Weekly Risk Report 02/09/2009
The i-Wave continues in unprecedented territory for yet another week. In only two weeks since 1982 have we seen all four of our i-Wave components all giving bullish signals simultaneously up until the panic of '08. The i-Wave has now finished four weeks in this incredible condition. Valuations are discounted as though average earnings are going to be cut in half. Short term interest rates all the way through 30 year fixed rate mortgages are set as though there isn't going to be any inflation to speak of for years. Essentially all speculators have left the stock markets (for what, I don't know). There is strong consensus about market direction (a very bullish sign). And finally, the number of issues available in which to invest continues to shrink.
If one is looking for bad news, one is rewarded with an abundance of it from every corner. Here at SignalPoint we attempt to filter the noise and boost the signal when analyzing what is happening. When the panic started at the beginning of last Quarter, it appears that many a purchasing department was told to delay buying as long as possible. This has caused a chain reaction of shortages on one end and inventory on the other. At the same time, the poorly worded addresses by public figures shocked consumers into a similar "purchasing department" holding pattern. In a matter of 13 weeks the country went from being on a spending binge to tightly holding purse strings. While some spending is beginning again, it is the discounters that are doing the business as higher priced stores and specialty retailer report low traffic and sales.
It was an exaggeration to say this was "the worst economy since the Great Depression" during the presidential campaign. However it was also a very large mistake. It's hard to compare a 7+ % unemployment rate to a 25% Great Depression level and be talking about the same thing. Even the '80s had 11% unemployment and interest rates in double digits. Capital equipment spending ground to a halt for years. Plant capacity utilization was well under 70% during much of that decade. So maybe they should have said it's "... the worst economy since the '80s" but that doesn't have as much "drama."
The economic slowdown is not just a U.S. happening. The same panic that gripped the U.S. consumer seems to have gripped the rest of the world as well. Even so, hidden deeply behind all the "bad news" there's the start of spending again around the globe. It was reported that in January, automobile sales in China were larger than the U.S. for the very first time. Yet, depending upon which article you read, this is either "good news" or "bad." In one sense it seems the U.S. is in a bad way. However, when we read deeper we find that U.S. as well as many other auto companies and parts suppliers are heavily involved in China. It is nearly a certainty that the U.S. sales were extremely low and will probably rebound in the near future. It's also near certain that as sales of autos in China continue to grow, the suppliers for that new business will also see business grow.
So, as we watch the world as well as the business news, keep in mind that there's more noise than signal much of the time.
