Ramblings of a Portfolio Manager

The Junk Indicator

Earnings season is winding down, economic data releases are being greeted with almost a yawn, the VIX is holding steady under18 and trading volume is easy to confuse with Google’s stock price on our screen. We’ve had a stretch of spring-like weather in the New York City area over the weekend and forecasts are for the more of same the next couple of days. It’s starting to feel like August on Wall Street except that the calendar tells us we haven’t even reached St. Patrick’s Day.

There’s probably a trading opportunity in here somewhere and we think we’ve found it—the Junk Indicator. No, we’re not talking about high yield fixed income securities we’re talking about junk. Good old used and discarded stuff. Wall Street prognosticators constantly scour the data for indicators of where the market and individual stocks might be going, giving us everything from Astrological indicators to Numerology tables as forecasting tools (there are probably still some entrail readers out there too). So it is without shame that we proffer the used auto and parts market as a leading indicator of the direction of the economy and, ultimately, stock prices.

We know a guy. This guy is in the “recycling business.” That’s PC these days for owning a junkyard. Anyhow, it seems his used auto parts business is just now starting to ramp up significantly after nearly 18 months in the doldrums. His used car lot, quiet for almost two years, is also seeing signs of life. This initially confused us as we’ve tried to track his business as a counter-cyclical indicator ever since the economy entered its current downturn—because that’s what common sense and Wall Street analysts (the gaping contradiction here should have been our tip-off) told us to do. We’ve been frustrated, for our sake and his, that business didn’t really pick up as expected during the downturn. That it is now starting ramp made equally little sense until we combined this anecdotal evidence with what we’ve heard from the automakers and the data from the big auto retailers.

The fact is, our friend’s market is people who cannot afford a new car. And despite what we hear on TV about cuts on Wall Street and Corporate America, these are the people who have really borne the brunt of the current economic slump. The stated unemployment rate of 10% probably doesn’t include these individuals—they are part of the additional 7% who have given up looking for work out of frustration. And amid their despair, they have not been buying cars—used or otherwise—and they have been deferring maintenance on their existing modes of transportation. That is until recently. Now, if we can believe this one data point, this strata of the workforce has either found some sort of work—permanent or temporary—or at least feels confident enough in the future to start laying out cash on their ride and its effects are being seen in the used car and parts business. We realize, of course, that there are alternative explanations to this phenomenon and we also understand that the sample size would make a statistician cringe. But we also know quite a bit about our guy and his business, which gives us confidence that what he is seeing is true evidence of the “green shoots” that Larry Kudlow has been talking about for months. The difference between our green shoots and Larry’s is that ours started much, much closer to the ground and, as a result, have deeper and stronger roots. That’s a gardener’s metaphor for our belief that, finally, the job market may indeed be turning and it is getting its start at the very bottom. If that’s true, then the ripple effects will eventually be felt all the way up the tree trunk. If so we may see the unemployment rate, finally and thankfully, head down and the market, ultimately, head higher.