Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
Gerald Celente: Why You Still Need Guns, Gold, and a Getaway Plan... - 23rd Jun 18
Cheap Gold Stocks Bottom Basing - 23rd Jun 18
A Trade War Won’t Be Good for the US Dollar - 23rd Jun 18
SPX/Gold, Long-term Yields & Yield Curve 3 Amigos Update - 22nd Jun 18
Gold - How Long Can This Last? - 22nd Jun 18
Dow Has Fallen 8 days in a Row. Medium-long Term Bullish for Stocks - 22nd Jun 18
Trouble Spotting Market Trends? This Can Help - 22nd Jun 18
Financial Markets Analysis and Trend Forecasts 2018 - A Message from Nadeem Walayat - 21st Jun 18
SPX Bouncing Above Support - 21st Jun 18
Things You Need To Know If You Want To Invest In Bitcoin Now - 21st Jun 18
The NASDAQ’s Outperformance vs. the Dow is Very Bullish - 21st Jun 18
Warning All Investors: Global Stock Market Are Shifting Away From US Price Correlation - 20th Jun 18
Gold GLD ETF Update… Breakdown ? - 20th Jun 18
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Five Signs the Economy is Recovering

Economics / Recession 2008 - 2010 Feb 25, 2009 - 04:36 AM GMT

By: Q1_Publishing

Economics

Best Financial Markets Analysis ArticleWhat a relief. The markets are up. We're all saved. It's time to spend again. Borrow away. The panic's over. A recovery is coming in 2010. We're home free, right?

If you listened to Fed Chairman Bernanke today that's what we would be led to believe. He said “there is a reasonable prospect” the recession will end this year.


Now, I know we have too many houses in overbuilt suburbs that nobody wants at these prices. And the auto industry is sucking down billions of cash each month. Housing prices are still falling. It goes on and on. But the government has it all solved.

The credit bubble boom has burst. The government cried panic and scared people for long enough. They got their stimulus bill passed. Now it's time to think positively.

Yet, all I can glean from this, is they're saying, “This time is different.”

Of course, as anyone who has been through a stock market bubble knows it's never different this time.

5 Signs of a Recovery

Despite today's unusual cheeriness and lack of “it's going to get worse before it gets better” talk, I still have no doubt the global economy will recover.

Whether it starts today or two years from now, nobody knows. One thing we do know though is what to watch. Chances are they're not what everyone is watching.

Practically every day we get a new report stating this or that economic reading increased or declined by some insignificant amount. Then the total change from the past recession or last year is calculated and a “worst since” (i.e. - worst since 1997, the Great Depression, Carter Administration, etc.) headline is created.

But here's the thing, we can watch the U.S. manufacturing data, business inventory levels, consumer confidence figures, and every other bit of econo-claptrap which moves the markets 3% a day and still have no idea where the economy is headed. It's the trends that really matter. By the time an uptrend has been confirmed, it's too late and the economy has already started its recovery.

That's why I look to these five indicators to see if and when a recovery is underway.

1. Takeovers accelerate – There are dozens of great companies who prepared for this downturn. When they looked at potential takeovers before, the numbers just didn't work out. These are the prudent few though.

Over the last few years we've watched a record number of takeovers. Most of them were leveraged buyouts. That's when an acquirer would borrow about 90% of the money needed for the takeover (read: leverage themselves to the hilt) and hope their growth and cash flow productions were right. On top of that, the acquirer would pay themselves huge fees to do it.

Since then, the credit spigot has been turned off and these assets are not producing as well as projected, and they're facing big interest and principle payments they won't be able to make. As a result, some will head into bankruptcy and others will be so cheap they'll simply be taken over.

When we start seeing assets and entire companies get irresistibly cheap, there will be loads of acquisitions. It's not an easy process. Lenders will get caught short and there will be a lot of corporate restructurings (firings and layoffs), but its part of the process. Historically, when the “crisis investing” style takeovers start to happen, an economic recovery is still in the early stages.

