Being plugged into the latest economic trends is crucial when it comes to making sound investments. Julie Jason speaks with Simon Constable, co-author of a new guide to help smart investors make sound decisions using economic trends.
FINRA foundation offers tools for understanding investment issues
If you are an investor, do you watch economic trends?
Some economists believe that being aware of economic trends gives investors an edge. I spoke with economist Simon Constable a few weeks ago to discern how his work might provide some insights and guidance to today’s investors. Constable is co-author of “The Wall Street Journal Guide to the 50 Economic Indicators That Really Matter: From Big Macs to ‘Zombie Banks,’ the Indicators Smart Investors Watch to Beat the Market.”
Constable and his co-author, Robert E. Wright, made a provocative statement in the book, which was written in 2011, a few years after the market bottomed on March 9, 2009: “The financial crisis of 2008-09 and its aftermath suggest that most investors were insufficiently nimble because they were looking at what the economy was rather than what it would become.”
They observed: “Discerning the economy’s direction — whether it will soar, plummet, or stagnate — may sound difficult, and it certainly isn’t easy, but the economy can’t help but constantly provide statistical clues about its health.”
And they provided a tool chest of 50 indicators for investors to follow.
I asked Constable the obvious question: What do the economic indicators tell us about today? Is there a bear market on the horizon?
Constable advised: “The stock market and economy are related like cousins. They are related, but can be estranged for many years.” So, there won’t be simple answers to my questions. That is, the 50 indicators will not provide a clearly defined stock market forecast. Reviewing them will provide insights, however, by watching trends as they develop.
Now, that’s quite a bit of work for the everyday investor. Being pragmatic, I asked Constable for a shortcut:
Could he identify one, two or three of the most important indicators to follow?
He offered this starting point: The Weekly Leading Index (WLI), developed in the 1980s to take an accurate read “on the future of the entire economy,” is published by the Economic Cycle Research Institute (ECRI). The WLI “is a composite leading index that anticipates cyclical turning points in U.S. economic activity by 2-3 quarters,” according to ECRI. The inputs include measures of money supply, housing activity, the labor market, and equity and bond market prices.
For this indicator to be meaningful in calling a recession, trend changes need to be “pronounced, persistent and pervasive,” explained Constable.
As it says in Constable’s book: If “there is a turn in the WLI growth rate that satisfies the three P’s, then a recession (or the end of one) can be expected seven to eight months later.” When the WLI growth rate is trending up, the economy is growing.
The best way to look at trends is graphically. ECRI provides access to free graphs (with underlying data) online at. When you visit this site, look at different time frames.
For an example of this indicator at work, change the dates at the bottom of the graph. Take a look at the end of 2005 through the end of 2009 to pick up economic trends before the financial crisis up to the year the stock market bottomed (March 2009). Zoom out to pick up 1970 through 2017.
Look for warnings as well. At the height of the 2007 market, the November-December 2007 ECRI Outlook cautioned: “The growing weakness in the growth rates of ECRI’s leading indexes is a warning that recessionary weakness could develop. One key danger is a sustained credit crunch because the credit crisis is clearly not over. … [Our] Leading Index[es are] now approaching [their] worst reading[s] since the 2001 recession. … Also, the breadth of deterioration evident in the latest data on the components of ECRI’s many leading indexes has rarely been seen except near the cusp of a recession.”
Returning to today, we are not in a 2007 market, based on economic trends. However, the economy is not the sole arbiter of stock market movements — for one, consider rare but impactful “black swan” events.
In the end, following indicators can help investors evaluate their investments in the context of the broader economic picture.
* * *
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments ([email protected]). To hear Julie speak, visit here.
(c) 2018 Julie Jason.
Distributed by King Features Syndicate Inc.
Ackman’s Hot Streak Continues, Dumps Berkshire, Says ‘We Can Be More Nimble’
Bill Ackman’s hot streak continues. This comes after he announced that his Pershing Square hedge fund has returned an average of 25% this year. It also trounces the average hedge fund return of -7%. Additionally, this reveals that it sold its $1 billion stake in Warren Buffett’s Berkshire Hathaway. The fund first invested in Berkshire less than a year ago and only weeks took a larger stake in the conglomerate.
