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  • Slow growth, Slim Chance of Double Dip

    Currently, the US economy is still growing, with expansion in both manufacturing and service sectors. It is quite certain that the second half will see slower growth.  There are several headwinds comparing to the first half of 2010. Weak Euro and European austerity will impact exports; Inventory restocking that contributed significantly to the first half of 2010 may be over; Housing market will slow down and home prices may drop further; government impact changed from positive to negative. Labor market has improved comparing to last year, but only generating meager number of jobs; consumers are weaker after stimulus ending, and confidence numbers declined to levels not seen in a year.

    Several key indicators may help predict future direction of the economy: ISM index and ISM service index, Chicago PMI, Philly Fed index, Empire state index and ECRI weekly leading indicator.

    PMI indices

    The Philly Fed and Empire State Manufacturing index reported earlier both gave very disappointing numbers. Both indices declined rapidly from last month and registered first contraction in unfilled order since recession ending. Philly fed also reported contraction in new orders. However, the Chicago PMI for July came in at a very strong 62.3, reflecting brisk growth in the region. The national ISM index reported 55.5, and ISM service index reported a strong 54.3. The service sector provides the majority of job in the US. With ISM indices at current level, the economy, particularly the service sectors, shall be able to generate job growth.

    Period

    ISM index

    ISM Service

    Chicago PMI

    Philly Fed

    Empire State

    Jan-09

    35.5

    43.2

    33.3

    -29.6

    -25.8

    Feb-09

    35.7

    42.1

    34.2

    -36.1

    -31.6

    Mar-09

    36.4

    41.2

    31.4

    -31.4

    -32.3

    Apr-09

    40.4

    43.9

    40.1

    -22.3

    -14.6

    May-09

    43.2

    44.5

    34.9

    -21.7

    -5.6

    Jun-09

    45.3

    46.3

    39.9

    -5.0

    -9.5

    Jul-09

    49.1

    46.7

    43.4

    -8.9

    -0.8

    Aug-09

    52.8

    48.2

    50.0

    0.0

    10.2

    Sep-09

    52.4

    50.1

    46.1

    10.5

    16.7

    Oct-09

    55.2

    50.1

    53.2

    11.8

    33.4

    Nov-09

    53.7

    48.4

    55.5

    18.8

    22.3

    Dec-09

    54.9

    49.8

    58.7

    22.5

    4.5

    Jan-10

    58.4

    50.5

    61.5

    15.2

    15.9

    Feb-10

    56.5

    53.0

    62.6

    17.6

    24.9

    Mar-10

    59.6

    55.4

    58.8

    18.9

    22.9

    Apr-10

    60.4

    55.4

    63.8

    20.2

    31.9

    May-10

    59.7

    55.4

    59.7

    21.4

    19.1

    Jun-10

    56.2

    53.8

    59.1

    8.0

    19.6

    Jul-10

     55.5

    54.3 

     62.3

    5.1

    5.1


    ECRI weekly leading Indicator

    Since early June the ECRI weekly leading indicator has registered 8 consecutive weeks of negative growth. It currently stands at -10.7%. In the history of ECRI leading indicator, the economy entered recession subsequently in all cases that the index was this negative. Statistically, ECRI appears to point to significant chance of deceleration. The Conference Board’s leading indicator was negative for April and June, but positive for May.

     

    Besides the above-mentioned indicators, it is also helpful to examine several key components of the economy.

    Consumption

    Retail has been growing consistently despite recent weakness in confidence data. However, that’s over the very low comparable in 2009. Without dramatic external impact, consumers spending probably will continue to grow slowly in the second half, given the high unemployment rate, lower consumption level comparing to the peak. The Q2 GDP report also showed weakness in consumer spending. In the long term, high unemployment rate is a drag on consumption.

    Business spending

    Business spending is quite strong in both Q1 and Q2 of 2010. Overall, corporate debt level is low and profitability good. So businesses are willing to spend and expand, especially off the very low investment levels of 2009. The hope is, business investment will lead to job creation, and further helps consumption growth, which in turn drives better corporate, profits, and eventually form a positive cycle.

    Government

    The positive contribution from government to the economy won’t be there for the second half. It is estimated that the government and the fiscal policy in the second half will be slightly negative for the economy.

     

    Key sectors

    Real Estate

    Home sales data is weak after stimulus expiration. It now stands at the lowest level post WW II, and the inventory is still growing. However, the most recent new and existing home sales data appear to be not as bad as expected. 

