The IMF: Magnanimous

By tothetick

Once upon a time, there was (and still is) the International Monetary Fund. Their story reads something like this. It’s not all make-believe; it actually happens.

It never ceases to amaze that we vote people into positions. Those people that we have voted in elect in turn (or just go ahead and appoint without an election, making it all look very transparent) other people who are not as important but who will have the possibility of choosing (apparently in an “open, merit-based, and transparent manner”) someone who will be more important than they are, but less important than the first person that is in the voting/appointment chain. If it’s getting complicated by now, that’s the whole point of it. It’s meant to look complicated from the outside, so that we all lose in interest in the last person that’s being appointed in the said chain. Then, we allow that last person to take decisions all around the world, dish out the dough and tell other countries that they have got it all wrong, imposing austerity here and there willy-nilly as if it has been decided over a croissant in some Washington D.C. Hotel. The, to cap it all, that person stands up last night and says something along the lines of: “sorry boys, we went a bit tough on you I guess”. But, hey, the damage is done now, so what are we going to do? The answer is probably little, as usual.

Christine Lagarde announced yesterday in a press statement following an International-Monetary Fund report released on the austerity program offered to Greece in 2010 and 2012, that mistakes had been made. It had failed to see the full extent that austerity would have on the Greek economy. In 2010, they provided 110 billion euros in a loan to keep the Greeks afloat. But, there was an obligation to restore the fiscal balance through the setting up of an austerity program as well as the privatization of state assets (to the tune of 50 billion euros). The privatization of assets took longer than had been planned and structural reforms were not being put into place, so the IMF provided another bailout of 130 billion euros (not all on their own, along with the Eurozone in both instances).

The present situation in Greece is pretty dire. Unemployment stood at 24.4% (2012) and has since increased to 27% in February 2013. That’s a rise from 17.4% from 2011.  Youth unemployment has hit 60% (aged 15-24 years old) and the country is being crippled by the austerity measures. Inflation was -0.6% in April 2013. The national debt of the country stands at more than 381 billion, clocking up more than 50 billion more each year in interest alone. The debt represents 189.19% of GDP today.

Neither the bailout of 2010, nor the one that took place last year to patch the wounds up did very much to help the Greeks out of their predicament. The only thing that the IMF did largely was to enable the setting of the scene to push the Greek people into such a corner that they would elect a far-right fascist party, the Golden Dawn. In 2012, the waning economic bailout measures that were not showing through in Greece resulted in the break-through by the Golden Dawn Party (7% in the elections), who vowed to turf the immigrants out of Greece and make the country good again. Of course, it’s the immigration problem, isn’t it? In Greece 1/5 of the population is from immigration. But, that’s not the problem. Why oh why do we always have to fall back on the scapegoat theory and choose the people that we want to blame for our own mistakes?

The IMF and the European Central Bank may have kept the Greeks in the Eurozone. But, it was at a price. Market confidence has not been restored and unemployment has continued to rise. The poorest in the country were hit and are still being hit the hardest. Of course consumer confidence hasn’t returned in a country where we still talk of ousting them from the Eurozone, and perhaps even the EU. We refer to them as one of the PIGS. Would you fancy being an ‘oinker’ in the family? Would that restore your confidence?

The contraction of the economy of Greece is beyond the IMF’s wildest nightmare-scenario situation. They thought it would contract by just 5.5%. It turns out that it’s more than three times that (17%). Wonderful mathematical wizardry. Calculations are not easy at the best of times, but in times of crisis , they are even harder.

Stories that begin by “one upon a time” are not always for children. The Greeks aren’t children, but the IMF belittled them. The IMF told them they had to do this and that they had to do that; and it was that which brought them down even more. But, they had to be publically punished to make sure that the others that were getting bigger around the world didn’t end up doing the same thing. Who in their right mind would ask the IMF now for money? You would have to be desperate, wouldn’t you? It would only plunge you further into economic disarray. What a botch-job by the IMF. Well done guys. Credibility just went (further) down the pan. What did you expect? But, what’s worse, the Greeks are the ones that are being hit the hardest at the moment. They have just taken another slap in the face from Ms. Lagarde. Isn’t it magnanimous to admit one’s mistakes? Absolution?

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China corn, soy imports to fall short of US hopes

by Agrimoney.com

China's imports of corn will grow over the next decade, but not by as fast as some other commentators believe, being outpaced by those of cheese, and not far ahead of beef, leading economists said.