Completely exiting the Berkshire position surprised many on Wall Street, as Ackman has long admired Buffett as a mentor. He recently said that Buffett had built Berkshire “to withstand a global economic shock like this one.”
It appears that Ackman, like many, may have felt frustrated by the lack of activity from Berkshire during the recent market downswing. Berkshire’s cash balance has ballooned to $137 billion. Many, including Ackman, had likely expected a portion of that cash to be used to scoop up bargains during the late-February selloff. The said selloff took markets down nearly 30%.
Instead, Berkshire stood pat, and that appears to have been enough for Ackman to pull the plug on his investment. While discussing the exit, Ackman said that due to Pershing’s smaller size compared to Berkshire, “we can be much more nimble… and so our view was generally we should take advantage of that nimbleness, preserve some extra liquidity in the event that prices get more attractive again.”
Pershing Square’s success over the last two years had thrust Ackman back into the spotlight. This, perhaps, turned the chapter on a period where he became more famous for his misses than his home runs.
He was invested in Valeant Pharmaceuticals as it collapsed. He also famously squabbled on live TV with fellow billionaire Carl Icahn over Herbalife. Then, he gave a nearly 3-hour-long presentation explaining why he thought the company runs as a pyramid scheme. He finally exited his $1 billion short position at a loss.
Ackman’s current hot streak started last year, when Pershing Square returned 58.1%. This is its best annual return since the hedge fund was founded in 2004. After years of letting others make the firm’s investment decisions, Ackman took back the reins in 2018 with a back-to-basics strategy he learned from Buffett.
He returned the fund to a strategy that invests in simple, predictable, cash flow positive companies. He said, “It’s very hard to lose money by buying great businesses if you pay a fair price. For a while there, we forgot that our main job was to make money, so we woke up, and now we’re back in the money making business.”
Making money is exactly what Ackman did earlier this year. He did so with “the single best trade of all-time,” as what many calls it. He correctly predicted that the coronavirus would wreak havoc on our economy. Because of this, Ackman made a $27 million bet that netted his firm a $2.6 billion profit in less than two months as the markets crashed.
Now, his war chest is full again. It appears that Ackman is ready to buy should asset prices come down again.
As Airlines Suffer, American Most Likely To File Bankruptcy
A few weeks ago, Boeing CEO Dave Calhoun startled the airline sector when he said a major airline would go bankrupt by Halloween.
“I don’t want to get too predictive on that subject. But yes, most likely,” Calhoun said. “Something will happen when September comes around.”
Airline stocks plunged as investors and analysts scrambled to determine which airline became most vulnerable.
RapidRatings, a risk assessment firm, recently completed a comprehensive stress test on the major U.S. airlines. They used dozens of variables including debt loads, cash flow analysis, and a loss of at least 15% of revenue.
American Airlines To Suffer The Most?
We may never know which airline that Calhoun was alluding to. Although, RapidRatings’ analysis says that American Airlines is the most likely to go bankrupt in the coming months.
The company also looked at Delta, United and Southwest, but none of them are in such dire circumstances as American.
In an interview with Yahoo Finance, RapidRatings CEO James Gellert said, “American is the most at risk and that’s it in every way you look at it. American stands out as the weakest of this cohort.”
The stress tests run by RapidRatings produce both a short term financial health rating (FHR) and long term core health score (CHS). According to RapidRatings, the FHR measures a company’s short-term resiliency and default risk. Meanwhile the CHS analyzes risk and company efficiency over a three year period. A score lower than 40 means a company is at risk of failing.
Gellert says the analysis has more than a decade of proven results. Also, “over 90% of companies that failed have been rated 40 and below on our scales.”
The stress tests found that American was the weakest U.S. airline going into the recent pandemic. It has a financial health rating of 59 and core health score of 66.
