TRADENOMITRADENOMICSCS

How To Be Prepared How To Be Prepared During Times of During Times of

ECONOMICECONOMIC Uncertainty, Uncertainty, Growth, and/or Growth, and/or

Stagnation.Stagnation.By Mike Kleinhenz

FIRST OF ALL…FIRST OF ALL…• I am an “economic enthusiasteconomic enthusiast”.• I studied economics as a point of emphasis

during my undergraduateundergraduate studies.• I continued emphasizing this discipline during

my graduategraduate 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 , but constantly keep at least one eye focused on constantly keep at least one eye focused on economic analysis economic analysis and trends (and trends (decision making).).

WHAT IS WHAT IS ECONOMICS?ECONOMICS?

• EssentiallyEssentially, it is a social science that studies production, distribution, and consumption.

• Non-essentiallyNon-essentially, it is a “problem solving model” and/or “way of thinking” that often-times 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 The Undercover

EconomistEconomist” and/or “FreakonomicsFreakonomics”.

ESSENTIALLYESSENTIALLY……

…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-NON-ESSENTIALLY…ESSENTIALLY…

• We individually analyze the information in search of trendstrends that positively or negatively affect the markets [sound familiar?].

• We use this information to make more efficientefficient decisions on a daily basis.– An “economist’s mottoeconomist’s motto” of efficiency…– There is NONO SHAMESHAME 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”; OBSERVEOBSERVE!

TRADENOMIC ANALYSIS - TRADENOMIC ANALYSIS - OPAOPA::

• OOBSERVEBSERVE– Take note of current economic situations; reports.

• PPREPAREREPARE– Develop strategies; know what’s going on; create

a working game plan for different scenarios.

• AACTCT– Reaction Trading: gauge the emotion in the

markets AFTERAFTER an event and “go with the flow”.– Speculating: within good reason, act BEFOREBEFORE the

event in hopes of windfall profits; hedge yourself.

SO, HOWHOW 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!

QUESTIONQUESTION: where’s a good place to start our daily where’s a good place to start our daily trading efforts?trading efforts?

OVERALL ASSESSMENT!OVERALL ASSESSMENT![ [ D e v e l o p a f o r e c a s t D e v e l o p a f o r e c a s t ]]

• Any successful trading routine will probably include an assessmentassessment 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 “forecastforecast” to

determine where it makes sense to place our focus (such as specific sectors/industry groups).

– Must be flexibleflexible and adaptiveadaptive after concluding our daily assessments; we live in volatile times.

GENERAL GENERAL ECONOMICS…ECONOMICS…

• Economic indicators gather the past, apply it to the present, in order to help create a vision of the near future.

• FOR EXAMPLEFOR 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 WHERE TO GO FOR PREPARATION?PREPARATION?

http://www.bloomberg.com/markets/ecalendar

There are several different types of Economic Calendars to choose from and are very easy to find on the internet…

DAILY / WEEKLY DAILY / WEEKLY ECONOMIC ECONOMIC ASSESSMENTS 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 TWOTWO CONSECUTIVECONSECUTIVE quarters of NEGATIVENEGATIVE Gross Domestic Product growth…BUT the NBERNBER (National Bureau of Economic Research) usually has final say in the matter…

This is BY FAR 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 especiallyespecially during the time of the announcement.

[ http://www.bea.gov ]

Most recent quarter; first Most recent quarter; first quarter of 2008; reported in quarter of 2008; reported in early June of this year.early June of this year.

ECONOMIC ECONOMIC RELATIONSHIP RELATIONSHIP

CLASSIFICATIONS & TIME CLASSIFICATIONS & TIME VARIANCEVARIANCE

• RELATIONSHIP CLASSIFICATIONS:– Procyclic, Countercyclic, & AcyclicProcyclic, Countercyclic, & Acyclic

• TIME VARIANCES:– Leading, Lagging, & CoincidentLeading, Lagging, & Coincident

1/3 TYPE OF ECONOMIC 1/3 TYPE OF ECONOMIC REPORTSREPORTS

• ProcyclicProcyclic: 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 (GDPGDP) is an example of a procyclic economic indicator.

