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Op-Ed: Surprises Continue to Drive the Rally


The blue-chip economists aren't going to know what hit them.

Editor's Note: As an emerging-markets banking analyst, James Kostohryz has firsthand experience of banking collapses and their subsequent resolutions in Mexico, Argentina and Southeast Asia. Since leaving his position as Head of International Investments at Brazil's Banco Pactual in 2000, James has worked as an independent trader and investor.


In my article Is a Countertrend Rally Inevitable, I argued that a major countertrend rally -- to take place between March and June 2009 -- would be driven by 4 main factors. In this article, I'll discuss the second factor: Positive surprises in the economic data released between March and June of 2009.

Based on my proprietary econometric research, I've been predicting on the Buzz & Banter that we'd begin to see such evidence starting in March (Also see All Signs Point to Bulls). We've indeed witnessed a slew of better-than-expected economic numbers in March and early April. I expect this trend will intensify in April and May and carry through until June.

Positive surprises in the economic data releases in the second quarter will be a primary driver of the second phase of the current countertrend rally.

The Positive Surprises Thus Far

In Marc, there emerged a trend of better-than-expected economic results in a wide variety of indicators across the economy. To name just a few: retail sales, car sales, home prices, housing starts, new-home sales, restaurant sales, durable goods orders, Richmond Fed and various manufacturing indicators.

Indicators to Look for in the Coming Weeks

I expect significant improvements in the various national and regional PMIs, retail sales, auto sales, durable-goods orders, imports, indicators of transportation intensity, driving mileage, fuel consumption and various housing indicators.

I also expect a stronger-than-expected turnaround in the export data in Japan and a few Asian Tiger nations, such as Korea and Taiwan. This could spark important rallies in these markets that could spill over into the US.

What Do I Mean by Improvement?

In many cases, the improvements will consist in a turn in the second derivative - which in this case, simply means the rate of contraction will moderate (also see my article, Will Troubles Abroad Stop a Countertrend Rally?). In other words, the indicators will continue to reflect recession, but the rate of contraction reflected will be less severe. This will be interpreted by many to mean that the economy has bottomed out, that the worse is behind us, and that the process of healing can begin.

What will be most surprising to economists and market participants is that the turnaround in some of the statistics will be so dramatic that they'll actually reflect year-over-year (YoY) growth. We've seen this already in the case of durable-goods orders. Such data points will generate excitement and speculation that the economy might resume growth much sooner than expected.
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