Seeking Alpha

John Furlan's  Instablog

John Furlan has been familiar with financial markets for many of the past thirty years. Please contact him at jf09sa@gmail.com.
My blog:
What's Changing
  • Bernanke Extends Easy Money, Trickle Down to Leading Indicators? 0 comments
    Nov 8, 2009 10:06 PM
    (Note to editors: My last 13 weekly articles were tagged "Market Outlook" and "Economy," thanks very much.  jf)

    Nov 8, 2009
    By John Furlan
     
    Risk markets rallied last week on the view that, following the FOMC meeting Wed and dismal U.S. employment report Fri, the Fed is even more likely to continue to keep rates at “exceptionally low levels” for an “extended period.” 
     
    An “extended period” of Fed easy money would seem to make it more likely that the speculative dollar “carry trade” continues to the upside during the market’s usually seasonally strong period through Jan. 

    (The IMF gave a very slight nod to the “carry trade” systemic risk discussed in my Nov 3 weekly article     in its report to this weekend’s G-20 meeting: “there are indications that the U.S. dollar is now serving as the funding currency for carry trades.”)
     
    In the charts at the end of this article, SPX rallied in the beginning of Sep, Oct, and now Nov (also in the beginning of April, May, June.) China’s Shanghai Composite has started to regain some relative strength (also see chart), China’s market led up by four months last October, then corrected starting in August. 
     
    Of some concern to bulls, last week’s SPX rally was on declining volume into the resistance area, and also that small caps and financials have lost relative strength, with tech perhaps about to do so to energy (also see charts). 
     
    If SPX fails to rally through resistance back toward the top of the Bollinger band at the previous high around 1100, you’ll hear more about a “sell the news” correction and head-and-shoulders top (currently making a right shoulder). Breaking the Oct 2 low (1019.95) would make a lower low and be more serious.
     
    Fed's Newly Stated Conditions Viewed as Lowering Risk of Easing Ending Soon
     
    The FOMC statement added three conditions the Fed is using to gauge how long an “extended period” of easing might be, “low rates of resource utilization [e.g. high unemployment—jf], subdued inflation trends, and stable inflation expectations.” 
     
    Financial markets chose to interpret the Fed’s defining its “reaction function” as a positive sign that it won’t start to end its super easy money policies simply in response to renewed economic growth. Very strong U.S. “productivity” data (i.e. working harder for less, aiding corporate profit margins) also reinforced the market’s rally.
     
    As today's WSJ's “Abreast of the Market” column says:
     
    “much of that [new--jf] money eventually finds its way into financial markets…the amount of cash circulating in the global economy as a percentage of total economic activity. Massive money injections by the world's central banks have pushed that gauge to its highest level by far since Morgan Stanley began tracking it 30 years ago…."First, we enjoy our dinner. Later come the after-dinner speeches," says David Kotok, president of money-management firm Cumberland Advisors.”
     
    Latest Global Leading Indicators Still Strong, Tiny Signs of Slowing?
     
    For this speculative risk market game to continue, the global economic response to this flood of free money must continue to be at least mediocre, otherwise earnings growth projections will be called into question.  (A mediocre recovery also helps keep in check the populist backlash to current policies which have encouraged the return of speculator hubris like that in the preceding paragraph.)
     
    There were several new reports on leading economic indicators this past week, data from which I show at the end of this article.  Staying in sync with these leading indicators is very important for investors.
     
    1) The monthly JPMorgan Global PMI came out Nov 4 (2-page pdf available here also two separate releases on global services and manufacturing at same ISM site here), saying:
     
    “The global economic recovery gained further momentum in October. Activity and new orders rose at the fastest rates since late 2007. However, the labour market continued to disappoint, with job losses recorded for the eighteenth month in a row and at a quicker pace than in September. At 54.2 in October, up from 53.2, the JPMorgan Global All-Industry Output Index posted its highest reading since November 2007. At its current level, the output index is consistent with growth of global GDP of around 3% q/q saar.”

    3% growth is better than negative, but it is not a robust recovery.
     
    2) The monthly OECD Composite Leading Indicators (CLI) came out Nov 6 (4-page pdf available here). If you look at the second section of data in the OECD table shown below (left click to enlarge), “Change from previous month (point)”, the positive change has declined slightly in the last two months for four large areas, 2 months for “Major Five Asia” (CLI data lags one month).
     
    3) ECRI Weekly Leading Index (WLI), which I have reported on many times, is available here.  Friday saw the first negative values since the Mar 6 simultaneous low in WLI and SPX in both the 1-week change of WLI's 4-week moving average and the 4-week change (second derivative) of WLI's AGR (annualized growth rate, first derivative). You can see this now three-week slight downturn in WLI's AGR in the chart at the end of the article (left click to enlarge).
     
    U.S. Consumer, Health Care Bill Center Stage This Week
     
    The other market moving event the past week was CSCO’s better-than-expected earnings (BTE) report and CEO Chambers’ upbeat comments on Wed.  Perhaps strong demand for smartphones and streaming video have greatly upped the deluge of IP packets on the Internet that must be switched and routed.
     
    The next look at the state of the U.S. consumer going into the critical year-end holiday season will come this week, when several leading retailers such as WMT report earnings; initial jobless claims on Nov 12 (consensus a still abysmal 510k from 512k the prior week); and the preliminary U. of Mich. consumer sentiment report on Nov 13 (consensus 71.0 slightly up from 70.6).
     
    The other big news of the week was the very narrow House passage Sat night of a health care bill, whose fiscal impact would not seem to be in line with the budget tightenging message (euphemistically called "reforms") of the IMF in its report to this weekend’s G-20 meeting (16-page pdf here).
     
    “The challenges of placing fiscal policy on a sustainable path—both political and economic—are greater than for normalizing monetary policy. The scale of fiscal adjustment required to ensure fiscal sustainability will be large, particularly in advanced economies. This suggests that fiscal policy changes that have long-term effects but that do not affect the economic recovery in the short term (such as entitlement reforms and strengthening fiscal frameworks and institutions) should be implemented soon to enhance credibility.” (p 8)

    Charts
     
    Along with leading economic indictors, I consider relative strength charts, shown below, very important.  Why be long something persistently losing relative strength to something else (its opportunity cost)?

    LEFT CLICK ON SOME CHARTS TO ENLARGE.






    ACWI is a lightly traded ETF that mirrors the MSCI All-Country World Index which can be used in real-time trading as a simple proxy for global equities.  20-day EMA now just below 50-day EMA.






    20-day EMA has just crossed slightly below 50-day EMA.  Can post-Mar 9 rally continue if financials lose too much relative strength?



    I can't draw the trendline on this free chart, but connecting all the dashed line lows, tech coming very close to losing relative strength to energy.



    Source: ISM.  Left click to enlarge.



    Source: OECD.  Left click to enlarge.



    Source: ECRI.



    Source: IMF.  Left click to enlarge.

Back To John Furlan's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Full index of posts »
Latest Followers

Latest Comments


Most Commented
  1. ECRI vs Roubini, Round Two (1 Comment)
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.