Economic Reality Check - What Green Shoots?

Just because Warren Buffett doesn't see any green shoots doesn't mean they aren't there... it just means he's selective about what he chooses to look at. On the flipside, the media and self-proclaimed prognosticators who see nothing but sunshine and roses may be a little too optimistic. 

As usual, the truth is somewhere in the middle of the two extremes. To find said 'truth' we're going to devote most of today's edition to the economic facts that matter. No bias, no agenda - let the chips fall where they may. 

After that, we'll take our usual look at some trade-worthy stocks. 
 

Just the Facts

Not that this is all the data that matters, but our five economic barometers today examine the economy's heaviest hitters ....inflation, confidence, employment, productivity, and capacity utilization. The other information the media usually covers may be interesting, but not necessarily telling. (We'll look at the other significant data in an upcoming newsletter.) 

Inflation 

One of Buffet's big worries - according to his ongoing reiterations - is staggering inflation. Given the dollars the Federal Government is flooding the economy with, we have the same concern. Where we differ from Buffett, however, is that we don't bet on assumptions; we bet on reality (to the extent that we can). 

On that note, here's the reality regarding inflation.... it's not even close to being a problem.

Since December we've seen zero inflation, and even a mild case of deflation since March. As of the end of May, consumer prices were actually 1.3% below where they were a year ago despite the rising cost of oil during this time. 

Granted, part of the reason we're seeing mild deflation has a lot to do with diminished purchasing power, but given the amount of stimulus we've seen injected into the economic engine, the side effects so far have been minimal. 

Yes, inflation is still a legitimate worry, but the worry over inflation has historically been unmerited. If it does end up being a significant issue this time, we'll respond to it then. If Buffett is right about the recovery taking years to get rolling though, then inflation isn't going to be a problem anytime soon. By the way, the Fed's basically pleased with this happy middle ground between inflation and deflation. 

Bottom line? Not a problem. 

Consumer Confidence 

We talked at length about Consumer Confidence back on May 27th (What Consumer Confidence Didn't Say), so we're not going to dive all the way into it again. We'll just post the Cliff's Notes. 

Though flighty, sometimes irrational, and occasionally inconsistent, the average consumer basically knows the difference between 'things getting worse' and 'things getting better'. Moreover, rising consumer confidence has actually been a pretty good coincidental indication of economic and market recoveries. That's why we went bullish - in the bigger picture - in late May. 

June's surprise dip in confidence wasn't a surprise to us - we knew optimism had swelled a little too fast over the prior three months. What you can't forget, however, is that one month neither makes nor breaks a trend. Overall, confidence is still improving, and since it's such a strong coincidental indicator with the market, we remain bullish. 

Bottom line? Still encouraging. 

Unemployment 

We haven't taken a look at unemployment in a while, mostly because there's been no need to. It's rising, as it has been for months, and it's not like there's anything to 'interpret' other than the obvious. 

So what does June's unemployment rate of 9.5% mean? 

The upside is that it 'only' increased 0.1% from May's unemployment rate of 9.4%. The downside is that 9.4% and 9.5% are both phenomenally high. 

As much as we'd like to say things have gotten as bad as they're going to get on the jobs front, we don't actually have evidence of this; they could get worse. However, we will point out that the modest increase of 0.1% is one of the slowest month-to-month increases we've seen in a long time. Perhaps the rise in unemployment is slowing down. 

Until we actually see the unemployment rate tick lower (even a hair lower would do), the majority is likely to be right.... this is a major hurdle for an economic recovery. Even better would be two or three months of lowered unemployment rates. 

Bottom line? Still a problem, but perhaps close to being reversed. 

Capacity Utilization 

Though the media and investors tend to treat capacity utilization as something of a second-tier indicator, we've actually found it to be one of the better - and more reliable - economic tools. 

In short, all we want to see is increasing utilization of our manufacturing capacity to hint that our factories are ramping up their output to build real goods that are being paid for with real dollars. 

Unfortunately, we just don't see it. It's getting worse. Capacity utilization now stands at 69%, and is trending lower. Oh, that's also the lowest capacity utilization figure we've seen since the date began being tracked in 1967. 

That said, we do want to point out one thing regarding capacity utilization.... it can stop and turn on a dime. Unlike unemployment or consumer confidence (which really require a few months to confirm a reversal), a sharp uptick on this chart may be taken at face value. 

Bottom line? As it stands right now (and until further notice), not good. 

