Trading the Durable Goods and Building Permits Numbers

Once a month, the U.S. Census Bureau gives us a glimpse into what the future demand for big ticket items is going to be by releasing its Durable Goods numbers. Traders love this information because consumers only buy durable goods when they are confident in the economy and in their ability to pay for the big-ticket items.

[VIDEO] Trading the Durable Goods Numbers

The more durable goods consumers are purchasing, the stronger the economy is and the higher stock prices will typically go.

The fewer durable goods consumers are purchasing, the weaker the economy is and the lower stock prices will typically go.

Of course, there are certainly other factors you should be looking at when determining consumer demand so  read the news wisely.

What is the Durable Goods Number?

The Durable Goods number reports the amount of purchase orders placed with manufacturers for durable goods. Durable goods are hard products—such as automobiles, computers and appliances—with a life expectancy of more than three years.

You can see the most recent Durable Goods report here.

Appliance Stocks to Watch

The Durable Goods number is especially important for shareholders in the nations largest appliance companies. When you see the Durable Goods number rising, it is a good sign for appliance companies and will typically have a positive impact on the price of their stocks. When you see the Durable Goods number falling, it is a bad sign for appliance companies and will typically have a negative impact on the price of their stocks.

Here are a few of the appliance companies you should keep an eye on:

  • Whirlpool Corporation (NYSE: WHR)
  • The Black & Decker Corporation (NYSE: BDK)
  • Snap-on Incorporated (NYSE: SNA)
  • Pentair, Inc. (NYSE: PNR)

Trading the Building Permits Number

Once a month, the U.S. Census Bureau gives us a glimpse into the future health of the housing market by releasing it Building Permits numbers. Traders love this information because the number of building permits issued impacts the building industry for months to come.

The more permits are issued, the more homes will be built, the more appliances and furniture will be purchased and the more construction workers will be employed.

[VIDEO] Trading the Building Permits Number

The fewer permits are issued, the fewer homes will be built, the fewer appliances and furniture will be purchased and the fewer construction workers will be employed.

What is the Building Permits Number?

The Building Permits number is an annualized number of all of the residential building permits that were issued during the previous month. In other words, the Census Bureau determines how many building permits were issued during the previous month and multiplies that number by 12

Now, the Census Bureau does not go around and add up every single permit that was issued across the United States to get this number. Instead, it conducts a sample survey and extrapolates the data from the survey. With that in mind, the Census Bureau states “It may take 3 months to establish an underlying trend for building permit authorizations.” So be wary of jumping the gun just because you see one good, or one bad, announcement.

You can see the most recent Building Permits report here.

Home Builder Stocks to Watch

The Building Permits number is especially important for shareholders in the nations largest home builders. When you see the Building Permits number rising, it is a good sign for home builders and will typically have a positive impact on the price of their stocks. When you see the Building Permits number falling, it is a bad sign for home builder and will typically have a negative impact on the price of their stocks.

Here are a few of the largest home builders you should keep an eye on:

  • The Ryland Group, Inc. (NYSE: RYL)
  • Meritage Homes Corporation (NYSE: MTH)
  • Standard Pacific Corp. (NYSE: SPF)
  • Hovnanian Enterprises, Inc. (NYSE: HOV)

 

Images courtesy LGEPR and Great Valley Center.

Does a CPI Drop Lead to Deflation?

Recall late 2008. The Consumer Price Index (CPI) fell for five straight months and the index showed inflation at its lowest rate since 1954. While pundits and news analysts began sowing the seeds for a deflationary environment we suggest these numbers don’t necessarily point to deflation. However, it is a debatable point and worth exploring in detail.

[VIDEO] CPI and Deflation

The first thing we need to understand is that there’s CPI, and then there’s core CPI. When the Bureau of Labor Statistics reports its monthly CPI numbers, it reports CPI numbers and Core CPI Numbers, and each number tells a dramatically different story.

Consumer Price Index for All Urban Consumers (CPI-U)

— The Consumer Price Index for All Urban Consumers (CPI-U) is the broadest measure of consumer inflation used by the government. Basically, it tells us how much prices on nearly almost everything a consumer might buy are rising or falling.

Core Consumer Price Index (Core CPI)

— The Core Consumer Price Index (Core CPI) is a narrower measure of consumer inflation. Core CPI looks at everything the CPI-U looks at except for the price of food and energy. Now, if you’re looking at this and thinking to yourself…”Wait a minute. Aren’t the prices of food and energy pretty important when you’re looking at what typically consumers are spending their money on?”…you’re not alone. Food and energy prices are extremely important.

Each one of these numbers also has a dramatically different affect on the value of the U.S. dollar (USD).

What We Can Learn from CPI Reports

The numbers we saw in the 2008 CPI report told us something extremely important: deflation was not yet a major problem. And in fact, that remains the case to this date.