2. Number of people on unemployment starts to drop – Last week the total number of people in the U.S. cashing unemployment checks passed 5 million. To put it in perspective, if you lined everyone up back-to-front (assuming 2 ft for each person) the line for those waiting for weekly unemployment checks would be 1908 miles. That's a line that stretches from New York City to Disneyworld in Orlando, Florida and back again.

That's a lot of people. Everyone knows about it. It sounds awful, but it's actually a good thing.

That's because the clock on the nine months (usually six, but it was temporarily increased to nine months last year) of benefits keeps ticking with each day that passes. It's not easy to live on unemployment, but it can be done. But when the seventh and eighth months roll around, people are much more willing to take a job in a different field.

This is part of the foundation of a turnaround. This is how people get back to work and spending. Sure we'll have underemployment. We'll hear stories of engineers working as dishwashers, real estate agents mopping floors, and investment bankers turned bus drivers, (I washed dishes professionally before, it's not so bad), but it is all part of every turnaround.

3. Oil prices stabilize Oil prices have historically been very volatile. Of course, when bubbles burst, they only go in one direction. Lately though, oil prices have started to stabilize.

If oil continues to trade in the $30 to $50 trading range, it'll be clear there is increasing demand for oil. If oil demand starts to tick up, oil buyers will have to start replenishing their stocks and buying oil. The price won't necessarily go up because of this, but it should stabilize. If there's no recovery, oil buyers will have no place to store millions of barrels of crude and oil prices will fall.

The world is almost overflowing with oil stocks right now and only some semblance of a recovery will keep oil price falling even lower.

4. China electricity consumption starts to increase – As we've learned over the past year and a half, China is not the driver of global economic growth. Granted, it's going to play a big role in the future of the global economy, but it's still a laggard.

It bet big on becoming the world's manufacturing center. Remember, China is built for booms. But during times when shoppers and businesses are buying less, it's not good at all.

So to see how well China's economy is really doing, it's best to keep an eye on its electricity consumption. Electricity consumption is highly correlated to the GDP. And it's far less impacted by unreliable assumptions and different ways data is presented (i.e. – SAAR – Seasonally Adjusted Annual Rate). It's how much electricity was used.

So when we see the manufacturer to the world start turning the lights back on in factories and running all their equipment, we'll know they're starting to get orders they have to fill. And we'll see it well before positive trends appear in declining inventories or when orders for consumer durables start to pick up.

5. IPO market recovers – There are two reasons to take a company public: owners cashing out and to raise capital for expansion.

Don't worry about when owners want to cash out. They do this in a good market when they can get a good valuation for their company. It puts more money in their pocket. In many cases they've been running the company for years so waiting an extra year or two to cash out usually isn't much of a problem.

The other reason, raising capital, is what companies will be doing in a rough market. Only the ones which truly need new capital to expand will raise money now because it's more dilutive. Think of a business that wants $200 million to expand. They can sell 20 million shares at $10 in a bad market or can sell 10 million shares at $20 in a good market. The more shares issued, the smaller the company's founders will be after the IPO.

It's no secret we're in a bad market. So when we see they want the money badly enough to expand that the owners of the company are willing to sacrifice a bigger stake in the company, that's when we'll know they see good times ahead.

------------------------------------------------------------------------------------

I realize it's tough to believe there is any hope in all this mess right now. Any belief in a recovery coming soon will be tested many times by the markets. Remember, economists get a bad reputation for predicting 10 of the last three recessions. But the markets anticipated 10 of the last three recoveries as well.

There will be rallies and sell-offs. There will be periods of hope and periods when it seems all hope is lost. For now, we've got to roll with the punches, use conservative investment strategies , keep plenty of cash on the sidelines, and find the opportunities where they lie.

There's always been a correlation between the size of market recovery and depth of the downturn during a recession. Considering the handsome rewards afforded those who stuck it out during the past few soft recessions, the rewards for sticking this harsh one out will likely be far greater than all of them.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Q1 Publishing Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules