Thanks Steve, this is a very nice summary. However, even I, a
nonbusiness student, can see the flaws when the logic is applied to the
present situation. When the business cycle turns around, it is because
some basic money making process is improved. In the process, consumer
demand goes up because people have the money to spend, which causes a
self-reinforcing process. All the factors in place now are also
self-reinforcing, but in a negative way. I fear that this is the start
of the crash that occurs when the supply of ignorant people runs out and
no one is left to buy stocks.
Ed
Stephen A. Lawrence wrote:
Edmund Storms wrote:
I'm confused. Perhaps someone on this list has the answer. Everyone
who has discussed the issues here seems to agree to the following:
1. Increase in energy cost will drive up food and other commodity
prices, which will reduce consumer spending.
Yes, and increasing energy prices are what may very well kill the bull
for good this year. We shall see. I think it's significant that news
stories about oil still talk about "demand" much more than they talk
about "supply" -- it's as though most observers haven't yet absorbed the
fact that "supply" is not going to respond to increased "demand", no,
not this time...
2. Increased cost of personal transportation will reduce consumer
spending.
3. The collapse of the housing market will reduce consumer spending.
That's already happened, stocks have already fallen as a result, and
stock market investors try to drive very "far ahead on the road".
The housing mess is already fully factored into stock prices, or so it
appears; in fact some building stocks have actually been showing signs
of going up again. As an outrageously out-on-the-end-of-the-bell-curve
example, Comstock Homebuilding, http://www.comstockhomes.com/, is up
almost 40% **today**. (If you'd bet the wad on Comstock yesterday you'
be grinning today, that's for sure -- but yesterday they looked like
going bust; you just never know.)
4. The fed generated inflation will reduce consumer spending.
But injecting money into the economy stimulates spending, it doesn't
restrain it, and in fact the increase in the money supply is one of the
elements pushing up the leading indicators. (Looks like M2 is the one
they use, don't ask me why; when I was in school it was M1, M1, M1,
nobody cared about M2 or M3.)
Inflation favors borrowers, it favors spenders, it favors people who buy
today and don't wait for tomorrow.
5. Loss of jobs will reduce consumer spending.
Yes, but job loss *usually* comes late in the downturn, and the stock
market tends to turn up long before the employment data, because all the
players are trying to outguess each other and "get there first". So,
reduced employment may actually encourage investors to get back into the
market.
The stock market leads the job market, typically by a number of months.
Consumer spending determines the profit of companies. So, why then is
the stock market going up?
It goes up in advance of the changes in company profits.
**************************
But wait, we need a caveat here: Anyone who listens to investment
advice from me should have his head examined.
**************************
OK with that said, let's move on:
Last Friday, GE reported weaker results than expected and the market
went down like a rock. It looked like a panic, and against a backdrop
of skyrocketing oil prices, things looked very black indeed.
That's how it usually looks at the market bottom, of course.
This week, in stark contrast, a whole raft of companies reported
earnings results, and they were all awful. In response, the market ...
went up. Everything's heading up this week; it looks like spring. As I
mentioned, even some homebuilding stocks are coming back from the dead;
even the *airlines* are apparently bouncing back a bit. Of course, it
could be just an upward blip before the *real* crash, or it could be
that the market has "turned the corner".
Anyhow after seeing the market showing a little life, I dug out the
leading indicators report and was surprised to see that the leading
indicators had gone up this month, in spite of the stock market going
down over the last few weeks (the market is one of the biggest items in
the leading indicators, IIRC).
There are other straws in the wind: Congress is about to pass a rescue
package, which normally happens only after the need is gone. (I learned
that in a management class I took a long, long time ago -- Congress's
inability to act fast enough to do any good in battling a recession is
so consistent, it's included in standard curricula dealing with business
cycles.) Jobs data finally are showing rising unemployment, which
usually happens not long before the market starts to recover
(employment's a lagging indicator).
So, my personal conclusion is that the market's heading up again, or if
not just yet, it will be, real soon now.
I'm not unique; I figure if I think it's heading up, probably a lot of
other people do too, and some of them trade commodities. And if they
think the market's turned the corner, they'll start bidding up oil, too,
since a rising market will inevitably boost demand even farther.
(Whatever .... time to refer back to that "Caveat" I mentioned, up
above...)
One last point: A war is very pro-business, because it injects cash
into the economy at the same time that it drains consumer goods from the
economy. It's very difficult to have a recession *and* a war at the
same time. Bush has managed it, but even he probably can't keep it up.
(Whoops -- check that "Caveat" again, folks.)
Ed
Stephen A. Lawrence wrote:
The government office concerned with such things has predicted that
oil prices will average about $101/bbl this coming year, if I recall
correctly.
Commodities traders don't seem to agree. As I write this, May crude
oil contracts are going for $116.82/bbl.
That's up $4 in the last four days.
Sorry if this seems boring or off topic, but I'm finding this run-up
in oil prices fascinating/horrifying. It's presumably driving the
food price problems, of course. And in turn, the oil price run-up is
no doubt driven in part by the nascent recovery in the U.S. stock
market (which may very well sputter again, of course, due in large
part to the run-up in oil prices).
Leading indicators blipped up in March, for the first time in months,
despite the stock market still being down. Ratios of coincident to
lagging and leading to lagging are still both down, though, for
whatever that's worth. Here's the text from the first page of the
March leading indicators report:
==========================
[begin quoted text]
• The leading index increased slightly in March, following five
consecutive monthly declines. Money
supply (real M2)*, index of supplier deliveries (vendor performance)
and the interest rate spread
made large positive contributions to the index this month,
offsetting the large negative contributions
from initial claims for unemployment insurance (inverted), building
permits and stock prices. During
the six-month period ending in March, the leading index declined 1.6
percent (a -3.3 percent annual
rate), and the weaknesses among its components have been very
widespread.
• The coincident index also increased slightly in March, following
a decline in February. Industrial
production contributed positively to the index in March, more than
offsetting the decline in
employment. Despite this month’s gain, the six-month change in the
coincident index has fallen to -
0.1 percent (a -0.2 percent annual rate) from September 2007 to
March 2008, down from 0.6
percent (about a 1.1 percent annual rate) in the six-month period
through December 2007. In
addition, the weaknesses among the coincident indicators have been
very widespread in recent
months. The lagging index continued to increase in March, and as a
result, the coincident to lagging
ratio continued to decrease for the third consecutive month.
• Since the middle of 2007, the leading index has been declining
while the coincident index, a measure
of current economic activity, has also deteriorated in recent
months. In addition, the weaknesses
have also become more widespread among the components of both
indexes. Meanwhile, real GDP
growth slowed substantially to 0.6 percent in the fourth quarter of
2007, down from 4.9 percent in
the third quarter and an average of 2.2 percent, annual rate, in the
first half of 2007. The current
behavior of the composite indexes suggests economic weakness is
likely to continue in the near term.
