Monthly Archives: July 2010

U.S. Dollar Target

On July 8 I wrote my last post concerning the U.S. Dollar.  In the last line of that post I said “…I continue to believe the U.S. Dollar is highly vulnerable to a substantial decline.”

As “substantial decline” is somewhat open to interpretation, I would like to clarify what I meant.

Here is a chart of the U.S. Dollar on a monthly basis since 1983:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

As one can see, the current price of 81.64 is approaching the technically significant 80-level.  This level has served as technical support on a number of occasions.

If that level is broken, there is not much precedence from a longer-term perspective.  For many reasons I doubt that the 70.7 level reached in 2008 will serve as any type of significant technical support.  Below the 70.7 level is obviously a “new frontier” with no obvious strong technical support.  In essence, from a technical perspective the downside would appear rather open-ended.

From a fundamental perspective, a substantial dollar decline appears likely as well.  As I wrote in my January 13 U.S. Dollar post, “Many people, especially those of the “hard money” and “Austrian” philosophies, have long held that many of the actions we (as a nation) have been taking to combat our current period of economic weakness would unduly pressure the dollar.  These actions have included very low interest rates, truly outsized interventions (including “money printing”) and deficit spending.”

Additionally, I would like to address one comment I have repeatedly heard regarding the U.S. Dollar.  Many people believe that the U.S. Dollar is (still) a “safe haven” as it has increased in price during The Financial Crisis of 2008-2009 as well as market turmoil during this year.  As such, this purported continual “safe haven” status is supposed to support the idea that the U.S. Dollar is strong fundamentally.

While I see the reasoning behind this logic, I don’t believe that this logic or interpretation of recent upward Dollar movements is correct.  Many complex factors impact the price movements of the U.S. Dollar, and I wouldn’t assume that just because it has recently increased during periods of market stress that it will continue to do so.

In summary, I continue to believe the U.S. Dollar is highly vulnerable to a substantial decline.  This decline has the potential to be rather open-ended in nature, as supported by both technical and fundamental factors.  Once the 70-level is broken, the U.S. Dollar decline would likely become very pernicious and levels of 50, as well as substantially below, should be considered possibilities.

Should such a U.S. Dollar decline occurs, this currency weakness alone would create an entire new set of severe economic problems and challenges.

back to <home>

SPX at 1113.68 as this post is written

Updates On Economic Indicators July 2010

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The July Chicago Fed National Activity Index (CFNAI)(pdf) updated as of July 26, 2010:

The Consumer Metrics Institute Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from July 26, 2010:

“The July update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing to 2.5% in December. The end of government stimulus spending and inventory buildup combined with continuing high unemployment, a weak housing market, tight credit and high debt are behind the slowdown.

The index predicts future real GDP growth (gross domestic product, adjusted for inflation) based on 11 leading economic and financial indicators.

Four of the 11 indicators were positive in July, down from five last month and the lowest number since USA TODAY first published the index in June 2009.”

The ECRI WLI (Weekly Leading Index):

As of 7/16/10 the WLI was at 120.17 and the WLI, Gr. was at -10.5%.  A chart of the Weekly Leading and Weekly Coincident Indexes:

The Dow Jones ESI (Economic Sentiment Indicator):

The Indicator as of June 30 was at 40.3, as seen below:

An excerpt from the June 30 Press Release:

““The ESI’s modest and steady rise over the last couple of months is a positive sign, but the U.S. is not out of the woods yet,” Dow Jones Newswires “Money Talks” Columnist Alen Mattich said. “Anxiety about the U.S.’s employment conditions and questions around Europe’s stability are key concerns that are unlikely to subside soon.”

The Dow Jones Economic Sentiment Indicator aims to predict the health of the U.S. economy by analyzing the coverage of 15 major daily newspapers in the U.S. Using a proprietary algorithm and derived data technology, the ESI examines every article in each of the newspapers for positive and negative sentiment about the economy. The indicator is calculated through Dow Jones Insight, a media tracking and analysis tool. The technology used for the ESI also powers Dow Jones Lexicon, a proprietary dictionary that allows traders and analysts to determine sentiment, frequency and other relevant complex patterns within news to develop predictive trading strategies.”

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, updated through 7-17-10:

The Conference Board Leading (LEI) and Coincident (CEI) Economic Indexes:

As of July 22, the LEI was at 109.8 and the CEI was at 101.4 in June.

An excerpt from the June 22, 2010 Press Release:

“”The indicators point to slower growth through the fall,” says Ken Goldstein, economist at The Conference Board.”

