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Browsing Posts published in October, 2011

Modified Ivy Portfolio Simulation Update thru October 2011

October 31, 2011 at 4:55 pm No comments

I’ve updated my portfolio simulation page with the latest information thru close of Oct 31, 2011.  October finished with a big loss on the day, which really boosted the Easynomics portfolio because it is mostly positioned for losses in the market.  But the gains seen from the relief over apparent progress in Europe took its toll last week.  In fact, the rally resulted in two securities flipping from a “sell” to a “buy.”  Check out the latest figures and hypothetical positions at the link mentioned above.

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Simulated Portfolio ,

Economic Indicator Roundup: Adding “Easynomics Real Estate Price Stability Index” (October 31, 2011)

October 31, 2011 at 10:00 am No comments

For a “Quick ‘n Easy” read, just review the labeled white boxes, then skip to my “Easy Take” summary at the end.  You can review any charts/graphs afterward.  I want to make sure no one is intimidated by the length of my posts, even though I’m trying to making them easy …

This is a dashboard of economic indicators that I most regularly follow.  For each, I will try to give you a brief description, the latest reading and what I understand to be its implications.  For simplicity, I will assign each a rating of positive, neutral or negative.  For each indicator, I will denote in its section how I decide which rating to give it.

  • Positive – indicative of a healthy, growing economy.
  • Neutral – indicative of a slow or no growth economy but not a contracting (recession) economy.
  • Negative – indicative of a shrinking economy or recession.

 

Indicator: USA Today / IHS Global Insight Economic Outlook Index   |   NEUTRAL
Easy Intro: Click here   |   Link to Source: Click here   |   Latest Date This Info Represents: September 2011

Quick ‘n Easy

A combination of indicators that predict the growth rate of the economy for the next several months suggests that the U.S. economy will grow at a very slow pace through February 2012.

Source: USAToday.com

Easy Description: Forecast of the 6-month annualized Real GDP growth rate for the next several months.  Based on an index of 11 leading indicators, each of which generally predicts future changes in economic growth.

Latest Reading: Forecast for October is only 1.2%, and each month’s forecast is ever so slightly higher from there, eventually reaching a February 2012 forecast of 1.6%

Implications: These numbers begin to convey what all the others have been pointing to – growth should be very slow, and that means a recession is much more of a possibility, especially if there is a shock to the financial system (like Greece defaulting on its obligations.)  These growth rates will almost certainly result in an increase in unemployment rates.  Also, some of this forecast depends upon interest rate spreads (the difference in interest rates on short-term bonds versus long-term bonds, for example).  Those kinds of spreads have been artificially affected by the Federal Reserve’s interventions that are intended to keep interest rates low.  Their usefulness as tools for forecasting economic growth are lower as a result.  What I’m saying is that this forecast may be slightly too optimistic – it shouldn’t surprise anyone if we end up in a recession despite what this forecast says.

Easynomics Rating Methodology: For this index, if the average growth rate of the forecast months is 3 percent or higher, I will rate that “positive” – between 0 and 3 percent is “neutral” – below zero will be “negative.” continue reading…

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Easy Trends: ECRI Weekly Leading Index – Looking Less Bad Now (thru Oct 21, 2011)

October 31, 2011 at 5:00 am No comments

I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

ECRI Weekly Leading Index (WLI) and Weekly Leading Index Growth Rate

Quick ‘n Easy

The ECRI Weekly Leading Index is a weekly indicator that is designed to tell us how the economy will look several months down the road.  There are two parts to the index: 1) the weekly level and 2) the annualized rate of growth (or decline) in this index.

The Economic Cycle Research Institute (ECRI) does something very similar to the Leading Economic Index from The Conference Board, but they are not at all transparent about how they do their calculations.  We can only wait to see what they publish as their index level and see where it leaves us.  But many people believe this is a good leading indicator for the economy.

Specifically, investors look at two components of the indicator:

  • Weekly Leading Index (WLI)  - This is the actual value of the index released each week.  It will change more rapidly than the growth rate measure mentioned below.
  • Weekly Leading Index Growth Rate – It is unclear how ECRI calculates this, but it is supposed to represent the rate of growth/decline of the WLI over a longer period of time, expressed as an annualized rate (i.e., how much it would rise/drop if it continued at that rate for a full year).
There are numerous other indicators that the ECRI uses to assess the future of the economy.  They have a paid client base for whom they reserve their most up-to-date forecasts, but the WLI is publicly available data that can provide some hints at the overall picture they are assessing.

Here are graphs of the WLI and WLI growth rate for the past year:

Source: BusinessCycle.com

Source: BusinessCycle.com

Trends and Projections

Below, I will discuss whether the indicator is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. continue reading…

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Introducing the “Easynomics Real Estate Price Stability Index” (EREPSI)

October 30, 2011 at 9:51 pm No comments

Because there are only a half dozen or so indexes out there … sorry, I’m being told that’s actually a half million.  Oh well, too late!  I’ve already created the index and feel compelled to announce it.  Drumroll …

Easynomics Real Estate Price Stability Index (EREPSI)

First off, it’s clear that I picked the acronym first (it’s so catchy!) and worked my way backward to think of what it stands for.  Anyway, let’s get to the why, what and how of the index.

Why did I create this index?

Simple.  I see all kinds of housing indicators out there, but none of them seem to encapsulate in one number the thing that I’m personally looking for.  I want to know how close we are to achieving a balanced state of equilibrium in the price of real estate.  That is, are we close to a situation where there isn’t a bubble or a depression in any area of real estate.  The best way I could think of capturing that was to look at three indicators that all relate to price stability.  This is NOT a scientifically validated index with any special adjustments or complex calculations.  In fact, for now, one of the components of the index is an eyeball estimate from looking at a chart!  Maybe I should have called it “Lazynomics” bla bla?  But who cares?  I’m not using it to make investment decisions, and neither should you.  It’s just an easy way for me to comment on housing in my weekly indicator roundup.

