Transcript Tradenomics

TRADENOMICS
How To Be Prepared During Times of
ECONOMIC Uncertainty, Growth,
and/or Stagnation.
By Mike Kleinhenz
FIRST OF ALL…
• I am an “economic enthusiast”.
• I studied economics as a point of emphasis
during my undergraduate studies.
• I continued emphasizing this discipline during
my graduate studies.
• I was part of a published economic study
(researcher) centered around real-estate
valuations in pre/post collegiate cities.
• I trade technically and fundamentally, but
constantly keep at least one eye focused on
economic analysis and trends (decision making).
WHAT IS ECONOMICS?
• Essentially, it is a social science that studies
production, distribution, and consumption.
• Non-essentially, it is a “problem solving
model” and/or “way of thinking” that oftentimes involves emotions & rational thought.
– Some of the best problem solvers in the world
have been economists (Keynes, Smith, etc…).
– Great books to read are: “The Undercover
Economist” and/or “Freakonomics”.
ESSENTIALLY…
…we allow economic analysts to gather
and distribute the information; we have
very little control (if any at all) over the
“specifics” of economics, but…
NON-ESSENTIALLY…
• We individually analyze the information in
search of trends that positively or negatively
affect the markets [sound familiar?].
• We use this information to make more
efficient decisions on a daily basis.
– An “economist’s motto” of efficiency…
– There is NO SHAME in taking advantage of
negative economic news (e.g., SHORTING; PUTS).
– Emotions are our enemy/friend; no need to “over
think”; no need to “over analyze”; OBSERVE!
TRADENOMIC ANALYSIS - OPA:
• OBSERVE
– Take note of current economic situations; reports.
• PREPARE
– Develop strategies; know what’s going on; create
a working game plan for different scenarios.
• ACT
– Reaction Trading: gauge the emotion in the
markets AFTER an event and “go with the flow”.
– Speculating: within good reason, act BEFORE the
event in hopes of windfall profits; hedge yourself.
SO, HOW DO WE USE ECONOMICS TO OUR
ADVANTAGE? WHERE DO WE BEGIN?
…like any good story, we start at the beginning just like we do
with our individual trading routines!
QUESTION: where’s a good place to start our daily trading efforts?
OVERALL ASSESSMENT!
[Develop a forecast]
• Any successful trading routine will probably
include an assessment of the broad markets.
– It makes sense to swim in the direction of the
current rather than fight against it.
– Then develop a short-term “forecast” to
determine where it makes sense to place our
focus (such as specific sectors/industry groups).
– Must be flexible and adaptive after concluding
our daily assessments; we live in volatile times.
GENERAL ECONOMICS…
• Economic indicators gather the past, apply it
to the present, in order to help create a
vision of the near future.
• FOR EXAMPLE: If a set of economic indicators
suggest that the economy is going to do
better or worse in the future than we had
previously expected, we may decide to
change our investing/trading strategy.
*This is why a stern focus on economic indicators and reports is so
important; it helps us DECIDE and BE PREPARED for strategy shifts.
WHERE TO GO FOR PREPARATION?
There are
several
different
types of
Economic
Calendars
to choose
from and
are very
easy to find
on the
internet…
http://www.bloomberg.com/markets/ecalendar
DAILY / WEEKLY
ECONOMIC
ASSESSMENTS (Start at
the top & work down).
The broadest measurement of our
country’s economic stability has
always come from the quarterly Gross
Domestic Product (GDP) reports.
The definition of a RECESSION is TWO
CONSECUTIVE quarters of NEGATIVE
Gross Domestic Product growth…BUT
the NBER (National Bureau of
Economic Research) usually has final
say in the matter…
This is BY FAR the biggest quarterly
report that we (as traders) should pay
attention to. If the economy (GDP) is
growing then there is reason to
believe that the markets will/should
exhibit positive emotions in an
aggregate manner especially during
the time of the announcement.
[ http://www.bea.gov ]
Most recent quarter; first
quarter of 2008; reported in
early June of this year.
ECONOMIC RELATIONSHIP
CLASSIFICATIONS & TIME
VARIANCE
• RELATIONSHIP CLASSIFICATIONS:
– Procyclic, Countercyclic, & Acyclic
• TIME VARIANCES:
– Leading, Lagging, & Coincident
1/3 TYPE OF ECONOMIC REPORTS
• Procyclic: A procyclic (or procyclical)
economic indicator is one that moves in the
same direction as the economy. So if the
economy is doing well, this number is usually
increasing, whereas if we're in a recession
this indicator is decreasing. The Gross
Domestic Product (GDP) is an example of a
procyclic economic indicator.
2/3 TYPE OF ECONOMIC REPORTS
• Countercyclic: A countercyclic (or
countercyclical) economic indicator is one
that moves in the opposite direction as the
economy. The unemployment rate gets larger
as the economy gets worse so it is a
countercyclic economic indicator.
3/3 TYPE OF ECONOMIC REPORTS
• Acyclic: An acyclic economic indicator is one
that has no relation to the health of the
economy and is generally of little use. The
number of home runs the Cincinnati Reds hit
in a year generally has no relationship to the
health of the economy, so we could say it is
an acyclic economic indicator.
TIMING is EVERYTHING
– LEADING: Leading economic indicators are indicators which change
before the economy changes. Stock market returns are a leading
indicator [as the stock market usually begins to decline before the
economy declines and they improve before the economy begins to pull
out of a recession.] Leading economic indicators are the most
important type for investors as they help predict what the economy
will be like in the future.
