The Spin Zone!
The major indices over the last couple of days reflect a mixed picture. If you look at the Dow Jones it has been running strong against the short-term resistance and looks like we are going to see a break-out rally as early as today. The tech heavy NDX has been flirting with recent lower lows and having difficulty bouncing after seeing over 1% declines. The S&P 500 has been floating in the middle not pushing against resistance or support, with the VIX still stuck in the 14-15 range. And the broader based Russell is sitting on the support level, wondering if we will see a strong bounce or sell off. The pre-market futures are looking strong, so are we going to see a general rally with a possible break-out in the Dow Jones, or is this just another head fake in the early session only to see weakness at the close?
Economic Survey – the SPIN ZONE!
CNBC released their economic survey this morning, which had some interesting results. As I pointed out over the last couple of Market Preview’s that the government economic data is not only skewed with “seasonal adjustments” and some model issues, but we have had so much government stimulus and Fed QE that any clear indication about the REAL health of the economy and private sector is murky at best.
I also pointed out that market rally is not indicative of a healthy economy, as the old saying goes; “Correlation does not prove causation”.
All about perception – or SPIN!
No doubt that PERCEPTION is a key factor in driving optimism. Regardless if you agree with government stimulus and Fed monetary policy, and how much government economic data is skewed, “seasonally adjusted”, and revised, I have no doubt in my mind that it has boosted OPTIMISM. Remember, if we all FEEL good and everything SEEMS good, then it must be good, right?
Optimism is an important factor in the domestic economy and eventually to the top-line growth for businesses, because it will determine if the people of this nation are willing to spend, take risk, invest, and borrow money. Certainly a huge factor, beyond optimism, is their ability to spend and their access to credit. I would argue that regardless of their optimism we are still struggling with broad credit/spending and job creation, which is a contributing factor.
So let’s look at the CNBC survey and compare it to some government and real-world economic data. However, I would like to point out that HOW you display the information is almost as important AS the information. While I am not critical of the data, I am critical how CNBC (Keynesian Economic Reporter, Steve Liesman) decided on how to PRESENT the information (graphical). To show the difference, I will post the CNBC graph and then how I believe it should be CORRECTLY displayed, including notes as to why the visual reference SKEWS ones interpretation and bias.
View of CURRENT economic state
The First Graph reflects how people view the CURRENT economic state. Is it Excellent/Good or Fair/Poor? Liesman displayed the graph by putting Fair/Poor as GREEN, which visually represents POSITIVE or GOOD, while he made Excellent/Good in BLUE. Additionally, rather than his typical BAR graph, he used a line graph, which better masks the DIFFERENCE between the two. If you don’t look at the Key, your eyes gravitate to the green and you believe green is good, growth, positive. Below I created the same graph, but changed the color, with Fair/Poor as RED and Excellent/Good as GREEN. I also added a bar graph, so you can see the difference. Notice he also left out the % rates for Q4 13, so how much did it really improve?
Courtesy of CNBC.com
Economic View based on INCOME, over time
This second graph is interesting in that it shows how the people view the economy based on income and over time. The issue with how Liesman decided to DISPLAY the data is that he did NOT put the years in chronological order. If you did NOT look at the key, you would just assume that people believe the economy is significantly improving, but the truth is the exact opposite.
Courtesy of CNBC.com
The third graph shows how people viewed economic expectations, will they get worse or better? Liesman color codes WORSE in Green and then aligns them so that the GREEN shows improvement, which distorts the data. I color coded them RED for WORSE and GREEN for Better. Additionally I added a line graph which better reflects the trend.
Courtesy of CNBC.com
Better or Worse?
As you can see, HOW you present the data is almost as important as the data it self. In whole, it seems that the people surveyed do not see much improvement since the crisis, which is reflected in the non-seasonal adjusted government data, the U6 unemployment, GDP growth, domestic top-line revenue, actual job creation, and pretty much ever economic report. Again, not to rain on the parade, the point is the economy’s improvement is tepid at best and this is not only reflected in government economic data (pre any adjustments), but is also reflected in the CNBC All-American Economic survey (how people PERCEIVE the economy). What I would further add is that all the government injections, intervention, bailouts, stimulus, and Fed monetary policy IS the biggest contributor to domestic economic improvement. Is optimism getting better and is the economy REALLY improving as much as we are told or led to believe by GRAPHS like these?
