AAForecast.com

Commentary

Aug 29, 2010

 On this page there are seven different views of the economy and the stock market.  Consider this list to be like a stop light. Green means to Invest long, Yellow means invest with caution or get ready to invest, and Red means to be in cash or invest short.

1. Industrial Production Forecast - The rate of growth of the economy should continue until after the 3rd quarter of 2011.
2. Federal Funds Forecast - suggests we are entering stage 2 of the economic cycle.
3. The Unemployment Forecast suggest the unemployment rate has already peaked and is starting to decline.
4. Long Term Momentum Oscillator suggests the investor should not be invested in the market.
5. S&P 500 Long Range Forecast suggests the investor should be fully invested in the market until April 2011.
6. Russell 2000 Forecast - The short term process may have changed after the unemployment announcement.
7. Russell 2000 Momentum Oscillator suggests the investor should not be in the market.

(In the paragraphs that follow, the factual information came from the Wall Street Journal or CNBC.  The analysis and opinions are mine.)

The Commerce Department revised down its estimate for the second quarter growth of the GDP from 2.4% to 1.6%.

The Federal Reserve had its annual retreat at Jackson Hole, Wyoming last Friday. Bernanke outlined four steps the Fed could take to help stimulate the economy.

1. Resume purchases of long term securities in order to push long term rates down.   James Bullard (President of the St. Louis Fed) revealed on CNBC last Friday that the Fed is converting its $1.2T of Mortgage Backed Securities (MBS) to Treasuries as the mortgages are refinanced.  This is a brilliant move.  Direct purchases of Treasuries will depress the entire yield curve not just the short term interest rates.  Mortgages will be affected along with all other long term corporate or municipal bonds.  The lower long term interest rates will encourage companies to put the money to better use than just holding it as cash.   Purchases of Treasuries using QE (quantitative easing) money essentially erases $1.2T of government debt at the same time interest rates are depressed.
2. Lower the rate banks get for reserves kept with the Fed. It currently stands at 0.25% and there is not a lot of freeboard to go lower.  If the Fed lowers this rate, what is to say the Banks won't lower their CD, savings, and checking rates similarly.  This option may not be very effective.
3. Promise to keep rates lower for a longer period than markets currently expect.  An appeal to the emotions with a "Trust the Fed" strategy.  The government is a fickle partner.  Everyone knows the government will do what it needs to do when it needs to do it.  This is not a real strategy.  Greenspan perfected the tactic of talking like a hawk and acting like a dove.  Is this "talk like a dove and act like a dove"?
4. Raise the Fed inflation target to more than 2% from its current informal target of 1.5 to 2%.  This is another emotional play insinuating that the Fed is willing to print money to make the 2+% inflation target happen.  But would it print money and funnel it through the government to get it spent? Absolutely!  As long as the government has an unsupportable debt/GDP ratio, Bernanke will be obligated to buy Treasuries with QE money.

What Bernanke failed to list was the "deliver cash by helicopter" scenario.  All monetarists know they can stimulate consumption if they would just put the money in the hands of the consumer.  They call it "helicopter cash".  Ironically this is exactly what the economy needs.  The disadvantage is that the money would flow to China, India, Brazil, and all those countries that have a positive trade surplus with us and would cause enormous inflation there but that is the price a country must pay if it wants an undervalued currency.

No one will argue that small companies generate far more jobs than the large ones yet all the stimulus activity is focused on large companies.  Is anyone thinking on how to get the money to the small companies and bypass the banks altogether?  Has anyone determined why the banks aren't lending and removing that impediment to money flow? 

Because the Fed's number one goal is to remain independent of political oversight by Congress or the Executive branch, it must do its best to serve the political purposes of the government as if it were an agency of the government.  The fact that Bernanke is spending his QE money buying Treasuries suggests that he is more concerned with government debt reduction than with creating jobs - though he might be able to do both to a certain extent.

Reducing the debt undercuts a major argument of the Republicans against Obama but there is a lot of debt and it will take time for the issue to die away.  If unemployment remains high as Obama's reelection nears, the monetary strategy will shift from buying treasuries to helicopter cash in order to create jobs quickly.  If it comes too close to the election, it will appear that the government is buying votes.

All forecasts are provided "as is".  I guarantee nothing but I try to provide the best forecasts or investment timing indicators that exist.  The reader accepts all responsibility for the use of this information.  I try to provide enough "other" indicators to help paint the big picture. 

Industrial Production Forecast

Aug 22, 2010 updated monthly

The Industrial Production Index is provided by the Federal Reserve to indicate the health of Industrial Production in the US. 

The growth rate of the Industrial Production Index (IP) was 2.27% for the three month period from the end of April through the end of July.   Curiously the three month growth rate is close to the annualized growth rate of the GDP for the second quarter.  The growth rate for July was .98%.

If the IP grows at the rate forecasted, there is no reason to not expect the stock market to follow.

Federal Funds Forecastst

Aug 8, 2010 (updated monthly)

The Federal Funds Rate remained steady at 0.18%.   The forecast has not been updated.

Unemployment Forecast

Aug 15, 2010 (updated monthly)

The unemployment rate for May moved down to 9.49% from 9.51% - an insignificant change.  Because the Bureau of Labor Statistics (BLS) rounds to the nearest tenth of a percent, they reported unchanged unemployment numbers.

The updated forecast suggests that the unemployment rate should come down faster than in previous recessions. 

Long Term Momentum Oscillator

Conservative Investment Timing

Aug 29, 2010

The S&P 500 fell 7.1 points for the week for a loss of 0.66%.

The long term momentum oscillator continues to recommend being out of the market.

The conservative investor should be watching this chart most closely.  Every once in a while it might give a spurious sell signal but it is important to heed it if you are most concerned about capital preservation.

S&P 500 Long Range Forecast

Aug 29, 2010

The graph to the right the most accurate long range forecast of the stock market.  While it doesn't tell you what will happen day to day, it reveals where we are in the business cycle and what to expect from the stock market in general.

The forecast forecast suggests not only that the market is undervalued by 3 points but that the general trend should start moving upward from here.

Russell 2000 (IWM) Forecast

Aug 29, 2010

The IWM short range forecast suggests that the stock market may move down to 59 before rebounding.

Please remember that forecasting the day to day movements of the stock market is prone to significant error. 

Russell 2000 Short Term Momentum Oscillator

Aug 29, 2010

The momentum oscillator for IWM is still in the sell mode.