Economic Indicators

Let's review some important economic indicators, think about some questions, and draw some conclusions. Starting with Real GDP:

Number 1:

Real GDP = C + I + G + (Ex - Im) (Inflation adjusted)
where C = consumer spending - Think consumers are spending?
I = private investment - Think money is being pumped into businesses?
G = government spending - Think the government has blown all the money yet?
Ex = exports - Think we produce much in this country anymore?
Im = imports - Think we buy more US made than Chinese made products?

1st quarter of 2010 Real GDP: 2.7%
4th quarter of 2009 Real GDP: 5.6%
(source: bea.gov)

The Real GDP shows the effects of government stimulus running out. The last time we saw a nearly 3% drop in Real GDP was from the 3rd to 4th quarter of 2008.

Number 2:

M2 - aggregate of money supply in circulation.

June 2010 M2: 8,611 (in billions)
(source: federalreserve.org)

Fed Reserve uses this to determine whether to raise or lower interest rates thereby contracting or expanding the money supply. The more you have of something the less it is worth. A good analogy for those sports card collectors out there is when you open a pack of baseball cards the cards that are most abundant are worth the least (a.k.a. the commons). This is the highest M2 has been in two years, which means that higher interest rates could be coming soon.

Number 3:

Consumer confidence survey - economic sentiment of 5,000 random people
Consumer confidence index - based upon the numbers from the survey

June 2010 Consumer Confidence Index: 52.9
May 2010 Consumer Confidence Index: 62.7
(source: conference-board.org)

The consumer confidence index is used loosely to determine what consumers think of the economy. A higher number means consumers are optimistic, and that they tend to spend more.

Number 4:

Housing starts - indicates housing construction activity on building new homes/buildings, and modifying existing homes/buildings

May 2010 Housing Starts: -10%
April 2010 Housing Starts: 3.9%
(source: census.gov)

Housing starts are a large part of our GDP (about 5%). This indicator is historically volatile, but over the course of six months solid trends can be formed.

Number 5:

S&P 500 index - 500 stocks from a broad selection of industries that gives us a good indication of our economy's overall health

July 16, 2010 S&P 500 Index - 1065 points (downtrend forming)
Mar 6, 2009 S&P 500 Index - 683 points
(source: finance.google.com)

One of the best indicators of the overall economy's current health. The index is off 200 points in about 3 months. All the news about the economy's performance in all sectors and industries is factored into the price.

What are Your Conclusions?:

• What do you make of these indicators?
  
• Where do you see the economy going in the second half of 2010, if there is government stimulus, and if there is not government stimulus? (Two very different outcomes!)
• How can be bring the manufacturing base back to this country?

Casino Bet With Odds In Your Favor

The money making trade (in the short term 3 - 6 months) with the odds in your favor is shorting the stock market, and profiting from the decline that could be heading our way at the end of this year and into 2010.

Why would this be a good trade? Below are my top 3 reasons.

Reason #1:

Based on the last ten years, the "January Effect" has led to stock declines nine out of the last ten years. Much selling occurs in the final week of December and into the month of January. All this selling, causes stock prices to pull back a bit. Below is a chart to illustrate the January Effect over the past decade.


Reason #2:

As of late there has been a strong inverse correlation between the dollar and the stock market. If the dollar increases in value the stock market decreases and vice-versa. As such, the dollar has been losing much value as of late, and a short term dollar rally might be in the cards.


Reason #3:

The appetite for risk is going to lessen because of what is happening around the world. There is Dubai defaulting on their debt, which is not too significant if it was an isolated event that did not affect other parts of the world. Greece just recently received a debt downgrade from Moody's, and the Baltic area in general is experiencing many economic and social issues because of the huge deficits they have. Also, Spain just received a debt downgrade from Moody's. These occurrences are not isolated to the countries with which they happen, there will be worldwide effects from these issues with debt whether it is big or small.

Stock Market Gains Created By Government Bailout Monies

If you have been following the stock market closely since March 2009, you would be able to draw the conclusion that the gains of the stock market are not based on solid economics. I think what we are seeing is what market analysts call a 'dead cat bounce'. Per Bob Chapman, "there is low volume in the overall market and short covering", which typically infers a bear market and lower market prices. In addition, the market is pricing in the future economic strength that we are suppose to have, and this is simply not possible with a weak dollar. You cannot have a weak dollar, and a strong economy. Also, there is no such animal as a jobless recovery, especially when our economy is fueled by 70% spending. What's more is that the savings rate among Americans is increasing quickly, so the people that do have money are saving more and spending less. The latest government numbers showed that Americans were saving approximately 7% of their income on average, versus 0% of their income on average a year ago. This is the highest our savings rate has been since 1994. Based on the graphics below, I would conclude that people across all generations are saving more and making less.