Specifically, here’s what we learned from the 2008 report:

“Declining energy prices, particularly for gasoline, again drove most of the decline. The energy index declined 8.3 percent in December. Within energy, the gasoline index fell 17.2 percent and accounted for almost 90 percent of the decrease in the all items index. The index for household energy declined 0.7 percent.

“Excluding energy, the index was virtually unchanged for the third straight month. The food index declined 0.1 percent in December, the first decrease since April 2006, as many meat, dairy, fruit, and vegetable indexes decreased. The index for all items excluding food and energy was virtually unchanged in December.”

In other words, the CPI dropped because food and energy prices—which had risen to unrealistic prices during the commodity bubble of the summer of 2008—dropped, not because prices in general dropped. In other words, it appeared that prices were just re-setting, not deflating.

 

Image courtesy [sic].

Why Consumer Confidence Reports Matter

How would you react, as an investor, if you heard that consumer confidence fell during the previous month? What if you heard this in October and you knew were were headed into the holiday shopping season? This is important because a falling trend in consumer confidence may hurt the holiday shopping season. In a consumer-driven economy this is a bad sign and one that traders will be very concerned with, so it’s important to understand the impact of these numbers.

[VIDEO] Why Consumer Confidence Reports Matter

Consumer Confidence: A Glimpse Into If and How Consumers are Going to Spend Their Money

Once a month, the Conference Board gives us a glimpse into if and how consumers are going to spend their money. Traders love this information because the Consumer Confidence Survey number helps them determine if the economy is going to be expanding or contracting in the future.

The more confident consumers are in the current and future state of the economy, the more money they are likely to spend. The more money consumers spend, the more profits companies earn. The more profits companies earn, the higher their stock prices typically go. In other words, a positive Consumer Confidence Survey number typically leads to higher stock prices.

The less confident consumers are in the current and future state of the economy, the less money they are likely to spend. The less money consumers spend, the fewer profits companies earn. The fewer profits companies earn, the lower their stock prices typically go. In other words, a negative Consumer Confidence Survey number typically leads to lower stock prices.

Of course, there are certainly other factors you should be looking at when determining how Consumer Confidence is going to affect the economy so Don’t Read the News in a Vacuum.

What is the Consumer Confidence Survey Number?

The Consumer Confidence Survey™ is a survey of economic expectations conducted by the Conference Board—an independent, non-governmental organization. The survey is based on a representative sample of 5,000 U.S. households. To put it another way, the Conference Board asks consumers what their expectations for the economy are and how confident they are in the current state of the economy.

You can see the most recent Consumer Confidence report here.

Retail Stocks to Watch

The Consumer Confidence Survey number is especially important for major retailers. When you see the Consumer Confidence Survey number rising, it is a good sign for retailers and the outlook for their future sales numbers and will typically have a positive impact on the price of their stocks. When you see the Consumer Confidence Survey number falling, it is a bad sign for retailers and the outlook for their future sales numbers and will typically have a negative impact on the price of their stocks.

Here are a few of the largest retailers you should keep an eye on:

  • Dillards (NYSE: DDS)
  • Saks Incorporated (NYSE: SKS)
  • Nordstrom (NYSE: JWN)

 

Image courtesy tshein.

Understanding the Weekly Unemployment Claims Number

The U.S. government releases two broad sets of unemployment numbers: the weekly unemployment claims and the monthly unemployment and nonfarm payroll numbers. Typically, the monthly unemployment numbers carry more weight, but the weekly unemployment claims can provide you with tremondous ongoing information on a much more regular basis.

[VIDEO] Understanding the Weekly Unemployment Claims Number

Weekly Initial Unemployment Claims

The weekly initial unemployment claims number measures the total number of people who filed for unemployment benefits for the first time during the previous week.

The number does not include individuals who applied for benefits before or after the designated week.

The numbers are usually released on Thursday morning at 8:30 am Eastern Time.

Seasonal Adjustment

Seasonal adjustments to the unemployment numbers play an important role in your analysis of the numbers. The Bureau of Labor Statistics (BLS) describes seasonal adjustments this way:

“Total employment and unemployment are higher in some parts of the year than in others. For example, unemployment is higher in January and February, when it is cold in many parts of the country and work in agriculture, construction, and other seasonal industries is curtailed. Also, both employment and unemployment rise every June, when students enter the labor force in search of summer jobs.

The seasonal fluctuations in the number of employed and unemployed persons reflect not only the normal seasonal weather patterns that tend to be repeated year after year, but also the hiring (and layoff) patterns that accompany regular events such as the winter holiday season and the summer vacation season. These variations make it difficult to tell whether month-to-month changes in employment and unemployment are due to normal seasonal patterns or to changing economic conditions. To deal with such problems, a statistical technique called seasonal adjustment is used. This technique uses the past history of the series to identify the seasonal movements and to calculate the size and direction of these movements. A seasonal adjustment factor is then developed and applied to the estimates to eliminate the effects of regular seasonal fluctuations on the data. When a statistical series has been seasonally adjusted, the normal seasonal fluctuations are smoothed out and data for any month can be more meaningfully compared with data from any other month or with an annual average.”

