Research Excerpts

Guest Column: 2012 US Macroeconomic Analysis/Forecast

Posted on: Friday, January 20th, 2012

The following is another guest commentary from my friend, economist James Padinha.  (James’ first one, entitled The Lay Of The Land, was posted here on November 20th.)

James and I have known each other since 1998, when James was a columnist for  Since then we have been corresponding on a regular basis, as a check and balance to each others’ own analysis.  James and I provide each other with a look at “the other side of the elephant”, so to speak, as I supply the technical backdrop while he counters with the fundamental/economic part of the equation. 

James is the best economist I know.  Unlike some more well-known economists, political bias does not taint James’ analysis.  He objectively and intelligently tries to extract the meaning and directional implications of the latest economic data, which is precisely what I try to do every day for Asbury Research.  I can tell you this: when James’ macro-economic analysis and my technical/quantitative analysis agree, we generally have a very good handle on what to expect from US financial asset prices one to to several quarters in advance.


John Kosar, CMT
Director of  Research

Hate and love and risk.

We remain fundamentally bullish on the economy (we do not expect GDP to post decreases in the next 18-24 months).  We believe strongly that economic expansions die in only one way—the Fed kills them—and in our view Gentle Ben does not have murder on the mind.

We have grown more bullish on the economy in the past few months because key macro indicators have improved.

 Leading indicators:

~ The 10-year/three-month yield curve has been level at about 200 basis points for four straight months.  In our view this curve has to flatten to about 150 basis points and stay there for at least a month or two in order to signal the possibility of a recession unfolding in the next four quarters.

~ M2 posted a year-ago increase of 10.0% in four of the past five months.  These increases mark the largest since the start of 2009.

~ The six-months-ahead general business activity index from the Philly Fed soared to 49.0 from 3.7 in the past seven months (note the black line in the chart below).  In our view this is extremely bullish.  Meantime the six-months-ahead capex index has also soared.  This is great news for fans of XLK.

~ The manufacturing workweek stands at a relatively high level (40.5 hours).

 Coincident and lagging indicators:

~ Private-sector employment (1.8%) and total employment (1.3%) are posting year-ago increases not seen since 2006-2007.  Also keep in mind that employment prints are clocking in smaller than normal in part because government employment posted a year-ago decrease in 27 of the past 30 months.

~ Mortgage rates sit at a record low.

~ Commercial and industrial (C&I) loans increased in each of the past 14 months.  This fact does not draw a lot of ink but banks have indeed been lending.

~ The core PCE price index posted a year-ago increase of 1.7% in three of the past four months.  These increases mark the largest since the start of 2010.

 Other observations:

~ The more market participants embrace the notion that the economy is sailing at a decent clip and unlikely to sink the more we like risk-on trades (especially if the technicals are also bullish).  XLI might be one good candidate.

~ In our view a pronounced and quick decrease in long yields (the cash 10 moving to (say) less than 1.60%) would owe not to the economy or her prospects but rather to a credit event or a shock.  In our view the move would probably prove temporary.

~ Our hated home dog NFL season ended with a bang when the 49ers not only covered but also won (63% of the public was on Nawlins).  Congrats to San Fran backers and we now focus on college hoops.

~ Fixed Income ETFs raked in $44.7 billion in 2011.  This marks the beefiest inflow of all ETF categories.  Meantime Dividend ETFs ($18.0 billion) and Large Cap Equity ETFs ($13.9 billion) also posted heavy inflows.  In our view the best investment candidates do not include the most loved assets more often than not.

~ Emerging Markets ETFs redeemed $4.0 billion in 2011.  Small Cap ETFs shed $3.5 billion.  These mark the two heaviest outflows of all ETF categories.  Meantime Financials ETFs ($1.5 billion) and Industrials ETFs ($1.3 billion) also posted chunky outflows.  In our view the best investment candidates include the most hated assets more often than not.  Note that XLF (up 8.1%) and XLI (up 7.8%) boast the second- and third-best sector performances of 2012.  XLB (another risk play) is up 9.7%.

~ Leveraged Short Equity ETFs are sucking in cash and Leveraged Long Equity ETFs are bleeding assets.   In our view this is especially bullish for the S&P 500 in the short term because the exotics crowd typically buys high and sells low.

Cheers and a terrific 2012 to all.

James Padinha

Editor’s Note: For the first time in a while James is available for contract work or salaried work.  If you know of something then please let me know.