Financial Options

This is likely to be a fairly uninteresting week on the economic indicator front for those investors who look at the surface numbers. The only suspense with inflation indicators due out Wednesday, Thursday and Friday is whether they will show further price deflation, but with energy prices rebounding a bit that is unlikely. Industrial production indicators due out Tuesday and Wednesday could show some stabilization, but are unlikely to show any rebound as new factory orders and consumer sentiment haven't provided any fuel. The housing indicators due out Tuesday and Wednesday are builder sentiment, which is unlikely to have risen much from an all time low, and housing starts which are dependent on that record low builder sentiment for any increase.

The Federal Open Market Committee Minutes due out Wednesday could have some interesting tidbits, though what we'd all really like to see is a full transcript. There has been some evidence of dissension in the ranks at the Federal Reserve as they venture into the uncharted territory of a Zero Interest Rate Policy and quantitative easing. It's unlikely that the minutes will include any admissions of impotence, so what we're looking for is any corroborated evidence that the policies are working.

I'd be surprised to see much improvement in the State Street Investor Confidence Index, as the stock market is down since the last release and it is based on actual investment portfolios of large institutions. If those portfolios were moving back into stocks and out of bonds, we should have already since evidence of it in positive price movement and rising bond yields.

Thursday will bring the two headline numbers that may be worth watching: jobless claims and the Leading Index. The jobless claims number has risen substantially over the last 3 months, reaching almost unsustainable levels – eventually the economy runs out of cyclical jobs to lose. There are some indications that it may have hit the peak, a potential sign that the broader economy is starting to turnaround, so movement in this number would be important.

The Leading Index is, of course, the single broadest number for forecasting upcoming economic activity. Though big improvements aren't likely, there have been positive developments in some of the components. The consensus is flat to slightly negative after a fairly strong 0.3% improvement last month. An upside surprise would be a great sign for markets, which should be responding more normally to economic news now that both fiscal and monetary stimulus plans locked in politically.

One other report to watch closely this week will be the oil report from the Energy Department. You'll really want to bypass the surface commentary on the business channels and go look at the numbers on the reports themselves and, as I've noted several times recently, just take a look at the graphs comparing current inventories to seasonal averages. Crude oil inventories are above the average range for this time of year. That in itself is a negative for crude prices, but more importantly the inventories are also 10 to 12 million barrels above the average peak range – normally reached in June – and refinery inputs are well below their average of the last several years. Looking at days supply, the current inventories are nearly 25 days supply of refinery crude inputs. If I were building a formal model of oil prices, I'd build it on days supply of crude and refined products adjusted for fluctuations in the value of the dollar. Even without a formal model, the closer we get to a 30-day supply, the harder it is to ignore the fact that one entire months futures could go undelivered and the refineries would still run.

The economic news out this week isn't likely to create shocks that make for big market moves. Buried in the full reports, there may be plenty of clues as to what areas of the economy are worsening and what sectors are improving – the kind of data that investors can use to allocate investments as the recession begins to bottom out. It will also give the sharpest investors the information they need as the combination of fiscal and monetary stimulus starts to create the next bubble; the information to be in on the ground floor and out before the top.

*See more information on the Financial Roadmap series here. Earnings reports are companies of interest, NOT recommendations.