The Importance of the 4-Week Moving Average

Looking at the initial claims numbers from week to week can be difficult because of volatility.

However, if you look at a 4-week moving average of the weekly initial unemployment claims, you get a much clearer picture of where unemployment is headed in the United States.

If the trend of the 4-week moving average is headed higher, you know the economy is deteriorating.

If the trend of the 4-week moving average is flat, you know the economy is stabilizing.

If the trend of the 4-week moving average is headed lower, you know the economy is improving.

Source: Federal Reserve Bank of St. Louis.

 

Image courtesy bgottsab.

The Yield Curve and Investor Sentiment

The yield curve is something that analysts and professionals will track but is rarely talked about by smaller individual traders. This is a very important topic right now as the market is hearing echoes of the credit crisis of July 2007. There are some important differences between now and then and some of these differences are related to the yield curve and what it is telling us about investor sentiment.

[VIDEO] The Yield Curve and Investor Sentiment: Part 1

The yield curve is a simple comparison of short term, mid term and long term bond yields. A bond’s yield is how much it will return to you on an annualized basis from the time you purchase it until it matures. Typically the “curve” of yields means that you will be paid more for a long term bond and less for a short term one. This is because it is riskier to tie up your money for a long time than a shorter time frame. We can make pretty good estimates about what should happen in the next three months but no one knows what will happen over the next 30 years. That means that buyers will be paid a higher yield for the 30 year note than they will for the 13 week note. Long term buyers are being paid more to compensate for that uncertainty. For example, as we write this the yields on treasury notes looks like this.

  • 13 Week – 1.645%
  • 5 Year – 3.031%
  • 10 Year – 3.782%
  • 30 Year – 4.369%

The fact that the current yield curve looks “normal” is important and gives us some good information about investor expectations about the future. If short term bonds were paying a higher yield (which sometimes happens) we would draw very different conclusions about what traders think about the future.

Now that we understand the yield curve, it’s time to talk about how the yield curve can give us guidance for the future and why it is telling us very different things today (as we write this) than it did in July 2007.

The yield curve will change over time and these changes can be very important indications for what investors think about the market today and what they expect in the future. There are four main types of yield curves and these types can tell us a lot about how today’s curve differs from the credit crisis of July, 2007.

[Video] The Yield Curve and Investor Sentiment: Part 2

A yield curve can be inverted, flat, normal or steep. Inverted or flat yield curves are bearish while normal and steep curves are considered bullish.

Inverted Yield Curve

An inverted yield curve means that investors are being paid more for short term debt than long term debt. That is extremely bearish because it means that investors are expecting yields to drop significantly in the long term and that short term risk is high as well. An inverted yield curve has a striking correlation to bear equity markets. In the video I will show a couple recent examples of this kind of correlation.

Flat Yield Curve

A flat yield curve is also bearish for the same reasons an inverted curve is negative. A flat curve indicates a lack of investor confidence in the future. The last credit crisis in July of 2007 was correlated with a flat yield curve and followed an inverted curve earlier that year. This is one of the reasons why the correction in the stock market was so severe since last year.

Normal Yield Curve

A normal yield curve indicates lower short term yields and a mild increase between mid-term and long-term debt. This is a very common scenario and indicates a normal level of confidence about the future.

Steep Yield Curve

A steep yield curve is very bullish as traders expect better yields in the future. A steep yield curve means that longer term yields are much higher than short and mid-term yields. This type of curve is correlated with rallies in the stock market.

As we write this article there is a steep yield curve in the market and this is one of the most significant differences between this current market and conditions in July of 2007. While there is definitely still risk in the market, it is not the same kind of risk as it was in 2007.

Now that we’ve looked at the yield curve from a fundamental perspective — which is very useful and provides context for what drives short term and long term yields over time — it’s now time to look for changes in the yield curve on a shorter term basis using technical analysis. In this case, what we are looking for are changes in the yield curve that would indicate a shift in investor sentiment. A shift in investor sentiment will impact the stock market and can be used to adjust portfolio risk control measures.

One of the simplest types of analysis we can apply is to measure the relative change between long term and short term yields. For example, if rising long term yields relative to short term yields is bullish, then the stock market should improve in value. The more dramatic that change in relative values is the more important the subsequent affect it should have in the stock market.

[VIDEO] The Yield Curve and Investor Sentiment: Part 3

In the above video I will walk through applying a comparative relative strength analysis on short term yields represented by the 13-week yield index (IRX) and the 10 year yield index (TNX.) I will show how a sharp positive change in the relative performance of long term yields is correlated with a bullish change in the stock market. This is helpful because the accompanying change in investor sentiment should indicate increased risk for short traders or bears and potential entry opportunities for long investors and bulls.

 

Image courtesy Dominic’s Pics.