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Don’t trust figures too much

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by Peter Switzer

‘Never trust one month’s figures’ is a good piece of advice from an experienced economist and it came to me when the Yanks could only produce 39,000 jobs in November, when the experts had tipped 150,000!

By the way, this is another good piece of advice — don’t place too much store on the consensus of economists. Locally, all of the economists — and it’s most of them! — who find it hard to find fault with the Reserve Bank’s excessive interest rate rises, wouldn’t have predicted that economic growth for the third quarter would have come in at 0.2 per cent.

This was a big fall from the 1.1 per cent growth rate we saw in the June quarter and if the RBA had known this figure, I bet the board wouldn’t have chanced its arm with the Cup Day rate rise. This, of course, led to the banks’ extra rate rises, which will slow down the economy even more.

Hold rates

The national accounts figures, which brings us the economic growth number, showed farmers actually rode to the rescue of the economy. The non-farm economy actually fell by 0.2 per cent, while farm GDP was up a whopping 21 per cent.

By the way, our annual growth rate is now 2.7 per cent, well below the RBA’s forecasted “normal growth” of 3.25 per cent. This data was followed by the latest reading on the services sector — the Australian Industry Group/Commonwealth Bank Performance of Services index — which fell dramatically from a nearly neutral 50.7 to 46.2 in November.

If the number is below 50, then the sector is contracting, which it has done for, get this, nine out of the past 11 months. In fact, the national accounts showed that 11 of the 19 sectors it surveys also contracted in the September quarter.

CommSec’s chief economist, Craig James, got it right when last week he wrote: “Overly optimistic analysts have some soul searching to do. Retail spending is slumping, the services, manufacturing and construction sectors are going backwards and the non-farm economy actually contracted in the September quarter. The mining sector is not coming to the rescue of retailers or builders – for that we have to rely on a period of stable interest rates to allow some positive momentum to take hold.”

Unless Christmas activity shocks us all by being a booming end to the year, then interest rates should be left alone for some time, however, making bold predictions on the actions of the Reserve Bank board hasn’t been a good gamble, as Cup day proved.

Cautious of data

Back to America, and the fact that the Dow ended close to 20 points higher to finish at 11,382.09 was a pretty good effort showing that US investors are also cautious about one month’s figures and that the overall run of economic data is positive in the USA.

How the market reacts this week will be important, but the bad number might actually help stocks by making US politicians vote to extend the Bush tax cuts. It will also mean more QE2, which will also stimulate the US economy.

"When things don't fall apart on bad news, you know that the market is no longer vulnerable. The overall sentiment is pretty solid," Randy Frederick, director of trading and derivatives at Schwab Center for Financial Research in Austin, Texas, said to Thomson Reuters.

Indicator watch

The VIX, or fear index, has fallen and this is a positive sign for shares. A more complex indicator is the outstanding put-to-call ratio on index options, which is heavily linked to the S&P 500 index. It fell from 1.32 last week to 1.29, and this is often a good omen for shares going forward.

These have all happened despite the job numbers.

“The ratio, which is always greater than one, is the primary hedging vehicle for institutional investors,” a Thomson Reuters article explained. “The ratio rises with a market rally as the possibility of a pullback also increases.”

So the fact it fell last week gives this current rally a few more positives to work with.

Good week on Wall Street?

And then there was this observation from Jeffrey Saut, chief investment strategist at Raymond James in St. Petersburg, Florida, made to Thomson Reuters: “The portfolio managers are ‘all trying to scramble to catch up. They have performance risk, they have bonus risk and ultimately they have job risk’."

All of this and a healthy disrespect for one month’s figures could make for another good week on Wall Street, which would have to be good for our stocks. Let’s hope Europe and the US Congress can also kick in with some positive news as well — that would be a nice Christmas present for stock players.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, December 06, 2010