The Will Robinson Moment continued Part 4


The United States economic indicators have been negative for so long, but in the last quarter of 2016 we see the long awaited change to positive readings. It is encouraging. The positive economic measures are accompanied by positive changes in money and interest rate indicators, with offsets from negative readings in equity market and foreign exchange. So we have a bit of a mixed bag, but do see the blended economic picture as more positive then it has been over the past years.

The economic indicator is a composite of the following factors:

• Durable Goods produced and Durable Goods Orders
• Factory operating rates, inventories, shipments and new orders
• Business Inventories and Business Sales
• Domestic Auto Sales
• Construction Spending and New Building Contracts
• New Housing Starts
• Personal Income and consumption
• Consumer spending
• Average New Home prices
• Baltic Dry Rates
• Steel Production
• Electric Power Usage
• Exports and Imports
• Jobless Claims and Continuing Claims for Unemployment
• Mining and Petroleum Rigs running
• Producer Price Index

Money and Interest Rate indicators are a composite of the following factors:

• Total Loans outstanding in the U.S.
• The M2 Money Supply
• Free Reserves in the U.S. Banking System
• The Federal Funds Rate
• The rate spread between Investment Grade Corporate bonds and Intermediate Grade bonds
• The rate spread between the Ten-Year Treasury bond and Intermediate grade Bonds
• The 3-month Treasury Bill
• The ten year Treasury Bond

The Market indicator is a composite of the following factors:

• The Price Earning ratio of equities
• The yield gap between fixed income coupon payments and dividends paid on common stocks

The Foreign Exchange indicator is a composite of the following factors:

• The UK Pound, China Renminbi, Japanese Yen, and EURO vs the U.S. Dollar

The individual indicator readings of the four categories currently read as follows:
• Economic reading of positive 174
• Money reading of positive 190
• Interest Rate reading of positive 46
• Market reading of negative 260
• Foreign Exchange reading of negative 115

Below is the chart of the year-over-year percentage change in the individual economic, money, interest rate, market and foreign exchange categories:

% change
Year over Year Change 12/31/2016

Dow Jones Industrial Avg 14%
Durable Goods -1%
Factory Op Rate -2%
Industrial Prod -2%
Business Sales 2%
Domestic Auto Sales -9%
Factory Shipments -2%
Business Inventoris 0%
Factory Inventories -3%
New Factory Orders -1%
Producer Price index 1%
Construction Spending 3%
New Housing Starts -7%
Fed Funds Rate 11%
Total Loans Outstanding 6%
Total Real Estate Loan 6%
M2 Money Supply 7%
Free Banking Reserves -16%
Interest Confidence Index 6%
Gov’t Corp Yield Spread -23%
Stock/Bond Yield Gap -9%
DJ P/E 31%
Personal Income 4%
Personal Consumption 3%
Pounds per Dollar -18%
YEN per Dollar 2%

3-month T Bills Auc 112%
10 year Treasuries 14%
Dollars per EURO -4%

Consumer spending 4%
Durable consumption -3%
Durable orders 1%

Non Borrowed Reserves -14%
Average NHome price -5%

Median NH Price 0%

3 mo-10 yr spread 2%

Steel Production 9%
Exports 2%
Imports 1%
Initial Jobless claims -8%
Continuing claims -10%
Avg weeks unemployed -6%
U-6 -6%
Median Household incom 5%
Mean Household income 5%

Total Banking reserves -14%
Discount window borrow -55%

Mining -3%
Petroleum Capacity -2%
Rigs running 0%
Retail Sales 4%
Wholesale sales 2%
Wholesale inventories 0%
Building Contracts 12%
Consumer Confidence 16%
Leading eco indicators 1%

The sustainability of the improving economic trends is critical to an expanding equity market. Monitoring the new data releases on each category as the weeks and months unfold will be extremely important to changes in stock valuations.

The negative market and FX readings are strong causes of concern for if the US economy slows or turns negative in growth, these metrics will move in a direction that could be very painful for investors.

Author: Thomas Connolly

Tom possesses a rich and diverse background that includes deep investing experience, senior corporate executive positions, and roles as a Regional Managing Partner and Global Industry Leader within Ernst & Young. He has advised executives on some of the largest acquisitions and dispositions in the Media and Entertainment industry, including clients such as Comcast, Citibank, Sony, Dalian Wanda and Publicis. Tom is a Certified Public Accountant with a Masters Degree from Columbia University. His skills are further accompanied by a personal passion for the study of economic trends and evolving market dynamics.

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