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Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
|
|
|
World |
U.S. |
|
Nasdaq
100
(QQQQ)
|
Russell
2000
(IWM)
|
S&P
500
(SPY)
|
|
The Russell 2000 (IWM) gained 0.06% over the five-day span while the S&P 500 (SPY) and Nasdaq 100 (QQQQ) respectively lost 0.13% and 0.54%. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a
0.52% gain this
week. The portfolio consists of the 5 top-ranked world ETFs
as of July 16, which marked the beginning of the current 4-week
holding period.
Our current Buy
signal remains in effect.
We've written before about the increasing difficulty the U.S.
economy has in recovering jobs. This seems to be primarily a
function of the dramatic shifts in the global economy. China
growing at 8-10% per year. Brazil very quickly evolving from
a debt-ridden nation to an economic powerhouse. The emergence
of Australia and Russia as strong and fast-growing economies.
The rapid development of India's extraordinary outsourcing industry.
You can't have all these transitions occurring at the same time
and expect the U.S. to be immune from this enormous increase
in competition for business and labor.
Given that the U.S. economy is substantially built upon consumer
spending, it is perhaps natural that few indicators are more
closely watched these days than the monthly labor report. Or
ANY labor report, for that matter. Given the scrutiny, you would
think that improving employment data is required for investors
to reap stock market gains. Of course, that's far from true.
The 2003-2007 cyclical bull market occurred in the midst of
a "jobless" recovery. Remember the monthly trotting
out of Labor Secretary John Snow to tell us that employment
was improving despite fairly weak job gains? The modest job
performance did nothing to slow down the steady stock market
advance in those years.
With the greatest economic and labor market crisis in two generations
now weighing upon us, it is natural to worry about the impact
this perhaps structural weakness in labor will have on our economic
and investing future. A weak labor market leads to sluggish
consumer spending which dampens the earnings growth that powers
stock market gains over time. With the enormous overhang in
housing supply, one of our nation's largest employers - the
housing industry - is hugely constrained. But does this impact
near-term stock performance?
This question was begged by a recent Wall Street Journal graphic
showing job growth in various countries.
Chart 1: The haves and have-nots of job creation
If job growth were heavily correlated to stock market performance,
we would expect the markets from the Thriving countries to be
dramatically outperforming those lagging in job creation. However,
that is not necessarily the case.
Chart 2: Market performance of select countries (in
$U.S.)
While Brazil and Australia performed well in 2009, neither has
yet to ring up stock gains in 2010. We could argue that the
stock market, ever looking forward, booked these gains in 2009
and is digesting those before further rewarding investors. Separately,
South Korea has roughly the same flattish job picture as Germany
though it's stock performance is twice that of the lagging Germany,
no doubt in part due to the drag on German stocks from the Euro
currency.
The performance of the U.S. market closely corresponds to that
of Germany over this period leading us to believe that there
is some general correlation between job performance and the
stock market (both are job creation laggards in the above chart).
If only in how it impacts investor perceptions - e.g. optimism,
willingness to take risk - a nation's ability to recover employment
losses is a key factor to driving its stock market.
The depth of the recent recession is such that investors can't
help but feel queasy about the economic future. There has been
a non-stop flow of downbeat news for months on end with few
breaks. It will be a challenge for investors to rise above that
sour mood and find the optimism necessary to embrace stocks.
As a result, we watch with keen interest whether this market,
which has come very close in recent months to descending back
into bear territory, will be able to right itself and resume
a cyclical uptrend. Our recent Buy
signal suggests that the market is making another try - taking
another shot at pushing past the Euro debt problems, weak job
picture, and overall sluggish domestic economy. Is what we have
experienced recently simply the typical double-dip recession
fears that always occur in a recovery; fears that are only setting
up to give way to further gains? July's earnings season has
buoyed stocks as we thought they might. However, July is often
a very good month; August and September are not. Labor growth
may or may not accelerate from here. History would say that
it should improve. Fortunately, our investing strategy compels
us to follow the tried-and-true route of our signals rather
than having to bank on whether labor will or will not improve,
and whether the market will or will not respond favorably to
that input.
Far too often supposed news sites fail to educate their audience,
instead preferring to blind them with innuendo and opinion paraded
forth as news. When it comes to U.S. government finances, our
difficulty in understanding is compounded by the maze of government
accounting intricacies. To help clear that up for at least a
minute or two, we found Chart 3 below to be
a very nice start.
Chart 3: The basics of U.S. government finances
Since 2000, the U.S. government has run a deficit - spending
more than we make, with our income primarily derived from tax
revenues. That deficit gets mostly financed by issuance of U.S.
Treasury notes - T-bonds and T-bills. Those bonds provide an
interest payment to the bond holders as shown in the bottom
right. There is much talk about the increasing U.S. debt some
day driving up interest rates and subsequently our interest
payments. Thusfar, none of that has come to pass. Interest rates
are at historic lows with no evidence in sight they will markedly
change (and the Fed having every incentive to keep rates low).
As a result of these low interest rates, the U.S. government's
interest payments are about the same as they were a full decade
ago, despite a huge rise in our debt over that time (and a large
rise in our economy as measured by GDP).
The typical notion is that the government steps in to provide
a safety net during a recession, either in the form of higher
spending programs, lower taxes, or some combination of the two.
As the economy recovers, the spending programs and tax cuts
get rolled back allowing the government's income statement to
substantially improve and the debt added during the recession
to be drawn down. Of course, problems arise if the recession
lingers, or if the recovery is weak. Then, it becomes politically
difficult to roll back the spending and/or tax cuts because
people argue that the support these programs provide is still
needed.
Thus is the situation the U.S. faces currently. When the economy
recovered in 2003-2007, the tax cuts enacted during the 2000-2002
slowdown were never rolled back. The result? Our debt doubled
through the decade despite a 45% growth in our economy, which
should have provided plenty of cover for rolling back the tax
cuts and improving the deficit. Instead, the economy imploded
and the deficits have soared to new heights leading many economists
to paint a pretty bleak financial picture of our future.
The overwhelming financial challenge in dealing with the nation's
deficit is the sheer size of the "Mandatory" expenses.
Assuming these are indeed mandatory, we are left with only about
1/3 of the spending to work with. Figuring we will only have
the gumption to trim defense spending and not dramatically cut
it, we are working with even less. Thus, we look to the income
side. There, the options are no more palatable. Raising tax
rates, or at least finally letting the tax cuts expire, is a
given. But pushing taxes much higher is something U.S. voters
are certainly not ready for, especially given the severe labor
problems and sluggish economy discussed above. Economic growth
becomes the hoped-for panacea, as growth generates more taxable
revenue and a better climate for working through the deficit
(evidenced by the major strides in deficit reduction made through
the 1990s).
The intractable nature of the "mandatory" spending
on one side and the relative lack of viable options for improving
revenue lead to a situation called a "structural"
deficit. It's not all that dissimilar from a family of five
owing more on their house than it's worth at a time when the
parents are unemployed during a severe recession. The "fixed"
expenses are high with few options for reduction. The income
is lacking with few options for making it better. Thus, the
deficit goes on and on while money is borrowed from every conceivable
corner to make ends meet. An improving economy hopefully brings
more job choices and a better chance at bringing income and
spending into balance. The good news? The U.S. government, at
least for now, has a heavy influence on interest rates and has
every incentive to keep talking those rates low. That's probably
it for the good news in government finances, however.
Warm wishes and until next week.
The TimingCube
Staff
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Turbo Model
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Classic Model
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