2/3 TYPE OF ECONOMIC 2/3 TYPE OF ECONOMIC REPORTSREPORTS

• CountercyclicCountercyclic: 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 3/3 TYPE OF ECONOMIC REPORTSREPORTS

• AcyclicAcyclic: 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 EVERYTHINGTIMING is EVERYTHING– LEADINGLEADING: Leading economic indicators are indicators which change

beforebefore 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 Leading economic indicators are the most important type for investorsimportant type for investors as they help predict what the economy will be like in the future.

– LAGGINGLAGGING: A lagged economic indicator is one that does not change direction until a few quarters afterafter 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.]

– COINCIDENTCOINCIDENT: A coincident economic indicator is one that simply moves at the same time same time the economy does. The Gross Domestic Product (GDP) is a coincident indicator.

THE “SUPER SEVEN” THE “SUPER SEVEN” CATAGORIESCATAGORIES

• Total Output, Income, and Spending Total Output, Income, and Spending • Employment, Unemployment, and Wages Employment, Unemployment, and Wages • Production and Business Activity Production and Business Activity • Prices Prices • Money, Credit, and Security Markets Money, Credit, and Security Markets • Federal Finance Federal Finance • International Statistics International Statistics

OUTPUT, INCOME, & OUTPUT, INCOME, & SPENDINGSPENDING

• 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 coincident and a procyclicalprocyclical economic indicators.

Employment, Unemployment, and Employment, Unemployment, and Wages 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 PRODUCTION & BUSINESS ACTIVITYACTIVITY

• 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 LeadingLeading, ProcyclicalProcyclical 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 price level and thus measure inflationinflation. Inflation is COINCIDENTCOINCIDENT and a PROCYCLICALPROCYCLICAL

economic indicator.

Money, Credit, and Security Money, Credit, and Security MarketsMarkets

• 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 FINANCEFEDERAL 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 COINCIDENTCOINCIDENT economic indicators. They tend to be COUNTERCYCLICALCOUNTERCYCLICAL to the

business cycle.

INTERNATIONAL INTERNATIONAL STATISTICSSTATISTICS

• 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 COINCIDENTCOINCIDENT and COUNTERCYCLICALCOUNTERCYCLICAL

When times are good people tend to spend When times are good people tend to spend more money on both domestic more money on both domestic andand imported imported

goods. The level of exports tends goods. The level of exports tends notnot to to change much during the business cycle.change much during the business cycle.

WHAT TO DO…???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.

• HEDGEHEDGE, , HEDGEHEDGE, and Take Advantage?!, and Take Advantage?!– 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, SDSVIX, DXD, QID, SDS).– A little bit of speculation can sometimes put us in

great situations (avoid the “Vegas Mentality”).

LEARN THROUGH LEARN THROUGH EXPERIENCE!EXPERIENCE!

• MondayMonday - - TuesdayTuesday - - WednesdayWednesday - - ThursdayThursday - - FridayFriday

• Indicator: • Release Time: • Expected Value: • Actual Value: • Sector Affiliations: • Notes:

CONFLICTING CONFLICTING MESSAGESMESSAGES

• Have you heard in the Have you heard in the past few weeks that past few weeks that the American economy the American economy is in a recession and/or is in a recession and/or beyond repair?beyond repair?

• Have you heard in the Have you heard in the past few weeks that past few weeks that we’re no where near a we’re no where near a recession and that recession and that things aren’t as bad as things aren’t as bad as they seem?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 CURRENT ECONOMIC ASSESSMENTASSESSMENT

• 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, can you say, ““STAGSTAG//FLATIONFLATION”?”?

Another term being applied to our current economic condition is:

“A ‘Goldilocks’ Economy”.-Not Not tootoo hothot-Not Not tootoo coldcold

-Are the Are the BEARSBEARS coming home? coming home?

recap: WHAT CAN WE DO???

…BE PREPARED!!!

THANK YOU!THANK YOU!

……are there any questions?are there any questions?