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Commentary Jan 22, 2012 On this page there are 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 caution is advised, and Red means to be in cash. The Unemployment Forecast Industrial Production Jobless Claims Federal Funds S&P 500 Long Term Momentum Oscillator S&P 500 Forecast S&P 500 Short Term Momentum Oscillator IAU Short Term Momentum Oscillator Summary: The December unemployment rate declined to 8.51% from 8.664% in November. Jobless Claims declined to 352K from a revised 402K the previous week. Industrial Production increased 0.4% in December. Real Private Fixed Investment grew at 3.28% in the 3rd quarter (a 13.13% annualized rate). This is very positive for the economy and the stock market. GDP rose 2% in the 3rd quarter (does not support a recession hypothesis). Everything is green for once but, be warned, the rally we are in may come to an end in early February but it will resume. Kodak filed for Chapter 11 bankruptcy protection this week. During the announcement at Kodak, Antonio Perez rambled for an hour on the history of the transition to digital under his watch. Several times he said "no apologies there" despite the end result being the destruction of an icon under his watch. He apparently doesn't think he is to blame. He also cast bankruptcy as the logical next step in the digital transition. Perez positioned Kodak to compete against giants Hewlett Packard, Xerox, Epson, Lexmark in Printing. Both desk top Printing and commercial printing were declining businesses with negative margins or razor thin margins before Perez decided to enter it. Was he thinking that to reap the rewards on ink sales he had to enter the printing business? We know that not to be true yet he persisted on throwing money at a losing business. The only positive was that ink manufacturing took advantage of two Kodak core competencies: chemistry and chemicals manufacturing. Ink manufacturing has had positive returns for the company. Entering the digital camera market positioned Kodak to compete against other giants: Sony, Nikon, Canon, Minolta etc. As the cell phone market evolved, digital images came more and more under control of the phone manufacturer and obviated the need for a stand alone camera. Furthermore Kodak had no core competency in electronics, integrated circuit manufacturing, or competing against companies that renewed their product line in less than one year. As any military person will tell you, the choice of the battlefield is the single most important decision a leader can make. First of all, the battlefield should be worth fighting over. If there is victory, there are riches to be had. The desktop digital printer market was and is definitely not worth fighting over: consumer or commercial. Parts of the plates business is quite profitable but this is not "digital". It is analog and plays to two of Kodak's strengths: chemistry and coating technology. The digital camera business was an attractive business initially until cameras were bundled in with cell phones. This single act diminished the value of the digital camera. It was a flanking maneuver of one cell phone manufacturer with another that had the collateral effect of rendering the digital camera market barren and obsolete - not worth fighting over. To this day Perez has not understood that the digital camera market is not worth fight over and continues to waste money in its pursuit. It's over. Move on. Secondly, the choice of battlefield should magnify your organization's abilities and diminish your opponents' while providing impregnable defenses. Hannibal was able to destroy the Romans legions during the Second Punic war because he attacked or lured the Romans to attack him on the battlefields of his choosing - ones that conferred great advantages to him. Hannibal almost never outnumbered his opponents yet he almost always defeated them. Kodak had no core competency in building and selling digital electronic devices. US companies gave up on electronics a long time ago because it could be done in South East Asia more cheaply. What made Perez think he could contract to a Chinese company to build the camera and make a profit on reselling it in the US? Kodak had virtually no market presence in any country but the US. If this is what everyone was doing, what was the advantage? Did he think the Kodak brand was more powerful than Sony or Minolta in cameras? Were there superior features? Most people would say no - the delay between pressing the trigger and the camera taking the shot was so long that the event you wanted to capture was already over. Thirdly, choosing to pick a fight against an opponent stronger than you is not wise regardless the nature of the battlefield. At the battle of Thermopylae the Spartan 300 fought a Persian force of 30000. They could do this because the actual battlefield front was very narrow eliminating the numerical advantage of the Persians until the Spartan endurance ran out or they were all