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Friday, August 27, 2010

ECRI WLI Update - Weekly Leading Index Data & GDP Growth

ECRI's WLI Up & WLI Growth Rate Up; GDP Growth Down
The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, released their latest readings for their proprietary Weekly Leading Index (WLI) this morning. (More about ECRI)
For the week ending August 20, 2010
  • WLI  stood at 120.9, upfrom the prior week's revised reading of 120.7.  The lowest reading for WLI this year was 120.4 for the week ending July 16.
  • WLI growth moved higher for the fourth week in a row to minus 9.9 percent from a revised minus 10.1 percent a week ago.  
Chart of WLI and WLI growth vs GDP Growth
Click to view full size chart
Q2 GDP Growth  - Second Estimate
Today's chart shows the second estimate for Q2 GDP growth which came in today at a positive 1.6%, revised down from  2.4% as shown on last week's chart.

Since ECRI releases their WLI numbers for the prior week and the stock market is known in real time, you can often get a clue for next week's WLI from the weekly change in the stock market.


Chart of S&P500 vs ECRI's WLI

Click for Full Size Image

Charts:
Notes: 
  1. The WLI for the week ending 8/27/10 will be released on 9/3/10.
  2. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
Before you claim understanding of ECRI's WLI, make sure you read the article  "ECRI Weekly Leading Indicators Widely Misunderstood."
"Bottom line, neither the “experts” predicting that the sky is falling based on the WLI, nor the other “experts” indulging in misinformed WLI-bashing in an effort to discredit the super-bears, have a real clue to what the WLI is all about...  A slowdown in U.S. economic growth is imminent, but a new recession is not." 
Disclosure:  I am long SPY (charts and quote) in my personal account and in the "Explore Portfolio" in  "Kirk Lindstrom's Investment Letter."

Thursday, August 26, 2010

Equity, Bond & Money Market Fund Flows - Yearly Totals

Money continues to pour into bond funds and out of equities.  This is the fifth week in a row with positive (inflows) into low yielding money market funds.  Annual data shown in table 1 below.
Weekly 08/25/2010 
  • Equity Fund outflows $4.6 Bil
  • Taxable Bond Fund Inflows $3.9 Bil
  • xETFs - Equity Fund outflows $1.4 Bil
  • Taxable Bond Fund Inflows $2.9 Bil
Fund Flow Totals for 2010 through 8/25/10
Table 1 AMG Fund Flows for Full Year - $B
Fund Flows for Equity Tax Bond MM Fund
2003 40.8 40.7 NC
2004 95.0 11.3 (64.3)
2005 71.9 9.3 89.0
2006 52.5 29.9 308.3
2007 111.3 68.8 569.5
2008 3.5 (3.3) 608.0
2009 6.0 172.0 (280.2)
2010 (23.6) 110.2 (379.4)
  • NC = Data Not Compiled
  •  += Some data points for Money Market Fund flows between March 2010 and July 14, 2010 are missing but the overall trend is clear. 
  • Raw data from AMG Weekly Fund Flows Data
ExETFsFor the week ended 8/25/2010 all Equity funds report net outflows totaling $1.395 billion as Domestic Equity funds report net outflows of $1.199 billion and Non-Domestic Equity funds report net outflows of $0.196 billion...   ExETFs—Emerging Markets Equity funds report net inflows of $0.232 billion, the group’s twelfth consecutive week of positive flows…   Net inflows are reported for All Taxable Bond funds (+$3.885 billion), bringing the rate of inflows of the $2.565-trillion sector to $6.673 billion/week...  International & Global Debt funds (+$0.879 billion) continued to draw assets as they reported inflows for the thirteenth consecutive week... Net inflows of $1.277 billion were reported for Corp-Investment Grade funds... Money Market funds report net inflows of $2.758 billion...  ExETFs—Municipal Bond funds report net inflows of $0.677 billion.... 

