Enzio's Clock

Background

1. More "excess supply of goods"

Have a look at America's Economic Time®, which we updated recently. It correctly has predicted the US downturn since 2007, and that is why our advice on individual ETFs has reaped rewards since - despite a 47% drop in the market. 

One of the "arms" of our Economic Clock® is the "real" economy, jn which we measure the supply of goods relative to demand for them. More recent data point to an ever-intensifying excess supply of goods:

EMPLOYEE CONFIDENCE. This March, U.S. joblessness rose to a 25-year high: the unemployment rate reached 8.5%. Meanwhile, last month, employers slashed another 633,000 jobs. More job cuts are expected, particularly basic industries such as cars and home building; this has to mean that suppliers to such industries will have tougher times ahead, too, and

EMPLOYER CONFIDENCE. In today's press, we read that the confidence of America's chief executive officers (CEOs)  plunged to a seven-year low. The Business Round-table economic outlook index shriveled by minus 5, which iis way below its +16.5 reading in the fourth quarter. Any reading under 50 signals that CEOs' pessimism. This means that the current "minus five" is really awful. 

• This ties in with our long-held skepticism of the Obama stimulus packages
• Indeed, the CEOs forecast further declines in sales, investment and employment over the next six months, i.e. until at least this September. In particular,
  
• 70% of these CEOs said that they would cut payrolls this quarter,
• 67% of these CEOs said that their sales might drop, and
• 66% said that they would spend less on new equipment.

 2. Effects on the financial sector

The other "arm" of our Economic Clock is the "monetary economy". Here we look at money supply relative to demand for money.  Currently, the economy continues fighting an "excess demand for money": banks just don't want to lend, as  America's Economic Time suggests. 

So what do falling employment and rising corporate pessimism have to do with America's financial sector? Everything.

Indeed, the de-stocking in the industrial world - the reduction in inventories - is akin to the de-leveraging in the financial world. Both are flip-sides of the same coin.

Here are the linkages between the more recent news that we reported on just now and the financial sector:

• if employees are losing their jobs, how can they service their debts? Credit cards and mortgages spring to mind. Equally, how on earth will these unemployed people spend if they keep de-leveraging, i.e. reducing their debts?
• if employers are cutting jobs, they are doing so because they have to de-stock, i.e. reduce their inventories.  All of which means that their turnover has to fall, along with margin compression further eating-away at profits.
  

The bottom line: with individuals de-leveraging, and with corporates de-stocking: why should banks want to lend? Besides, who can guarantee that they will get their money back from the loans that they already have made?

 

 

 

 

3. How toMake Money Off This Idea

1. Always consult your financial adviser first.
2. In order to short the U.S. financial sector, have a look at the ETF, SKF:US: 
• it represents an elegant way to stay short of the whole secto\r;
• it currently is trading very much at the bottom of its range, meaning that its price is attractive. Yes, as we suggested in our weekly Advice Tracker which measures how our advice is serving our readers (we are up while the market is down by 47% since its peak in early October 2007), this ETF has taken a beating - but we reckon that this represents a  buying opportunity, and 
• currently trading in the early $80s, its price is way below its peak of $250 back in early March; equally, it is trading well below its "lower band" of around $102.