The Organisation for Economic Co-operation and Development and the UN Food and Agriculture Organisation, in a much-watched annual outlook on world agriculture, highlighted that China, the world's most populous country, will become increasingly more dependent on food imports.

While annual demand growth will slow to 1.9% over the next decade, from 3.4% over the past 10 years, reflecting the extent of the improvement in diets already achieved, the rate of increase in production will slow too, to 1.7% per annum from 3.2%.

"China's consumption growth will slightly outpace its production growth," the report said.

"The challenge is clear - feeding China in the context of its rapid economic growth and limited resource constraints is a daunting task."

'Environmental stress'

Meeting demand will require large increases in imports of many agricultural commodities, including corn and oilseeds, as China struggles to maintain self-sufficiency in production of pork, its favoured meat.

Producing virtually all of its own pork "will be a challenge" even with a slowdown to 1.6% a year in growth in consumption.

"Management of land and water constraints, for example, will play a major role in China's ability to remain self-sufficient.

"In the next decade, China's pig population will rise to almost 550m head, further stressing the environment, often in areas surrounding cities."

'Strict control'

However, while imports of coarse grains – mainly corn – will more than double to 13.2m tonnes by 2022, that is a far smaller increase than observers including the US Department of Agriculture foresee.

The USDA predicts China's corn imports alone hitting 19.6m tonnes by 2022-23, with barley buy-ins reaching 3.3m tonnes on top.

The FAO and OECD said that annual growth in China's use of coarse grains would slide to 2.1% over the next decade, from 5.2% in the last, "largely because China will exercise strict control over the industrial usage of corn".

"Production of ethanol from maize will remain less than 1.5bn litres."

The groups were, relatively, downbeat on imports of oilseeds too, seeing growth to 82.8m tonnes in 2022 from 65.1m tonnes this year – representing a slump to 2.6% from 13.3% in the annual growth rate.

"Import growth should slow down compared to the last decade, on account of the deceleration in growth of the crushing sector, as demand growth for both protein meal and vegetable oil eases, from a higher base," the report said.

The USDA foresees China's imports of soybeans alone hitting 102.9m tonnes in 2022-23.

Trade prospects for China, as the top buyer of soybeans and prospectively a huge purchaser of corn, are particularly closely watched in grain and oilseed markets.

'Slow down significantly'

The OECD and FAO, which five years ago were among the first to highlight the potential squeeze on food supplies caused by population growth and productivity slowdowns which has fuelled the revival in the agriculture sector, were also downbeat on prospects for China's sugar imports, which they saw stagnating at about 2.5m tonnes a year.

Extra beet and cane plantings, and yield growth, will allow the country to meet most of its increasing demand.

"China's recent import growth should slow down significantly compared to the last decade, and remain below the peak reached in 2011."

Purchases, and production, of cotton will slow too as China's rising labour costs shrink its textiles industry.

"While domestic consumption of textile products is likely to increase, the intensification of competition in cotton spinning products, especially from India and other countries with low-cost labour, the use of cotton in China will decline," the report said.

Diary, beef booms

The FAO and OECD were more upbeat on prospects for dairy imports, with domestic milk production slowing to 2.4% a year, from 6.9% a year over the past decade, behind growth in many milk products.

Consumption increases will be "mostly driven by income levels and the growing influence of multinational companies, which are introducing new retail products and processing efficiencies, as well as government programmes that promote, for example, school milk consumption".

Cheese imports will soar by 10% a year to top 100,000 tonnes in 2022.

Imports of beef will also soar, as China's low consumption rates, of 4 kilogrammes per person per year, catch up with the average in OECD countries of 14 kilogrammes per person per year.

"Bovine meat will become the fastest growing [meat] import sector with a growth rate of 7% per annum."

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China’s Stealth Wars

by Brahma Chellaney

NEW DELHI – China is subverting the status quo in the South and East China Seas, on its border with India, and even concerning international riparian flows – all without firing a single shot. Just as it grabbed land across the Himalayas in the 1950’s by launching furtive encroachments, China is waging stealth wars against its Asian neighbors that threaten to destabilize the entire region. The more economic power China has amassed, the greater its ambition to alter the territorial status quo has become.

Illustration by Paul Lachine

Throughout China’s recent rise from poverty to relative prosperity and global economic power, the fundamentals of its statecraft and strategic doctrine have remained largely unchanged. Since the era of Mao Zedong, China has adhered to the Zhou Dynasty military strategist Sun Tzu’s counsel: “subdue the enemy without any battle” by exploiting its weaknesses and camouflaging offense as defense. “All warfare,” Sun famously said, “is based on deception.”

