USA/Global: Stock markets and inventory cycles
Summary
Readers know of our fixation on how well the Economic Time™ has served our readers. Indeed, per our last Advice Tracker, our advice has provided subscribers with a return of 28.5% since the market crash of October, 2007!
As you know, our Economic Clock™ has two arms. In the middle of this December, we issued a missive on its monetary arm, discussing stock markets and lending cycles, suggesting when the U.S. lending cycle that is relevant to markets "should"bottom.
Today, we discuss the real arm of the Clock, looking more closely at what inventory cycles reveal about when markets bottom.
Topics Covered
- The Economic Time
- What the Economic Clock's monetary arm reveals
- What the Economic Clock"s real arm reveals
- Near and long-term investment road map
- How to save money off this idea
Background
1. The Economic Time
Just to re-iterate, it is characterized by an
- excess demand for money (banks won't lend), and by an
- excess supply of goods (cash-starved companies have to save money by cutting costs).
2. What the Economic Clock's monetary arm reveals
In our note of 18th December, 2008, we suggested that bank lending to the property sector would bottom around the end of 2011. We stick with this view.
The important point to note is that there is a logical link between stock markets and the property sector: if people have roofs over their heads, they are all right. So they are more inclined to spend money. All of which drives demand, thus cash flows and profits.
3. What the Economic Clocks real arm reveals
Having looked at America's inventory cycles since 1992, there have been three major down-legs in the inventory cycle (when measured in terms of annual percentage changes):
- June 1999 - September 2001
- February 2002 -March2003, and
- February 2004 - December, 2005
On average, the stock market has bottomed about 19 months after the inventory cycle has bottomed. Last November (the most recent point in our CEIC Data base), inventories were still rising by an annual five percent. So, they have yet to contract.
If I am anywhere near correct in assuming that the property lending cycle bottoms closer to the end of 2011, then I would imagine that inventories will bottom about 19 months before, i.e. about May of 2010.
So come May of 2010, it looks like profits will have got over their worst - and then comes the big market "wait" for them to recover.
This, curiously, ties into my "sell in May and go away" theme.
4. Near- and long-term investment road map
We stick with our "fish on a hot cement sidewalk" view: markets flop around until this May, which point we "sell in May and go away".
From a longer term perspective, it looks like markets will start rising again in late 2010 or in the first half of 2011. Of course we have to re-visit this long-term view all along.
5. How to Save Money Off This Idea
- Always consult your financial adviser first.
- Just stay away from markets, unless you are a smart, well plugged-in trader!
- See our Advice Tracker for profitable ideas.
