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The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
TheStreet) -- Today I'd like to review and expand upon my recent views on the stock market and the economy.
1. The economy is worsening because of the one-off Japanese disaster of March 11 that led to the largest supply-side shock since 1921.
The recent Japan Machinery Order Report showed a worse-than-expected 3.3% drop in April, but those data are more than a month old. When you're dealing with a short-term disruption, one month might as well be an eternity.
The Bank of Japan
is forecasting a modest recovery as soon as June/July and a full recovery by November.
Production in Japan is still constrained by power shortages, but many large-cap companies have announced plans to resume full capacity sooner than expected.
Both President Obama and
Federal Reserve Chairman Ben Bernanke have remarked that the current economic soft patch in the U.S. is largely influenced by Japan. Bernanke is forecasting a return to growth in the second half of 2011 even without plans for QE3.
We agree with this assessment and are confident that investors will do what they do best and price in a Japanese recovery before it happens. The stock market is the most reliable forward-looking indicator that we have. Once Japanese stocks begin to climb, you can be confident that U.S. stocks will follow.
Because of the declining rate of change of economic data, our E Weather portfolio is 65% in cash. From an economic perspective, when should the portfolio begin the re-invest that cash?
Common sense would tell you to follow the action of Japanese leadership stocks, and that is exactly what we are going to do. We have created a basket, or mini-index, of Japanese leadership stocks that includes
Toyota(TM) (the world's top automaker),
Kyocera(KYO) (which makes electronics components),
Kubota(KUB) (Japanese machinery),
Hitachi(HIT) (consumer electronics), and the
iShares MSCI Japan(EWJ) and
iShares:S&P/TOPIX 150(ITF) exchange-traded funds.
At this stage of the economic cycle, the action in Japanese leadership stocks is of primary importance. We will be using this mini-index as a leading economic indicator.
From March 11 through June 13, the Japanese leadership mini-index lost 8.13% while the the
S&P 500 lost 1.8%. But last week, the mini-index shed only 0.7% while the S&P 500 was down 2.4%. This means the S&P 500 is lagging leading Japanese stocks. When Japanese stocks eventually turn positive, it will be time to boost our allocation of U.S. equities.