Excellent case against this rally starting a new Bull Market
Excerpted these segments on the thinking of economist Lakshman Achuthan from an article by Ron Markman on MS Investor.
Some points have been brought well explored by our astute regulars here. But along with other important points Achuthan adds an important review of time leads and lags vis a vis fundamental recovery signals vs historical bull market kickoffs points.
Don't usually paste something as long as this. But this really is excellent stuff and worth the read.
The verdict is: The rally IS NOT a new Bull Market. We goin' lower. A LOT LOWER...FIRST.
Isopatch
<...determining the likelihood of rebound doesn't need to be a gut-level guessing
game. Independent economists such as Lakshman Achuthan of the Economic
Cycle Research Institute, profiled in that piece, have gotten demonstrably
good at weighing a variety of metrics to determine the timing of the business
cycle.>
<Today Acuthan says facts and figures still line up powerfully against investors'
hopes for an early 2002 recovery. In fact, he doesn't see the likelihood of a
rebound before July. In an interview Friday, he listed three positives weighing
in favor of a recovery and eight against. Here they are:
Positives
1.Rise in equity values. Stock-market moves are a single imperfect
ingredient, not the whole enchilada, in economic forecasts. They do
lead economic recoveries, but they can also give many false signals.
So while it's important to note that the broad market's powerful move up
from the Sept. 21 low provides evidence suggesting that an economic
rebound is at hand, it's likewise important to realize that's only half the
story.
The bad news is that most people seem to think that the typical lead is
six months, but Achuthan says that 50% of the time in the post-war
era the lead has been four months, 25% of the time it's been five
months and 25% of the time it's been three months. Thus if you believe
that the September low was the real thing, then the economic rebound
has to start in December, January or February. Will it? Well, great
minds will differ. But the well-regarded folks at the National Bureau of
Economic Research speculated in their press conference that the
recovery would begin in July 2002. If you date the stock recovery back
three to five months from then, you would expect a cyclical market low
-- that is, prices below the September 2001 low -- between February
and April 2002. Achuthan notes that his percentages are facts, not
guesses, which encompass all cycles in the post-war era. "It's possible
we'll get a longer lead this time," he said, "but given our experience, it's
not likely."
2.Decline in energy prices. Oil and natural-gas prices have declined
sharply in the past nine months, giving consumers a big boost in their
available funds for spending on stuff that can revive the economy. ‘Nuff
said.
3.Explosion in the money supply. Eleven interest-rate cuts since
January in the United States and other measures in Europe have
flooded the global economy with an unprecedented amount of cheap
money -- possibly more than gushed in anticipation of Y2K in 1999.
Lower borrowing costs are bound to result in higher business and
consumer spending -- and whatever's left is almost certainly bound to
find its way into stocks and support the market.
Negatives
1.Initial claims for unemployment insurance. Until last week, the
bulls were able to argue that this leading indicator of employment had
made a change for the better. But on Thursday the thesis was trashed
because initial claims spiked back up. The level of jobless claims has
to fall in a persistent way before economists can forecast recovery.
2.Building permits. The market for housing has been great, but when
economists look for turning points, they turn to the building permits
report. Despite a surprising rise in new-home sales, permits --
especially for multifamily housing -- have been slipping gently since the
start of 2001 and in the past few months have accelerated in the wrong
direction. The number needs to first stop falling, and then to turn up, to
provide a signal that an economic recovery is imminent.
3.Commodity prices. The JOC-ECRI Industrial Price Index -- made up of
18 components divided into energy, metals, textiles and miscellaneous
(e.g. hides, tallow and plywood) -- is resting at multidecade lows. If a
nascent recovery were at hand, there should be enough demand to
cause a rise in commodity prices. A couple of individual commodity
prices have risen lately -- copper's an example -- but turning points are
made when the whole slate of commodities rises together. The global
recession has pushed the price of rubber to a 30-year low, in spite of
the rise in U.S. auto sales thanks to 0% financing. Achuthan says he
would like to see a pronounced, pervasive and persistent move up in
the index before using it to forecast a recovery.
4.Bond quality spreads. Just before recoveries, the price differential
between junk bonds and investment-grade bonds -- e.g., between
bonds rated BBB and AAA -- sharply narrows. Currently the spread is
relatively wide. Thus bond buyers are not exhibiting the sort of
optimism seen in the stock market.
5.Vendor performance. Achuthan looks closely at several of the
answers given by respondents to the National Association of
Purchasing Managers (NAPM) survey each month. Response to
whether "vendor performance" is high or low has been one of most
prophetic in the past. He's a contrarian on this one, because if
performance is high, then there's not enough demand. He wants to hear
that things are being delivered slowly. "If this deteriorates a bit, then
vendors are busy -- and that's a very good sign," the economist said.
6.New factory orders. The "new order" series in the NAPM report
plunged to a two-decade low in November. This can be a noisy number,
with a single big Pentagon order distorting results. But if you strip
defense out of new orders and compare November to a pre-attack
month like August, Achuthan said, you see that the indicator does not
forecast an imminent recovery.
7.Price to unit labor cost. This is a fancy measure of profitability, and
Achuthan pronounces it "really ugly" at this time. It's almost impossible
now for companies to raise prices, and, in a period of diminished sales,
that means that profits get hit. When you consider that profits are
required to fund corporate investment, you have a real problem with the
business side of the recovery. Firms are trying to cut costs by firing
record numbers of employees, but at this point in the cycle, layoffs can
cost more in severance and other expenses than they actually save.
8.Synchronous global recession. Very often there are pockets of
strength abroad to offset the weakness in the United States. In the
1991 U.S. recession, for instance, both Europe and Asia were still
expanding. But right now big multinationals such as General Motors
(GM, news, msgs) aren't making money anywhere -- something that
hasn't happened in 25 years. German economists just announced that
their economy had slid into a contraction, and Japan might be on the
verge of its worst recession in a whole decade of financial capitulation.
In short, Achuthan warns that stocks may have once again forecast a "false
dawn." He knows, and I know, and you know, that eventually the United
States and the world will experience a full and complete economic recovery.
But it is critical for investors to think for themselves and get the timing right --
and not to simply hope that the market has gotten the timing right.
So let's end with some math. In the spring, it turned out that a 1,948-point
move in the Dow Jones industrials from the low of March 22 to the high of May
21 incorrectly forecast an autumn recovery -- and the Dow went on to plunge
3,102 points before turning around on Sept. 21. If the same script were run
from current levels, the Dow would retrace back to the 6,750 area -- exactly its
10-year moving average, last visited in March 1997.>
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