For more than two decades after Deng Xiaoping consolidated power over the Chinese Communist Party, China pursued a “good neighbor” policy in its relations with other Asian countries, enabling it to concentrate on economic development. As China accumulated economic and strategic clout, its neighbors benefited from its rapid GDP growth, which spurred their own economies. But, at some point in the last decade, China’s leaders evidently decided that their country’s moment had finally arrived; its “peaceful rise” has since given way to a more assertive approach.

One of the first signs of this shift was China’s revival in 2006 of its long-dormant claim to Indian territory in Arunachal Pradesh. In a bid to broaden its “core interests,” China soon began to provoke territorial disputes with several of its neighbors. Last year, China formally staked a claim under the United Nations Convention on the Law of the Sea to more than 80% of the South China Sea.

From employing its strong trade position to exploiting its near-monopoly on the global production of vital resources like rare-earth minerals, China has staked out a more domineering role in Asia. In fact, the more openly China has embraced market capitalism, the more nationalist it has become, encouraged by its leaders’ need for an alternative to Marxist dogma as a source of political legitimacy. Thus, territorial assertiveness has become intertwined with national renewal.

China’s resource-driven stealth wars are becoming a leading cause of geopolitical instability in Asia. The instruments that China uses are diverse, including a new class of stealth warriors reared by paramilitary maritime agencies. And it has already had some victories.

Last year, China effectively took control of the Scarborough Shoal, an area of the South China Sea that is also claimed by the Philippines and Taiwan, by deploying ships and erecting entry barriers that prohibit Filipino fishermen from accessing their traditional fishing preserve. China and the Philippines have been locked in a standoff ever since. Now the Philippines is faced with a strategic Hobson’s choice: accept the new Chinese-dictated reality or risk an open war.

China has also launched a stealth war in the East China Sea to assert territorial claims over the resource-rich Senkaku Islands (called the Diaoyu Islands in China), which Japan has controlled since 1895 (aside from a period of administration by the United States from 1945 to1972). China’s opening gambit – to compel the international community to recognize the existence of a dispute – has been successful, and portends further disturbance of the status quo.

Likewise, China has been posing new challenges to India, ratcheting up strategic pressure on multiple flanks, including by reviving old territorial claims. Given that the countries share the world’s longest disputed land border, India is particularly vulnerable to direct military pressure from China.

The largest territory that China seeks, Arunachal Pradesh, which it claims is part of Tibet, is almost three times the size of Taiwan. In recent years, China has repeatedly attempted to breach the Himalayan frontier stretching from resource-rich Arunachal Pradesh to the Ladakh region of Jammu and Kashmir – often successfully, given that the border is vast, inhospitable, and difficult to patrol. China’s aim is to needle India – and possibly to push the Line of Actual Control southward.

Indeed, on April 15, a platoon of Chinese troops stealthily crossed the LAC at night in the Ladakh region, establishing a camp 19 kilometers (12 miles) inside Indian-held territory. China then embarked on coercive diplomacy, withdrawing its troops only after India destroyed a defensive line of fortifications. It also handed a lopsided draft agreement that seeks to freeze the belated, bumbling Indian build-up of border defenses while preserving China’s capability to strike without warning.

India has countered with its own draft accord designed specifically to prevent border flare-ups. But territory is not the only objective of China’s stealth wars; China is also seeking to disturb the status quo when it comes to riparian relations. Indeed, it has almost furtively initiated dam projects to reengineer cross-border river flows and increase its leverage over its neighbors.

Asian countries – together with the US – should be working to address Asia’s security deficit and establish regional norms. But China’s approach to statecraft, in which dominance and manipulation trump cooperation, is impeding such efforts. This presents the US, the region’s other leading actor, with a dilemma: watch as China gradually disrupts the status quo and weakens America’s allies and strategic partners, or respond and risk upsetting its relationship with China, the Asian country most integral to its interests. Either choice would have far-reaching consequences.

Against this background, the only way to ensure peace and stability in Asia is to pursue a third option: inducing China to accept the status quo. That will require a new brand of statecraft based on mutually beneficial cooperation – not brinkmanship and deception.

