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« Why US Stocks Can Move Much Higher - Part One, Overview | Main | Market Higher in 2007: The Underlying Bid from Stock Buybacks »

May 10, 2007


will rahal

During the recent extraordinary climb of the stock market, the Consumer Discretionary
Sector failed to reach its February high.
I believe that this is indicating a change. The US Economy is heavily influenced
by the consumer-oriented sectors. This change suggest lower Profits Margins ahead.

Factors contributing to profits such as reluctance to hire, a soft US Dollar and
a steadily rising Capacity Utilization will slow or reverse their contribution.
The squeeze on profits put by higher commodity prices will soon be felt.

To get a perspective go to:


Some further studies here:

A good summary is on page 10 and page 12. What I take from this is that forecast error is biggest at turning points where it might be most necessary. Hence, I wonder whether a simple trend-based model as described above may do just as well. Secondly, forecast is definitely important for the Fed since inflation expectations of professionals should be factored into monetary policy so that they don't become self-fulfilling.

Today the Fed model and normalized earnings give conflicting pictures.

The investment world has well-known outliers, frequently based on strategies that do not involve economic forecasts. After issuing a novice alert, I just don't know if the same holds true with regards to professional forecasters.


CXO has a review of Abby Joseph Cohen's record of stock market forecasts. "Sunny" is more likely to win out in the long run. Hey, even Don Luskin ranks pretty highly in their study. The studies I linked to show that any forecaster is not better than the median. CXO has some stock market forecasts studied to show that the median forecast is not better than a mechanical trend-based one. For better or for worse, I am partial to ECRI's approach -- of trying to predict turning points instead of making GDP forecasts. They also show that ECRI is a coincident indicator for the market however, so it may not be a profitable strategy necessarily. It seems to me that GDP forecasts are not worth factoring into investment decisions. Not that I know what is worth factoring into either. But for GDP forecasts, just for the heck of it however, I nominate a mechanical trend-based annualized GDP from 1960-current.


Sound observations by RB. Some things are difficult to forecast. We like to look at the expected error and keep it in mind.

But what about those who argue as follows: No one is any good at these forecasts so all opinions are equal.

The article you cite shows the flaw in this thinking. The perma-bear recession forecasters have been even worse. All are not equal in this enterprise.

Whom would you nominate to beat the consensus pick?

Thanks again,



This is getting a bit trite, but fashionable as it may sound, so much for the track record of this particular group of experts

30% accuracy?! I personally don't see the usefulness of these forecasts as far as strategy goes.


Perhaps one ought not to get too wishful in expert source #3 after reading this:

will rahal

Today’s report on CPI came at .4% . PPI(all commodities ) was .9%
In the last few years ,the PPI has been accelerating more rapidly than CPI.

The implication is for an overall stock market P/E contraction.

Ex-Fed Chairman Greenspan’s favorite way of measuring relative valuation
between Stocks and Bond is the Earnings-Yield to Bond-Yield ratio.
This ratio oscillates around one.

When should this ratio be above one?

The answer is: in an environment of PPI relative out-performance to CPI.
That is the environment we are in. This is due to the P/E contraction that
results when the PPI/CPI ratio goes up over time.

To see this behavior historically go to:


I came across this site.The blogger predicts the index value of dow one day in advance.His outlook for 15 th may is +72 points.


weekly charts gives the direction of the trend


Again a perfect column for the retail trader. I often advocate using weekly charts to time the market especially if you are trading in a day to day mode.

Bill aka NO DooDahs!

I dig the redesign!

Having gotten my ass bitten off and handed to me recently, while trying to time outside my timeframe, I can identify totally. Actually went up from 85% to about 100% long this a.m.


Consensus forecast for Q1 2007 GDP was 2.4%. Let's hope the forecasters are more accurate going forward at least.

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