Retail Traders Are Bullish According To AAII Survey

The American Association of Independent Investors released its weekly survey of retail traders. Bullish sentiment rose to 49.6%, up from 47.1%. Bearish sentiment declined 2.5 points to 25.2%, down from 26.8%. The number of investors describing themselves as neutral was down slightly to 25.2%.

Historically, a number of 50% or more has marked tops in the stock market. Furthermore, bullish sentiment has been elevated for an extended period of time indicating that retail traders are very bullish. Since this is a contrarian indicator, it would suggest that now is not the best time to be long stocks. That being said, AAII sentiment has not been very helpful during the last 4 weeks. It has remained extremely bullish for some time and yet the market has continued to climb. 

Here is a short-term chart of AAII sentiment.

Click chart for larger image.

  

















Here is a longer term chart which compares AAII bullish sentiment with the S&P 500

Here is a chart which compares AAII bearish sentiment with the SP 500.

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Retail Traders Are Bullish According To AAII Survey

Investment Managers Are Bullish

Today the NAAIM released its weekly survey of investment manager sentiment. The results indicate a rebound in bullish sentiment compared to last week. Currently, investment managers have a 72% equity exposure. As you can see from the chart below this is a very volatile number much like the AAII poll. Generally a reading above 70% indicates caution and signals that we may be nearing a short-term top, which usually coincides with a reading of around 80%. However, it should be noted that this number can remain elevated for a while so it is best to combine it with other trading indicators.

Click chart for larger image.

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Investment Managers Are Bullish

Bernanke's Greatest Fear Realized

Sometimes it is worthwhile to try to understand the madness of Zimbabwe Ben and his merry criminals at the Federal Reserve. During the last few months, members of the FOMC have argued that inflation is too low and that they must print money to increase inflation to an "acceptable rate". To the average layman this statement is absurd, after all, low inflation is a good thing. Why on earth would the Fed openly state they want higher inflation?

Below is a chart which compares Core inflation in the US and Japan-post bubble. So far, US inflation has tracked Japan on the way down, despite money printing by the Federal Reserve and the 2009 stimulus package. This is why the Fed is so eager to initiate QE 2. They see these parallels and want to avoid Japan's deflationary spiral at all costs. To the Fed, low inflation signals QE 1's failure and increases the risk that the US may be falling into the dreaded liquidity trap where monetary policy is rendered ineffective.  

Click chart for larger image.

Chart Source: Economistsview

Personally, I do not see the Japan scenario as a likely outcome. The main reason is demographics. The major determinant of Japan's deflation was a declining population. This resulted in a continuous reduction in demand for goods and services.  However, in the US we have an ever increasing population, which leads to a continual increase in demand for goods and services. It is hard to have a period of prolonged deflation when there are more and more people entering the economy every year. Regardless of economic conditions people need a certain amount of stuff to live and more people need more stuff. The US economy is not set up for deflation in the long-term.

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Credit Managers See Signs Of Stability

The International Association of Credit Portfolio Managers conducts a quarterly survey of credit managers at 94 financial institutions in 17 countries. It is a good indicator of how the pros are positioned and their outlook for the economy. The survey indicates that credit managers are slightly more optimistic about the economy and expect credit spreads to tighten From the IACPM:

The latest IACPM Credit Outlook Survey has turned positive for the third quarter, as respondents forecast fewer defaults over the next 12 months and tighter credit spreads over the next three months. The IACPM Credit Default Outlook Index is positive 14.8, while the IACPM Credit Spread Outlook Index is positive 20.9. Both results are in contrast to last quarter, when survey respondents forecast somewhat higher defaults and wider credit spreads.


IACPM Executive Director Som-lok Leung cautions, however, that respondents may not be predicting significantly better conditions so much as not expecting trends to get worse. “Stability appears to be the key for a number of the survey takers,” commented Mr. Leung. “They’re not expecting a lot of improvement but they believe conditions have at least stabilized, if at more subdued levels.”
 