10-YEAR TREASURY NOTE TNX (in %)



Wednesday, August 25, 2010

Investors Intelligence Sentiment Survey Data & Graph

Investors Intelligence Sentiment Survey Data and Chart

One of the oldest weekly sentiment indicators is the “Investors Intelligence Survey“ or IIS. A chart of the Investors’ Intelligence Survey (IIS) “Bulls over Bulls plus Bears” versus the market is a key sentiment tool for stock market technical analysis. The IIS began in January 1963 by A.W. Cohen and has been published every week ever since. Cohen was surprised to find out that the newsletter writers, just like average investors and speculators, were usually wrong at major turning points!  Cohen found the best time to go long the stock markets was not when the most advisers were bullish, but when they were bearish! Cohen’s IIS survey turned out to be a wonderful contrarian indicator!

Data for Aug. 25, 2010:   
  • Bulls = 33.3%
  • Bears=31.2%
Chart of Bulls / (Bulls+Bears) vs. S&P500 for 8/25/10

click for full size graph
More about
Raw Data
Date Published Percent Bullish Percent Bearish
08/25 33.3 31.2
08/18 36.7 31.1
08/11 41.7 27.5
08/04 38.9 33.3
07/28 38.2 34.9
07/21 35.6 35.6
07/14 32.6 34.8
07/07 37 34.8
06/30 41.1 33.3
06/23 41.1 31.1
06/16 37 32.6
06/09 38.5 31.9
06/02 39.8 28.4
05/26 39.3 29.2
05/19 43.8 24.7
05/12 47.2 24.7
05/05 56 18.7
04/28 54 18
04/21 53.3 17.4
04/14 51.1 18.9

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 152% (a double plus another 52%!!) vs. the SandP500 UP a tiny 5.7% vs. NASDAQ Comp  down 0.6%!   (All through 8/22/10)  More Info
In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%
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Tuesday, August 24, 2010

Charles Neener Predicts DOW 5,000

Charles Neener, former Goldman Sachs technical analyst, is on CNBC talking about his market advice. 
CNBC printed a summary of his past calls
  • 2009:  Dow 5,000 in 2 to 3 years
  • Dec. 2008: Called for deflation in 2009
  • Early 2007:  Called for DOW 14,500
  • Aug. 2006:  Warned of "substantial drop" in housing market
Summary of Current advice:
  • DOW 5,000 in 2 to 3 years
  • Deflationary crisis ahead
  • Investors should stay out of the market
  • Invest in 10-year Treasuries - Quotes
  • Dollar won't rally
Charts of
DOW JONES INDU ^DJI - More charts
S&P 500 - More charts


Today's Current Market Stats: 
  • DOW  10,042
  • Nasdaq 2,124.97 
  • S&P 500 1,052.01  
  • 10YR UST: TNX = 2.49%
  • 30-Yr UST: TYX = 3.56%
Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 152% (a double plus another 52%!!) vs. the SandP500 UP a tiny 5.7% vs. NASDAQ Comp  down 0.6%!   (All through 8/22/10)  More Info

In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%
  • Subscribe NOW and get the August 2010 Issue for FREE!   
  • Your 1 year, 12 issue subscription will start with next month's issue.

BTIG Fed Model With VIX Risk Adjustment

This model was discussed in a very long but interesting article by Doug Kass posted on the Wennerstrom Semi Equipment Analysis forum at Silicon Investor. Kass makes two major points:
#1 Kass is bullish now. Kass expects the market (S&P500 Quote and Charts) to trade between 1020 and 1150 (roughly between 11x and 13x 2011 S&P EPS forecasts). At 1075 "there is approximately 55 S&P points of risk and about 75 S&P points of upside. In other words, the scale has now tipped back to the bullish side."
Last year Kass called for a "generational low" in March 2009. With the market now in the 1050s, there is even more upside and less downside left.
#2 Kass says "Stocks Are Extraordinarily Cheap Against Interest Rates.
* For the first time since 1962, the yield on the Dow Jones Industrial Average exceeds that of bond yields.
* Risk premiums (the difference between the earnings yield of the S&P index and the 10-year U.S. note) is at the highest level since the beginning of the modern era's bull market that began in the early 1980s.
* Nearly four-fifths of the companies contained in the S&P 500 index possess earnings yields that are greater than bond yields. And many have (growing) dividend yields that are similar to their own bond yields.

*The BTIG Fed Model says equities are nearly as compelling (last week) as they were in March 2009 when Kass said the market was making a "generation low."
More on BTIG Fed Model:
 This is how Kass explains the BTIG Fed Model
The "BTIG Fed Model" attempts to place a more conservative and defensive twist on the traditional Fed Model. When the levels of risk and fear rise in the financial market, Treasury Bonds represent the safe haven for investors and Equities are a proxy for risk. Thus, Treasuries become expensive relative to Equities, but that heightened level of risk is the obvious reason for that shift.