killed. In the end, the Spartans lost despite their superb choice of battlefield. Both the foray into the digital printing business and the digital camera business pitted Kodak against opponents much bigger and stronger. What did Perez think the result would be? Where ever Kodak competed using one or more of its core competencies (chemistry, coating, chemical manufacturing) it has generated profitable businesses. Where ever Kodak competed in the digital arena it has failed: the competition is too fierce, the margins too narrow, the opponents too strong, and there was no battlefield advantage or the advantage disappeared over time. Perez allowed Kodak to enter bankruptcy because he was not willing to acknowledge the reality of the battlefield soon enough to stem his losses. Instead he let his armies be destroyed. A key question is: why didn't the board of directors act? Disclaimer All forecasts are provided "as is". I guarantee nothing but 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 macro and micro picture.
The Unemployment Forecast January 8, 2012 updated monthly The unemployment rate declined from 8.664% in November to 8.51% in December. While the unemployment rate is forecasted to have a minimum in early 2014, the next recession is forecasted to begin in late 2015.
Jobless Claims Forecast Jan 22, 2012 updated weekly The January 15th Jobless Claims declined to 352K from a revised 402K the previous week. The forecast suggests that unemployment claims will continue to decline until mid-2013 after which they will rise slowly until late 2015. A steady state jobless claims number of 300K is normal for the US economy. The next recession is forecasted to begin in late 2015.
Industrial Production Forecast January 22, 2012 updated monthly The Industrial Production index is a monthly surrogate for the GDP which is provided only quarterly. The more frequent reporting rate provides faster assessment of economic trends. The Industrial Production reported in January for December increased by 0.4%. If multiplied by 12, the expected growth rate of the industrial part of the economy is 5.2%. The next recession is forecasted to begin in late 2015.
Real Fixed Private Investment November 20, 2011 updated quarterly Real Private Fixed Investment is one of the few very reliable indicators of recessions. Note how the time series peaks and starts to decline well before a recession begins. When the Fed included data back to 1950, this time series did not fail to indicate an impending recession. It makes sense that the growth of the economy is a function of the rate of growth of investment. The chart shows that Real Private Fixed Investment grew at a rate of 3.2% in the 3rd quarter of 2011 (13.13% annualized rate). This is a long way from zero or negative that would indicate an impending recession. Recall that this indicator grew at an 8.8% annualized rate in the second quarter. We were rewarded with an increase in the Industrial Production of 8.18% annualized just last month. From a business cycle standpoint this is the healthiest part of the business cycle.
Federal Funds Jan 1, 2012 (updated monthly) The Federal Funds declined to 0.074% from 0.08% the previous month. The Federal Reserve remains in stimulus mode. Expect this to continue through the election.
S&P 500 Long Term Momentum Oscillator Conservative Investment Timing Jan 22, 2012 The long term momentum oscillator gave a buy signal on January 18. The return on the S&P 500 Long Term Momentum Oscillator is only 6.93% per year or 95.36% over a 10 year period. Not great but certainly better than most funds or a buy and hold strategy. If this chart is not as responsive as you would like in order to preserve or grow your equity, please look at the S&P 500 Short Term Momentum Oscillator below.
S&P 500: Short Term Investment Oscillator Jan 22, 2012 The S&P 500 short term investment oscillator indicated a BUY on Dec 23, 2011. This oscillator provides the best appreciation potential of the ones shown on this page and has protected against downside movements quite well over the past year. If you want to avoid the steep corrections, this is the momentum oscillator to watch. The investment advice indicated by the long and short toggles would have provided a long return of 17.86% and a short return of 13.88%. If you traded both long and short, the return would have been 34.22% in a year when the S&P barely broke even. No account has been made for transaction costs because the number of trades is not great and it is easy to find a brokerage account that has low transaction costs.
S&P 500: Forecast Jan 22, 2012 The S&P 500 forecast suggests that there are two weeks left in this rally. The S&P 500 is forecasted to reach 1410 on Feb 6 for an expected gain of 7.2%. I suspect the rally will be cut short by a resumption of the debt limit and unemployment benefit extension discussions.
IAU (Gold) Short Term Investment Oscillator January 22, 2012 The IAU (gold) Momentum Oscillator triggered a buy on January 13.