What makes up the index?

There are three components:

  1. New Homes Inventory Months of Supply(Source: U.S. Census Bureau) - When there are too many new homes still left unsold (inventory) on the market, it usually means that prices will be dropping because supply is greater than demand.  The opposite is also generally true.  A good way of measuring the inventory is to calculate how long it would take that inventory to sell at the current pace of sales.  The normal level for this is around 6 months.NOTE: Data for this indicator lags considerably.  In addition to the index that is based on all available actual data, I will also calculate an index using the Easy Trends projection for the latest month, which basically assumes the recent trend will continue.  If there is no projection, I will assume the latest month’s data is the same as the previous month and calculate the index with that.
  2. Existing Homes Inventory Months of Supply(Source: National Association of Realtors) - Same concept as “New Homes” above but with homes that already have an owner.NOTE: Data for this indicator lags considerably.  In addition to the index that is based on all available actual data, I will also calculate an index using the Easy Trends projection for the latest month, which basically assumes the recent trend will continue.  If there is no projection, I will assume the latest month’s data is the same as the previous month and calculate the index with that.
  3. Price-to-Rent Ratio (Source: Until I figure out how to do the calculations myself, I am “eyeballing” this from the monthly chart on Calculated Risk.) - Comparing the prices of homes to the equivalent price of renting a similar home is a good way to gauge whether there is generally more incentive to buy or to rent.  Based on what I’ve seen, the normal for this ratio is approximately one, so if this number is higher, it means home prices are more likely to fall.  The opposite is true if the ratio is below one.NOTE: Data for this indicator lags considerably.  In addition to the index that is based on all available actual data, I will also calculate an index assuming the latest month’s data is the same as the previous month.

How is the index calculated?

The index is the equally-weighted average of the deviation from normal for these three components.  Although there are a ridiculously higher number of existing homes than there are new homes, the sale of each new home is much more important to the economy (GDP), so I didn’t feel that I should weigh one more than the other.

Example:  For a given month, if the new homes months of supply is 7.5, and the existing homes months of supply is 5.5, while the price-to-rent ratio is 1.10, the calculation is as follows:

  • Deviation for new homes months of supply is 1.5 months (because normal is 6 months).  1.5/6 = 25% (rounded) –> I convert this to negative because it’s in the direction that hurts home prices.
  • Deviation for existing homes months of supply is 0.5 months (because normal is 6 months).  0.5/6 = 8.33% (rounded) –> I keep this number positive because it’s in the direction that favors existing home prices.
  • Deviation of price-to-rent ratio is 0.10 (because normal is 1.0).  That’s 0.10 divided by 1.0 = 10% — I convert this to negative because it’s in the direction that hurts home prices.
  • Final calculation is the average of:  -25 percent, +8.33 percent and -10 percent = -8.89 percent.

Watch for this week’s indicator roundup for your first look at the value of this index!

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Tech It Easy: Market technical analysis summary – A New Bullish Indicator (Oct 29, 2011)

October 29, 2011 at 9:40 am No comments

This is my standard intro to technical analysis – you can skip down to the table (or click “continue reading”) if you read this feature regularly:

Many people who trade in the markets believe that there are patterns that can generally lead to profitable trades.  By analyzing stock charts that show the change in price along with the volume (how many shares were traded), “technical analysts” believe they have an edge and can time their trades profitably.  There is significant controversy over this subject, however.  Others say that, unless you have some information that no one else does, basically you can never beat “the market” because everything is already baked into the current price of a stock.

Nevertheless, supporters of “technical analysis” are everywhere, and the tools for their trade can be found throughout bookstores and the Internet.  I like to follow some websites that do some of the work automatically and provide a snapshot opinion of whether a particular stock is considered “bullish” (going to go up in price), “bearish” (going to go down in price) or “neutral” (stay about the same price).

For simplicity, I’d like to start by showing you a snapshot of what several technical analysis websites suggest about the exchange traded fund (ETF) with the ticker symbol of SPY.  This fund is supposed to go up and down the same as the S&P 500 index does.  And many people consider the S&P 500 index (a measure of the price of the 500 largest companies that trade in the U.S.) to be an accurate gauge of where “the market” stands.

For each of the sources below, where I have a choice, I will use a measure that attempts to predict the future direction of SPY or S&P 500 in the next 3 months. continue reading…

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Easy Trends: Durable Goods New Orders Excluding Transportation – Steady Rise Continues (thru Sep 2011)

October 28, 2011 at 5:00 am No comments

I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  For a few notes about methodology, see an earlier post.

Durable Goods New Orders (excluding Transportation)

What are “durable goods?”  Basically the following:

Durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods.  Examples of durable goods include: Cars. Appliances, Business Equipment, Electronic Equipment, Home Furnishings & Fixtures, Housewares & Accessories, Photographic Equipment & Supplies, Recreational Goods, Sporting Goods, Toys & Games.

Why do investors care about new orders for durable goods?  For one, it is a leading indicator for what industrial production will show, which is one of the key areas that the NBER looks at in determining whether the economy is expanding or contracting.  In the most basic terms, Econoday says it nicely:

Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders.

The transportation portion of the durable goods report is a little bit up and down, so to remove that from the equation and get a better look at the underlying trend, many people like to look at the new orders for durable goods minus the orders for transportation items (like airplanes).  That’s where I’ll focus my trend analysis.

Trends and Projections

Below, I will discuss whether the indicator is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. continue reading…

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Easy Trends, Economy, Indicators , ,
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