The End Of The Recession?

Yesterday on The MoneyMan Report on The Biz Radio Network (www.bizradio.com), Anirvan Banerji of ECRI announced that his indicators were signaling the end of the recession.  Obviously, this is one group’s opinion.  There are probably many economists that disagree.  In fact, many of them can’t see how we’ll improve given some of the policies coming out of Washington.  I would say even if you don’t agree with the policies coming out Washington and their affects on the economy, there’s no doubt that this much stimulus will help in the short & medium term.  It’s the long-term that I worry about.

However, ECRI is seeing many of their forward looking indicators pointing upwards.  They’ve actually been improving all of 2009.  But, like many economic models, they have to be sustainable, not just a one month wonder.  The good news about this one group’s findings is that they have been very accurate over the past several years that I’ve been following them.  They were first warning us in 2006 about a slowing economy.  Obviously the stock market didn’t peak until the next year.  Because they are so early in a lot of their calls, we need to be careful about getting too bullish too quickly.  Just as the market didn’t peak until well after a whole year of their warnings, we may have a tough market for a while.  Although, it certainly doesn’t look that way right now.

Since March 9th, the strongest gainers have been the most cyclical and beaten up areas.  Transportation, housing, financials, emerging markets, & materials have been the strongest.  Early in the rally, you could have said it was just short covering because these areas were oversold.  But, now with not just ECRI’s data but some other data that I read, maybe these gains have been justified.  Stocks are a great leading indicator.  That’s something many people don’t realize.  Sometimes they go up or down and you don’t understand why until several months later.  That may be what we’re dealing with right now.

Despite the Fed’s efforts to push rates down, interest rates continue to rise causing them in mid March to announce they would buy treasuries & mortgage bonds at the clip of $1 trillion.  That cause rates to drop dramatically from 3% on the 10-year treasury to 2.5% in one single day.  Today, we stand at 3.2% looking to about 3.5% in the short run.  This move in rates tells me a few things.  First of all, investors are betting on an improving economy.  Treasuries fall and rates go up during times when the economy is good.  Secondly, it tells me investors are assuming more risk.  They are selling “safe” investments such as treasuries (although those may be among the riskiest investments of all right now with future inflation a real possibility) and going into riskier assets such as stocks.  So, we have overall rates going up.

In addition, we have not just stocks going up, but very cyclical stocks going up.  With ECRI’s announcement yesterday, perhaps the move is justified.  If you’ve been somebody that has made a lot of money by selling every rally in the past year, I think we need to be open to the possibility of buying the dips over the next few months.

Let me be clear that any change in my economic outlook doesn’t change the fact that we’re overbought.  Stocks have had a huge run (30-50% depending on the index) since March 9th.  They are due for a pullback.  In fact, the stock market is beginning to look a little tired.  Many investors I know are beginning to put some shorts on for a trade.  They may be bulls, but they are feeling a little piggish now.  I’m not doing that.  I’m simply being a little more cautious with my buying and holding a lot of cash.  Lately, I’ve been stopped out of a few positions and haven’t replaced them yet.  I do have to admit though that I feel underinvested but I’d rather see a breakout of a low volume pullback in order to get me to invest a good deal more of capital. 

Have a nice weekend.  I’m going to celebrate my son’s 7th birthday.  Still strange to be a dad.

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