send comments to:

AAForecast@yahoo.com

Commentary

Jan 22, 2012

On this page there are 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 caution is advised, and Red means to be in cash.

The Unemployment Forecast
Industrial Production
Jobless Claims
Federal Funds
S&P 500 Long Term Momentum Oscillator
S&P 500 Forecast
S&P 500 Short Term Momentum Oscillator
IAU Short Term Momentum Oscillator

Summary:

The December unemployment rate declined to 8.51% from 8.664% in November.
Jobless Claims declined to 352K from a revised 402K the previous week.
Industrial Production increased 0.4% in December.
Real Private Fixed Investment grew at 3.28% in the 3rd quarter (a 13.13% annualized rate). This is very positive for the economy and the stock market.
GDP rose 2% in the 3rd quarter (does not support a recession hypothesis).

Everything is green for once but, be warned, the rally we are in may come to an end in early February but it will resume.

Kodak filed for Chapter 11 bankruptcy protection this week. During the announcement at Kodak, Antonio Perez rambled for an hour on the history of the transition to digital under his watch. Several times he said "no apologies there" despite the end result being the destruction of an icon under his watch. He apparently doesn't think he is to blame. He also cast bankruptcy as the logical next step in the digital transition.

Perez positioned Kodak to compete against giants Hewlett Packard, Xerox, Epson, Lexmark in Printing. Both desk top Printing and commercial printing were declining businesses with negative margins or razor thin margins before Perez decided to enter it. Was he thinking that to reap the rewards on ink sales he had to enter the printing business? We know that not to be true yet he persisted on throwing money at a losing business. The only positive was that ink manufacturing took advantage of two Kodak core competencies: chemistry and chemicals manufacturing. Ink manufacturing has had positive returns for the company.

Entering the digital camera market positioned Kodak to compete against other giants: Sony, Nikon, Canon, Minolta etc. As the cell phone market evolved, digital images came more and more under control of the phone manufacturer and obviated the need for a stand alone camera. Furthermore Kodak had no core competency in electronics, integrated circuit manufacturing, or competing against companies that renewed their product line in less than one year.

As any military person will tell you, the choice of the battlefield is the single most important decision a leader can make. First of all, the battlefield should be worth fighting over. If there is victory, there are riches to be had. The desktop digital printer market was and is definitely not worth fighting over: consumer or commercial. Parts of the plates business is quite profitable but this is not "digital". It is analog and plays to two of Kodak's strengths: chemistry and coating technology.

The digital camera business was an attractive business initially until cameras were bundled in with cell phones. This single act diminished the value of the digital camera. It was a flanking maneuver of one cell phone manufacturer with another that had the collateral effect of rendering the digital camera market barren and obsolete - not worth fighting over. To this day Perez has not understood that the digital camera market is not worth fight over and continues to waste money in its pursuit. It's over. Move on.

Secondly, the choice of battlefield should magnify your organization's abilities and diminish your opponents' while providing impregnable defenses. Hannibal was able to destroy the Romans legions during the Second Punic war because he attacked or lured the Romans to attack him on the battlefields of his choosing - ones that conferred great advantages to him. Hannibal almost never outnumbered his opponents yet he almost always defeated them. Kodak had no core competency in building and selling digital electronic devices. US companies gave up on electronics a long time ago because it could be done in South East Asia more cheaply. What made Perez think he could contract to a Chinese company to build the camera and make a profit on reselling it in the US? Kodak had virtually no market presence in any country but the US. If this is what everyone was doing, what was the advantage? Did he think the Kodak brand was more powerful than Sony or Minolta in cameras? Were there superior features? Most people would say no - the delay between pressing the trigger and the camera taking the shot was so long that the event you wanted to capture was already over.

Thirdly, choosing to pick a fight against an opponent stronger than you is not wise regardless the nature of the battlefield. At the battle of Thermopylae the Spartan 300 fought a Persian force of 30000. They could do this because the actual battlefield front was very narrow eliminating the numerical advantage of the Persians until the Spartan endurance ran out or they were all killed. In the end, the Spartans lost despite their superb choice of battlefield. Both the foray into the digital printing business and the digital camera business pitted Kodak against opponents much bigger and stronger. What did Perez think the result would be?

