You can observe a lot by watching. –Yogi Berra
I have a bit of contrarian in me, and it makes me nervous when everybody gets on one side of the boat. Recently, I’ve noticed some large number of people saying that at recession or contraction is near and the market is headed down. So..uh…what does this mean?
Maybe nothing. Bumblebee has been on the “doesn’t look good” side for more than a year. So maybe the world is just catching up. But, still, if the world is caught up, maybe there is a diminishing number of people out there who aren’t yet flat or short. And with a shortage of sellers, the market isn’t going down, because it’s already gone down, and the pullback is over.
To answer the question with some degree of objectivity, I look to my indicators, by which I mean the graphs of economic activity that I rely upon to gauge the economic background and which, according to the Bumblebee Grand Unified Stock Predicting Theorem (BGUSPT) allows me to infer the future of stock prices.
The BGUSPT is anchored in corporate profits. More exactly, it is anchored in the level of real and anticipated corporate profits – which is a way of accounting for the fact that perception is reality as far as market punters are concerned. But reality does have a way of catching up with perception, and that is why many people lose money in the market.
There is also the occasional situation where reality is different from perception, but reality changes so fast that it becomes coincident with perception before perception figures out its error, which leads punters to believe they were right all along, which leads them to hold on to their perceptions into the next reality v. perception fight, and that is also why many people lose money in the markets.
Well, there are lots of ways to lose money.
Now the Bumblebee understanding of the Stock Market Universe is quite simple: profits (real and imagined) drive everything. If you don’t believe this, just study what happens when earnings are reported. And because our view is simple, it is quite easy to explain it to my readers.
Schumpter and Keynes agreed that money profits drove capitalism. Readers who are business managers probably think it is obvious prima facie. Businessmen invest when they perceive an actual or future demand for some product. Absent demand, there is little incentive to do anything.
Suppose, for example, I decide to start a business writing a blog and make money selling subscriptions. Some investment is necessary. I need an internet connection, a computer, software, and so on. I look around and find that I can borrow from the local bank at 0.5% per annum. Do I think, “Great! Let’s get to it!”? Not at all. I think, “Yes, that’s all very well, but who will pay for anything I have to say? There are a vast number of blogs already. Is there any room (i.e., demand) for another?”
Financial Stress Index
And right now, demand is lacking in the economy. One reason is because the economic recovery since 2009 has been predicated on financial stimulus, not demand creation; and this because some economists believe that investment, not profit, drives the capitalist economy and that if you create enough cheap money, you will get investment; and also because the economy was placed in the hands of people determined to save their friends on ‘Wall Street’ and who expropriated the ‘investment drives capitalism’ model for that purpose.
OK. Whether you agree or not, it is easy to see where I’m coming from on this subject. But there is a more difficult side of Bumblebee Investing, and that is timing buying and selling decisions in the stock market.
It is all very well to know that the general economy is going to slow down and that consequently stock prices are likely to fall because businesses profits will decline. The problem is that market prices do not conveniently correspond with one’s perception of the economic situation. This could be because one is wrong, but even more often it is because the players in the markets do not or will not see what is happening. Therefore, we have to figure out someway to enter the market just when the players begin to realize what a great person you are because you figured it out months ago.
At Bumblebee, I do have a way to decide when to enter and exit, but it is based on a rather complicated and Cryptographic Top Secret Proprietary Econometric Model (CTSPEM) that I couldn’t explain very well if I wanted to; which I don’t, because that would render me superfluous, blogwise.
It is this model that I base my entry and exit calls, that is, time the market once I believe the economy is going up or down in a meaningful way. You sort of have to trust me on this because it’s a trade secret, but our results are published on this blog so that visitors can at least see how it has done in the past.
Bumblebee Investing’s general position remains the same as I said a couple of posts ago:
Probably the most succinct summary of the economic situation is that business is unwilling to deploy capital because of lack of demand and has been attempting to preserve profits by reducing expenses, including wages, thereby worsening the lack of demand. This is a vicious circle that increases the pressure for an economic downturn.
Bumblebee does not at this time see signs of a major contraction. Employment data is not bad. There is still no sign in bond yield spreads of difficulty. AAA bond yields, which frequently spike before a recession, have not done so. But for stock prices, we believe there is currently no reason to be a buyer.
The market started with a weak attempt to rally and spent the rest of the week trying to decide whether to go down or not. I was hoping the Employment Situation Report on Friday would precipitate something one way or the other, but though the market sold off, it didn’t get below support at the September 29th low.
Still, price did close beyond the (daily) up channel and not far from the support. I’m contemplating a short term short on Monday if early weakness develops indicating a test of the recent lows. It is well to get in early on such trades because if traders decisively break support, the market can sell off very quickly.
Bumblebee took note of a very sharp 2.9% drop in December Factory Orders reported on Thursday, which is consistent with our view of contraction in the economy. Meanwhile, the Baltic Dry Index is at the lowest level in its history. I mean you can’t just ignore this stuff.
The headline numbers for the Employment Situation on Friday were weak. December’s Nonfarm Payrolls number was revised downward 30,000 to 262,000 and the number for January was just 151,000.
After examining the report, though, the market decided that it wasn’t as bad as it seemed at first glance, because the Unemployment Rate (4.9%) and the Participation Rate (62.7%) were improvements. Also, though the December number was revised downward, the November number was revised upward 28,000. And Average Hourly Earning and Average Workweek both increased beyond expectations. Consequently, market traders did not feel empowered enough to move prices below support, as noted above.
So, make of the reports what you will, they did nothing to encourage Bumblebee to a more sanguine view of the economy.
GLOBAL ECONOMY – Global factories parched for demand need stimulus
“January surveys of global factory activity released on Monday showed the new year began much as the old one ended – with too much capacity chasing too little demand.”
Bank of America: The Oil Crash Is Kicking Off One of the Largest Wealth Transfers in Human History
Three trillion dollars
S&P 500 Earnings Outlook: Gross
The Reformed Broker
“Savita Subramanian’s Equity & Quant Strategy group at BAML looks at the earnings outlook trend for the S&P 500. On a monthly basis, the trend in downward revisions is the worst they’ve seen since March of 2009.”
The Global Economy Could Fall Farther and Faster Than Pundits Expect
Of Two Minds
“Systemic fragility doesn’t respond to central bank jawboning or Keynesian claptrap; unlike those ‘policy tools,’ fragility is real.”
Death Throws of the Bull
David Stockman, Seeking Alpha
“The fast money and robo-machines keep trying to ignite stock rallies, but they all fizzle because bad karma is beginning to infect the casino. That is, apprehension is growing among whatever adults are left on Wall Street that 84 months of ZIRP and $3.5 trillion of Fed balance sheet expansion, aka money printing, didn’t do the trick.”
The West is Traveling the Road to Economic Ruin
Paul Craig Roberts
“Michael Hudson is the best economist in the world. Indeed, I could almost say that he is the only economist in the world. Almost all of the rest are neoliberals, who are not economists but shills for financial interests.”