[powayseller]

The Coming Economic Collapse, by Stephen Leeb, PhD

“When we examined the relationship between oil prices and these zigs and zags [recessions and periods of strong growth between 1973 and 2000], we discovered that economic downturns and bear markets were always preceded by rising oil prices In particular, whenever the price of oil doubled over a 12 month period, stock returns ranged from -27% to +4% over the following 18 months. On the other hand, whenever oil prices declined over a 12 month period, stocks returned anywhere from -1% to +30%.”

According to the book jacket, Stephen Leeb “edits the prestigious newsletter The Complete Investor. Renowned for consistently finishing among the leaders in the annual stock-picking contests of the Wall Street Journal and Forbes, he is the author of 5 previous books and holds a BA in economics, MS in mathematics, and a PhD in psychology.”

In the book, he explains that the media, government, and Wall Street is short sighted in not recognizing the oil shortage, and recommends investments that will outperform as inflation and energy costs rise.

Chris, the studies in your newsletter about a relationship between oil and stock prices are pretty short term. 3 of the studies looked at the effect of a change in oil prices on the stock performance the following day. The one study which looked at 12 – 67 day moving averages, found a mild connection. Investors consider the price of oil to be volatile, and therefore don’t base stock decisions on the movement of daily changes in the oil price. Rising oil prices are a problem for the stock market only when they are persistent, because then they are inflationary. A 1 week rise in oil prices doesn’t mean anything. Now with this logic, the past 2 years, where oil prices have been steadily rising, should be bad for earnings, and thus, stocks. The Fed has been raising rates for 2 years, and stocks have held up pretty well. So the mitigating factor is the global liqudity.

You and I have very different approaches to investing. My approach is based on the economy, yours on technical signals. I think when both approaches line up, there should be a much higher certainty of a win. But if you do not wish to discuss this any further, I will oblige.

[powayseller]

I’m happy to be within 5%. I can’t pick the exact day of the bottom, but should be able to pick the quarter.

I will start a chart of months inventory. I can get the inventory data back to January from Bob C. Sales are published.

I will use pending for forward looking approach. Sales lag by 1-2 months.

I will post my findings. It will be interesting to note the seasonal effect, if any. thanks.

[powayseller]

Chris, your input and experience have been very valuable. My questions are to improve my understanding of the markets. People ask me questions all the time. Look at the objections I am getting over at the months inventory post. I think it is fair for people to question what I am saying; if my system is really that good, I will be able to answer the questions; if I cannot answer the doubters, maybe my system is not that good after all and needs to be modified.

In my opinion, we are heading into a long period of declining earnings later this year, which will bring on a bear market lasting for at least one year. I prepared for this in March 2006, by going 95% cash.

Then, I hear about a very interesting mid-presidential election year rally, which has never missed since the 1930s. Your theory is not anything that needs defending; it is a well known stock market cycle.

I am trying to reconcile the economic slowdown we are heading into, with a historic precedent for a rally in the late fall. I was hoping you could explain how this could happen, and if it happened before.

It’s my understanding that your trading system uses a variety of proprietary trading inputs, but not economic forecasts. You look at the bond yields, technical trading indicators, COT report, and various other things. Is the COT report a proxy for the economy? I assume the COTs go long when they perceive corporate earnings will rise in the near future.

Since you don’t use economic input, you wouldn’t have tracked earnings per share and probably don’t have the data on whether the stock market rallied while earnings decline. But I wonder if the COT report ever showed they were short, and the market rallied anyway. In your trading system, is there a proxy for the economy or do you trade on technical signals alone?

The question posed by anxvariety, about your historical returns is certainly fair. Some of the considerations you use, like not being in the market in years ending in 7, do sound unusual, so it does make one curious. Often a system works well during a bull market or a bear market, or a time of rising commodities (Zeal), but then the system no longer works when economic conditions change. How well will Zeal do when commodity prices retreat?

Also, I am not sure how my question relates to stock and oil prices. Your detailed review of 4 studies showed that oil prices do not affect the stock market, but I think it’s safe to say that earnings, inflation, and the Federal funds rate definitely affect the stock market. Inflation may stop rising and the Fed may lower interest rates, but I’m certain earnings will fall. So the question was: how can the stock market rally when earnings are declining?