Where ever Kodak competed using one or more of its core competencies (chemistry, coating, chemical manufacturing) it has generated profitable businesses.

Where ever Kodak competed in the digital arena it has failed: the competition is too fierce, the margins too narrow, the opponents too strong, and there was no battlefield advantage or the advantage disappeared over time.

Perez allowed Kodak to enter bankruptcy because he was not willing to acknowledge the reality of the battlefield soon enough to stem his losses. Instead he let his armies be destroyed. A key question is: why didn't the board of directors act?

Disclaimer

All forecasts are provided "as is". I guarantee nothing but 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 macro and micro picture.

The Unemployment Forecast

January 8, 2012 updated monthly

The unemployment rate declined from 8.664% in November to 8.51% in December.

While the unemployment rate is forecasted to have a minimum in early 2014, the next recession is forecasted to begin in late 2015.

Jobless Claims Forecast

Jan 22, 2012 updated weekly

The January 15th Jobless Claims declined to 352K from a revised 402K the previous week.

The forecast suggests that unemployment claims will continue to decline until mid-2013 after which they will rise slowly until late 2015. A steady state jobless claims number of 300K is normal for the US economy.

The next recession is forecasted to begin in late 2015.

Industrial Production Forecast

January 22, 2012 updated monthly

The Industrial Production index is a monthly surrogate for the GDP which is provided only quarterly. The more frequent reporting rate provides faster assessment of economic trends.

The Industrial Production reported in January for December increased by 0.4%. If multiplied by 12, the expected growth rate of the industrial part of the economy is 5.2%.

The next recession is forecasted to begin in late 2015.

Real Fixed Private Investment

November 20, 2011 updated quarterly

Real Private Fixed Investment is one of the few very reliable indicators of recessions. Note how the time series peaks and starts to decline well before a recession begins. When the Fed included data back to 1950, this time series did not fail to indicate an impending recession.

It makes sense that the growth of the economy is a function of the rate of growth of investment.

The chart shows that Real Private Fixed Investment grew at a rate of 3.2% in the 3rd quarter of 2011 (13.13% annualized rate). This is a long way from zero or negative that would indicate an impending recession.

Recall that this indicator grew at an 8.8% annualized rate in the second quarter. We were rewarded with an increase in the Industrial Production of 8.18% annualized just last month.

From a business cycle standpoint this is the healthiest part of the business cycle.

Federal Funds

Jan 1, 2012 (updated monthly)

The Federal Funds declined to 0.074% from 0.08% the previous month.

The Federal Reserve remains in stimulus mode. Expect this to continue through the election.

S&P 500 Long Term Momentum Oscillator

Conservative Investment Timing

Jan 22, 2012

The long term momentum oscillator gave a buy signal on January 18.

The return on the S&P 500 Long Term Momentum Oscillator is only 6.93% per year or 95.36% over a 10 year period. Not great but certainly better than most funds or a buy and hold strategy.

If this chart is not as responsive as you would like in order to preserve or grow your equity, please look at the S&P 500 Short Term Momentum Oscillator below.

S&P 500: Short Term Investment Oscillator

Jan 22, 2012

The S&P 500 short term investment oscillator indicated a BUY on Dec 23, 2011.

This oscillator provides the best appreciation potential of the ones shown on this page and has protected against downside movements quite well over the past year.

If you want to avoid the steep corrections, this is the momentum oscillator to watch.

The investment advice indicated by the long and short toggles would have provided a long return of 17.86% and a short return of 13.88%. If you traded both long and short, the return would have been 34.22% in a year when the S&P barely broke even.

No account has been made for transaction costs because the number of trades is not great and it is easy to find a brokerage account that has low transaction costs.

S&P 500: Forecast

Jan 22, 2012

The S&P 500 forecast suggests that there are two weeks left in this rally. The S&P 500 is forecasted to reach 1410 on Feb 6 for an expected gain of 7.2%.

I suspect the rally will be cut short by a resumption of the debt limit and unemployment benefit extension discussions.

IAU (Gold) Short Term Investment Oscillator

January 22, 2012

The IAU (gold) Momentum Oscillator triggered a buy on January 13.