The latest forecast results are clearly positive but perhaps hint at an element of uncertainly, as survey respondents are generally split between those who believe conditions will improve in coming months and those who see no change. For example, 44 percent of respondents forecast a decline in corporate defaults, while 39 percent expect them to remain at current levels. Just 17 percent, however, think corporate defaults will increase. Similarly, 41 percent of respondents predict consumer defaults will drop, 35 percent expect no change and 24 percent think they will increase.

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Credit Managers See Signs Of Stability

Highlights From The Beige Book

The always anticipated Beige Book was released today, which reports on economic activity across all 12 Fed districts. Here are some of the highlights:

Macro Economy

Economic activity continues to expand but at a slow pace

Manufacturing

Still expanding with many districts reporting increases in new orders. Semiconductors in particular showed strength along with Auto production.

The problem is that hiring within the manufacturing industry remains very weak. Companies seem to be comfortable with current production, and capital spending is expected to remain limited, except for the St. Louis district which saw an increase in future capital spending.

Non-Financial Services

Remained flat to slightly positive led by strong demand for IT services. Demand for transportation services declined, in particular freight volumes. Railroads continue to report positive volumes but growth is at a slower rate than in the past.

Consumer Spending & Tourism

 All districts reported an increase in retail sales except for the Richmond and Atlanta districts. Back to school spending is looking good. Retailers reported that consumers are still price conscious and hesitant to purchase large discretionary items.

Tourism also saw an increase but still remain weak. The Atlanta district saw continues weakness because of the oil spill in the Gulf. Airline traffic remains soft but has improved considerably over the past year thanks to business traveling.

Real estate and Construction

This remains the weakest sector of the economy. Home sales are declining and in some districts are below year-ago levels. The only districts which reported slight increases in home sales were Philadelphia, Dallas, and Kansas City. Housing inventories remain high in all districts while home prices were stable since the last report. Declining home prices were reported in Kansas City, New York, and Minneapolis. Home builders remain in a tough situation and continue to report declining price pressures. Construction activity remains at depressed levels with most industry respondents expecting the situation to remain soft through the end of the year.

Commercial real estate remains subdued with reports of falling rent rates. The only sub-sector which showed any strength was apartments. With continued softness in commercial real estate, developers remain on the sidelines. Most respondents expect commercial real estate to remain weak for a prolonged period of time.

Banking and Finance

Lending activity and demand for loans remain weak. This is especially true for businesses who have delayed future capital spending until the economic outlook improves. Consumer demand for loans was flat with some reports of slight increases (mainly in refinancing activity).  

Prices and Wages

Input prices rose across the board, but were not passed through to consumers. Agricultural and shipping prices accounted for most of the increase.

Wage pressures remained contained expect for an expected increase in health care related costs.

Corporations do not have future plans to hire permanent workers, although demand for temporary work has been strong.

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Highlights From The Beige Book

ASA Weekly Index Still Strong

The American Staffing Association reported today that its weekly index, which tracks temporary and contract work held steady at 100. Historically, the demand for temporary work has been a leading indicator of permanent jobs. However, this has not been the case during this cycle as companies remain hesitant on account of economic uncertainty. From the ASA:

During the week of Oct. 4–10, 2010, temporary and contract employment dipped slightly (-0.21%), maintaining the ASA Staffing Index at a value of 100.


At a current index value of 100, U.S. staffing employment is 45% higher than the level reported for the first week of the current year and is 23% higher than the same weekly period in 2009.

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ASA Weekly Index Still Strong

Commerical Real Estate In Free Fall--Back To 2002 Levels

The depression continues for US commercial real estate. Today, Moody's reported that its Moodys/REAL Commercial Property Price Index declined 3.3% in August, which means prices have fallen back down to levels not seen since 2002. The index is now 45% off its all time high reached back in Oct. 2007.

Below is a chart which shows the performance of the index since 2001.

What is disturbing is how quickly the index has fallen over the last few months. The index is down almost 10% since the beginning of the year.  It should be noted that the majority of transactions are distressed sales which are largely responsible for the sharp decline. This is the major reason banks are not foreclosing on commercial properties. They don't want to be stuck with the losses when trying to resale the property. No wonder banks have been so willing to restructure and extend loan terms for commercial real estate. Extend and pretend is the name of the game right now.

