Research Excerpts

Guest Column: 2013 US Macroeconomic Analysis/Forecast

Posted on: Friday, January 18th, 2013

The following is another guest commentary from my friend, economist James Padinha. (James’ 2012 US Macroeconomic Analysis & Forecast was posted here on January 20th 2012.)

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/quantitative backdrop and he counters with the fundamental/economic part of the equation.

I can tell you this: when our analysis agrees, we generally have a very good handle on what to expect from US financial asset prices over the next one to several quarters.

James is the best economist I know. He has been forecasting and writing about the economy for 20 years.  He earned economics degrees from Cal State Chico and U.C. Santa Barbara (which he refers to as Harvard’s main rivals), and his past employers include Arnhold and S. Bleichroeder, Standard & Poor’s,, and Grant’s Interest Rate Observer.

James also tells me that he is now for hire and looking for a new venture/opportunity.  You can email him directly at


John Kosar, CMT
Director of Research

The Economy, Love, and Hate

By James Padinha
January 18th 2013

We remain fundamentally bullish on the economy.  We think it is very unlikely that a recession will unfold in the next four quarters.  We believe that economic expansions die in only one way—the Fed kills them—and in our view Gentle Ben will not be shooting anytime soon.

The latest six-months-ahead general business activity index from the Philly Fed clocks in at 29.2.  This marks the second-highest level in nine months.  The black line in the chart below shows that this index stands comfortably north of recession levels.

Commercial and industrial (C&I) loans at all commercial banks increased 1.5% in December.  This marks the 26th straight (!) gain.  C&I loans are up $303.6 billion since October 2010.

Nominal M2 posted a year-ago increase of 8.3% in December.  This marks the largest gain since June.  M2 growth has accelerated for four straight months.

The latest increase in nominal GDP (5.9% in Q3 2012) marks the largest since 2007, while the latest increase in real GDP (3.1%) marks the second-largest since 2009.  We view the average quarterly increase in GDP since the start of 2010 (2.2%) as mildly impressive in that government spending (the G in C + I + G + X = GDP) decreased in 9 of the past 11 (!) quarters.

The year-ago increase in the core PCE price index slowed to 1.5% from 2.0% (the largest increase since 2008) in the past eight months.  Note that the latest increase stands only four ticks higher than the record low of 1.1% (December 2010, January 2011, and March 2011).  We reckon this makes Gentle Ben and crew feel okay about being cheap and easy.

Mortgage rates sit near the record low of 3.31%.

The labor force grew 0.9% in 2012 after decreasing 0.2% in 2011.  The household measure of employment grew 1.9% in 2012 after increasing 0.6% in 2011, while the establishment measure of employment showed improvement in the same period (1.4% against 1.1%).  The unemployment rate clocked in at 8.1% in 2012, which was better than 2011 (8.9%), which was better than 2010 (9.6%).  Additionally, the manufacturing workweek stands just south of the multi-year high (40.7 hours against 40.9 hours).

Finally, the 10-year/three-month yield curve (the yield on the 10-year Treasury note less the yield on the three-month Treasury bill) stands at about 170 basis points.  We think the yield curve is a very reliable guide concerning recessions.

~ A recession started in Q3 1990.

One year earlier—in Q3 1989—the 10-year/three month gap averaged nil (zero basis points).

~ A recession started in Q1 2001.

One year earlier—in Q1 2000—the 10-year/three-month gap averaged 78 basis points.

~ A recession started in Q4 2007.

One year earlier—in Q4 2006—the 10-year/three-month gap averaged negative 40 basis points.

In contrast, the smallest gap of the past year clocks in at 143 basis points (July 2012).


Large Cap ETFs hauled in $15.6 billion in December.  This marks the heaviest monthly inflow of all ETF categories.  Fixed Income ETFs raked in $51.5 billion in 2012.  This marks the heaviest yearly inflow of all ETF categories.

In our experience, loads of love often leads to disappointment.

From a sector standpoint, technology ETFs shed $1.0 billion in December.

This marks the heaviest monthly outflow of all sector ETFs.  Utilities ETFs shed $1.8 billion in 2012.  This marks the heaviest annual outflow of all sector ETFs.

In our experience, the best near-term investment candidates often include the most hated assets.  Additionally, John Kosar, one of the most reasonable and seasoned technicians we’ve ever known, sees bullish technicals for XLK and XLU.


We estimate that roughly 70% of the betting public is on the Ravens.  In our experience, it is rare to see Joe and Jane fall in love with a large dog.

A public that disagrees so strongly with those who excel at predicting margins of victory has us thinking that Belicheat and Gisele’s husband might be the right way to go.