` Gary Investing Blog: My Notes on 2 leading indicators (LIs)

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Friday, June 29, 2012

My Notes on 2 leading indicators (LIs)


Conference Board Leading Economic Index (LEI) 
Announcement: Last business of each month, reporting previous month data
It consists of ten leading indicators which can forecast the coming 3-6 months economy.

The ten components of The Conference Board Leading Economic Index® for the U.S. include:
1. Average weekly hours, manufacturing
2. Average weekly initial claims for unemployment insurance
3. Manufacturers’ new orders, consumer goods and materials
4. ISM Index of New Orders
5. Manufacturers' new orders, nondefense capital goods excluding aircraft orders
6. Building permits, new private housing units
7. Stock prices, S&P500
8. Leading Credit Index™
9. Interest rate spread, 10-year Treasury bonds less federal funds
10. Average consumer expectations for business conditions from Michigan Consumer Expectation

Diffusion index is the percentage of component index advancing.

When LEI has fallen for more than 3 months, investors should increase proportion of U.S. bonds

Law of 3-D: Duration, Diffusion, Depth
If LEI rises above 1-2% (depth) for longer than 6 months (duration) contributed by more than half of the component indexes (diffusion), a bottoming should be formed and economic growth should pick up in the coming months

Because stock markets tells us economic prosperity around 6 months in advance and leading indicator forecasts the coming 3-6 months. We can tell stock market’s top and bottom by reading LEI.

OECD composite leading indicators (CLIs) and Business Tendency Surveys
Announcement: the middle Monday of each month, reporting data of 2 months prior
It consists of 224 indicators from 29 countries such as the U.S., Germany, France, Japan and other developed countries, taking 5-10 most important indexes from each countries.
OECD member countries’ GDP constitutes two third (2/3) of the world’s GDP.
Above 100: Economies are growing or in recovery period
Below 100: Economies are slowing down or in recession

OECD Business Tendency Surveys shows OECD member-country-corporate confidence and expectation on future economies
OECD Consumer Opinion Surveys: similar to above

OECD CLIs has been highly accurate in predicting a top or bottom when the index turns around.

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