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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Bruce Brown who wrote (76744)	5/10/2001 8:01:48 AM
From: Bruce Brown	Respond to of 99985

Tony Crescenzi wrote an article on this at TradingMarkets.com. tradingmarkets.com Excerpts: ===== Going forward, the market's ability to overlook lagging but weak employment data will only stay in play so long as the leading indicators on the economy point north. Should these leading indicators turn south, it will be a whole new ballgame. But for now, the markets are latching onto a number of key leading indicators that suggest an economic rebound is around the corner. Here are a few of them: 1) Housing activity: In March, total home sales (new and existing homes) reached a record. The housing sector tends to provide benefits to the economy for 18 months or more. Moreover, the multiplier effects from the housing sector are bigger than perhaps any other economic sector. The strength in housing is therefore an enormous plus for the economic outlook. 2) Inventories: With inventories having posted their biggest drop in 10 years last quarter, inventory levels are now at manageable levels. With the bulk of the economy's inventory adjustment essentially complete, increases in production are around the corner. 3) Money supply: Led by the Fed's sharp interest rate cuts, the money supply is growing at an extremely rapid rate—even after taking into account the recent shift from stocks to bonds (this lifts the money supply, especially the Fed's M2 and M3 gauges). Even considering the shifts in capital, strong money supply growth has historically been bullish for the economy. 4) Increased credit borrowing: The sharp gains in the money supply are rooted in the expansion of bank credit and increased borrowing. Both are bullish for the economy as individuals and corporations that borrow money today will be spending money tomorrow. The proof: Corporate bond issuance is up roughly 40% from year ago levels; commercial and industrial loans are up at a roughly 7% rate (despite sharply reduced inventory investment); mortgage refinancing is running six times higher than in 2000. 5) Yield curve: The yield curve has historically been one of the best leading indicators on the economy, foretelling events 12 months in advance compared to the 6 to 9 month lead the stock market provides. With the yield curve having begun its steepening trend at the end of last summer, an economic rebound is not likely far away. 6) Cyclical stocks: Cyclical stocks continue to significantly outperform the broader market and are a sure sign of investor optimism in the economy. 7) Strong dollar: Despite the sharp slowing in the U.S. economy, foreign investors have stayed invested in the U.S, thereby reducing the cost of capital for U.S. companies. Foreign investors apparently believe that a proactive Fed will help to maintain Corporate America's deep competitive advantages over the rest of the world. In Europe, for example, by refusing to lower interest rates, the European Central Bank has missed an enormous opportunity to help European companies gain ground on the U.S. The ECB's outdated focus on inflation will do little to reduce Europe's long-term growth gap with the U.S. Investors apparently recognize this, judging by capital flows and the dollar's strength. 8) Industrial commodity prices: Following a steady downtrend, industrial materials prices have begun to tilt upward. The Journal of Commerce index, for example, has jumped 3.7% since it bottomed at a 22-month low on April 2nd. Presumably, investors active in the industrial commodities are anticipating an economic rebound. 9) Tax cuts: There will be $100 billion of tax cuts released into the economy this calendar year. Money should begin flowing in starting sometime in July. Since Americans simply do not save, nearly every extra penny of the tax cuts will likely be spent. ...If the markets continue to turn their back on the weak jobs situation, it would not be the first time. Historically, in fact, the equity market has had a penchant for ignoring employment data. During the last recession back in 1990-1991, for example, although the unemployment rate rose sharply, so did the stock market. The S&P 500, for example, which bottomed in the middle of the recession in October 1990, gained 45% even as the unemployment rate soared from 5.9% in October 1990 to 7.8% in June 1992. Similar market behavior occurred in the previous recession in 1982. The Writing Was On the Wall The reason for this seemingly odd behavior relates to the simple fact that investors recognize that the employment situation lags the rest of the economy and is a coincident indicator at best. Since forward-looking markets are always looking ahead, so employment statistics don't resonate much on Wall Street-by the time the unemployment rate starts rising, the markets have already discounted that likelihood. ===== BB