As I’ve told you many times, the news is either misleading, or just irrelevant. What’s relevant is Rule Number One, “Don’t fight the Fed, and Rule Number 2, “The trend is your friend” aka “Don’t fight the tape.” So I concentrate my work in attempting to get a handle on the market strictly on liquidity analysis and technical analysis. (See my LAMPP update at the bottom of this article).
But it’s still really important to understand as much as possible, exactly what the US economy is doing. We need to know that because we need to be able to cut through all the Wall Street noise and sales hype to get to the truth about the direction of the economic data. That data does not directly drive the market trend, but it does correlate. It’s helpful to know when that correlation is based on a false narrative. That can help us with our timing on betting with the trend or seeing patterns of market behavior develop that indicate the trend change is underway.
The problem is that the economic data, and the reporting of it by outlets like the Wall Journal and CNBC, is often confusing. It is often based on the extrapolation of tiny survey samples. The data is heavily statistically massaged, particularly with the use of seasonal adjustment, which is an indefensible obfuscation of what actually transpired in a given month. Sometimes it approximates the real trend, and sometimes it doesn’t. Furthermore, the data is always reported with a lag, sometimes a few weeks and sometimes a couple of months. Things can change during those weeks and months.
The incomplete and misleading nature of the data and the way it’s reported often leads you and other investors, both individual and institutional, to bad investment decisions.
But amazingly, there’s a source of economic information that is accurate, complete, not statistically massaged, and real time. That is Federal tax data. It’s reported daily one day after the collections, and it covers a wide spectrum of data that accurately reflects the state of the most important sectors of the US economy.
That data enables us to always know exactly what direction the US economy is headed, and how fast it is moving. It enables us to spot exactly when Wall Street is feeding us a false narrative. It tells us, weeks in advance what to expect from the economic data releases. And it tells us well whether the Fed will stay on track or will be motivated to shift policy, well before the economic data will provide any clue, accurate or otherwise.
For example, back on August 1 I foresaw that the July tax data would reinforce the Fed in its intention to reduce the size of its balance sheet. I predicted that that would be the first real tightening of monetary policy. Shrinking the balance sheet removes funds from the system. I said that that would be the Fed’s first real bearish move. The Fed announced its “normalization” (which really means tightening) program in September, just as I had predicted, simply by recognizing what the tax data was telling us at the time. In spite of any nervousness about the economy reported in the media, in fact the tax data told us that the topline numbers for the US economy would continue to trend positive enough to move the Fed to tighten.
Earlier this month I brought you up to date on Federal Tax Collections for October and the first week of November. This data came from the Daily Treasury Statement (DTS). The Treasury also publishes a Monthly Treasury Statement (MTS) between the 10th and 13th of the following month.
And in this statement, we find a very, very important little nugget of information about the coming bear market.
To be precise, it’s the “sin tax.”
When The Ship Is Sinking, The “Fun Rats” Are The First Ones to Leave
The MTS is not quite as timely as the DTS but it provides us with a little more detail on several categories of data, particularly the excise tax collections which are a good indicator of the US economy. I also look at the data from the US Energy Information Administration on gasoline demand for another near real time indicator of how the US economy is faring right now.
Perhaps the most important indicator that we can’t get from the DTS data is a breakdown of excise tax collections. Excise taxes are collected on the basis of unit volume. There’s no need to adjust for inflation. They’re collected on things like gasoline, aviation fuel, and a variety of goods like guns, booze, and gambling. I call these sin taxes. They tell us how much US consumers are spending on fun and games. They’re often the first numbers to go south when the US economy turns down.
Gas Taxes and Gasoline Demand: One of the largest components of Excise Taxes is the Highway Trust Fund tax on gasoline. That data is only provided in the Monthly Treasury Statement which comes out on the 8th business day of the following month. Like all excise taxes it is based on unit sales, not dollar value.
Specific excise tax collections have a two week reporting lag relative to the period that they were collected. Gas taxes collected in October declined. They were about flat in September, and also fell in August. They had been rising at an accelerating clip, hitting +5.5% in July. The growth rate had been climbing since December, when the year over year change was -10%.
The recent softness doesn’t exactly suggest a vibrant economy. But there’s nothing here that would deter the Fed from its path to reduce the money supply.
The EIA reports gasoline demand weekly with a lag of less than a week. This is another source of near real-time data that the media ignores. But it is useful to us as an indicator of how the economy is doing right now. Consumption declined sharply in September as gas prices rose, and major hurricanes impacted travel in the southeast. But it rebounded in October. The drop in excise tax collections could be reversed in the next report.
That said, it still appears that the growth rate is rolling over after peaking at a lower level. This still looks like a slowing trend. If it continues in November, it could spell recession in a few months. That could lead the Fed to start cutting rates. However, they would be unlikely to restart QE until, as Yellen said, there was a “material adverse event.” My guess is that she was talking about at least a 20% decline in stock prices.
But at this point, it’s premature to speculate on that.
The aviation fuel tax (table above) fell 5.9% year over year in October. That was on the heels of a 2.5% gain in September. Again, this is uninspiring, but no cause for expecting anything dramatic in the US economy.
Miscellaneous excise taxes include “sin taxes” such as alcohol, tobacco, firearms, and gambling taxes, as well as telecommunications taxes. They have been extremely volatile, rising 42% in October after falling 79% in September. Apparently some revenue that should have been recognized on September was shifted to October. We can’t make much of this.
Normally, economic data is tangential as far as we are concerned. But in this case it appears that as the Fed begins to pull money out of the banking system, the stock market bubble is running on fumes, and the economy has already run out of gas. It doesn’t get much more bearish than that.
The LAMPP Stays Bearish – and Your Cash Stash Should Be Going Up
There are no substantive changes in the LAMPP this week.
The Short Term LAMPP remains on red but is rebounding to near a yellow signal. Over the period since the red signal in mid September, the market averages have continued to advance. But short side trading picks generated by my trade setup algorithm have increased to about 40% of all selections, and they have performed as well as longs. That indicates that the rally is weakening as the market averages rise on the backs of fewer rising stocks.
The Long Term LAMPP continues to edge toward a red signal. It could come literally at any time as the indicator is now a couple of thousandths away from crossing the 78 week moving average trigger line. We only look at the Long Term LAMPP as red or green, but if we had a yellow reading, this would be one. It’s a warning that if we are buying here, we are picking up nickels in front of a steamroller. Consequently I am sticking with my recommendation to sell a small amount of stock systematically and periodically with the goal of raising a 60-70% cash balance (more or less depending on your personal circumstances) by the end of the first quarter, or January if feasible.