The Market and Questions?
This brings us to the equity market. I think between the economy data, earnings, and economic survey the reality is that the equity rally is NOT based on a robust or even strong economic improvement, but rather a massive amount of government intervention and Fed QE monetary policy.
The questions we must ask ourselves are:
1. When will the domestic economy really improve, as measured by the private sector?
2. When will the Fed fully wind down their QE monetary policy and raise interest rates and at that time can the private sector rebound without government intervention?
3. How much is the emerging market growth and what is the forecast? Can the emerging markets continue to help off-set stagnant top-line domestic growth and weak growth in the West?
4. How much leverage can the equity markets consume before it runs out of available credit?
5. How much will the US dollar weaken against foreign currencies? How much real inflation will we experience in the near-term and long-term?
These are the long-term questions that we need to consider over the next 1 – 5 years, as these answers will determine the fundamental health of the economy and equity markets. Right now, I would argue, we are rallying (for the most part) on government intervention and perceived optimism, based on skewed, seasonal adjustments, revisions, and bias data. One only has to look at Liesman’s (Keynesian) presentation of his data to show how he is trying to SPIN his data into something other than what it really says.
By-the-way, today’s durable goods economic data wasn’t good and January was revised to a NEGATIVE 1.3%.
Support & Resistance
INDU 16,000- 16,500
The pre-market futures look strong and this index looks like it wants to push higher.
NDX 3600 – 3700
The NDX has seen some significant volatility compared to the other indices. I would look at 3600 carefully; we dropped down two days in a row before bouncing. It seems we just can’t get off the mat. The pre-market futures are showing some strength, can we say above 3600 and perhaps close above 3650 to build some support?
SPX 1840 – 1880
This index is stuck, do we go higher and break-out of the 1880 resistance area or head lower test and drop below the 1840 support area? The VIX is even confused, it has not dropped to show significant confidence in the rally and it has not spiked to show concern about a drop.
RUT 1180 – 1210
The broadest based index and in my opinion one of the better indicators of order flow, shows some weakness and is hovering above support. The pre-market futures are showing some strength, but I would watch support.
Why are People Poor or Wealthy?
Steve Liesman’s economic survey also contained an interesting survey, how people PERCEIVED why people are poor or wealthy. Not surprising the stark difference between Republicans and Democrats. Why are People Poor or Wealthy?
Democrats believe that it is NOT hard work that made people wealthy and blame economic conditions for poverty.
Republicans believe that it IS hard work that made people wealthy and people are generally responsible for their status.
There is some truth in both views, but ultimately this is the land of opportunity. What I find hypocritical of Democrats is that we have elected TWICE as President from a broken family, mixed race, and faced challenging and difficult economic conditions. Yet he rose up, went to law school, and became the President of the United States. If that is not a message to the world that THIS is the nation of OPPORTUNITY, in which ANYONE can rise up to become anything they want, then I don’t know what is.
However, if you review the survey you see that Democrats treat the word FAIRNESS and OPPORTUNITY synonymously, but they are not. America is NOT the land of Fairness, it is the land of Opportunity and while I fully agree the government is charged with the responsibility that it must create EQUAL OPPORTUNITY, it is NOT responsible for creating FAIRNESS.
We all start on a different rung of the ladder of opportunity. Obama certainly started several rungs below me, but he climbed to the very top – because this IS the land of Opportunity. Life isn’t fair, we can’t make it fair, but we can do our best to make sure EVERYONE has an EQUAL OPPORTUNITY. However it is up to the individual to take responsibility and accountability for their actions and whether they WANT to climb the ladder of opportunity.
There was one item that both Democrats and Republicans agreed on, which I agree with as well, is that education is a significant and contributing factor as to poverty and wealth. While we all agree, we certainly don’t all agree on HOW to make education better.
Watch the video on this part of the survey, it is certainly interesting how it is ideologically split.