    Auto sales

    Auto sales data was strong in the past several months. Second half is expected to be soft but stable.

     

    Export

    The most important regions of US export are Europe and the developing world. 

    Developing countries

    Although the recovery around the world has slowed, recent data still point to strong growth in developing countries, especially China and Brazil. The rapidly growing demand for materials and industrial goods is a positive for the developed world.

    Europe

    The economic recovery in Europe is better than early expectation. But currency is a negative for the US export. The overall effect may be canceled out.

     

    In summary, I see the following for the second half of 2010:

    Consumer (necessity, discretionary, durables): slightly positive

    Business spending: positive

    Government: slightly negative

    Export: slightly positive

    The aggregate effect on GDP is probably somewhat positive. The biggest risk is, if job creation is not enough to improve consumer spending, and consumers decide to give up at some point, and that in turn impacts the business investment, then the economy may enter another recession. I feel the possibility of that is quite slim, because the current level personal expenditure is already low, it is not very likely that consumers further cut it. The ISM service index also points to a strong service sector recovery and job growth shall follow.

    Overall, the recovery appears to continue according to economic data and analysis on key factors. I estimate the chance of a double dip in the next six month to a year to be about 20%. 




    Disclosure: No positions
    Aug 05 10:39 AM | Link | Comment!
  • A review of recent key macro economic data
    The stock market has just been through another quarterly “sell on the news”. Looking at the chart of S&P 500 index, it seems that the market has its own rhythm: two or three weeks into earnings season, it is time to sell on any news, good or bad.
     
    What’s next after the selling? Time is up again for the quarterly macro economic review. Several important economic reports just came out: Chicago PMI, Q4 GDP and the January ISM index.
     
    The Q4 GDP came out to be a strong 5.7%, although some said it was not strong enough. Personal Consumption Expenditure was 2%, much weaker than typical V-shaped recoveries. The bright spot was a 13.3% increase in equipment and software, signaling pick up in business spending.
     
    Although comprehensive and important, GDP data is a lagging indicator. The Chicago PMI and ISM index are more meaningful in forecasting the future. Fortunately, both reports for January were very strong.
     
    Chicago PMI for January rose to 61.5, blowing away all expectations. It was the highest level since November 2005. Employment of the region also leapt to the highest level in five years. The ISM index registered 58.4, the highest reading for the Index since August 2004. I will not quote the specific numbers here, but both reported accelerated increases in new orders, production and employment, longer supplier deliveries, slower contraction in inventories, accelerated increase in backlog orders and higher producer prices. The exports and imports components of ISM index also reported accelerated increases.
     
    If the manufacturing sector continues to expand at similar pace in the next several months, we can expect another quarter of reasonably good GDP growth. Admittedly, the improvement in employment will be slow, government spending is weak, stimulus not enough, and the real estate recovery takes time. But at this time positives still significantly outweigh negatives, I remain cautiously optimistic that the economic recovery is strengthening, and there is no double dip in sight.


    Disclosure: No positions
    Feb 02 1:19 AM | Link | Comment!
  • Book Review: Chart Patterns
    I recently read the book Chart Patterns by Bruce M. Kamich, published by Bloomberg. It is a book focusing on a very specific area of technical analysis: classical vertical bar-chart patterns. If asked to rate it from 1-5, I give it a 3 star Amazon rating.
     
    As a fundamental investor, I don’t often read technical analysis books. But I do believe in the behavioral side of financial markets, which I think, may be reflected in chart patterns.
     
    I like the author’s idea to focus only on a few category of patterns, those that are probably the most common and useful ones, such as head and shoulders pattern, double top/bottom, triangles, flags, reversal patterns etc. It is also easy to read, with less than 200 pages.
     
    Although the book gives a pretty good behavioral interpretation of market price and volume dynamics for the major top and bottom chart patterns, I’m disappointed by the chapter on continuation patterns, that is, triangles, flags, pennants and wedges etc. I have to admit that I have a poor understanding about technical analysis. My last reading on these patterns was long ago and they were completely beyond my understanding. I was hoping this book can demystify them for me, but I was disappointed that the differences between these patterns are still blurred to me after reading this book.    
     
    In summary, this is a book for people who want to have a better understanding of a few major categories of chart patterns: major tops and bottoms, continuation patterns, reversals, etc. Those who want an encyclopedia of chart patterns should probably look elsewhere.


    Disclosure: No positions
    Jan 31 11:53 PM | Link | Comment!
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