In a recent interview for Bloomberg, Lakshman Achuthan, the co-founder and COO of the Economic Cycle Research Institute (ECRI), the world's leading authority on business cycles, asserts that "we're in a recession." A video of the interview is available on the ECRI website: www.businesscycle.com.
The ECRI made their recession call in late-2011, expecting the U.S. recession to begin in the first quarter of 2012, or by mid-2012 at the latest. The ECRI never wavered from their recession forecast, despite little support from other economists. They now believe the recession has already started. Note, recessions are not typically recognized until many months after they have already begun. It is also not unusual for GDP growth to remain positive in the first quarter of a recession.
Negative Earnings Revisions
ECRI offered the first warning of the looming economic downturn, but their views are now becoming more widespread. Recent economic data supports their position. I won't go through all of the latest economic releases here, but there are several statistics that provide new insights into the state of the economy. The one that really surprised me came from Zacks Investment Research.
I discussed Zacks in a recent post titled "Proven Stock Screens Earn 20%+ Annual Returns." Zacks is famous for their proprietary classification system called the Zacks Rank, which is driven by earnings estimate revisions. The concept is simple: stocks with increasing earnings estimates outperform stocks with stable or decreasing earnings estimates.
Here is the shocker from Steve Reitmeister at Zacks: 2.5 companies are seeing negative revisions for every 1 getting a positive revision. According to Zacks, this is the worst reading since the Great Recession. Given the proven value of using earnings estimate revisions for security selection, this is a particularly ominous sign for the economy. Unlike reported earnings which lag the market, earnings estimate revisions lead the market. The negative/positive revision ratio of 2.5/1.0 provides compelling evidence to support ECRI's recession call.
Retail Sales
Retail sales is not one of the leading economic indicators that I use to calculate my summary market indicator score, but it is important nonetheless; retail spending is responsible for almost 70% of U.S. economic growth. June retail sales declined by 0.5%, much worse than the consensus estimate of +0.2%. This was the third consecutive monthly decline, a streak not seen since the second half of 2008 - during the heart of the last recession.
The declines were widespread, permeating most retail sectors. Liquor stores were one notable exception; however, consumers drowning their sorrows does not seem particularly bullish from a market sentiment perspective.
Europe
Despite a never-ending series of promises and proposals out of Europe, borrowing costs continue to rise for both Italy and Spain. Italy's yields have spiked to 6.11%, well into the danger zone. Spain's yields have risen to 6.81% and are trending back toward the crisis level of 7%. On a related note, the European Central Bank (ECB) has reversed its previous position and is now advocating imposing losses on all holders of senior debt in Spanish banks.
I cannot resist including a quote from my July 7, 2012 post titled "Global Recession Increasingly Likely:"
While these prospective new loans may not initially be senior to outstanding debt, those rules could change retroactively – as they did with Greece (and General Motors for that matter). Bond investors in Europe would be wise to plan accordingly.
Conclusion
Europe is already in a recession, China and the emerging markets are slowing dramatically, the U.S. economy is weakening and may even be in a recession, and we are rapidly approaching our own fiscal cliff. Where did the S&P 500 index close last Friday? Only 4.4% below the post-recession highs
Feedback
Your comments, feedback, and questions are always welcome and appreciated. Please use the comment section at the bottom of this page or send me an email.
Do you have any questions about the material? What topics would you like to see in the future?
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Thank you for your support.
Brian Johnson
Copyright 2012 - Trading Insights, LLC - All Rights Reserved.
.
About Brian Johnson
I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers.
I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies.
In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years. I have also written four books on options and derivative strategies.
ECRI: “We’re in a Recession”
In a recent interview for Bloomberg, Lakshman Achuthan, the co-founder and COO of the Economic Cycle Research Institute (ECRI), the world's leading authority on business cycles, asserts that "we're in a recession." A video of the interview is available on the ECRI website: www.businesscycle.com.
The ECRI made their recession call in late-2011, expecting the U.S. recession to begin in the first quarter of 2012, or by mid-2012 at the latest. The ECRI never wavered from their recession forecast, despite little support from other economists. They now believe the recession has already started. Note, recessions are not typically recognized until many months after they have already begun. It is also not unusual for GDP growth to remain positive in the first quarter of a recession.
Negative Earnings Revisions
ECRI offered the first warning of the looming economic downturn, but their views are now becoming more widespread. Recent economic data supports their position. I won't go through all of the latest economic releases here, but there are several statistics that provide new insights into the state of the economy. The one that really surprised me came from Zacks Investment Research.
I discussed Zacks in a recent post titled "Proven Stock Screens Earn 20%+ Annual Returns." Zacks is famous for their proprietary classification system called the Zacks Rank, which is driven by earnings estimate revisions. The concept is simple: stocks with increasing earnings estimates outperform stocks with stable or decreasing earnings estimates.
Here is the shocker from Steve Reitmeister at Zacks: 2.5 companies are seeing negative revisions for every 1 getting a positive revision. According to Zacks, this is the worst reading since the Great Recession. Given the proven value of using earnings estimate revisions for security selection, this is a particularly ominous sign for the economy. Unlike reported earnings which lag the market, earnings estimate revisions lead the market. The negative/positive revision ratio of 2.5/1.0 provides compelling evidence to support ECRI's recession call.
Retail Sales
Retail sales is not one of the leading economic indicators that I use to calculate my summary market indicator score, but it is important nonetheless; retail spending is responsible for almost 70% of U.S. economic growth. June retail sales declined by 0.5%, much worse than the consensus estimate of +0.2%. This was the third consecutive monthly decline, a streak not seen since the second half of 2008 - during the heart of the last recession.
The declines were widespread, permeating most retail sectors. Liquor stores were one notable exception; however, consumers drowning their sorrows does not seem particularly bullish from a market sentiment perspective.
Europe
Despite a never-ending series of promises and proposals out of Europe, borrowing costs continue to rise for both Italy and Spain. Italy's yields have spiked to 6.11%, well into the danger zone. Spain's yields have risen to 6.81% and are trending back toward the crisis level of 7%. On a related note, the European Central Bank (ECB) has reversed its previous position and is now advocating imposing losses on all holders of senior debt in Spanish banks.
I cannot resist including a quote from my July 7, 2012 post titled "Global Recession Increasingly Likely:"
Conclusion
Europe is already in a recession, China and the emerging markets are slowing dramatically, the U.S. economy is weakening and may even be in a recession, and we are rapidly approaching our own fiscal cliff. Where did the S&P 500 index close last Friday? Only 4.4% below the post-recession highs
Feedback
Your comments, feedback, and questions are always welcome and appreciated. Please use the comment section at the bottom of this page or send me an email.
Do you have any questions about the material? What topics would you like to see in the future?
Referrals
If you found the information on www.TraderEdge.Net helpful, please pass along the link to your friends and colleagues or share the link with your social network.
The "Share / Save" button below contains links to all major social networks. If you do not see your social network listed, use the down-arrow to access the entire list of social networking sites.
Thank you for your support.
Brian Johnson
Copyright 2012 - Trading Insights, LLC - All Rights Reserved.
.
About Brian Johnson
I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years. I have also written four books on options and derivative strategies.