In order to account for the fear risk, in the BTIG Fed Model, we use the Vix in conjunction with the 10 Year Treasury Yield to raise the threshold with which Equities must compete. During these episodes of heightened fear, the Vix traditionally moved inversely with the 10 year Treasury yield. The Vix rises with the volatility and Treasury yields contract due to a flight to quality. Thus by taking the Vix and dividing by 10 and adding it to the 10 Treasury yield, we derive a larger number representing bonds not only reflecting the expected cash flow, but also adjusting for the heighted level of risk investors perceive in equities. Then comparing this "higher bar" to the S&P 500 earnings yield, one is comparing this relationship on a more conservative basis for equity investors. Additionally, we are using trailing S&P 500 earnings yield, which is also more conservative than using forward estimates.

What is extremely noteworthy about this metric in the current environment is that the level of equity undervaluation relative to Treasuries today using this model is equivalent to the extreme levels registered in early March of last year.
I cover the simple "Fed Model" in "Kirk Lindstrom's Investment Letter" but I sure like the added value of the BTIG Fed Model.

Kass's belief that the market is a good trade here aligns well with much of my own thinking and work.  So much so that I was a buyer of equities earlier this morning for my personal portfolio and my newsletter "explore portfolio."  I alerted my subscribers via email what I bought.

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 152% (a double plus another 52%!!) vs. the S&P500 UP a tiny 5.7% vs. NASDAQ Comp  down 0.6%!   (All through 8/22/10)

In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%

  • Subscribe NOW and get the August 2010 Issue for FREE!   
  • Your 1 year, 12 issue subscription will start with next month's issue.

     

Sunday, August 22, 2010

Fund Flows: Small Investors Flee Stocks For Bonds

Yesterday's NY Times [Kindle Edition] article In Striking Shift, Small Investors Flee Stock Market is a MUST READ for all readers of Kirk's Market Thoughts.   Excerpts and graph
Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year... Now many are choosing investments they deem safer, like bonds. 
Bonds won't be "safe" if interest rates surge.  Bonds have been in a bull market as interest rates have fallen from the mid teens in the 1980s to record low levels today.
Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.
On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses.
Stories on TV about this say the hardship withdrawls are often used to pay mortgages to prevent or delay foreclosures.
 As investors pulled billions out of stocks, they plowed $185.31 billion into bond mutual funds in the first seven months of this year, and total bond fund investments for the year are on track to approach the record set in 2009.
Beware of performance chasing:
Charles Biderman, chief executive of TrimTabs, a funds researcher, said it was no wonder people were putting their money in bonds given the dismal performance of equities over the past decade. The Dow Jones industrial average started the decade around 11,500 but closed on Friday at 10,213. “People have lost a lot of money over the last 10 years in the stock market, while there has been a bull market in bonds,” he said. “In the financial markets, there is one truism: flow follows performance.
What I own:
As a contrarian, I have been adding to my equity positions during this recent market pullback. 
Also, I am completely out of bonds not indexed to inflation and am considering lowering exposure to those as well. 
I may add more to equities given it is so much against the crowd to own stocks these days.

In addition to equities, I am currently long TIPS, TIPS funds VIPSX (charts and quote) and FINPX (chart and quote) and Series-I Bonds (the majority have a 3.0% base rate) in my personal account.    I-Bonds will not lose net asset value if rates surge but new i-bonds currently pay very little above inflation so I have most of my cash in CDs and savings accounts paying over 1.0%.  I personally own no bonds or bond funds not indexed to inflation.   I also own a REIT fund.  REITs pay good income and should do well in a growing economy but they could suffer if we have a double dip recession.

In 
both the "core" and "explore" portfolio in  "Kirk Lindstrom's Investment Letter" I sold all bonds not indexed to inflation with the majority of my fixed income (about 30% of the total) in cash and CDs.  For yield and diversification, I have a REIT fund in the "Core Portfolio" in  "Kirk Lindstrom's Investment Letter" that has done well the past two years and should continue to do well if the economy avoids a double dip recession.

