Notes from the USA (Jul 2012) - a guest post

Warren Buffett continues to invest in the US markets. The US Dollar is gaining against the Euro, the Rupee and other world currencies. Gold is no longer in a parabolic rise to the stratosphere. Surely these are signs that the US economy is on its way to a slow but steady recovery?

Not quite, suggests KKP in this month’s guest post. He takes a look at a couple of less known indicators, as well as very long term charts of Dow and S&P 500 indices to make the case for a slowing economy and a stock market that is tantalisingly poised at the edge of a cliff. Do let him know if you agree or disagree with his point of view.

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US Economy Slowing – New Indications

We have to look under the surface to see what is really happening in the economy. The reason one has to do this is because there is a lot of political pressure around the world to report what is being ‘expected’ or close to it. GDP, Inflation, Purchasing Managers Report, Manufacturers Report, Unemployment, Layoffs (mostly going unannounced) etc. are variables that constituents around the world feel are being adjusted, or need to be understood like a PhD student.

For example, unemployment figures are reports that include people who are ‘claiming unemployment income’. What happens to a person who was an IT Professional earlier, but is now working at a Walmart (32 hours or more per week)? This person does NOT get counted among the unemployed. What happens to a person who cannot make any more claims for unemployment (since it is allowed only for 26 to 52 weeks)? What about the 55 year old who decides that if he is laid off, he will just do independent consulting or plain retire? Again these people will NOT be counted in the unemployment figures. So, how does one believe the unemployment numbers?

Garbage Indicator: Among the 21 categories of items shipped by rail, which are measured as ‘product shipped’, none have a tighter correlation to GDP than Garbage or Waste. According to a 2010 article, economists Michael McDonough and Carl Riccadonna note that waste has an 82 percent correlation to US economic growth, and it is almost a leading indicator. This is pretty intuitive and should be studied.  The more you produce, the more you throw out. Frankly the results really looks gloomy for the rest of 2012. Waste carloads are way down.

Trucking Indicator: American Trucking Association’s advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 1.2% in June after falling 1.0% in May. June’s increase was the largest month-to-month gain in 2012. However, the index contracted a total of 2.1% in April and May. Compared with June 2011, the SA index was 3.2% higher and YTD tonnage was up 3.7%.

June’s increase was a pleasant surprise, but the lower year-over-year gain fits with an economy that has slowed,” ATA Chief Economist Bob Costello said. Many of the other economic reports are showing slowdown now.

Costello said he’s still concerned about businesses sitting on cash instead of hiring more workers or spending it on capital, both of which would give the economy and tonnage a shot in the arm, as they are worried about Europe and the U.S. fiscal cliff at the end of the year. Costello lowered his tonnage outlook for 2012 to the 3% to 3.5% range due to recent economic weakness.

Currently the Dow, S&P 500 and Nasdaq are very near multi-decade rising channel lines and look to be forming bearish rising wedges (see picture below). Even though rising wedges break to the downside roughly two-thirds of the time, the probability increases if you coincide this topping formation with the Garbage Indicator or the Trucking Indicator. Imagine the impact to the portfolios (globally) as a result of this under-current. Being near the long-term channel/resistance lines for decades means that if the downside begins, then the bottom of these rising channels is a large percentage away!

As a result, protect capital (in case a breakdown occurs) and then follow an upside breakout if that is the eventual outcome. Missing some upside action is a lot better than losing capital!

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.