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Two More Weekly LCD Sell Signals

by Tom Aspray

The US stock market failed to continue higher after Monday’s rebound, and once again, the overseas markets are putting pressure on US stocks in early trading Wednesday. The Nikkei 225 was hit hard again as it lost 3.26% overnight, and there were greater than 1% losses in several of the Euro markets.

For the past week, the market internals like the NYSE Advance/Decline have been acting weaker than prices so a further decline would not be surprising. Some of the key averages like the NYSE Composite are already reaching the support from the April highs as it is down 2% from its recent highs.

It appears that traders are quickly moving from one sector to another, which has made the ranges even wider. Since May 2012, two of my favorite sector plays have been the Select Sector SPDR Health Care (XLV) and biotechnology. XLV is up 35.9% from last June’s lows while the DJ Biotechnology Index is up 63.4%. They have both clearly outperformed the 28.6% gain in the Spyder Trust (SPY).

On a seasonal basis, health care typically tops out in late May so this, combined with last week’s LCD sell signal, suggests that this market-leading sector may be ready for a rest. Health care broke out of a 12-year trading range last March so the longer-term outlook is still clearly positive. The charts can help us determine likely downside targets for health care, as well as two leading biotech ETFs.

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Chart Analysis: The Select Sector SPDR Health Care (XLV) hit a high on May 22 like many of the market averages and is down 4.6% from its high of $50.40.

• The weekly starc- band is now at $46 with the 20-week EMA at $45.76.
• The longer-term uptrend from the 2011 lows is at $45.70, which corresponds nicely with the major 38.2% Fibonacci retracement support.
• The 50% support level is at $40.
• The weekly relative performance did not confirm the recent highs, line b.
• The RS line is still well above its WMA and the uptrend line c.
• The OBV did confirm the highs with initial support at its WMA and then further at line d.

The daily chart of the DJ Biotechnology Index closed last week below the prior week’s lows after making a high in May at 1183.

• The daily starc- bands are now being tested suggesting that prices should stabilize or rebound in the near future.
• There is first resistance in the 1225-1265 area.
• The daily relative performance peaked in April and has formed lower highs, line e.
• The RS line broke its support, line f, on May 31 just before highs.
• The daily OBV also did not confirm the recent highs (line g) and then dropped below the support, line h, that goes back to the middle of March.
• A rebound back to the OBV’s declining WMA should be a good short-term selling opportunity.
• The major 38.2% retracement support is at 1022, which is 5.7% below current levels.

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The SPDR S&P Biotech ETF (XBI) has assets of $758 million and its largest holding makes up less than 3% of the ETF. It has an expense ratio of 0.35%.

• It triggered a LCD sell signal with last week’s close at $107.52.
• There is next minor support at $104.50 with the weekly uptrend, line b, at $101.93.
• The April highs at $97 are the next major support with the 38.2% Fibonacci retracement support at $91.
• The weekly studies have turned lower but are both positive as the RS line did confirm the highs and is above its WMA.
• The OBV broke through resistance, line d, in the middle of April confirming the price action.
• There is good support for the OBV at its WMA and then the uptrend, line e.
• The key resistance is at the doji high of $113.53.

The iShares Nasdaq Bitoechnology Index (IBB) has assets of $2.58 billion but is less diversified that XBI as its top ten holdings make up 57% of the fund. Gilead Sciences GILD -4.07% (GILD) and Regeneron Pharmaceuticals REGN -1.31% (REGN) both make up over 8% of the fund. It has an expense ratio of 0.48%.

• IBB closed above its starc+ band on May 13, which was one day before its high at $186.34.
• Prices are now close to the daily starc- band with further support in the $170 area.
• The 38.2% support from the November lows (not shown) is at $164.
• The daily uptrend, line e, is a bit lower at $161.70.
• The daily relative performance appears to have completed a short-term top as it has broken through support at line f.
• The daily OBV did confirm its highs but volume was heavy in the past two days.
• This has dropped the OBV below its WMA and is testing its uptrend, line g.
• There is a band of resistance now in the $178.50-$180.70 area.

What it Means: Those who are heavily long health care or biotech sectors should have a plan in place as a further correction is likely this month. I would expect them to rebound in the next week, at which time I will look to take further profits on XLV.

How to Profit: Biotechnology is one sector I will be watching closely as the market corrects as some of the key stocks are already well below their highs and a further correction should provide good buying opportunities.

Portfolio Update: Still long the Select Sector SPDR Health Care (XLV) from $38.50 but have taken some profits as it has moved higher. We are using a fairly wide stop for now at $45.72.