I asked Bill Fleckenstein if he expects a rally this fall, in the mid-year cycle. He said

“I do not pay attention to cycles, but I don’t expect a rally this fall– just the opposite.”

I told him that in 1982 and 1990, both recession years, the stock market rallied after and during the recesson. He said

“1982 and 1990 are different from today”

This is just his opinion, and he could be wrong…

One more thing: Barry Ritholtz wrote today that the stock market ralied because core PPI came in low. But the rally will be short lived. PPI fell because low demand for light trucks forced discounts, so truck prices fell. Everything else in the PPI index rose, and rose by a lot. Some materials costs rose over 4%! In an ironic twist, GMs stock rose because demand for its trucks is down.

[powayseller]

an – how did 9/11 change the cycle? I didn’t see that in the data. The prices were going up continuously since before that, and did not go down at all. You mentioned a slowing in the rate of increase, but that is not in the method. I am looking for a shift, not a slowing in the rate of increase.

The median price data is very interesting, as is the data showing prices rise in the summer. Inventory rises in the summer too, as do sales.

Again, the method is not concerned with prices, medians, or even inventory.

The data part of the method is months inventory, so it combines supply and demand. This seems to be the most accurate metric of market direction.

I think I must not be explaining it well, because people are posting all this data about prices.

Disproving the theory requires showing that months inventory was rising while prices rose, or months inventory declinded while prices fell. I’ve not been able to find this data anywhere.

This is the method I will use, and I may miss the bottom by a month or two, but with real estate so slow moving, I would miss out at most on 1% or 2% of price. Small price to pay for being at the bottom. Imagine buying too early, and having the house lose another 5% or 10%.

an, you are welcome to keep this method in mind as you plan your purchase, or discard it, as you wish. I just learned about this method, so I will use it in the future, and maybe I will get rich! I can buy a lot of rental property at the bottom, and hold it for many years.

[powayseller]

Ok, let me ask it this way: are there any times you can think of, where the stock market rallied during or just before, a period of falling earnings. A rally could occur during declining earnings based on perhaps the Fed lowering, oil prices falling, a Mideast conflict easing.

I believe earnings will keep falling into next year, until the imbalances in our economy are worked out. Consumer debt must stabilize, and consumers have to either save or get the ability to take on new debt. Until then, the economy will keep slowing. However, if the Fed cuts interest rates in the fall, and we can have a rally. How that rally could sustain for 2 years is beyond me though.

I am looking to get into stocks next year, when earnings are very low, the builders/retailers/banks are hammered due to bankruptcies and foreclosures, and nobody wants to own stocks. That’s when I would get back in.

Your mid-year election cycle plan has historical precedent, but runs counter to what is in the pipeline for the economy. So it requires the stock market to rally in the face of declining earnings.

[powayseller]

This article includes a charts of listings and sales in Phoenix since January 2002. This is the type of data I plan to use. I guess I better start charting, so I have a history, and can see a change in trend.

In the graph, we can see inventory is falling, until January 2005. In April 2005, the inventory leaps up, and keeps rising. Nowhere do we see a “dead cat bounce”, i.e. inventory reversing trend, and then resuming its previous course.

Has anyone seens a chart like this for San Diego?

[powayseller]

Hi Brooke, does that mean you will be joining our forums now? That would be really cool!

[powayseller]

SD Realtor, you are my fav! You are in my first sentence: “The realtors I met on piggington are very smart; several are engineers.” That’s *you* I am referring to.

[powayseller]

I wouldn’t be surprised to see class action lawsuits against these advertisers, real estate seminar promoters, even the NAR. Just wait until you have a million people in foreclosure in the US; that collective anger and desperation will seek to blame anybody and everybody. In our country, we have more lawyers than engineers, all standing by to serve their country in the court of law. What will be the Enron of real estate?

[powayseller]

The FDIC website gives you the definitive info on insurance. It is $100K per person per account, so you can end up with $500K per institution between various types of accounts, for a married couple.

privatebanker posted that getting money back from FDIC is a hassle, because you have to wait a while. I don’t know if it’s 6 months, 1year, or less.

World Savings had the best rates last spring, so I went there also. I wondered why they were so desperate for the deposits. Their high rate, to me, was a warning sign. But I thought it would be another year at least before they were hit with foreclosures, so I planned to use them only until this fall.