For the Future:  I am strongly considering selling my TIPS funds to lock in nice gains and perhaps wait for them to pay a better spread similar to when I bought them.  The individual TIPS I bought pay inflation plus better than 1.0% so I can hold those to maturity and do very well with or without inflation.


Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 152% (a double plus another 52%!!) vs. the SandP500 UP a tiny 5.7% vs. NASDAQ Comp  down 0.6%!   (All through 8/22/10)

In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%
  • Subscribe NOW and get the August 2010 Issue for FREE!   
  • Your 1 year, 12 issue subscription will start with next month's issue.


Friday, August 20, 2010

ECRI WLI Update - Weekly Leading Index Data

ECRI's WLI Down and WLI Growth Rate Up
The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, released their latest readings for their proprietary Weekly Leading Index (WLI) this morning. (More about ECRI)
For the week ending August 13, 2010
  • WLI  stood at 120.8, down from the prior week's revised (lower) reading of 122.0.  The lowest reading for WLI this year was 120.4 for the week ending July 16.
  • WLI growth moved higher for the third week in a row to minus 10.0 percent from minus 10.2 percent a week ago.  
Chart of WLI and WLI growth vs GDP Growth
Click to view full size chart
Commenting on the numbers, ECRI's managing director Lakshman Achuthan said,
"With the WLI staying essentially flat for the last six weeks, following a nine-week plunge, it is premature to predict a new recession, though risks remain.

Since ECRI releases their WLI numbers for the prior week and the stock market is known in real time, you can often get a clue for next week's WLI from the weekly change in the stock market.

Charts:

Notes: 
  1. The WLI for the week ending 8/20/10 will be released on 8/27/10.
  2. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
Before you claim understanding of ECRI's WLI, make sure you read the article  "ECRI Weekly Leading Indicators Widely Misunderstood."
"Bottom line, neither the “experts” predicting that the sky is falling based on the WLI, nor the other “experts” indulging in misinformed WLI-bashing in an effort to discredit the super-bears, have a real clue to what the WLI is all about...  A slowdown in U.S. economic growth is imminent, but a new recession is not." 
Disclosure:  I am long SPY (charts and quote) in my personal account and in the "Explore Portfolio" in  "Kirk Lindstrom's Investment Letter."

Thursday, August 19, 2010

AAII Bull Bear Sentiment Graph for Aug 18, 2010

AAII Bulls Minus Bears vs DJIA Survey Data and Graph for 8/18/2010
The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months . AAII is the "American Association of Individual Investors." For the survey, Individual members of the AAII are polled on a weekly basis. Only one vote per member is accepted in each weekly voting period. The AAII reports the weekly results at http://www.aaii.com/sentimentsurvey/.
As of 08/18/2010, the AAII members are:
  • Bullish: 30.11%
  • Neutral: 27.42%
  • Bearish: 42.47%
This chart shows the 52-week moving average of the AAII bull/bear index (American Association of Individual Investors). 52 weeks removes seasonality from the number and gives startling results.
  Click chart for full size image
The 10-week MA seems to indicate the correction bottom is in and the market rally should continue for awhile.

Charts of the AAII (American Association of Individual Investors) Bulls minus Bears Index versus the market are key sentiment indicators for stock market technical analysis.  Contrarian theory states the time to buy is when fear and pessimism are at a maximum since this usually occurs near market bottoms.

More Information

Wednesday, August 18, 2010

Siegel and Schwartz Bond Bubble Warning

Jeremy Siegel and Jeremy Schwartz Say Bonds Are In A Bubble

Jeremy Siegel (author of Stocks for the Long Run") was just on CNBC to say bonds are in a bubble and stocks are a better deal.  In an op-ed written at the "Wall Street Journal," Jeremy Siegel and Jeremy Schwartz say that bonds, and in particular Treasury bonds are extremely overpriced, similar to what the tech bubble experienced in the late 1990's.

A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows.

We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.

The warning is not just for regular bonds but also TIPS.  (See chart of TIPS rates below article)

The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS - More Info) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.

