Tuesday, August 24, 2010

Bullish or Bearish?

This is such an important and difficult discussion topic. A lot of net worth is at risk to a bear market mauling. Saving it from the potential value destruction depends on having a plan or at least having a clear idea of what market orientation is reflected in the asset allocation strategy at work now. Is it a bull market strategy or a bear market one? Having a position provides a base of information. My observations from talks with peers and industry colleagues is that many are paralyzed bulls and remaining at risk to the bear. There is nothing bad with being a bull or a bear. Losing money is what is bad and that is what I'm concerned about. If this period is recognized as a secular bear market period, which many call it now, losing money will be the outcome for those who could not get comfortable zipping on a bear coat for a while.

Here are a pair of perspectives to define the distinction between the bullish and bearish economic outlook, mostly measured by the stock market. Bob Doll, who is paid to be a bull, represents his investment manufacturing employer. The bear is David Rosenberg. His employer is a wealth management firm in Canada where he is chief economist, a position he held previously at Merrill Lynch. He should be expected to walk his talk. This interview was conducted back in March. After the video clip, there are some graphs that try to look at the economy from the positions taken by Doll and Rosenberg to examine what has changed compared with their expectations. They have not changed their market outlooks since March. One of them should, which one?

Now take a look at the S&P 500 Index graph for the past twelve months, of course with particular interest in the trend from March to now. The 50 day moving average has crossed under the 200 day MA.

Next, examine these graph's from the St Louis Fed illustrating their data for the trends in GDP, productivity, commercial debt, housing, consumer revolving debt and employed citizens. First looking at GDP. The following graph is updated to 4/1/2010. Since then, the BEA has announced it's first of three estimates for Q2 GDP of 2.4% on the heels of a 3.7% Q1 rate of change.

Next, looking at monthly, seasonally adjusted, Capacity Utilization for Total Industry updated to 7/1/2010. Certainly improving after hitting a low level not seen in the past twenty years at least.

Now, looking at monthly, seasonally adjusted, Industrial Production Index ((2007 = 100)(that is data manipulation!)) updated to 7/1/2010. This looks like improvement too.

Followed by the monthly, seasonally adjusted Civilian Employment to Population Ratio ((2007 = 100)(that is data manipulation!)) updated to 7/1/2010. This metric is getting worse for some reason.

The data for unemployment insurance claims shows improvement, but this does not look at the bigger picture. It does not consider those who are still working but getting only part-time hours, or people who are so discouraged they are not seeking continued benefits because they are required to seek any employment to qualify for the benefit.

Now for some housing related graph's. Starting with the monthly number of New Private Housing Units by Permit, for Single Unit Structures, seasonally adjusted annual rate.

That is followed now by the graph showing New One Family Housing Unit Sales. The data available goes back to 1963 and has never been as low as shown below.

Finally, look at the condition and level of debt in the US economy. The first graph illustrates the amount of outstanding debt for commercial and industrial purposes at Commercial Banks.

Next, we're looking at Outstanding Consumer Credit. I believe this is excluding mortgage debt held by consumers.

Now a look at all of our debt, courtesy of our government. Here is the end of Q1 total of Public Debt. This is going to have to be paid back or defaulted on! Tough choices lie ahead.

There is no question in my mind that the BEAR is stalking the US economy and financial markets. If it turns and walks away, I will have acted prudently in the situation and can resume my financial and economic journey with only a little loss of momentum.

Just for fun now, here is a tip from a TV actor for surviving bear encounters...