Monday, November 11, 2013

Money Show 2013 - Donald Dony

Donald Dony is the Principal of D. W. Dony and Associates Inc. His web site is Technical Speculator. His talk was entitled "The Business Cycle: Understanding the Bigger Picture and Current Investing Environment". He was part of the Canadian Money Saver Special Event.

His list of topics is
  1. Understanding the Business Cycle
  2. Four Key Indicators
  3. Where we are in the cycle
  4. Stock Market and the Economy
  5. Importance of the US
  6. Currency conditions.
The reason we should understand the Business Cycle is that it is the most dominate force which dictates earnings, unemployed, rate of growth and etc. Generally the economy lags the stock market by 4 to 8 months. It is an important step in investing. It helps to assess risk and growth potential. The Business Cycle acts as a confirmation of the stock market.

The definition and the phases of the business cycle: Recession is a decline in real GDP growth for at least two quarters. The Low Point is the time when the real GDP stops decline and starts expanding. The Recovery is the period in which the real GDP grows. The Peak is the point at which the real GDP stops increasing and declines. The average business cycle last for four and one half years. The business cycle tends to last for 4 to 6 years.

The 4 Key indicators of the business cycle are:
  1. GDP
  2. Industrial production (measures about industrial output)
  3. Non-Farm employment, and
  4. Disposable personal income.
More people working equal a more strong economy. Average annual GDP has rhythm. Since 2010, GDP has been declining. There was a peak in 2010 and we then have had a decline over the past 2 years. Canadian Industrial Production has the same sort of rhythm.

There is a free site called Trading Economics from which you can get all sorts of economic charts from.

Canadian Unemployment is still rising. The same is happening with disposal income. We had a peak in 2010. US GDP annual growth has the same rhythm and peaked in 2010. It is hard to predict how deep the next low will be. It will probably be in 2014. There tends to be lows every 5 years in Canada. The US has been struggling from 2009.

The unemployment rate and the TSX move in the opposite directors. The more employment we have the higher the TSX. The TSX broke the resistance level of 12,900 and is now around 13,000. There is also a co-relation of US unemployment and the S&P500. The unemployment rate is still going down. There is a co-relation in the lows in unemployment and the peak in the market.

The world economies GDP growth rate and North American GDP growth rate peaked in 2010 and is slowly declining. There is a similarity to the world GDP and World Stock Markets. Switzerland and the US are the only the markets at new highs. Most global markets are going sideways or moving slightly down.

Oil prices pushed the Russian, Canadian and Brazilian markets up in 2008. When the oil price fell, so did the market in these countries. With commodities and the TSX, when the commodities go up the TSX generally goes up, but this is not a perfect match. All commodities are priced in US dollars. When the US dollar goes down, Canadian prices go up. There has been a short term bull back, but there is a gradual rise in the US dollar.

What are the current conditions of the market? The trailing P/E is not so reliable an indicator as prices move faster than earnings. The more reliable P/E uses the 10 year average of earnings. Looking at the S&P500 this way, it is getting expensive. Currently it is 63% higher than where it should be by this measure.

The NYSE debt margins are a current conditions leading indicator. As the market goes up, more people buy on margin. We might be near a peak on this measure. As far as valuations go on the S&P500, we are on the expensive side. We can get our current conditions from the Conference Board and their leading indicator shows that we are slowing drifting lower.

In section rotation, 6 months ago in Q1 and Q2, the best were financials, health care and consumer discretionary. Q3 is a swing towards materials and industrials. The swing is more towards risk and growth and there is an upward swing in the S&P500.

Retail sales are the biggest single factor for US and Canada. The current condition is that retail sales are dropping. They peaked in 2010 and are slowly moving lower. The US and Canadian consumer spending represents the largest component of the economy. Consumer discretionary spending is still moving up and consumer discretionary spending is still outperforming consumer staples. Investors are focusing on consumer discretionary versus consumer staples and this is good for the market. Before 2008, money was moving into consumer staples.

The current condition on bond yield is that they are still on a downward swing. Concerning the QE and the market, when QE2 stopped, the market dropped. Tapering may be in the early part of 2014. The current condition of the US market is that more than 50% of the market is trading above their 200 day average and the stock market is moving up. Eight out of ten stocks in the S&P500 is still moving up and this is a good sign for the market. The stock market is strong and he does not see weakness at least in 2014.

For the TSX, half the stocks are up and half are down. Slightly more are up (55.23%). The TSX is gradually moving higher.

The big picture is an investing end. The Canadian GDP and Industrial Production peaked in 2010. The 20 year pattern of lows in GDP suggests that there may be another low in 2014. The trailing P/E and 10 year P/E on the S&P500 is above average. The current market is 56 months old and the average length of a market is 54 months. Most of the world's stack markets have falling over the last 3 years.

Capital over the last quarter has been a movement into consumer discretionary, industrials and materials and this occurs in the last part of the business cycle. The US dollar is stabilizing and rising long term and this is negative for commodity prices.

In the past QEs were just stopped, they were never unwound. He thinks that they will just stop the QEs. QE cannot go on forever.

Donald Dony's website is called Technical Speculator.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.

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