Comstock Partners, Inc.April 26, 2012
The Market Is In For A Rude Awakening
The overwhelming weight of the evidence over the past four to six weeks is that economic growth has peaked and is now slowing down. In that period we have seen either disappointing results or actual declines in the following important economic indicators: core durable goods orders, the Chicago Fed National Activities Index, initial weekly unemployment claims, new home sales, existing home sales, payroll employment, the NFIB Small Business Index, construction spending, the ISM Non-Manufacturing Index, personal income, the Kansas City Fed Index, the Philadelphia Fed Survey, industrial production, the Empire State manufacturing index and the NAHB Housing Market Index.
These indicators cover most of the U.S. economy and generally provide a good idea of where activity is headed. In this regard we point out that the Chicago Fed computes and puts out a little-followed monthly indicator called the Chicago Fed National Activity Index (CFNAI), a weighted average of 85 monthly economic indicators covering production, income, employment, hours worked, personal consumption, housing sales, orders and inventories. The CNFAI has declined for three consecutive months and entered negative territory in March. From what we see so far in the current numbers, another drop is likely in April as well.
The significance of the above data is reinforced by ECRI Weekly Leading Indicator. On December 10th the ECRI dropped to 5.25% below a year earlier, a level that indicates a high probability of recession. In fact, since 1968 the ECRI leading indicator has declined to that level or below only six times, and each time a recession began either a few months before or a few months after. There has never been a false call, and this is the first negative call since January 2008.
Since most serious investors follow the same economic releases that we do, they must be aware of the fragility of the current recovery, particularly given the household debt burdens and the problems in Europe and China as well as the so-called "fiscal cliff" awaiting the U.S. That is why they slice and dice every single word in the FOMC monetary statements, minutes and speeches of Chairman Bernanke and every other Federal Reserve Board member, hoping to get a hint that QE3 is coming to the rescue soon. Yesterday was a good example where the FOMC and Bernanke basically said nothing new, yet were subject to all kinds of interpretation by the "experts" who do that sort of thing for a living. The market has been moving up on the liquidity provided by central banks around the world and is deathly afraid of going it alone.
All in all, the economic recovery is not sustainable, and we doubt that the Fed can do anything more. Although QE1 helped prevent the economic and financial system from collapsing, each easing move after that has had less and less effect. We believe that the stock market is in for a rude awakening.