Economic Indicators

Weekly and monthly leading indicators have stabilized over the
past two months at very low levels. There was a little slippage
toward the end of the month as jobless claims rose sharply again.
We remain on the cusp of a downturn not seen since the depression
years, and further significant weakness in the leading indicators
would signal that we may enter into a far more serious downturn.

My economic power index is at a +2.2 through Jan., primarily
reflecting yr/yr real wage growth of 3.8%. That is a strong number
and would normally make a recovery call a slam dunk. But as we all
now know, consumers are building liquidity in heavy preference to
spending, and we need to have a better balance between the two to
see recovery develop. The clock is running because with such a weak
job market, the growth of the current dollar wage can be expected to
slow. I also continue to look forward to spring, when sharply higher
housing affordability will test consumer interest. The Fed quietly
shrunk its greatly enlarged balance sheet by 18% in Jan., resulting
in a significant decline in the basic money supply. If this condition
persists, I would not be surprised to see the Fed purchase $100
bil. of Treasuries across the spectrum to inject liquidty directly
into the sytem and put some downward pressure on the yield
curve. That would further help the mortgage market.

As you can imagine, profits forecasts continue to be slashed with
the financial sector taking the heaviest hit by far. My profit model
for this sector shows an extended period of flat net revenues, fees
and operating expenses. The damage is mostly coming from loan
losses with securites losses a small but rising drag. As a group, the
major banks are well in the red. Analysts have continually
underestimated the losses. However, remember my point of a
few weeks back, banks can still be under repair in the early phase
of a recovery.