Update on Indicators

Usually I look at my indicators at the beginning of a month. If I look at them more frequently, the changes are too small, and I don’t get the signal. In no particular order, here are my thoughts, both Bullish and Bearish:


  1. Contrary to what the bear in Barron’s said this weekend, the chart for the Merger Fund is bullish. They paid a dividend at year end, and the current chart shows that arbs are making money, which is bullish.
  2. ECRI’s indicators are forecasting growth up, and inflation down.
  3. Both emerging market stocks an bonds have bounced back well.
  4. Earnings yields are still high relative to Treasuries, though if profit margins mean-revert, this argument is hooey.
  5. ISI Group’s broadline retailer’s survey is showing some life.
  6. Securitization of subprime loans, and CDOs containing tranches of subprime deals rated less than AA, are not getting done. These assets are getting sold to financial intermediaries that have adequate balance sheets to fund them.


  1. From Alan Abelson’s column in Barron’s this weekend, Henry Kauffman uses a concept akin to my “bicycle stability versus table stability” to discuss liquidity. The former is access to credit, while the latter is excess high quality assets that are readily salable.
  2. Imposing tariffs on China is a real dumbkopf move. Eventually that will bite into the capital flow that keeps our interest rates so low, in addition to decreasing the benefits from the global division of labor.
  3. M3 is falling, and significantly. The banks are pulling back from landing, and credit availability is shrinking. My M3 proxy is the total liabilities of the banking system. Works very well.
  4. Fed funds continues to miss on the high side, since the FOMC meeting. The monetary base has gone flat, and there has been only one permanent open market operation this year, on 2/26.
  5. Financial stocks are lagging the market.
  6. The yield curve is still flat.
  7. Equity REITs don’t yield enough relative to Treasuries.
  8. Housing prices are falling nationwide.
  9. Asset price changes are increasingly in two camps: safe and risky. Correlations within the two camps are high and positive. Correlations of the two camps are very negative.
  10. Inflation remains high over the Fed’s comfort zone.

Neutral, or You Call It

  1. Implied volatilities have bounced up, but are still low.
  2. Corporate bond spreads have bounced up, but are still low.
  3. Implied 5 year inflation, five years forward, has been in a channel between 2.2% and 2.8% for the last four years.
  4. TED spreads are higher, but still low.
  5. The swap curve gained slope after the recent mini-crisis.
  6. The FOMC tightened less this time relative to prior times, if the measure is inflation versus the Fed funds rate.

That’s all for now. The two biggest bits of news are the tariffs on Chinese goods, and the decline in my M3 proxy. Bearish items both.


  • Frank Morison says:

    The link I’ve found that purports to give a proxy to M3 is http://www.nowandfutures.com/articles/20060426M3b,_repos_&_Fed_watching.html . The latest data shows a slight drop but I looks like just noise so far. Does your indicator show a bigger drop? What do you think of “bart’s” data?

  • Isaac says:

    If you look at bank assets from the 8 release, it’s dropped to the level it was back in nov/dec. What’s interesting is that M2 has stayed steady (added $9 bill between 3/12 and 3/19).

  • Isaac says:

    That’s h-8, not 8.

  • Paul in Kansas City says:

    These lists of bull bear neutral indicators are very helpful David. Thanks

  • Doug McClure says:


    You mention ECRI is forcasting growth (I’m assuming you are referring to the Weekly Leading Index) and inflation down (the Future Inflation Gauge?) as being positive. What do you think regarding their Leading Housing Price index which is significantly up? It certainly foreshdowed the downturn in housing prices nationally. Any thoughts?

  • Frank & Isaac — My M3 proxy is total bank liabilities from the H.8 report. They have fallen significantly over the last month. The correlation versus the old M3 was 99%, and had a beta of 1.00. Bart’s data is fine with me — he is doing something more sophisticated than me. When I concocted my M3 proxy, it had the virtue of simplicity, and being the first solution that I saw publicly suggested (though I used assets, not liabilities at first).

    Paul, thanks as always.

    Doug, yes, you have it right. I don’t subscribe to ECRI; I only get what’s publicly available on Bloomberg. How much is their Leading Housing Price index up, and how much of a lead time is it supposed to have?

    Thanks all for commenting.