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of 156 found.
ECRI Recession Watch: Weekly Update
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) is at 133.2, up from the previous week's 132.0. The WLI annualized growth indicator (WLIg) is at -2.4, down from -2.9 the previous week. ECRI's latest public statements have focused on Japan. The website now features a November 17th response to the announcement of Japan's Fourth Recession Since 2008.
Is the Stock Market Cheap?
by Doug Short,
Here is a new update of a popular market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly averages of daily closes for the past month, which is 1993.23. The ratios in parentheses use the monthly close of 2003.37. For the earnings, see the table below created from Standard & Poor's latest earnings spreadsheet.
Financial Repression (and How to Defend Yourself From It)
by Mike Shedlock of Doug Short,
I had the pleasure of being interviewed by Gordon Long last week. Gordon is publisher and editor of Gordon T Long Macro Analytics. The topic was "Financial Repression". What is financial repression? I defined it as "a set of fiscal and monetary policies for the expressed benefit of the ruling class: politicians, banks, and the already wealthy, at the expense of everyone else." In the video, I give numerous examples of repression, noting that central bank sponsored inflation is the epitome of financial repression. We also discuss what to do about financial repression.
Visualizing GDP: The Consumer Is Key... and at the Razor's Edge
by Doug Short,
Over this time frame, we see that the personal consumption expenditures component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. As the Q2 GDP component analysis clearly illustrates, personal consumption expenditures, at 0.07 of the real GDP 1.29, is at the razor's edge of positive territory.
Taxes, Entitlements and the Federal Debt Crisis
by Doug Short,
Let's take a closer look at Uncle Sam's balance sheet for last year and the official government projections for 2011 and the decade beyond. With the looming congressional showdown on the debt ceiling, it seems particularly appropriate to understand the broader context. For a quick review of 2010, here is a slide I created for a presentation at the Retirement Income Industry Association (RIIA) conference. 2010 entitlement costs exceeded the entire tax revenue for the year. However, according to the Congressional Budget Office, entitlements only accounted for about 55% of 2010 spending.
Market Valuation Indicators Continue to Signal Caution
by Doug Short,
Here are the four market valuation indicators I regularly follow: The Crestmont Research P/E Ratio, The cyclical P/E ratio using the trailing 10-year earnings as the divisor, The Q Ratio, which is the total price of the market divided by its replacement cost and the relationship of the S&P Composite to a regression trendline. To facilitate comparisons, I've adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Based on the S&P 500 monthly data, the market is overvalued somewhere in the range of 34% to 48%.
The ECRI Weekly Leading Index: Ten Consecutive Weeks of Slowing Growth
by Doug Short,
The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 2.0 from last week's 2.9. This is the tenth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
Crestmont Market Valuation Update
by Doug Short,
The recent article P/E: Future On The Horizon by Advisor Perspectives contributor Ed Easterling provided an overview of Eds method for determining where the market is headed. His analysis is quite compelling. Accordingly I have added the Crestmont data to my monthly market valuation updates. The first chart is the Crestmont equivalent of the Cyclical P/E10 ratio chart Ive been sharing on a monthly basis for the past few years. The Crestmont P/E of 19.3 is 41% above its average of 13.7. This valuation level is almost identical what we saw in my latest S&P Composite regression to trend update.
Quantitative Easing Versus the 1940 Fall of France
by Doug Short,
In real (inflation/deflation-adjusted) terms, when did the US market permanently regain the high reached in 1929? The first chart illustrates two answers to the question. One uses the real price and the other uses the real total return. The remaining charts compare market performance since 2000 with the equivalent elapsed time following the peak in 1929. As the final chart shows, the current real total return over the past eleven plus years has been worse than the performance over the equivalent timeframe during the Great Depression ? at least until the second round of quantitative easing.
The ECRI Weekly Leading Index: The Ninth Week of Slowing Growth
by Doug Short,
The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 2.9 from last week's 3.6 (a downward revision from 3.7). This is the ninth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
Estimating Future Returns
There are several reasons why it may be useful to have a more robust estimate of future expected returns on stocks: People who are approaching retirement need to estimate probable returns in order to budget how much they need to save. A retiree's level of sustainable income is largely dictated by expected returns over the early years of retirement. And investors of all types must make an informed decision about how best to allocate their capital among various investment opportunities. Many studies have attempted to quantify the relationship between Shiller PE and future stock returns.