Industrial Production 

Productivity generally goes hand in hand with capacity utilization, so it shouldn't be surprising to hear that this economic measure is also less than encouraging. It too is at multi-decade lows. On a year-over-year basis, production is down 13.4%. (Sorry - no chart.) 

There's a modest silver lining here though.... much like the rise in the unemployment rate, industrial production has been getting worse at a slower pace since September of 2008. Granted, the bar is set fairly low, but it's a modest improvement nonetheless. 

Bottom line? This data shows no signs of any 'green shoots' popping up for many of the economy's key areas. 
 

Final Thoughts

We hope this data isn't interpreted as a reason to fear the market, or as a reason to assume the economic worst. It's just data, which should affect how and what you invest in, but not whether or not you invest. 

In fact, we've spotted a handful of sectors and industries that look they're starting to rally on real results. Think 'recession-proof', and think 'early-recovery'. 

Why should we think 'early recovery'? Though discouraging in many aspects, we also have to acknowledge that several data sets are indeed not nearly as alarming as they were a year ago. They may not be hinting at a rebound just yet, but the contraction at least appears to be slowing down. More on those specific stocks will be coming later.

A couple of the areas we didn't look at today was real estate and credit. We're saving those topics for their own special edition, to be published soon. Frankly, those economic ingredients paint a slightly more appealing picture (i.e. offer a few more tangible green shoots).

In the meantime, we'll keep an eye out on all our economic hot spots, and continue to bring you the un-hyped information you actually need. 
 

	This Week's Watchlist

We went ahead and booted the names we said we were going to the last time we checked in. Not too many names were added in the meantime, though we've got more than enough to keep us busy..

• U.S. Gold Corp. (UXG) - remains plenty volatile, but the overall trend is bullish 
• Gabelli Healthcare & Wellness (GRX) - the bears are slowly taking over here - let's take it off out radar 
• Flow International Corp. (FLOW) - the rally just can't take hold, $2.20 is now a key support level 
• Aristotle Corp. (ARTL) - see our blog notes on this one 
• Herzfeld Caribbean Basin Fund Inc. (CUBA) - the base at $6.00 is finally pushing it upward 
• Far East Energy Corp. (FEEC) - nice high volume outside day (bullish) on Wednesday 
• Solar Power Inc. (SOPW) - we blogged about this one too 
• Neogemomics Inc, (NGNM) - back above that support line, again in question 
• Oncothyreon Inc. (ONTY) - the overbought problem is being solved; this one's getting pretty erratic 
• Affymetrix Inc, (AFFX) - completely imploded on Thursday, breaking under support... let's watch it 
• New Energy Technologies Inc. (NENE) - this one was also reviewed in the blog 
• Petaquilla Minerals (PTQMF) - continues to work on a rebound 
• VCG Holding Corp. (VCGH) - it still looks like the lower edge of the wedge has given way 
• International Coal Group Inc. (ICO) - the rebound effort failed on Thursday - let's remove it 
• Blue Earth Solutions, Inc. (BESN) - support at 40 cents broke last week... now on notice 
• Echo Therapeutics, Inc. (ECTE) - looks like the regroup is turning into a breakout effort 
• Spark Networks, Inc. (LOV) - the overbought problem was solved ... we still like the potential here 
• ICO Inc. (ICOC) - Thursday's strength crumbled when the resistance line was hit 
• BRT Realty Trust (BRT) - Thursday's huge pullback is why we said play it tight 
• AtriCure, Inc. (ATRC) - despite trouble on Thursday, this is still an interesting upside idea 
• Reading International Inc. (RDI) - the pullback panned out, but a resumption of the uptrend hasn't yet 
• Pro-Pharmaceuticals Inc. (PRWP) - support is giving way again, downtrend resuming
• Javo Beverage Company Inc. (JAVO) - interesting high-volume rally on Thursday, well up since Feb.
• XO Holdings, Inc. (XOHO) - support at 30 cents is hanging by a thread
• ERF Wireless, Inc. (ERFW) - overbought after Thursday, but an interesting long-term chart
• BioNeutral Group, Inc. (BONU) - continues to rally on stronger volume
• Minera Andes Inc. (MNEAF) - long-term uptrend, coming off a short-term dip
• Evergreen Solar Inc. (ESLR) - time to get on the solar train again?
• FCStone Group, Inc. (FCSX) - support broke a couple of weeks ago, major downside potential
• Harvest Natural Resources Inc. (HNR) - decent recovery effort... worth a look anyway
• NPS Pharmaceuticals, Inc. (NPSP) - rolled over last week after excessive runup 

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