Philly Fed’s Business Conditions Index Update
The Philly Fed’s Aruoba-Diebold-Scotti index recently fell to its lowest level since the middle of 2009:
This isn’t necessarily a reason to panic. The way the index is constructed, its most recent reading is only slightly below its long term average, which is deliberately set at zero. Historically, the index has fallen well below -1.0 during recessions (with 1977 and 2005 the notable exceptions):
Our takeaway from the ADS data:
- We do appear to be in the midst of a soft patch.
- A near-term (2010) double dip into recession still looks unlikely to us.
- Considerable uncertainty remains in 2011-2012 and beyond.
- There are very few upside risks to economic growth on the horizon.
Whether the current ”soft patch” is due to seasonal or other factors is unclear, and the same cross-currents affecting most economic data are also at work in real time indicators of economic activity like shipping and trucking. For example, the Journal of Commerce reports that only 2% of the world’s container ships are currently idle (some sleuthing is called for, e.g., do non-idle tonnages include ships being leased for storage purposes?). Meanwhile, rail shipments continue to improve upon 2009, but we’ve heard a couple of troubling (and note: unverified!) anecdotes: first, that this may be due to the diversion of freight from Canada to the U.S. due to a strike at the Port of Montreal; and second, that the usual seasonal back-to-school traffic isn’t being seen by folks on the ground.
The recent Railfax data on Kansas City Southern (KSC) also raises some questions about the health of the U.S. and/or Mexican economies (if memory serves, KSC transports a relatively high volume of automobiles, but the cash-for-clunkers program ended in 2009):
It might be worthwhile to investigate the final destinations for other carriers’ traffic volumes which have help up better as of late. For example, what proportion of their shipments have been headed to Canada versus the U.S.? A higher than normal proportion to Canada would make sense, as we expect it to be the strongest of the three North American economies in the years ahead. It would also lend support to the Port of Montreal thesis, and imply that the U.S. economy is not as healthy as overall rail volumes suggest. The Port of Montreal strike ended over the weekend, so we’ll be watching the Railfax report to see what impact this might have, if any, on other carriers’ volumes, and what the potential implications are for U.S. GDP. It’s within the realm of possibility that those data could support the double dip in 2010 camp. We’ll see…
If our four-point assessment above proves to be well grounded, then inflation risk is low, sovereign debt is decidedly not in a bubble, and equity markets will continue to be range bound, unless or until there’s a significant break with the status quo in terms of slow expansion, current fiscal and monetary policies, and/or renewed credit stresses. Our approach in this kind of environment:
- We are being selective with our riskier investments (primarily equities). Healthy cash flows and prices below estimated fair value are critically important (as always!). And long-term investors should consider that a buy-and-hold approach to equity index funds could very well under perform Treasuries for several more years, if not another decade. At the very least, a sound rebalancing process, and adherence to it, is called for.
- We are not shying away from longer term sovereign debt. If long term growth in developed countries will be in the 1-2% range in the years ahead, and inflation is tame or negative, then a nominal 3-4% on long term Treasuries makes for a respectable real yield. Japan since 1990 is a far more reliable benchmark in this case than the 1960s and 70s, in our view.
- We still believe that the rush into gold is somewhat overdone. But that bubble could have a ways to go, so at the moment, we are avoiding it on both the long and the short sides. If desired as a portfolio holding, exposure to other precious metals — though they tend to be more volatile than gold — could be worth a look.
- Where appropriate, we are holding significant cash allocations as a hedge against volatility and uncertainty, and in order to take advantage of opportunities as they arise.
IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Neither the firm, its clients, nor its principals hold any positions in securities issued by KSC. Any mention of investable companies and/or securities is incidental and for illustrative purposes only.
News and Views | art July 26, 2010