The ECRI Weekly Leading Index: Eight Weeks of Declining Growth
by Doug Short,
The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 3.7 from last week's 4.1. This is the eighth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
Estimating Future Returns: New Update
Traditional Advisors assume that the best estimate of future market returns in all market environments is the simple long-term average return on stocks: about 6.5% per year after inflation. We hypothesized that it is possible to construct a statistical model using long-term market data which will allow us to make much more accurate predictions about long-term returns. It turns out that we were right. Those who are interested in the process we used, and the specifications of our model, are encouraged to read our full report.
Inflation: A Five-Month X-Ray View
by Doug Short,
Here is a table showing the annualized change over the past five months for Headline and Core CPI. I've also included each of the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation. We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the individual components.
The ECRI Weekly Leading Index: A Seventh Week of Declining Growth
by Doug Short,
The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 4.1 from last week's 4.9. This is the seventh consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15.
Will the "Real" GDP Please Stand Up?
by Doug Short,
How do you get from Nominal GDP to Real GDP? The Bureau of Economic Analysis (BEA) uses its own GDP Deflator for this purpose. In a recent commentary Rick Davis, the founder of Consumer Metrics Institute, made some interesting observations on the BEA's adjustment technique. His comments prompted me to investigate what Real GDP would look like if we used the PCE Deflator or the Consumer Price Index for the adjustment.
The ECRI Weekly Leading Index: A Sixth Week of Declining Growth
by Doug Short,
The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 4.9 from last week's 5.0. This is the sixth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
Crestmont Market Valuation Update
by Doug Short,
The recent series of articles by guest contributor Ed Easterling triggered a great deal of interest in the Crestmont P/E ratio. Accordingly I have added the Crestmont data to my monthly market valuation posts. The first chart is the Crestmont equivalent of the Cyclical P/E10 ratio chart I've been updating monthly for the past few years. The Crestmont P/E of 20.2 is 47% above its average of 13.7. This valuation level is almost identical what we saw in my latest S&P Composite regression to trend update and somewhat higher than the 40% above mean for the Cyclical P/E10.
The ECRI Weekly Leading Index: A Fifth Week of Decline
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) declined to 5.0 from last week's 5.3. This is the fifth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
The ECRI Weekly Leading Index: A Fourth Week of Decline
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) declined to 5.3 from last week's 6.4. This is the fourth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions. A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s.
Profit Margin Squeeze Continues to Grip the Economy
by Doug Short,
The two charts below offer clues for evaluating the risk of profit margin squeeze in the current economy. One is the ratio of crude to finished goods in the Producer Price Index (data through April). The other is an indicator constructed from two data series in the Philadelphia Feds Business Outlook Survey through todays release. It is the spread between the Philly Feds prices paid (input costs) and received (prices charged) data. A major risk factor for margin squeeze is the increase in commodity prices over the past several months with the price of oil and gasoline as the dominant factor.
Beyond The Horizon: REDUX 2011
by Ed Easterling of Doug Short,
Rather than rehash old ground, this article will provide a speed-round of charts and limited commentary to explain the current conditions and the expectation for an earnings decline within the next few years. Once again, since the fundamental principles of the business cycle cause history to repeat itself, a decline in EPS should not be beyond your horizon!
What 'Secular Cycle' Means
by Ed Easterling of Doug Short,
There is a skeptical gremlin perched on the left shoulder for many investors. He often sneers at notions of "cycles" and other presumably predictable periods. When the word "secular" accompanies the word "cycle," that gremlin becomes even more scornful. Why do we use the term "secular cycle" with the stock market and what does it mean? Figure 1 presents a view of the stock market over the past century. You will note periods of above-average returns (i.e., the green bar periods) and periods of below-average returns (i.e., the red bar periods).
Inflation: A Four-Month X-Ray View
by Doug Short,
Here is a table showing the annualized change over the past four months for Headline and Core CPI. I've also included each of the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation. We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the individual components.
The ECRI Weekly Leading Index: A Third Week of Fractional Decline
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) declined to 6.4 from last week's 6.6. This is the third week of fractional decline from the 11-month interim high of 7.7 for the week ending on April 15.
Retail Sales: The "Real" Story
by Doug Short,
I delayed my commentary on the latest Retail Sales Report until today because my focus is on "real" (inflation-adjusted) and population-adjusted retail sales data. Now that we have the April CPI report, let's analyze the numbers. Retail sales rose 0.5% in April. The chart below shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted the approximate range of two major economic episodes. The Tech Crash that began in the spring of 2000 had relatively little impact on consumption. The Financial Crisis of 2008 has had a major impact.
