Tower Private Advisors
- Excessive pessimism toward stocks
- Econ 101
- Slow week for economists
Capital Markets Reca
This marked the sixth consecutive week of falling prices on the S & P 500. That hasn’t happened for more than eight years, and if you like pictures better, here it is.
While there is absolutely nothing to prevent that from happening for another six weeks, the current slide has sent the bulls running for cover, at least as evidenced by the lemmings surveyed by the American Association of Individual Investors. In fact,the ratio of bulls to bears has gotten to a level that has produced strong rallies, as shown below.
Lemmings became the subject of a popular misconception that they commit mass suicide when they migrate. Actually, it is not a mass suicide but the result of their migratory behavior. Driven by strong biological urges, some species of lemmings may migrate in large groups when population density becomes too great. Lemmings can swim and may choose to cross a body of water in search of a new habitat. In such cases, many may drown if the body of water is so wide as to stretch their physical capability to the limit. This fact combined with the unexplained fluctuations in the population of Norwegian lemmings gave rise to the misconception.
The producers of the White Wilderness documentary, however, helped to perpetuate the myth, which you’ll see in the video below. I’ve captured a screenprint of the moment in time when the little critters are shown hurling themselves into the water. ’Trouble is, the producers chased the lemmings so that ran off the cliff just to get away from the producers.
–Whatever–this is not Marlin Perkins and my favorite Sunday evening show of the ’70s, Wild Kingdom. The point is that following the herd is not, generally, a good strategy, and individual investors tend to move as a herd. One client called me today, wondering if she should act to protect a part of her portfolio. ‘Not a bad concern; just a bad time to be thinking about it.
Where the crowd is especially wrong is at extremes. For the most part, going with the crowd isn’t a bad strategy, but when they’re so piled up on one side of the boat, it usually pays to go against them. The current ratio of bulls:bears is like my youngest son. He’s in the fifth percentile for his height and weight, meaning that in a crowd of 100 kids, there will be, on average, just 4 who are littler than he is. Similarly, the bull:bear ratio has gotten so stretched that, in its 24-year history, there have only been 5.7% of observations more gloomy than now.
Top StoriesTry as I might, I can’t find a lot of mention-worthy stories amongst this week’s top stories. This week Apple held its World Wide Developers Conference. Most of the announcements were non-hardware related, so they didn’t get much attention. The company announced its iCloud service, a new operating system, and lowered some prices. Google is increasingly mentioned as an Apple competitor, and there seems to be some synchronicity that a company so closely associated with cloud computing should announce this week that its new laptop, the Chromebook, could be preordered this week.
OPEC met this week and decided not to raise output quotas, despite a request from Saudi Arabia to do so. There is some concern that recent prices are causing what many call demand destruction, which refers to a downward shift in the demand curve, as is on display in my low-tech Econ 101 exhibit below. Demand destruction is as pernicious as it sounds because it introduces a permanent reduction in the demand function. Notice, in the lower graph, that demand is lower at every price. Theoretically, it never recovers. The idea of demand destruction seems to be peculiar to energy commodities. It’s this, though, that has the Saudis concerned.
Almost nothing this week. The only report of any consequence, IMO, was the weekly Initial Jobless Insurance Claims report. After a downtrend lasting 109 weeks, we are now in a–thus far–short-term uptrend–14 weeks into it. That seems to reinforce the idea that the economy has entered a soft patch.
Here is a review of a subject I have raised a number of times. Namely, the stock market seemed to be shrugging off the economic weakness implied by overly enthusiastic economists. That’s been reversed, as we conclude the sixth losing week in a row, and as you can see below.
Unlike this week, there’s lots going on next.
Key indicators to watch
- Producer Price Index (Tuesday) – May
- Consumer Price Index (Wednesday) – May
- Industrial Production (Wednesday) – May
- Capacity Utilization (Wednesday) – May
- Initial Jobless Claims (Thursday) – weekly
- University of Michigan Consumer Confidence (Friday) – June, preliminary
- Leading Economic Indicators (Friday) – May
Housing related indicators
- NAHB Housing Market Index (Thursday) – June
- Housing Starts (Thursday) – May
- Building Permits (Thursday) – May
- Empire State Manufacturing index (Wednesday) – June
- Philadelphia Fed Report (Thursday) – June