Browsing Posts published in December, 2011

Happy New Year to all my readers!  May 2012 bring you much happiness, health and hope …

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

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.

Quick ‘n Easy

The ECRI Weekly Leading Index is a weekly indicator that is designed to tell us how the economy will look 2-3 quarters (6-9 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 from ECRI:

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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Initial Weekly Unemployment Claims (4-Week Moving Average)

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.

Quick ‘n Easy

By tracking the number of people who are filing for unemployment benefits for the first time each week, we get a quick insight into the latest status of the economy’s health.  Fewer claims equals more jobs, which equals more income, which usually equals more consumer spending (70% of the economy!) that supports company profits, which in turn can lead to more hiring.

First, a nice summary about Initial Weekly Unemployment Claims and why they matter, from Econoday:

Jobless claims are an easy way to gauge the strength of the job market.  The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy.  Nearly every job comes with an income that gives a household spending power.  Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

Here’s a chart of the four-week moving average for weekly jobless claims from Calculated Risk:

Courtesy: CalculatedRiskBlog.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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Housing and Real Estate – Easy Pod

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 …

I’m continuing with a feature called “Easy Pod” – a collection of indicators that help portray the current status of something.  In this post, that something is housing and real estate. Let’s first review a few key concepts that are important to know about housing and real estate: (you can skip to below the first horizontal line if you’ve read this Easy Pod in the past)

  • There are two basic kinds of real estate, residential and non-residential.  Residential refers to places where people live.  Non-residential includes things like businesses, office buildings or warehouses.
  • For residential real estate (this is what we’ll refer to as “housing”) there are new homes and existing homes.  The difference should be fairly obvious.  New homes are looking for their first owner, while existing homes already have an owner.
  • “Inventory” is how many of something you have available to sell.  When we talk about the current inventory of new homes, we are talking about how many new homes are available to be sold.  When inventory is high, that makes it more likely that prices will be lower.  Remember, it’s the “supply and demand” basics here.  If you have too much of something, people will pay less for it.  The way we try to measure inventory in housing is by comparing how many unsold homes there are versus how fast homes are selling.  That’s why you’ll see things like “8 months inventory.”  It means that, at the current rate of home sales, it would take 8 months to get rid of the extra inventory.
  • Sales levels and prices are definitely related to one another.  If you see home sales slowing down, it means that homes are not in as much demand, so chances are good that prices will go down.  You have to look at the combination of housing prices, sales and inventory to get a good feel for what’s going on.

There are a number of indicators that describe what’s going on in housing and real estate, and there are even some people who combine these indicators into one number (an index) to give a summary.  In this “Easy Pod” I will show you indicators and indices that I like to follow.  Check back regularly for updates.

Special note:  You’ll notice a bunch of my charts shown below come from Calculated Risk.  This is a must-see for information on the economy.  I visit this site multiple times every day.  Bill McBride does a fantastic job of analyzing the most important economic data and events, putting them in context.


Quick Summary

Indicator (Click for details – only works if full article is open) Current Rating
New Home Sales Negative
Housing Starts Negative
NMHC Quarterly Survey of Apartment Market Conditions Positive
NAHB Housing Market Index (HMI) Negative
Easynomics Real Estate Price Stability Index Negative




Indicator: New Home Sales   |   NEGATIVE
Easy Intro: None yet   |   Link to SourceClick here   |   Latest Date This Info Represents: November 2011

Quick ‘n Easy

Every new home that is built and sold adds to the Gross Domestic Product (GDP), helping our economy grow.  Unfortunately, in November 2011, new homes were selling at an extremely low rate.  Fortunately, not too many new homes are being built so that the ones in inventory (still on the market) can get cleared out at a normal pace.

Courtesy: CalculatedRiskBlog.com

Easy Description: Statistics that tell us how many new single-family homes (basically a building for one family, not apartments or condos) were sold.  It also tells us about the selling price of those homes and the unsold inventory of new homes (waiting to be sold).

Latest Reading: If sales in November 2011 were to continue at that rate for a whole year, there would be 315,000 new homes sold.  This “annualized” rate is 1.6 percent higher than last month’s rate, and it is 9.8 percent above the rate from the same month last year.  The median sales price (half of homes sold for less than this amount, the other half sold for more) was $214,100.  That is 2.5 percent lower than the median price one year ago.  There were 158,000 new homes still for sale (inventory), so at the current pace it would take about 6.0 months to sell the remainder.