Estimating Future Returns: New Update
At Butler|Philbrick, we believe in crunching the numbers ourselves to discover where meaningful relationships exist. We apply statistical models to improve our chances of success. Traditional Advisors assume that the best estimate of future market returns in all market environments is the simple long-term average return on stocks: about 6.5% per year after inflation. We hypothesized that it is possible to construct a statistical model using long-term market data which will allow us to make much more accurate predictions about long-term returns. It turns out that we were right.
The ECRI Weekly Leading Index: A Second Week of Fractional Decline
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) declined to 6.7 from last week's 7.5. This is the second week of fractional decline from the 11-month interim high of 7.7 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
The Philly Fed ADS Business Conditions Index
by Doug Short,
The Philly Fed Aruoba-Diebold-Scotti Business Conditions Index is not very well known. But as this commentary demonstrates, it has had an amazing correlation with the better known Chicago Fed National Activity Index (CFNAI). Check out the parallel regressions in the two Fed indicators with a regression through GDP over the same time frame.
Is the Stock Market Cheap?
by Doug Short,
Here's the latest update of my preferred market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly averages of daily closes for March 2011, which is 1,363.61. The ratios in parentheses use the March monthly close of 1331.51. For the latest earnings, see the adjacent table from Standard & Poor's.
The ECRI Weekly Leading Index: Down Fractionally
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) declined fractionally to 7.5 from last week's eleven-month high of 7.7. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
U.S. Economic Growth: GDP Minus the Federal Deficit
by Randy Degner of Doug Short,
A few days before today's publication of the Q1 2011 advance GDP estimate, I received an email that eloquently expresses a widely held view of Gross Domestic Product ? namely that it is a gross exaggeration. It was accompanied by a pair of chart. One is straight from the St. Louis Federal Reserve database. The other is the creation of the author of the email.
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) increased to 7.7 from
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) increased to 7.7 from a slight downward revision (6.8 to 6.7) for the previous week. This is this highest level since May 14, 2010.
Understanding Your Capital
by Doug Short,
For many years financial planners embraced the image of a three-legged stool to explain sources of retirement income: Social Security, Pensions, Personal Savings. Of course, as we all know, for most people the stool now has only two legs, making it a rather wobbly support. Over the past few decades, private pensions have essentially disappeared. They may still be available for government and some union employees, but pensions in the world of private business are generally available only to a shrinking number of older workers who were grandfathered into a now closed system.
Inflation, the Education Bubble, and the Odds of a Disastrous Retirement
by Doug Short,
Mish Shedlock featured an article with a title that summarizes a huge financial problem: The Education Bubble; Student Loan Debt Passes Credit Card Debt, Expected to Hit $1 Trillion. Mish's article especially resonates with my own research on the astonishing inflation in college tuition and fees, an imminent disaster that's been in the making for decades. This chart shows the relative growth of education costs as compared to the consumer price index. College tuition and fees is a mere 1.5% of the overall CPI. But for households that pay these expenses with student loans, the burden is high.
The ECRI Weekly Leading Index Continues to Hold Steady
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) has held relatively steady over the past eight weeks. The Growth Index is now at 6.7 based on data through April 8. The average of the past eight weeks is 6.6 with a range of 6.2 to 7.1 (unchanged from last week). The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom.
Price and Earnings Growth Across Market History
by Doug Short,
Last week guest contributor Chris Turner's article on S&P 500 Trailing Earnings offered a fascinating perspective on the relationship between price and earnings in the S&P 500 since the late 1980s. His research prompted me to create a series of charts documenting the relative growth of price and earnings from various starting points in market history to the present. The chart below is an overlay of the real (inflation-adjusted) S&P Composite price and earnings since 1871. I've also plotted a 10-year moving average of earnings for those who share my interest in the cyclical P/E ratio.
The ECRI Weekly Leading Index: Growth Is Holding Steady
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) has held relatively steady over the past seven weeks. The Growth Index is now at 6.7 based on data through April 1. The average of the past seven weeks is 6.6 with a range of 6.2 to 7.1.
S&P 500 Trailing Earnings and What They Suggest Going Forward
by Doug Short,
When questioned the other day about the relationship between trailing earnings and the S&P 500, I was inspired to create the chart below to study the problem. It is based on Standard & Poor's Senior Index Analyst Howard Silverblatt's S&P earnings estimates spreadsheet. It shows the one-year trailing earnings for S&P 500 in blue with a linear regression to highlight the trend. The five-year average of trailing earnings in is shown in red. The Standard & Poor's one-year trailing estimates through 2012 are highlighted in yellow. The quarterly closes of the index itself are depicted in green.
