I don’t put much stock in the Conference Board’s Index of Leading Indicators. Seven out of 10 of the indicators are actually economic data—the Commerce Department released building permit data, for example, on Tuesday, May 18 —that were published before the index was released and that have already been factored into economists’ forecasts and stock prices.
In other words, what’s leading about this index?
But when the market is in a receptive mood and is looking for confirmation of its up or down trend, the index can be psychologically powerful. And that’s what happened this morning when a negative reading on the index—it fell by 0.1% when the consensus was looking for a positive 0.2% –confirmed investors’ worries about the U.S. economy. (It certainly didn’t help market psychology that initial claims for unemployment for the week that ended on May 15 came in significantly above consensus.)
The leading indicators index is falling so the U.S. economy is slowing and could even be headed into a double dip recession, just as the market fears in its worst nightmares.
That may be true—although I doubt it—but you sure can’t prove it from this index.
But let me give you my own leading indicator—on the index of leading indicators: It’s going to fall again when the May reading is announced in June.
That’s because the backwards looking index of leading indicators uses stock prices and initial claims for unemployment as two of its ten factors.
From today’s numbers we know that initial claims for unemployment rose to 471,000 for the week that ended on May 15. That’s up from 446,000 for the week that ended on May 8. My fearless prediction: initial claims for unemployment for the week that ended on May 15 will still be up when they get factored into the index of leading indicators when the May report is issued in June.
My equally fearless prediction: when the index factors May stock prices into the numbers for the June release, May stock prices will still indicate a stock market correction.
In other words, right now the odds are extremely good that the May index of leading indicators will be down again when it’s released in June.
But then we already know that, don’t we?
andante,
Keep in mind that the Fed printing money is only one factor in the whole inflation/deflation equation. If there is too much industrial production for consumer demand, then the economy will move towards deflation, regardless of the money supply.
Also, where is all that money the Fed has been printing? Oh yeah, sitting in bank reserves. That money hasn’t hit the economy yet. And that $6 trillion sitting in money market accounts isn’t doing anything in the economy yet.
If massive sovereign debt is the overiding issue that is hanging over and creating fear in the markets, and growth is what is needed to overcome the debt, then the ECRI WLI and CB LEI saying that growth will be slowing is a negative for recovery and a possible prognostication that the recovery will be anemic. An anemic recovery is what Roubini has been predicting as he made the rounds of all the financial TV shows over the past week.
Even though the CPI decreased, can’t really talk about deflation because the Fed is printing money at a high rate. Gold sold off because investors wanted liquidity. The market since the crash has been populated mainly by institutional investors and traders. Private investors haven’t come back into the market to any extent. A recent estimate showed there is 6 trillion dollars sitting in money market accounts. In the past these private investors were mainly “buy and hold” so this may mean that the markets behave a little more skittishly than when they were in.
RE: Leading economic indicators.
Recession start is approximately six months after LEI peak. Check it out!
Thoughts?
To paraphrase Dylan, don’t criticize what you don’t understand. If you want to understand the concepts of leading economic indicators read the book by Achuthan and see the ECRI weekly leading index at businesscycle.com—as well as their recent news articles. They are better than the CB IMO. The ECRI WLI is telling us that economic growth will slow down from its current pace over the next few months, but really nothing more than that and the CB LEI is saying about the same thing.
Thanks Ed!
EHG,
I did say that tongue-in-cheek, although it is possible. When I think the market has hit it’s low, I plan to sell those (as well as FAZ, SQQQ, and SDOW).
These are all market timing plays. You don’t buy triple shorts with the intent to hold them long term. With market fluctuations, a triple short will lose it’s advantage over time. You take the quick profit, then get out.
Kathy,
In all seriousness, if I do decide to do it, it won’t be based on the Index of Leading Indicators. As Jim pointed out, all it is doing today is confirming the market’s already bearish sentiment. I have no idea at this point in time how the market will feel in June.
I will add that what I did this time on this very short term bear play was to diversify. You’ll note I covered many bases with these shorts: SDOW (Dow 30), SQQQ (Nasdaq), FAZ (Financial sector), TZA (Small cap) and BGZ (Large cap). If the entire market crashes (as I thought), it doesn’t matter. But what if I was wrong? At least I had a few areas to gain profits to offset losses. The only way I would have totally lost was if the market turned bullish, but that was highly improbable (economics and market sentiment was working heavily against that possibility).
Jim:
WHR (Whirlpool) has fallen off a cliff in price today (down below 94 as of this post). I would assume this would make it a very good buy based on your recent stock recommendation of the company. Please let us know (or if anyone else has any thoughts) if this view has changed.
Ed,
Specifically which short fund will you use?
Ed,
I did not undestand your note. Aren´t you currently short with BGZ and TZA? Are you going to sell then and buy them again in June?
Jim,
Thanks for the heads up!
Note to self: Short the market when the Index of Leading Indicators comes out in June…