Monday, June 03, 2002

Tea Leaves

If you listen to the gurus, we're coming out of it. If you check with the local caterers, we're still mired in it. The real estate folks say it's spotty, while the deli owners say they still don't see daylight. No, they're not talking about the weather or the war on terror, or the summer movie season. Whether they have a degree from the London School of Economics or from the school of hard knocks, they're all talking about the economy.

But talk is cheap, and the more you listen, the more you come to the same conclusion: nobody really has a clue. You can find a set of numbers to support most any point of view, from recovery to stagnation to deepening recession. Even those trained in the black art of economics have widely differing viewpoints... or as well known economist Edgar Fielder says, "Ask five economists and you'll get five different answers... six if one went to Harvard."

So what tea leaves should you be scanning for insight? Well, most folks, professionals and civilian alike, take at least a cursory glance at the standard ones. There's the consumer price index, the CPI, perhaps the most-followed measure of inflation. It tracks the average change in the prices paid by urban consumers for a fixed market basket of goods and services, including everything from cigarettes to university tuition. Housing starts reflect how many new houses are being built in a month. Not only a measure of the construction industry, this is often looked upon by many as a broader indicator reflecting consumer confidence and general economic health. And then there's the much-watched gross domestic product, or GDP, which represents the broadest general barometer of the economy. Comparing the numbers on these and many similar benchmarks puts you in the same camp as Allan Greenspan.

But professionals looking at the big picture have also identified a number of non-traditional benchmarks. Derived from real life as opposed to real numbers, these bring new meaning to the phrase "voodoo economics." Some work better than others, but each has enough adherents among the cognoscenti to make you pay attention.

The Super Bowl Indicator is a case of chance correlation - a win by a team from the old NFL, before it merged with the American Football League, is good news for the market, while a victory by an original AFL team is a surprisingly accurate warning of a pending bear market. This year, with the New England Patriots as the newly crowned champs, the indicator points to a bear market. But the indicator, though accurate in 28 of its 35 years, has been off in recent years: back-to-back wins by the Denver Broncos, an original AFL club, in 1998 and 1999, would normally have spelled a bear rampage. But exactly the opposite happened, as the tech bubble pushed stocks to record gains.

The Taxi Driver/Soccer-Mom Indicator is what many analysts and strategists do to gather anecdotal evidence and to hear the word on the street. "I talk to cab drivers in different cities to see how business is. I think it's a good indicator of the economic conditions," said Patricia Croft at Sceptre Investment Counsel. UBS Warburg strategist George Vasic said conversations with soccer moms are good places to gather anecdotal research. "When I'm watching my kids' soccer games, I listen to the questions people are asking me. Typically, it's a lagging indicator. If they're asking me of resource or tech stocks, you know the phenomenon has run its course and has already peaked."

According to the logic of those who follow the U.S. Presidential Election Indicator, the current president doesn't meddle in the economy during his last two years of office. This is generally seen as good for Wall Street, since the last thing it wants is for the White House to meddle in its affairs. During the 20th century, the Dow Jones industrial average was down just seven times during 25 presidential election years.

The Hemline Indicator (also known as the "bull markets and bare knees" indicator) looks to the length of women's dresses and skirts to determine market sentiment. The shorter the skirts -- or the higher the hemline -- the better the market. Long skirts and dresses bring bearish times. The hemline indicator has been historically accurate since the late 19th century, when long skirts and bearish markets were the norm. Then, during the roaring '20s, the stock market soared while women's knees were bare. Women's fashion in October 1987 shifted from the once-popular miniskirt to longer ones. And notably, the market then crashed.

The January Indicator works on the premise that the first month dictates how the rest of the year will go. If stocks rise in January, then stocks will rise for the rest of the year, with the opposite also being true. With the Dow, the indicator has been accurate in 45 of the 51 years since 1950, though it was wrong last year.

There are others. The "Singing Gorilla" index is based on the idea that the more people that make purchases like the aforementioned pet, the better the economy is doing. Other seers count the number of sushi bars in New York, on the theory that it means there are more tourists coming here from Tokyo, favorably influencing the balance of trade. And the "Gadget Index" looks at how many stupid gizmos are being sold at The Sharper Image and Brookstone as an indicator of economic health.

Finally there's the Monkeydex. It was started in 1999, when six-year-old Raven, a female monkey, chucked darts at a board covered with the names of 133 companies... and her picks placed her as the 22nd best money manager on Wall Street. It turns out that she may have been even smarter than that. She retired in 2000 to count her bananas, missing out on the bursting tech bubble.

The bottom line is that it's all a guessing game. True, some guesses are more educated than others, but that doesn't make them any more correct. Or as Paul Samulelson noted, "Wall Street indices predicted nine of the last five recessions." So as the old carnival barker says... you pays you money, you takes you choice.


Marc Wollin of Bedford invests on the assumption that whatever he buys will go down. His column appears weekly in The Record-Review and The Scarsdale Inquirer.