Please spend the $15 for a Weiss ratings report before you give your life savings to a bank. And pretty please post your ratings here to share with us. They don’t rate credit unions. I am less confident in other ratings agencies, because they are less diligent. For example one rated everbank A,but Weiss rated them E-. Weiss is very diligent, and that’s what I want for someone evaluating my bank.

In September, after my World Savings CD expires, I am going to put my money into short term Treasury bills – no state income tax, and more safe than banks.

hs posted before that USAA has high rates. You don’t have to be military and they even beat World Savings. I don’t have a Weiss rating on it.

[powayseller]

Does your professor think the Saudi oil money is not invested directly, but via UK? If you look at Saudi Tbill purchases, they are flat, but the UK purchases have tripled. Brad Setzer, of Roubini Global Economics, suspects that it is Saudi money. Where else will they put all those extra dollars? I got an e-mail from Money and Markets, and that guy actually fell for the diversion, and said “Saudi Tbill purchases remain constant at $13 bil”. I would expect better research from a financial advisor.

What does your professor think about the sustainability of foreign financing, and whether our exports will eventually increase to satisfy a consumption oriented China? Will they start buying agricultural products from us?

[powayseller]

I love Chris’ newsletters! In one of them, he showed his research, via charts, of why gold does not follow the dollar, but inflation. It was driving me nuts when the median would keep writing “gold is up today because the dollar is weaker”, when that was just a coincidence. The media people have no clue why things happen, but they feel like they must give a reason for why they do happen. They’re just making stuff up. But Chris’ stuff is based on research and his experience trading for 20 some years.

Chris, are you still looking into that question: examples of where the stock market rallied when earnings per share were decreasing.

[powayseller]

Asianautica, thank you for taking the time to post this. The OFHEO median you showed is the accurate median, the one everyone should be using. (But NAR’s median, the one reported in the media, is plagued with problems. ) In the first cycle, I see that you have to wait for the median to be in a new direction for 2 consecutive quarters, if you check the quarter-over-quarter median. In this cycle, the median has been increasing every year; I don’t see a change around 2000; it keeps going up. We need to see not a slowing in rate of increase, but an actual decline. Anyway, I did not consider using median but I should add this to the model: 2 consecutive months of changed direction in the OFHEO median. Thanks for giving me this information.

The 3 indicators in my model are months inventory, realtor experience, and a change in HAI. Do you know if those 3 combined would have given a false signal at those 2 times you mentioned?

If you find evidence that my model does not work, then I will reconsider my strategy, definitely. Until then, from how I understand real estate, this is the best I’ve got.

As far as real estate responding to geopolitical shocks and high oil prices, do you have any examples from history that there were any “dead cat bounces” in real estate from such things? Real estate prices are historically linked to employment. Only during recessions have real estate prices fallen. Whenever people are employed, they can make their mortgage payment. Housing rises with inflation. It is not like a stock.

[powayseller]

2003 was not a dead cat bounce. Those people acted on fears, not data. Nothing you have said so far disproves my theory.

Disproving or proving my theory would require data of months inventory from the last cycle. Without that, only time will tell.

I was told that real estate is a slow moving ship. It moves in one direction, and takes many months to peak and turn. This time, the market softened in 2004, and it wasn’t until TWO YEARS later, in summer 2006, that the median went down. But months inventory changed already in 2004. It has not done any dead cat bounce since then. Inventory has been climbing steadily from 3,000 in march 04 to 6,000 in June 04 to 12,000 in Sept 04 to 23,000 today.

Perhaps you could find an example of where the inventory dipped and rose again since 2004. Then if you find that, we can check the sales and go further with this test.

Real estate moves very slow. It is not like stocks at all. No dead cat bounce.

You can have variations in new housing starts, permits, and all the stuff that manufacturers do to vary their work flows. But consumer demand and supply seems to be a very slow sticky type of thing.

Of course, if I am wrong, I want to be corrected, but all the things that people have written above, is not disproving my theory at all. Saying that I can’t possibly be right is not proof of anything.

Similarly, I cannot prove my theory without the data. So we are on even ground.

All I can say is that I will use this model to time my purchase.

[powayseller]

Hey, Lindi, does that mean you did your survey? Where are we supposed to post our results?

[Author]

Posts