Also, take a look at my Easy Trends analysis of New Homes Months of Supply thru November 2011 to see where the trends are headed.

Implications: The pace of new home sales has largely been moving sideways for over a year.  The “6.0 months of inventory” part is key to understanding that home builders have done a pretty good job of adjusting to market conditions.  Because so few homes are being sold, they have been dropping the number of homes they build way down, which means that supply is decreasing and price isn’t decreasing as much.  (Quick refresher on “supply and demand” – when something has a bigger supply  than there is a demand for it, sellers are forced to lower the price so that buyers will have a greater willingness to buy it.)  We are at incredibly low levels of new home construction, which is why that 6.0 months figure is very close to historical averages.  Before the housing boom, the typical months of inventory level was around 6 months.  At the 6 months level, prices tend to be stable.

So, what happens if new homes start selling again?  Builders will start making more homes, which will push up supply just enough to keep up with the new demand so that prices don’t move too much in one direction or the other.  The kind of massive price increases we saw in the housing boom were unsustainable, just as massive price decreases from this point would have to be temporary, too.  Market forces will always push things toward a “healthy” equilibrium.

But regardless of the fact that the inventory number is looking pretty decent, these number of sales (315,000 annualized rate) are just awful.  And when fewer homes are being sold, that’s less economic growth.  The sale of a new home is just like the sale of a car, television or clothes – someone made something and sold it, which adds to the GDP.  What we’d like to see from here is a continued increase in new home sales numbers while keeping that months of inventory right around the 6 month mark.  That would mean the housing market is on its way to greater positive contributions to the GDP report without having any false imbalances in the system.

Easynomics Rating Methodology: The long term average is about 672,000 new homes sold per year.  I’d like to see numbers that are within 15 percent of that average.  Therefore, I will give this indicator a rating based on the average of the last three months: Above 772,000 is “positive”; below 571,000 is “negative”; anything between is “neutral.”

continue reading…

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Easynomics Real Estate Price Stability Index (EREPSI) – thru October 2011

The latest Case-Shiller Home Price Index value for October 2011 was released this morning.  With that, I now have real values for all the components of the EREPSI thru October.  Below is the latest info on the index.  I have also updated it on my economic indicator dashboard for the week, although it doesn’t technically change the rating.  It is on the verge of breaking into the “neutral” category though!

Indicator: Easynomics Real Estate Price Stability Index (EREPSI)   |   NEGATIVE
Easy Intro: Click Here   |   Latest Date This Info Represents: October 2011 (November and December are estimates)

Quick ‘n Easy

An index designed to look at the stability of home prices indicates that, thru October 2011, there is room for another 15.3 percent drop in home prices before reaching a stable point.  Prospects for December 2011 look considerably better, but that assumes that the current trends in months of supply and price/rent continue.

Easy Description: This index is an average of three indicators that help ascertain whether home prices are above or below historically normal levels: 1) new homes inventory months of supply, 2) existing homes inventory months of supply and 3) price-to-rent ratio.  For more info on what these mean, click on the “Easy Intro” above.

Latest Reading: Thru October 2011, the EREPSI is at minus (-) 15.25 percent.  This is based on actual values for all components.  The estimate for November is missing only the Case-Shiller HPI that is used to calculate price-to-rent ratio.  December is based purely on estimates for all components. continue reading…

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Economic Indicator Roundup

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.

 


Quick Summary

Indicator (Click for details – only works if full article is open) Current Rating (change)
USA Today / IHS Global Insight Economic Outlook Index Neutral
Bloomberg Financial Conditions Index Negative
Daily Consumer Leading Indicators Neutral (upgrade)
ADS Business Conditions Index Neutral
Employment Trends Index Neutral
Citigroup Economic Surprise Index Positive
Chicago Fed National Activity Index Neutral
Easynomics Real Estate Price Stability Index Negative




Indicator: USA Today / IHS Global Insight Economic Outlook Index   |   NEUTRAL
Easy Intro: Click here   |   Link to SourceClick here   |   Latest Date This Info Represents: November 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 slower-than-average pace through April 2012.  But at least it’s slow growth instead of a shrinkage.

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 November and December is 2.2%, and each month’s forecast is slightly lower from there, eventually reaching a April 2012 forecast of 1.6%

Implications: There has been some improvement in these numbers from last month.  However, these numbers continue to convey the risks ahead – 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 a disorderly default on loan obligations for European governments.)  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 six months from now, 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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