Estimating Future Returns
Investors should heed the results of robust statistical analyses of actual market history, and play to the relative odds. This analysis suggests that markets are currently expensive, and asserts a very high probability of low returns to stocks (and possibly other asset classes) in the future. Remember, any returns earned above the average are necessarily earned at someone else's expense, so it will likely be necessary to do something radically different than everyone else to capture excess returns going forward.
Taxes, Entitlements, and Our Monstrous Budget Crisis
by Doug Short,
From time to time I've shared my historical perspective on Debt, Taxes and Politics. Let's now look at what's happening this week. Congress continues to squabble over trivial budget cuts for the 2011 fiscal year, for which the Congressional Budget Office projects a staggering deficit of $1.48 trillion. Meanwhile the word is out that tomorrow Republicans will unveil a plan to cut $4 trillion from the budget, primarily from Medicare and Medicaid, over the next decade. Against these political maneuverings, a partial government shutdown looms if congress can't pass a budget by Friday.
The ECRI Weekly Leading Index: Holding Steady
by Doug Short,
The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s. It lagged one recession (1981-1982) by nine weeks. The WLI did turn negative 17 times when no recession followed, but 14 of those declines were only slightly negative and most of them reversed after relatively brief periods. Three other three negatives were deeper declines.
Three Market Valuation Indicators Continue to Signal Caution
by Doug Short,
Here is a combined perspective on the three market valuation indicators I routinely follow and most recently updated on Friday: The relationship of the S&P Composite to a regression trendline. The cyclical P/E ratio using the trailing 10 year earnings as the divisor. The Q Ratio, the total price of the market divided by its replacement cost. This post is essentially an overview and summary by way of chart overlays of the three. To facilitate comparisons, I've adjusted the Q Ratio and P/E10 to their arithmetic mean, which I represent as zero.
Is the Stock Market Cheap?
by Doug Short,
A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.
Market Valuation: The Message from the Q Ratio
by Doug Short,
The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It's a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies. Fortunately, the government does the work of accumulating the data for the calculation. The numbers are supplied in the Federal Reserve Z.1 Flow of Funds Accounts of the United States, which is released quarterly.
The ECRI Weekly Leading Index: Slight Moderation in Growth
by Doug Short,
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) continues its rise. The Growth Index is now at 6.5 based on data through March 18. A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s. It lagged one recession (1981-1982) by nine weeks. The WLI did turned negative 17 times when no recession followed, but 14 of those declines were only slightly negative (-0.1 to -2.4) and most of them reversed after relatively brief periods.
Profit Margin Squeeze and Inflation Risk
by Doug Short,
A major risk factor for margin squeeze is the increase in commodity prices over the past several months. The latest turmoil in the North Africa and the Middle East has now put oil prices in the spotlight. At present, in light of the unemployment rate and the ongoing demographic shift, the rise in commodity prices probably poses more risk of margin squeeze than run-away inflation. Some degree of cost-push inflation may be a near-term risk, but the demand-pull inflation we saw in the 1970s is difficult to evision in the US economy of this decade.
The ECRI Weekly Leading Index Continues Its Climb
by Doug Short,
The question had been whether the WLI decline that began the the Q4 of 2009 was a leading indicator of a recession. The published index has never dropped to the -11.0 level in July 2010 without the onset of a recession. The deepest decline without a recession onset was in the Crash of 1987, when the index slipped to -6.8. The ECRI managing director correctly predicted that we would avoid a double dip. The latest GDP for Q4 of 2010, revised down slightly to 2.8, confirms the ECRI stance.
What Inflation Means to You: Inside the Consumer Price Index
by Doug Short,
The Fed justified the current round of quantitative easing "to promote a stronger pace of economic recovery" The Fed is trying to increase inflation, operating at the macro level. But what does an increase in inflation mean at the micro level, specifically to your household? Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers.
The ECRI Weekly Leading Growth Index Up Slightly
by Doug Short,
The question had been whether the WLI decline that began the the Q4 of 2009 was a leading indicator of a recession. The published index has never dropped to the -11.0 level in July 2010 without the onset of a recession. The deepest decline without a recession onset was in the Crash of 1987, when the index slipped to -6.8. The ECRI managing director correctly predicted that we would avoid a double dip. The latest GDP for Q4 of 2010, revised down slightly to 2.8, confirms the ECRI stance.
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of 156 found.
