fed announce QE3 to refill the tank?

I continue to believe caution is in order. I continue to take profits in equities as the market rises. Currently my "explore portfolio" is up 9.3% YTD with "only" 66% in equities and the remainder in fixed income earning next to nothing this year. The higher-than-expected return for this allocation comes from taking advantage of the "investment opportunities" ECRI talks about, as well as increased alpha from individual stock selection.

Now that interest rates are up, I am considering moving some of my cash to a bond ETF such as SCHZ, BND, AGG, LAG, TIP or buy more individual TIPS as I think the president may pressure the Fed to start QE3 to help him get reelected. As such I put together a table comparing bond ETFs at "What is the Best Bond ETF for tracking the Barclays Capital U.S. Aggregate Bond Index?" If you have a better suggestion for a bond ETF without leverage, then post it in the comments section here.

Heeding ECRI's warnings and following the footsteps of Warren Buffett, CEO of Berkshire Hathaway Inc. (BRK.B), I think it is never wise to be "all in" the stock market with no cash cushion to buy corrections and bear markets. Likewise, anyone "all in" fixed income is probably losing out to inflation, unless all in TIPS (TIP).

Buffett's Berkshire Hathaway Inc. (Class A Shares (BRK.A), ended 2011 with $37.3 billion in cash on hand, which is 19% of its current $201 billion market cap (market cap data sourced from MSN and Yahoo!).

Notes:

  1. Occasionally the WLI level and growth rate can move in different directions because the latter is derived from a four-week moving average.
  2. ECRI uses the WLI level and WLI growth rate to HELP predict turns in the business cycle and growth rate cycle, respectively. Those target cycles are not the same as GDP level or growth, but rather a set of coincident indicators (including production, employment income and sales) that make up the coincident index. Based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below negative 10, but no recessions resulted (although there were clear growth slowdowns).
  3. For a better understanding of ECRI's indicators, read its book, "Beating the Business Cycle."
  4. SPY is the exchange traded fund for the S&P 500 Index.
Source: ECRI's WLI Rises To 34-Week High, Growth Rate Now Positive

Additional disclosure: I may buy a bond ETF (listed in the article) if the market rallies and rates rise more in the next week or two.