Economists offer sharp Wall Street view

The world’s most influential economists are not at Harvard, the London School of Economics or Cal. They’re at the International Strategy & Investment Group in New York. ISI is a relatively small broker dealer, but its veteran bosses Ed Hyman and Nancy Lazar have been considered the savviest pair of eyes and ears on the street for four decades — and they ply their trade in such an easy-going, unpretentious way that they are loved as much as they’re admired. Unlike most research firms, which produce ponderous reports in block paragraphs with fancy charts and tiny italic captions, ISI reports often look like they were pasted together as a random note. Rather than stodgy Times Roman fonts, they use the same san-serif typeface used in comic books, and the arrows and circles are hand-applied seemingly at the last minute.  I have attended their 7 a.m. ET daily strategy meetings in Manhattan, and while they are serious affairs they are always punctuated with crackling wit and warm feelings. Guests sit in chairs placed in an outer ring around the big conference table overlooking midtown Manhattan, and after a quick introduction they are expected to “sing for their supper,” or, given the time of day, breakfast, by giving a 45-second pitch for their favorite idea on any relevant subject, such as economics, politics or stocks.  ISI sends out a half-dozen reports a day on various subjects related to macroeconomics, the markets and geopolitics, but their main report is produced on Monday mornings. It is not released to the media, and is hard to get unless you do something like $100,000 a year in commission business with the company. So I am lucky to get it most weeks due to the kindness of friends.  I like the report not because ISI is always right, because it isn’t, but because these analysts have their fingers right on the pulse of Wall Street and also influence its rhythm. ISI represents what I consider to be the “smart consensus”. Once you know what ISI is thinking, you have a pretty good idea of what the smarter hedge fund and pension fund managers are thinking. You can then bet against that if you like, but at least you know what the dominant smart opinion is.  Also the reports are sprinkled sometimes with odd statistics, quotes and statements you do not see anywhere else. They make you think, they make you curious, they make you smile. It’s all good. So anyway, now you know who I’m referring to when I mention an ISI Group report. So what’s on their agenda now? I’ll provide some of that today, and the rest later in the week. Here are a few of their main points. – ISI’s economic diffusion index, which incorporates all the economic and market data the firm tracks as signs of strength minus signs of weakness, was up to +6 last week vs. its recession low of -23. The normal range is +10 to -10, so +6 is pretty high. Last week’s top signs of strength were unemployment claims, consumer spending, wages and salaries, trucking stats, GDP, corporate profits and steel production. Key signs of weakness were durable goods orders, house sales and the stock market. – Real consumer spending in September moved above its 2007 peak and then increased further in October and is now +2.3% year over year. Transfer payments (i.e. unemployment checks) have been a key support. Recently, as hours worked has risen, wages and salaries have increased at an annual rate of 3.9%. Nominal GDP in the third quarter was also above its 2007 peak, which means we are currently in an expansion, not just a recovery. – Q3 capital expenditures on equipment is a strong +19% year over year and +16.8% quarter over quarter, annualized. Putting that together with the potential for an extension of the Bush-era tax cuts and a rising stock market, GDP forecasts for next year should come in above consensus — but still not be enough to put much of a dent in unemployment. – Sovereign and bank debt problems in the eurozone are a typical for the aftermath of a financial crisis, and will keep growth in Europe below normal. Policy makers, especially central bankers at the ECB, need to do more, and quickly. – Pork prices have a rather high 5% weight in China’s consumer price index, and they are rising. So while commodity prices like rubber and cotton have declined a bit recently, higher pork prices are putting upward pressure on China’s CPI and will keep the People’s Bank of China on a tightening path.  Above you can see a classic page from an ISI report, complete with hand-drawn arrows, cut-and-pasted charts, and connections made between the seemingly obscure piece of news (pork prices), economics and share prices.  Food for thought, you might say. For more insights like this, check out Markman’s two daily investment advisory services: Trader’s Advantage for short-term traders and Strategic Advantage for a longer-term investors.
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