The weekly cyclical fundamental directional indicator closed out 2011 slightly below the
2010 close, for a decent match with the SP 500. The indicator has turned up sharply so far
in 2012 and this primarily reflects commencement of a seasonal rise in industrial commodities
prices as businesses add inventory to meet production schedules. US production of manufactured
goods closed out 2011 on a stronger note, but the big kicker for sensitive prices reflects some
renewal of business confidence about an eventual re-acceleration of industrial output in China
following preliminary monetary easing moves there. If the US maintains industrial output growth
and China re-accelerates, sensitive materials prices would likely trace out a seasonal rise through
mid - year, which would provide ongoing support for the US stock market. Remember, however,
that sensitive materials prices composites are available weekly, are volatile and will not conform
to the seasonal pattern if economic weakness develops. JOC/ECRI Ind. Com. Comp. (interactive)
Federal Reserve Bank Credit and the monetary base have also increased since early Dec. 2011.
Given the close attention investors have been paying to the Fed's balance sheet, this is
also a positive for stocks, but one with low future visibility and possible volatility since the
bulk of the increase in the Fed's credit offered comes from the new liquidity swap program for
the ECB and other needy central banks. For now, investors regard that support as a positive.
The unseasonable uptrend in the oil price which reflects issues in Nigeria and with Iran is not
bothering stocks for now, although a rising gasoline price, should it continue, will negatively
affect US consumer confidence before long.
One negative in my weekly cluster of indicators which is important for stocks and which has
yet to turn positive is corporate bond credit quality spreads (BAA / BBB). Spreads have been
widening since early 2011 and remain sharply larger than levels seen in mid - 2010, when the
market's p/e ratio first began to contract. Now, spreads have been more stable in recent weeks
so maybe confidence could turn there as well, but they are quite wide and not far below
levels which suggest a bet on economic decline.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!