Economic Signals

Signs of Strength

• Second derivative economic statistics improving. After diving basically straight down, numbers coming from Washington agencies have show some signs of bottoming, or at least a slowdown in the pace of decline.
• A bit of a rally in high quality corporate bonds. The LQD ETF is a good proxy for investors’ state of mind. Since March 9th, LQD has inched up 3%, which for bond guys counts as a rally.
• Over half of transportation/logistics firms we spoke with this week indicated that volumes had stabilized. These firms, companies that ranged from consumer non-durables to industrial goods, had seen business level off. We have a more detailed discussion of this comment later in the note.

Signs of Weakness

• Unemployment nearly certain to continue to rise. We haven’t seen a dreaded million person unemployment report, but unemployment is a lagging indicator, and the number of people going into that category will rise this year. We think unemployment will peak at 10-10.5% in calendar Q4. If so, that can’t be good news for consumer spending.
• Second tranche interest rates are still way too high. P.E. and venture debt rates range from 12-20%. In a deflationary environment that level of real interest rate makes loan sharking look respectable. These rates need to drop by half before companies can rationally accept private offers from financial buyers. Until this happens, financial buyers are effectively pricing themselves out of the market.

Signs of Who Knows

• Low “real” volume in this rally. The trading volume for most growth company investment banks has been dreadful, down several percentage points year-on-year. This makes sense given that money managers are running 20-40% less than they were last year. However, the current rally has not produced a big surge in investor buy orders. This either means that the rally will peter out, or it will produce a buying panic as investors try not to miss the run. It seems very likely that you’ll see some buying going into the end of this quarter if only because money managers don’t want to be seen as having huge cash hoards when the March 31st snap shot of stock holdings is taken.