Shorter-term Treasury bonds are yielding even less. The interest rate on standard noninflation-adjusted Treasury bonds due in four years has fallen to 1%, or 100 times its payout. Inflation-adjusted bonds for the next four years have a negative real yield. This means that the purchasing power of this investment will fall, even if all coupons paid on the bond are reinvested. To boot, investors must pay taxes at the highest marginal tax rate every year on the inflationary increase in the principal on inflation-protected bonds—even though that increase is not received as cash and will not be paid until the bond reaches maturity.

Jeremys Siegel and Schwartz recommend stocks for both income and inflation protection

From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds. Rather, stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade.
and

Due to economic growth the dividends from stocks, in contrast with coupons from bonds, historically have increased more than the rate of inflation. The average dividend income from a portfolio of S&P 500 Index stocks grew at a rate of 5% per year since the index's inception in 1957, fully one percentage point ahead of inflation over the period. That growth rate includes the disastrous dividend reductions that occurred in 2009, the worst year for dividend cuts by far since the Great Depression.
What many bond investors fleeing the risk of equities fail to see is the risk of rising rates on bond funds.  The article points out the risk:

If 10-year interest rates, which are now 2.8%, rise to 4% as they did last spring, bondholders will suffer a capital loss more than three times the current yield.

[3 x 2.8% = 8.4%]
What I own: In addition to equities, I am currently long TIPS, TIPS funds VIPSX (charts and quote) and FINPX (chart and quote) and Series-I Bonds (the majority have a 3.0% base rate) in my personal account.    I-Bonds will not lose net asset value if rates surge but new i-bonds currently pay very little above inflation so I have most of my cash in CDs and savings accounts paying over 1.0%.  I personally own no bonds or bond funds not indexed to inflation.   I also own a REIT fund.  REITs pay good income and should do well in a growing economy but they could suffer if we have a double dip recession.

In  both the "core" and "explore" portfolio in  "Kirk Lindstrom's Investment Letter" I sold all bonds not indexed to inflation with the majority of my fixed income (about 30% of the total) in cash and CDs.  For yield and diversification, I have a REIT fund in the "Core Portfolio" in  "Kirk Lindstrom's Investment Letter" that has done well the past two years and should continue to do well if the economy avoids a double dip recession.

For the Future:  I am strongly considering selling my TIPS funds to lock in nice gains and perhaps wait for them to pay a better spread similar to when I bought them.  The individual TIPS I bought pay inflation plus better than 1.0% so I can hold those to maturity and do very well with or without inflation.

More information about



US Treasury Rates at a Glance


Beware of Annuities


Chart showing 5-YR TIPS rate below Zero
 Click to see full size chart



Friday, August 13, 2010

ECRI's WLI and Growth Move Higher

ECRI's WLI and WLI Growth Rate Both Up

The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, released their latest readings for their proprietary Weekly Leading Index (WLI) this morning. (More about ECRI)
For the week ending August 6, 2010
  • WLI  stood at 122.4, up from the prior week's revised (lower) reading of 121.7.  The lowest readings for WLI this year was 120.6 for the week ending July 2 and 16.
  • WLI growth moved higher for the second week in a row to minus 9.8 percent from minus 10.3 percent a week ago.  
Chart of WLI and WLI growth vs GDP Growth

Click to view full size chart
Since ECRI releases their WLI numbers for the prior week and the stock market is known in real time, you can often get a clue for next week's WLI from the weekly change in the stock market. 
Chart of WLI vs S&P500
Click to view full size chart
More S&P500 Charts and SPY Charts

Chart of WLI vs DJIA
  Click to view full size chart
More DJIA Charts

Commenting on the numbers, ECRI's managing director Lakshman Achuthan said, "The WLI plummeted for two months through late June before flattening out and then rising to a nine-week high. But if it turns down once again, that would signal heightened recession danger."

Notes: 
  1. The WLI for the week ending 8/13/10 will be released on 8/20/10.
  2. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
Before you claim understanding of ECRI's WLI, make sure you read the article  "ECRI Weekly Leading Indicators Widely Misunderstood."
"Bottom line, neither the “experts” predicting that the sky is falling based on the WLI, nor the other “experts” indulging in misinformed WLI-bashing in an effort to discredit the super-bears, have a real clue to what the WLI is all about...  A slowdown in U.S. economic growth is imminent, but a new recession is not." 
Disclosure:  I am long SPY (charts and quote) in my personal account and in the "Explore Portfolio" in  "Kirk Lindstrom's Investment Letter."


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