As the pandemic unfolded and air travel plunged 90%, American’s FHR score plunged to 29. Meanwhile, its CHS score fell to 27.
Gellert added that “I would be quite certain that is the airline in the crosshairs of the Boeing comment.”
The Future Of American
American, in response to the sub-40 stress test scores, said in a statement that it was “focused on rightsizing the airline for the current environment, and plan to reduce our 2020 operating and capital expenditures by more than $12 billion.”
Analysts, however, are starting to smell blood in the water. Cowen equity research analyst Helane Becker recently told Yahoo Finance, “American’s liquidity position is dependent on government aid, bucking the trends we’ve seen from other airlines. The company is receiving a total of $10.6 billion … [and] we expect another capital raise” in the 3rd quarter.”
Savanthi Syth, an equity analyst at Raymond James, also agrees American will need more capital to weather the storm. “I mean, if you look at the cash on hand that’s definitely the case,” Syth said. American has six months of cash on hand, United has 10 months, Delta has 12, and Southwest has almost 19 months, according to Raymond James.
Syth added, “I don’t think bankruptcy is a foregone conclusion… it’s just going to take longer for American to kind of dig themselves out of this kind of debt burden, and therefore equity could be challenged in the near term.”
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Sorry AOC, Billionaires Haven’t Made $434B During Pandemic
Nation’s Billionaire’s See Net Worth Jump $434B in First Two Months of Pandemic
It was an eye-opening headline, and fairly drew the frustrations of a lot of us. This is especially true for the 38+ million Americans who have lost their jobs since the coronavirus pandemic shut down. Our country has been at it a little more than two months ago.
How dare they get richer while we suffer?
Chuck Collins, director of the Institute for Policy Studies Program on Inequality, the co-author of the report, expressed his piece. He said, “The surge in billionaire wealth during a global pandemic underscores the grotesque nature of unequal sacrifice.”
Meanwhile, Frank Clemente, the executive director of Americans for Tax Fairness which co-authored the study, also shared his opinion. He said, “The pandemic has revealed the deadly consequences of America’s yawning wealth gap, and billionaires are the glaring symbol of that economic inequality.”
Democrat Alexandria Ocasio-Cortez didn’t want to miss the opportunity to inject her brand of socialism into the public discourse. “Really great system we got here. Can’t imagine why anyone would question how beneficial or sustainable it is for the working class,” she tweeted. This is in response to CNBC running the headline.
The Study’s Flaws
The top five US billionaires explicitly mentioned in the article are all Democrats. These include Warren Buffett, Bill Gates, Jeff Bezos, Mark Zuckerberg, and Larry Ellison. But setting that irony aside, the problem is that the article is simply dishonest, points out MarketWatch columnist Steve Goldstein.
“The study… examines billionaires’ wealth between March 18 — the rough start date of the pandemic shutdown, when most federal and state economic restrictions were in place — and May 19. It relied on the Forbes’ billionaire list, which itself is built around stock-market performance.”
The flaw, as Goldstein points out, is that the beginning and end dates used for the study are incorrect.
“Think about that in the market context. The pandemic did not start March 18 (nor, of course, had it ended on May 19), and certainly market concerns about the pandemic did not start March 18. Far from it.”
He says that to see a true picture of how much money the billionaires made – or lost – during the pandemic, they need to expand the date range.
“A more logical way to think about whether billionaires got richer, or not, is to think about the performance from the Feb. 19 peak in the market, after which more investors began to get concerned by the novel virus. You then get to see who got richer even in the face of the crippling economic blow.”
If you use this revised date range, Goldstein says the truth is that billionaires have actually lost money since the market peaked and the pandemic began
“Cumulatively, the top 50 billionaires lost $232 billion between the market’s peak and this Tuesday. If the remaining billionaires on the Forbes list lost wealth at the same roughly 12.5% rate that the top 50 experienced, that’s another $200 billion–plus wiped out.”
So while it’s easy to run a headline that bashes billionaires, the truth lies somewhere in the middle.
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