Great traders and true value investors know that it’s not only the return function that dictat...
More Green Shoots than Brown Weeds
07/15/2009 10:17 am EST
David Fried, editor of The Buyback Letter, finds good news that points to a better market ahead.
Let’s touch on a few developments that shed light on the positive direction [in which] the market seems to be heading.
- Americans are saving money again. Personal income rose 1.4% in May, the fastest since May 2008. The saving rate soared 1.3 points, the most in a year, to 6.9%, above its historical mean of 6.6% and at its highest level since December 1993.
- Households are able to pay debts. The household debt service (DSR) and financial obligations (FOR) ratios fell in [the first quarter] to their lowest levels in more than four years. This indicates an increased ability to make required payments out of disposable personal income. The ratios are still historically high and inconsistent with a secular trough, [but they are] moving in the right direction!
- Sentiment is up, but mixed. The Reuters/University of Michigan Consumer Sentiment Index firmed in June, rising to 70.8, the highest level since February 2008. However, another widely watched barometer—the Consumer Confidence Index—is down to 49.3, after hitting a May level of 54.8. While consumer sentiment has risen well above its new historic low of 25.3 in February, confidence is still well below what's considered healthy.
- The labor market has stopped deteriorating. While it may not be improving, the labor market may have stopped deteriorating. Remember that unemployment numbers are a lagging indicator. It will take employment six months to a year to after a recession to really pick up.
- Housing is doing better. Existing home sales rose for the second consecutive month, up 2.4% to a 4.77-million unit annual rate in May. Sales have risen 4.8% in the past two months, the largest two-month improvement since April 2004. We are beginning to see prices stabilize on an absolute level, as homes in the $400,000-$500,000 range gained market share at the expense of lower-priced homes for the first time since last year. These numbers are more important than the employment figures, because housing has led the rebound from every recession in this country since 1960.
- Manufacturing is up: Manufacturing activity in the Kansas City Federal Reserve District rebounded in June, [while the Philadelphia Fed’s] General Business Activity Index soared 20.4 points, the most in nine months, beating expectations. Manufacturers are increasingly optimistic about activity six months from now.
- The Leading Economic Index is up: The Leading Economic Index (LEI) rose for a second month in May, surging 1.2%, the most since March 2004, generating an expansion signal for the economy. The indicator has had almost a perfect track record in the past six recessions, identifying the end of downturns within two months.
The market has come a long way since the dark days of last fall. Even in a market that seems to be improving; there may still be a lot of pain to go through. But all in all, the market and the economy look like they are on the mend.
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