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The Dow's Ten Most Overbought Stocks

by Tom Aspray

As I pointed out in my Week Ahead column, the weekly close in the NYSE Composite below the prior three-week lows suggests that June may be a difficult month for stocks. Since the weekly and daily A/D lines have confirmed the recent highs, any correction should be a pause in the major trend.

This month’s starc band scan of the stocks in the Dow Industrials can be helpful in identifying those stocks that should be considered for profit taking, as well as identifying those stocks that should be monitored for buying opportunities on a further correction.

For those who are not familiar with these monthly scans, it identifies the stocks that are closest to either the upper (starc+) or lower (starc-) bands. When a stock is near the starc+ band, it is a high-risk buy but that does not mean the stock cannot still go higher. If a stock closes above the monthly starc+ band for several consecutive periods, then it becomes increasingly more vulnerable.

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At the top of the list this month, is the Boeing Co. (BA), which closed at $99.02, 1% above the monthly starc+ band at $98.07. BA was up 8.3% in May and is up 31.4% so far in 2013.

Of course, the rest of the top ten stocks are also some of the year’s best performers, but on a 5-10% correction in the stock market, they still will be vulnerable. The completion of the reverse H&S formation in T-bond yields may also put some short-term pressure on the higher yielding large-cap stocks. Therefore, I have included the yields on the table and will focus on the four most interesting overbought Dow stocks.

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Chart Analysis: As the long-term chart reveals, it is quite unusual for Boeing Co. (BA) to close above its monthly starc+ band. The last time it occurred was in April of 2006.

• The following month in 2006, BA made new highs and exceeded the starc+ but did not close above it. It lost 19.4% over the next four months.
• The blue circles show that the monthly starc+ band was also approached in June 2007 and March 2010.
• The May high at $101.47 was still well below the all-time highs at $107.83 from July 2007.
• The relative performance broke its long-term downtrend, line b, in March when BA closed at $85.85.
• The OBV also broke out in March as it surpassed the resistance at line c.
• It was a positive sign that the OBV was able to hold its multi-year uptrend, line d.
• There is initial support at $97.07 and the monthly pivot. There is additional support at $92.67.
• The major 38.2% Fibonacci retracement support from the 2012 low is at $88.24.

American Express Co. (AXP) closed above the 2007 high, line e, at the end of March. Therefore the $65.90-$66.20 area is now a major level of support.

• The last time AXP closed near its monthly starc+ band was at the end of 2006.
• The weekly chart of AXP (see insert) shows that it formed a doji last week and an LCD will be triggered on a weekly close below $75.39.
• The monthly pivot is at $73.75 with the S1 at $70.13, which is also close to the minor 50% Fibonacci support level.
• The relative performance has moved through its resistance at line g and is well above its flat WMA.
• The monthly OBV just broke out at the end of April (line h) and has support going back to 2010, line i. It is below the 2006 high.
• The weekly studies are all positive and have confirmed the recent highs. This is consistent with a correction that will be well supported.

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Johnson and Johnson (JNJ) is a stock that I have been trying to buy since February, and it appears to have formed a near-term top at $89.99 on May 22.

• JNJ has corrected 6.4% from the highs but is still up over 20% for the year.
• The monthly chart shows what is called a gravestone doji as the open, low, and close are near the same levels.
• The monthly pivot support is at $82.04 with the major 38.2% Fibonacci support from the 2012 lows now at $78.96.
• The former breakout level, line a, is at $74.50.
• The relative performance broke its downtrend, line b, in February but is still well below the 2011 highs.
• The monthly on-balance volume (OBV) looks much stronger as it broke out in late 2011 and has made a series of higher highs as it is leading prices higher.
• There is initial resistance now at $86.56 to $88.29.

The monthly chart of the Walt Disney Co. (DIS) also shows a gravestone doji, and as is the case with JNJ, a monthly LCD could be triggered in June.

• DIS is down almost 7% from the early May high of $67.89.
• The insert of the weekly chart shows that DIS closed above its weekly starc+ band for two weeks in early May before triggering a LCD (see arrow).
• There is next support in the $60.50-$61.20 area with the 38.2% support from the May lows at $59.80.
• The monthly relative performance overcame strong resistance, line f, in early 2012.
• The RS line has confirmed the new highs and is well above its rising WMA.
• The OBV broke through its resistance, line h, at the end of November and has been acting very strong.
• The OBV is well above its rising WMA.
• There is first resistance in the $65.60 to 67.15 areas.