– LAGGING: A lagged economic indicator is one that does not change
direction until a few quarters after the economy does. The
unemployment rate is a lagged economic indicator [as unemployment
tends to increase for 2 or 3 quarters after the economy starts to
improve.]
– COINCIDENT: A coincident economic indicator is one that simply
moves at the same time the economy does. The Gross Domestic
Product (GDP) is a coincident indicator.
THE “SUPER SEVEN” CATAGORIES
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Total Output, Income, and Spending
Employment, Unemployment, and Wages
Production and Business Activity
Prices
Money, Credit, and Security Markets
Federal Finance
International Statistics
OUTPUT, INCOME, & SPENDING
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Gross Domestic Product (GDP) [quarterly]
Real GDP [quarterly]
Business Output [quarterly]
National Income [quarterly]
Consumption Expenditure [quarterly]
Corporate Profits [quarterly]
Real Gross Private Domestic Investment [quarterly]
All of these reports are both coincident
and a procyclical economic indicators.
Employment, Unemployment, and Wages
• The Unemployment Rate [monthly]
• Lagged, Countercyclical
• Level of Civilian Employment [monthly]
• Coincident, Procyclic
• Average Weekly Hours, Hourly Earnings, and
Weekly Earnings [monthly]
• Lagged, Procyclic
• Labor Productivity [quarterly]
• Lagged, Procyclic
PRODUCTION & BUSINESS ACTIVITY
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Industrial Production and Capacity [monthly]
New Construction [monthly]
New Private Housing & Vacancy [monthly]
Business Sales and Inventories [monthly]
Manufacturers' Shipments, Inventories, and
Orders [monthly]
– ALL are Leading, Procyclical Indicators…
[ A slowdown in the housing market during a boom often indicates that a
recession is coming, whereas a rise in the new housing market during a
recession usually means that there are better times ahead. ]
PRICES
• This category includes both the prices
consumers pay as well as the prices
businesses pay for raw materials and include:
– Producer Prices (PPI) [monthly]
– Consumer Prices (CPI) [monthly]
– Prices Received And Paid By Farmers [monthly]
These measures are all measures of changes in the
price level and thus measure inflation. Inflation is
COINCIDENT and a PROCYCLICAL economic
indicator.
Money, Credit, and Security Markets
• Money Stock [monthly] - Coincident/Procyclical
• Bank Credit at Commercial Banks [monthly] –
Coincident/Procyclical
• Consumer Credit [monthly] – Coincident/Procyclical
• Interest Rates & Bond Yields [weekly &
monthly] – Coincident/Procyclical
• Stock Prices and Total Yields [weekly &
monthly] – Leading/Procyclical
FEDERAL FINANCE
• Federal Receipts (Revenue)[yearly]
• Federal Outlays (Expenses) [yearly]
• Federal Debt [yearly]
• Governments generally try to stimulate the economy
during recessions and to do so they increase spending
without raising taxes. This causes both government
spending and government debt to rise during a recession,
so they are COINCIDENT economic indicators. They
tend to be COUNTERCYCLICAL to the business cycle.
INTERNATIONAL STATISTICS
• Industrial Production and Consumer Prices of
Major Industrial Countries [quarterly]
• U.S. International Trade In Goods and
Services [quarterly]
• U.S. International Transactions [quarterly]
• All are COINCIDENT and COUNTERCYCLICAL
When times are good people tend to spend more money on
both domestic and imported goods. The level of exports tends
not to change much during the business cycle.
WHAT TO DO…???
• Major [economic] reports (such as GDP and
others) are very similar to individual corporate
earnings announcements, but rather than
affecting one company it affects the markets as
a collective whole.
• H E D G E , H E D G E , a n d Ta ke A d v a n t a g e ? !
– Prior to these announcements, it makes a lot of
sense to hedge your current positions.
– Inverse-related ETF’s and/or Indices are a good idea
to look at and consider for this ($VIX, DXD, QID, SDS).
– A little bit of speculation can sometimes put us in
great situations (avoid the “Vegas Mentality”).
LEARN THROUGH EXPERIENCE!
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Monday - Tuesday - Wednesday - Thursday - Friday
Indicator:
Release Time:
Expected Value:
Actual Value:
Sector Affiliations:
Notes:
CONFLICTING MESSAGES
• Have you heard in the
past few weeks that
the American economy
is in a recession and/or
beyond repair?
• Have you heard in the
past few weeks that
we’re no where near a
recession and that
things aren’t as bad as
they seem?
“IT’S THE ECONOMY, STUPID!”
- James Carville
GROUP QUESTION: What is your
current assessment/analysis of the
U.S. economy? Why? How can we
use this assessment to our
advantage?
CURRENT ECONOMIC ASSESSMENT
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Housing and Finance are getting crushed.
Inflation is on the RISE (see CPI/PPI reports).
The U.S. Dollar is hurting.
Food and Energy are consuming us! (CPI/PPI)
Overextended fiscally (debt, debt, debt).
Individual companies are still nominal.
Manufacturing/Production is at a low point.
…but the GDP is still GROWING!
…can you say,
“STAG/FLATION”?
Another term being applied to our
current economic condition is:
“A ‘Goldilocks’ Economy”.
-Not too hot
-Not too cold
-Are the BEARS coming home?
recap: WHAT CAN WE DO???
…BE PREPARED!!!
THANK YOU!
…are there any questions?