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Commerical Real Estate In Free Fall--Back To 2002 Levels

Fed's Fisher: Why QE Failed

Dallas Fed President Richard Fisher made a speech today where he gave a great example of why QE failed. Unfortunately, Fisher is not a voting member of the FOMC but he really nails it. Corporations are using cheap QE money to increase capital spending in emerging markets to the detriment of the US. They are investing abroad where there are lower taxes and better economic fundamentals. More from Fisher's speech to the New York Association for Business Economics:

In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. The Treasury International Capital, or TIC, data released yesterday morning show that foreign interest in buying Treasuries remains robust. Yet, far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please. This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin. We will have to watch the data as they unfold to see if this is momentary fillip or evidence of a broader trend. But I wonder: If others cotton to the view that the Fed is eager to “Open (the) Spigot,” as proclaimed on the front page of the Oct. 6 Wall Street Journal, might this not add to the uncertainty already created by the fiscal incontinence of Congress and the regulatory and rulemaking excesses about which businesses now complain?

So in essence, QE has done nothing but provide cheap financing for corporations to invest abroad. Companies borrow at extremely low rates and use the proceeds to build manufacturing plants in Brazil, China, and other emerging markets. The bottom line is that capital is fleeing the US and flowing to other countries. No wonder US unemployment is currently at 9.5%.

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Contrarian Analysis Of Gold--Mark Hulbert

An interesting piece from Mark Hulbert. For those who do not know, Hulbert has a popular newsletter tracking service and has developed many popular sentiment indexes. He is certainly no goldbug, but has a bullish contrarian analysis on gold. His main point is that despite gold's parabolic rally, bullish sentiment among newsletter writers is still low, indicating that we are nowhere near a major market top. From Dow Jones:

Consider the average recommended gold-market exposure among a subset of the shortest-term gold market timers tracked by the Hulbert Financial Digest (as represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at 59.2%, which means the average gold timer tracked by the Hulbert Financial Digest is currently allocating more than 40% of his gold trading funds to cash.

There are several ways of appreciating how significant it is that the HGNSI would be this low. One is to compare the current reading to the HGNSI's all-time high, which is 90%. Since the normal pattern is for timers to become more bullish as the market rises, and more bearish as it declines, we would otherwise expect the HGNSI right now to be at least as high as 90%--if not even higher.

That this sentiment index today is nevertheless some 30 percentage points lower than the previous all-time high suggests the gold market is not suffering from the excessive bullishness that so often accompanies major market tops.
 
Another perspective on the HGNSI's current level comes to a similar conclusion: a comparison with gold sentiment late last year and earlier this year. In January, for example, the HGNSI got as high as 60.9%, and in November and December it rose even higher--to 68%. Yet on those prior occasions, an ounce of gold bullion was trading in the low $1,100s.

Gold may continue to decline in the short-term, but sentiment never got bullish enough to indicate a major top. From a longer term perspective this is a good thing because it shows how much skepticism remains in the gold market.

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Contrarian Analysis Of Gold--Mark Hulbert

Housing Starts Increase In September

Today we got new housing starts and building permits. Housing starts came in at seasonally adjusted annual rate of 610,000, which was better than expected. Building permits were weak at 539,000. From the Census Bureau:

HOUSING STARTS

Privately-owned housing starts in September were at a seasonally adjusted annual rate of 610,000. This is 0.3 percent (±10.3%)* above the revised August estimate of 608,000 and is 4.1 percent (±12.0%)* above the September 2009 rate of 586,000.

Single-family housing starts in September were at a rate of 452,000; this is 4.4 percent (±13.9%)* above the revised August figure of 433,000. The September rate for units in buildings with five units or more was 150,000.

BUILDING PERMITS

Privately-owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 539,000. This is 5.6 percent (±1.4%) below the revised August rate of 571,000 and is 10.9 percent (±2.3%) below the September 2009 estimate of 605,000.

Single-family authorizations in September were at a rate of 405,000; this is 0.5 percent (±1.3%)* above the revised August figure of 403,000. Authorizations of units in buildings with five units or more were at a rate of 111,000 in September.

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Housing Starts Increase In September