“New Financial Conditions Index”

I wrote a post concerning this index on 3/10/10.  There is currently no updated value available.

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

back to <home>

SPX at 1113.68 as this post is written

Consumer Metrics Institute’s Readings

I have been following The Consumer Metrics Institute’s work since March.  I have previously written two posts focusing on their work (both found on March 31), as well as included it in the monthly “Updates On Economic Indicators.”

To briefly summarize, I find their work and methodologies very interesting, especially given that they appear quite different than other such measures that purport to depict/predict economic activity.

Here is one of their current charts, that of the Daily Growth Index:

Given its proprietary methodologies and relatively limited history, it seems likely that varying interpretations of The Consumer Metrics Institute’s data can be supported.   My interpretation of the chart is that the growing “rift” between GDP and the CMI’s Consumer Growth Index is significant.  This begs the question as to which trend will prove accurate going forward; that of GDP growth around 3% (that which is the current consensus among economists for both full-year 2010 & 2011) or that of the CMI’s Growth Index, which seems to be indicating some type of impending negative (perhaps significantly so) GDP growth rate?

Of course, one can argue that the CMI’s growth rate can suddenly materially increase, which would likely support a positive GDP growth rate.   Of course, such a sudden increase is possible, but my “guess” (which is seemingly all that one can offer, given the proprietary nature of the data) is that such is unlikely.

Of further note is the CMI’s “Contraction Watch” chart (not shown) and its implications.

Of course, the CMI’s readings of weakening economic activity are not entirely unique.  ECRI’s recent WLI Growth readings have generated much discussions lately given the WLI Growth’s significant and rapid decline.

It should be very interesting to see how the CMI’s readings evolve as compared to actual economic activity…

back to <home>

SPX at 1115.01 as this post is written

4 Confidence Charts

Here are four charts reflecting confidence survey readings.  These are from the SentimenTrader.com site.

I find these charts valuable as they provide a long-term history of each survey, which is rare.

Each survey chart is plotted in blue, below the S&P500:

(click on each chart to enlarge image)

Conference Board Consumer Confidence, last updated 6-29-10:

University of Michigan Consumer Confidence, last updated 7-16-10:

ABC News Consumer Comfort Index, last updated 7-8-10:


NFIB Small Business Optimism, last updated 7-15-10:

As one can see, these charts continue to show subdued readings, especially when viewed from a long-term perspective.

These charts should be interesting to monitor going forward.  Although I don’t believe that confidence surveys should be overemphasized, they do help to delineate how the economic environment is being perceived.

back to <home>

SPX at 1094.59 as this post is written



Infrastructure And The Economy

The Wall Street Journal had an article on July 17-18 titled “Roads to Ruin: Towns Rip Up the Pavement.”

The story highlights the practice of converting paved roads to gravel instead of repaving them in order to save money.

This is yet another example of our (national) inability to maintain our infrastructure.

I believe that the current state of our national infrastructure represents a “silent crisis.”  It is not one which receives a lot of press or attention, yet is very significant for a variety of reasons.

Apart from the obvious risks posed to citizens from decrepit, crumbling infrastructure there are other broader issues.   The longer one waits to fix the existing infrastructure, the higher the cost.  Needless to say, at this time there is not trillions of dollars available to make the needed repairs.  As such, one is led to wonder when such repairs will be made.  Even if the trillions of dollars needed were suddenly available, such repairs can’t be made in a short time period due to a variety of factors.

Of course, it is easy to let such repairs “slide”, since the costs are high and few currently seem concerned about the issue.

The state of the infrastructure can also be examined from an economic standpoint.  I view the deteriorating infrastructure as being both a symptom of as well as a contributor to the “economic brownfield” condition that I described in the article “America’s Economic Future – ‘Greenfield’ or ‘Brownfield’?”

back to <home>

SPX at 1093.67 as this post is written

2-Year Treasury: Odd Occurrences

I have written of “odd occurrences” and their significance, most recently in the July 14 post.

The yield of the 2-Year Treasury is one example of these “odd occurrences.”  Here is a 3 year daily chart:

click on chart to enlarge image; chart courtesy of StockCharts.com

Plotted below the 2-Year Treasury yield is the price of the S&P500.  As one can see, the 2-year Treasury yield at .61% is now at a level less than that seen during the height of the Financial Crisis during Q4 2008.

While there are many reasons that can at least partially explain why the 2-Year Treasury yield is so low now, it is still what I call an “odd occurrence.”  Why, during what most believe is an economic recovery, with generally robust financial markets, would investors in the 2-Year Treasury accept such low yields?

