Friday, January 20, 2012

Is the Economy Getting Ready to Shift Into Overdrive?

Consider the following charts:

Weekly initial unemployment claims have been decreasing for the last three months.  Yesterday, they printed a drop of 50,000.  While the series is by definition volatile, the trend is very encouraging. 

The 4-week moving average is also moving lower. 

Both of the above numbers are now below 400,000, which is a very important point.  

While there has been much talk and understandable concern about the job market, notice that the economy has created 1,572,000 in the last 12 months.  Granted, that is far from enough, but it's not as though nothing has been happening.  

The unemployment rate has dropped nearly a point over the last year.

The homebuilding sector of the stock market is in the middle of a very strong rally.  The daily chart (the upper chart) shows prices are at a 6 month high.  Morover, the underlying technicals are solid.  The EMAs are bullishly aligned, the MACD is rising and we're seeing money flow into the market.  Also note the volume surge over the last few weeks, as evidenced by the sharp increase in the A/D line.

The lower chart (a weekly chart) shows a very strong rally since last October, rising momentum and increasing volume inflow.  notice the very strong weekly bars over the last few weeks as well.  In other words, it looks as through traders are moving money into the homebuilding sector.  A move above 19.5 would be technically important.

The point of the above two charts is this: is the homebuilding ETF acting as a leading indicator of the housing market?

After dropping in the fall of last year, auto sales have picked-up and are now near their highest point of the recovery.  In addition, consider this data point:
The average age of a car or truck in the U.S. hit a record 10.8 years last year as job security and other economic worries kept many people from making big-ticket purchases such as a new car.

That's up from the old record of 10.6 years in 2010, and it and continues a trend that dates to 1995, when the average age of a car was 8.4 years, according to a study of state vehicle registration data by the Southfield, Mich.-based Polk automotive research firm.
That's a lot of pent-up demand for a durable good.  A big increase in auto sales was a big reason for the strong economy of the early 1950s, and may help to provide some of the ripple effect associated with an increase in new home sales that the economy is missing.

Overall real retail sales are still increasing and in an upward trajectory.   However, December's results were disappointing, especially considering all the advance hoopla.

However, a broader and more complete picture of consumer spending -- real PCEs -- is clearly above its previous peak and is moving higher.

Copper is rallying strongly on the weekly chart.  This tells us industrial demand -- especially from China -- is increasing.

And regarding Europe, consider this:
Spain and France, both hit by ratings downgrades last week, paid predominantly lower borrowing costs Thursday than at their previous auctions as markets remained upbeat after news of a possible boost in resources for the International Monetary Fund and hopes that Greece is moving closer to a deal with its bondholders.

Spain sold €6.61 billion (€8.5 billion), more than the €3.5 billion to €4.5 billion planned. With its January bond auctions, Spain has completed almost 20% of its 2012 targeted gross issuance of €86 billion.
This is but one auction -- and one of the first big ones after the ECB opened up an increased lending facility.  However, it is a good sign. 

Also consider these data points:

After falling at the end of last summer, the ISM manufacturing index has rebounded.  Also note this number never went negative, instead resting just above the 50 line. 

The ISM service index has been hanging just in positive territory as well.

Yesterday's initial claims print was the real driving force of this thought process.  That number has been fluctuating around 400,000 for the better part of the last year.  Yesterday's drop was exceedingly sharp and pronounced, and moved the number well into a "we're going to have a stronger recovery" territory.  My guess is employers have gotten to the point where they simply have to increase their labor force and so have said, "it's time.  Let's move forward."  Now, it's also important to remember that it's only one print and could reverse next week.  But then it's important to note the overall direction, which is clearly lower.  That makes me think a rebound will be a temporary hike as opposed to the beginning of a long-term, upward trend.

Couple that data with the recent employment figures -- which have been pretty good -- and it appears that the employment situation is finally set to really improve.  This solves one of the biggest problems with the economy.  That led me to look at the homebuilding sector of the stock market, which I hadn't really seen in a while.  The charts were very bullish, which made me think traders were more and more comfortable making long-term bets on the market.  Assuming the employment market continues to improve, that should have a ripple effect into the housing market, where record low interest rates and lower prices should bring in buyers.  The continued strength in car sales tells me that consumers are comfortable making long-term purchases, so a new home is a simple stretch from that position.  Assuming the preceding thought process is accurate, we see that the economy is on the way to solving its two big problems: employment and housing. 

Also note the general backdrop provided by the rest of the economy is still fairly sound.  The manufacturing and service sectors -- as represented by the respective ISM indexes - are still in positive (read expanding) territory.  This tells us that both business sectors are at minimum holding their own.   And while the EU situation is still the big wild card in the room, the recent move by the ECB to greatly increase liquidity is so far having its desired effect -- to calm markets.  While we're still not out of the woods in the EU (in fact, if anything will derail the previous thesis it's the collapse of the EU in some manner), the region has limped along for the last year.  If we do see a recession (or if we're already in one, which is highly likely) I think it will be shallow and only last for 2-4 quarters. 

Finally, consider this:

The US economy has been growing for the last nine quarters.  Granted, the growth has been weak, but it has been moving forward.  This tells us that there is already a foundation for growth. 

In short, the piece are aligning.  I will add that execution is an entirely different matter.  But, put me in the, "I think the possibilities are getting far more bullish" camp for the moment.