M2 has been flat for 9 weeks, loans flat 8 weeks, and M1 velocity has turned lower in recent weeks-now equal to a very low historical level of last August. Copper also hit a 3 month low on 3/1. Bottom line, they all point to a very weak economy-perhaps contracting. My hunch is that there will be an above average number of companies making warning statements for the 1st Q and consensus estimates for the S&P 500 will have to come down for 2013.
So, I'm raising cash in my non-core positions, preparing for better buying opportunities later.
M2 up $2.0 billion, but down $64.5 billion the last 10 weeks or a negative 3.2% annual rate. In a nutshell what happened is, leading up to the fiscal cliff, at the end of the year, the FED juiced up the economy with about $250 billion M2 increase the last 7 weeks of the year. Since then, week of 1/7, M2 is down about $75 billion.
The $250 billion bulge of M2, juiced up the stock market and the economy with some decent macro numbers for Jan and Feb. However, I expect the $75 billion decline, since the beginning of the year, to hurt stock prices and constrain the economy-to show up in the 2nd Q and perhaps continue into the 3rd Q as Europe and Asia continue to decline and be slow.
I thought stocks got over valued when the S&P 500 got over 1430, so for bargains to appear-not just a few but dozens of companies in many sectors, then the S&P 500 has to get to $1375 or so and oil come down to act as a tax-cut for consumers.
If M2 continues to decline, then the $ should continue to strengthen-taking down stocks and commodities.
M2 flat the last 12 weeks, loans down 50+ billion since the first week of Jan and M1 velocity falling and at a 1 year low. Bottom line FED's QE is pushing on a string, doing little for the economy except for industries that benefit for artificially low interest rates-auto and home sales. Otherwise QE is leaking into the financial sector-artificially pushing up stocks and bonds.
Still, the "music" of QE plays on and the game of buy high, sell higher continues to work. However, given the strong $, higher taxes, high gas costs, declining Europe, and soft China-I don't see how S&P 500 earnings can improve year over year with the exception of the NG producers.
Commandor, I have been following for some time and appreciate your insights, you have demonstrated quite a track record. I do however have a question regarding macroeconomic indicators. You have contributed your thoughts on a number of indicators recently, and one that keeps coming to my attention is M1 Velocity, as you discuss in your Mar 2 post above. Could you possibly provide some additional insight as to why you feel that lower M1 Velocity intself indicates a weakening economy?
I understand M1 Velocity as the ratio of quarterly nominal GDP to the quarterly average of M1 Money Stock, essentially representing how fast $1 moves through the economy. Following data provided for the measure, M1 Velocity was roughly 6.5 at Q4 end 2012, and has been on a steep decline since 2008 with a brief leveling period in mid 2009 through mid 2010. I'm not quite making the connection between the indicator and your comment above that "M1 Velocity has turned lower and is at a very low historical level of last August." From my view, M1 Velocity has been on a steady decline since 2010 and is now getting closer to what looks like loosely speaking a long term average (looking back to the 1950s), and doesn't seem to be at a low historical level, longer term time frame of course. From my interpretation of the indicator, as of 2008 to date, lower M1 Velocity is nothing new, so is there something in particular about the indicator that formed your most recent bearish outlook? What am I missing here and what is it about lower M1 Velocity that could send markets lower?
I do see that lower M1 Velocity can be a result of the Fed's expansionary policies, which in turn are a result of weak economic data. I have a harder time seeing how directly related M1 Velocity is to equity market prices as expanded money supply in theory could be a positive catalyst for the economy and in turn markets (that's the idea right). Any additional thoughts on this? As always your thoughts are greatly appreciated.
M1 velocity, which comes out bi-weely, was above 2 for the 1980s and 1990s, around 1.5 in the early 2000s before falling below 1 since 2008-now at about .858. For me, I watch it along with M2, commercial paper and loans to gauge:
1)To what extent animal spirits are returning to the economy
2)To monitor how effective QE is through the banking system
3)To gain insight on when "inflation" will be a problem before CPI, PPI and other measures "officially" measure it
In recent weeks/months: M1 velocity, commercial paper, M2 and loans have all been flat-indicating that:
1)Inflation is not becoming a problem-even though PPI and CPI later this week will be "high"
2)The economy is NOT setting up for acceleration in the 2ndH of the year-which is contrary to the consensus opinion
3)Given the above 1&2, I see the FED's QE continuing until they all turn up
Now if they were all turn up, for 3+ weeks, I would change my view. But as of last week's data, I think buying stocks in anticipation of a stronger 2ndH is wrong as softer data will most likely occur In addition, Europe data continues to be soft and China has become a worry.
well, most of us agree. problem is however, broader averages all keep going higher. im afraid the only thing that can derail it is an abysmal number tomorrow. i mean abysmal. mkt keeps shrugging every piece of news off that imo is blatantly obvious in indicating a mkt correction/pullback.
i know you have to be thinking the same thing about this irrational melt up.