With a mildly positive retail environment over the past year plus
a powerful recovery of export sales, the $ value of industrial
production is recovering rapidly. Through 12/09, $ production is
up 0.6% following several months of deep negative readings. On
the other hand, the broad measure of credit driven liquidity is
down 1.8% yr/yr reflecting a contraction in private sector credit
demand. As a consequence, the US is now running a liquidity
deficit instead of the large measures of excess liquidity seen earlier
in the year. So a major tailwind for the stock market has now turned
into a mild headwind. That development coupled with a rapid rise
in the price of oil above $75 signals caution based on my indicators.
The liquidity and oil price measures are secondary indicators and
would be far more fearsome were the US in an advanced state of
expansion with monetary tightening and with short term interest
rates in sharp ascent. Even so, for the stock market to maintain
buoyancy in a period of economic liquidity deficit, investors must
find it has special relative appeal and be willing to sell off other
assets to divert funds into equities. With cash / near cash holdings
low, a likely candidate would be bonds. And, such might happen, but
that is a very tricky call.
When I look at the stock market over the longer run compared to
the aggregate growth of credit driven liquidity over the comparable
period, that ratio remains well below levels seen at major market
tops. So, I am talking caution rather than bear. Moreover, as the
recovery proceeds and private sector credit demand rises, the stress
on liquidity may ease nicely and return the stock market to a much
more favorable position.
Since few analysts do this kind of work anymore, my concerns
might prove to be but a quaint artifact. But, think it over
nonetheless.
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