What it Means: Both Boeing Co. (BA) and American Express Co. (AXP) still look quite positive from the monthly charts, but I would not be surprised to have them see a one-two month correction as the overall market is looking more vulnerable They could easily drop 5-10% from their May highs.

Since both Johnson and Johnson (JNJ) and Disney Co. (DIS) have already corrected significantly from the recent highs, their correction may be already half over. Since both show strong weekly and monthly OBV patterns, a further correction should be a buying opportunity.

How to Profit: No new recommendations for now.

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The Most Important Economic Number

by Lance Roberts

Over this past weekend Russ Koesterich, CFA, who is the iShares Global Chief Investment Strategist, penned an article entitled "The Most Important (And Widely Ignored) Economic Number" wherein he states:

"While economic numbers like GDP or the monthly non-farm payroll report typically garner the headlines, the most useful statistic in my opinion– the Chicago Fed National Activity Index (CFNAI) – often goes ignored by investors and the press."

Russ is correct.  The Chicago Fed National Activity Index is a composite index made up of 85 subcomponents which gives a broad overview of overall economic activity in the U.S.  As Russ states ignoring the CFNAI could be a mistake:

Markets have run up sharply in recent months partly on the assumption that US economic growth is going to accelerate later this year and translate into faster earnings. But if recent CFNAI readings are any indication, investors may want to alter their growth assumptions for the third and fourth quarters.

Unlike backward-looking statistics like GDP, the CFNAI is a forward looking metric that gives some indication of how the economy is likely to look in the coming months.

The overall index is broken down into four major sub-categories which cover:

• Production & Income
• Employment, Unemployment & Hours
• Personal Consumption & Housing
• Sales, Orders & Inventories

To get a better grasp of these four major sub-components I have constructed a 4-panel chart showing each.

There are a couple of important points to be made in reference to the chart above.

1. The production, employment and sales components all appear to have peaked for the current economic cycle despite ongoing estimations of stronger economic growth in the last half of 2013. 
2. The consumption and housing component, while it has gotten stronger, remains well below its 2000 levels.

Russ stated that:

"And of all the indicators I've tested, the CFNAI has the best track record of forecasting future GDP. Since 1980 the CFNAI has explained roughly 40% of the variation in the following quarter's GDP, an extremely high proportion for a single indicator."

In order to assess that predictive capability I have created a second 4-panel chart with the four CFNAI subcomponents compared to the four most common economic reports of Industrial Production, Employment, Housing Starts and Personal Consumption Expenditures.  In order to get a comparative base to the construction of the CFNAI I used an annual percentage change for these four components.

The correlation between the CFNAI subcomponents and the underlying major economic reports do show some very high correlations.  This is why, even though this indicator gets very little attention, it is very representative of the broader economy.

Currently, the CFNAI is not confirming the mainstream view of an "economic softpatch" that will give way to a stronger recovery by year end.  The latest CFNAI report plunged to -0.52 for April and the index has been negative for the past few months.  This is shown in the chart below which shows the CFNAI index as compared to its 3-month average.

Russ goes on to state that:

"While the CFNAI's current level is still consistent with economic growth, it does suggest that growth will sharply decelerate in the second and third quarters of this year, falling to about 1.8%."

This last statement is key to our ongoing premise of weaker than anticipated economic growth despite the Federal Reserve's ongoing liquidity operations.  The current trend of the various economic data points on a broad scale are not showing indications of stronger economic growth but rather a continuation of a sub-par "muddle through" scenario of the last three years.

While this is not the end of the world, economically speaking, such weak levels of economic growth do not support stronger employment, higher wages or justify the markets rapidly rising valuations.  The weaker level of economic growth will continue to weigh on corporate earnings which, like the economic data, appear to have reached their peak for this current recovery cycle.

The CFNAI, if it is indeed predicting weaker economic growth over the next couple of quarters, also doesn't support the recent rotation out of defensive positions into cyclical stocks that are more closely tied to the economic cycle.  The current rotation is based on the premise that economic recovery is here, however, the data hasn't confirmed it as of yet.

The reality is that either the economic data is about to take a sharp turn for the positive or the market is set up for a rather large disappointment when the expected earnings growth in the coming quarters doesn't appear.   From all of the research that I have done as of late, it is the latter that seems the most likely of outcomes as there does not seem to be a driver, currently, for the former.  Maybe the real question is why we aren't paying closer attention to what this indicator has to tell us?

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