Of note, this 2-Year yield has acted strangely in the past; I commented upon the dip in yield during November 2009 in this November 23, 2009 post.

back to <home>

SPX at 1071.25 as this post is written

Finance Reform Bill – A Few Comments

With regard to the finance reform bill, I found a few comments in Friday’s (July 16) Wall Street Journal to be notable.

First, this quote from a story titled “Impact to Reach Beyond Wall Street”:

“”The bill does not respond at all to the causes of the financial crisis,” said Peter Wallison, a former Reagan administration official and co-director of American Enterprise Institute’s financial policy studies program. “Instead, it weakens the U.S. economy and reduces economic growth.”

Second, a couple of quotes from another July 16 story titled “Law Remakes U.S. Financial Landscape”:

“The bill “is a 2,300-page legislative monster…that expands the scope and the powers of ineffective bureaucracies,” said Sen. Richard Shelby (R., Ala.).”

also:

“”We failed completely to understand the complexity of what the impact of the national decline in housing prices would be in the financial system,” said Ms. Yellen, currently president of the Federal Reserve Bank of San Francisco. “We saw a number of different things, and we failed to connect the dots.”

My comments:

I am in general agreement with the quotes from Peter Wallison and Richard Shelby.

I included the quote from Janet Yellen as I believe it is notable, and frankly, I was surprised to see it.

From an “all things considered” standpoint, I don’t believe this bill provides any aggregate value.  It won’t prevent any future financial crisis.   I think it is notable that there is so much negative commentary about this bill from the financial and economic community; some of this commentary is appended to the second story mentioned above.

Furthermore, not only does this bill not provide aggregate value, but it also has the potential to be quite pernicious on numerous fronts.  At this point, it is impossible to predict how this bill will be enacted; however, it is clear that there is outsized potential for many unintended harmful consequences.

back to <home>

SPX at 1064.88 as this post is written

ECRI WLI Growth: Wild Times

As I commented in the July 12 post:

“For a variety of reasons, I am not as enamored with ECRI’s WLI and WLI Growth measures as many are.

However, I do think the measures are important and deserve close monitoring and scrutiny.”

Along those lines, I would like to make comments on the ECRI WLI Growth chart, as seen from a long-term perspective.  This chart is from Doug Short’s blog post of July 16:

As one can see, the chart shows the history of the ECRI WLI Growth vs. GDP and recessions from 1965.

I believe the wild swing from 2008 to the present is very significant for many reasons, of which five are discussed below:

First, as one can see, this swing dwarfs others from a long-term historical perspective.

Second, as many have commented, this depth of negative readings has a high incidence of presaging recessions.

Third, as I have commented extensively, this is yet one more economic statistic that is showing a highly atypical reading, especially if one believes we are in an economic recovery.  This is especially evident when one looks at the currently ECRI reading vs. the GDP reading.  As such, it is a “(negative) outlier” as I have referred to such (most recently in the July 14 post.)

Fourth, another question to ask is how one should interpret such a pronounced spike and then decline?  One thought is that the index may be exhibiting more volatility than in the past – which may distort any historical comparisons, correlations and/or conclusions one may make with regard to its movements.

Fifth, I find the long-term chart (not shown) of the ECRI WLI (Weekly Leading Index) itself to be rather interesting.

Given the above, the ECRI WLI Growth Index, in conjunction with overall economic conditions, certainly should be interesting to watch going forward…

back to <home>

SPX at 1064.88 as this post is written

The July 2010 Wall Street Journal Economic Forecast Survey

I found a few items of interest in The July Wall Street Journal Economic Forecast Survey.

The economists surveyed continue to place a relatively low probability on a “double-dip” recession.  As stated in the article, “Economists, on average, now see the odds of double-dip recession at 20%.”

As well, there a variety of interesting questions asked of the economists.  These questions are seen in the Q&A section of the detail.

The current average forecasts among economists polled include the following:

Ten-Year Treasury Yield:

for 12/31/2010: 3.5%

for 12/31/2011: 4.33%

CPI:

for 12/1/2010: 1.26%

for 12/1/2011: 1.93%

Unemployment Rate:

for 12/1/2010: 9.41%

for 12/1/2011: 8.57%

Crude:

for 12/31/2010: $76.78

for 12/31/2011: $81.01

GDP:

full-year 2010 : 2.93%

full-year 2011 : 2.99%

As compared to last month’s survey, there was little change in the above categories.

(note: I comment upon this survey each month; commentary on past surveys can be found under the “Economic Forecasts” category)

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

back to <home>

SPX at 1096.48 as this post is written