Published on Friday, May. 21, 2010 7:13PM EDT Last updated on Friday, May. 21, 2010 7:16PM EDT
Compiled by reporters Grant Robertson, Boyd Erman, Paul Waldie and Brent Jang
If you are an investor, there is good reason to be cheering for the Montreal Canadiens to win the Stanley Cup this year.
Since the National Hockey League expanded in 1968, the stock market
has gone up an average of 13.37 per cent in years when a Canadian team has claimed hockey’s top prize. In years when a U.S. team took the title, the average return has been just 8.96 per cent.
But the picture is even more bullish when Les Habitants are victorious. The S&P/TSX composite index has gone up an average of 16.76 per cent in the years Montreal won its 10 titles since the league expanded.
“If the Canadiens win, it looks like good news for the markets,” says Ernest Biktimirov, a finance professor at Brock University in St. Catharines, Ont. He came up with the Stanley Cup Indicator last year while writing the Canadian version of a U.S. text book that quotes the popular Super Bowl Indicator.
Mr. Biktimirov cautions against betting too much stock, let alone your RRSP savings, on the theory. However, even though the Habs Index may not be the most scientific stock market indicator going, there are many others that deserve a close look these days.
Take white paint, for example. The Titanium Dioxide Indicator tracks prices of the chemical used to make white paint. An increase tends to signal a boost in consumer activity, whether it’s a rise in home renovations or new home construction, which filters through to the economy in general.
After a difficult patch in the markets, which saw the S&P/TSX fall by 6.4 per cent or 800 points over the previous six days, before staging a 95.2-point rally Friday, market watchers are looking for signs of what comes next. Investors are following several indicators to determine if the economy is headed towards recovery or into a double-dip recession, amid debt concerns in Europe.
While the Stanley Cup Indicator is purely for sport, here are some economic indicators worth taking seriously:
Baltic Dry Index
What it measures: The spot price of transporting dry raw materials by sea over 26 global shipping routes.
Why we pay attention to it: The amount of raw materials being shipped – including coal, grain and iron ore – provides a key indicator of consumption and manufacturing trends. If iron ore shipments soar, it suggests people are buying cars and other products.
What it’s saying now: As the recovery goes, we’re not on dry land yet. On Friday, the BDI closed at 3,844 points, which is up 28 per cent so far this year but a far cry from the index’s record high of 11,793 points in May 2008. The index sank to a 22-year low of 663 points in December 2008, before staging a gradual, though choppy, recovery. It surged as high as 4,661 points in November, but then slumped for several weeks.
Titanium Dioxide
What it measures: The price of titanium dioxide, a chemical used to make white paint. Trends are reported monthly by the U.S. Bureau of Labor Statistics.
Why we pay attention to it: White paint is used just about everywhere: houses, cars, airplanes, rail cars and washing machines. So a rise in the price of one of the paint’s key ingredients should signal increased economic activity.
What it’s saying now: Prices and demand have rebounded sharply from last year, rising from about $1.07 (U.S.) per pound to as high as $1.24. All the big producers have announced price hikes this year, including an 8 cent per pound increase effective next month. One of the largest makers, Kronos Worldwide Inc., reported a 29 per cent increase in sales in the first quarter of 2010.
Copper
What it measures: the price of the world’s third most widely used metal.
Why we pay attention to it: Gold is where the glitter is, but copper does the heavy lifting. It is a building block in everything from televisions to cars to wiring for homes. So if consumer spending shifts, copper tells the tale.
What it’s saying now: The sluggish economy is still with us. Copper prices have slumped in recent months to about $3 (U.S.) a pound, down from $3.60 earlier this year. Analysts say a rebound depends on consumption in China — another demonstration of copper’s use as a bellwether for the global economy.
Markit iTraxx SovX Western Europe Index
What it measures: The cost of insuring debt issued by 15 governments in the Eurozone, as well as Denmark, Norway, Sweden and the United Kingdom.
Why we pay attention to it: It’s a mouthful to pronounce, but this index is worth the time. It suggests how scared investors are of government defaults in Europe. If the index is rising, that’s a sign that insurance against a default is getting more expensive because the risks of lending are deemed to be greater.
What it’s saying now: Investors are getting increasingly nervous that governments aren’t going to be able to cope with their growing debts. The European Union and International Monetary Fund managed to calm things down for a bit with their $1-trillion (U.S.) bailout plan, but fears came back in the last few days.
London Interbank Offered Rate (LIBOR)
What it measures: Banks make short term loans to one another all the time, and Libor is the average interest rate that the biggest banks say they are charging other banks.
Why we pay attention to it: It gives a read on how confident banks are in the financial system. When banks are nervous that loans might not be repaid by their peers, they crank up the interest rate to compensate for the greater risk, or cut back on lending, which thanks to the rules of supply and demand, raises Libor as well.
What it’s saying now: Libor is on the rise, so that means banks are getting steadily more nervous The concern is that other institutions could be stuck with bad government debt if a country like Greece defaults. That could lead to big losses, and difficulty repaying loans.
U.S. housing starts
What it measures: Construction of new homes, defined as when the foundation on a house is started. New building permits and housing completions are also tracked.
Why we pay attention to it: Housing starts and building permits are considered leading indicators, since construction usually gains momentum at the beginning of an economic cycle. The numbers point to the size of coming demand for a variety of goods from lumber and metals to appliances and furniture. When U.S. housing starts slow, the U.S economy goes down too.
What it’s saying now: After a year in the doldrums, housing starts are starting to pick up, indicating the worst of the recession is over in the U.S. However, recent numbers are still well off their highs from a few years ago.
The Vix Index
What it measures: The implied volatility of the stock market in the coming 30 days.
Why we pay attention to it: The VIX acts as a thermometer for volatility on the S&P 500. Devotees use it to judge if the market is about to turn. When the index is high, it indicates investors are worried and a sell-off may be imminent. A lower score suggests a buy-and-hold market.
What it’s saying now: The VIX is through the roof. As concerns over debt problems in Europe spread, the so-called Fear Indicator reached its highest point of the past year this month, following a steady decline since January.
Weekly jobless claims
What it measures: The U.S. Department of Labor tracks the number of new applications for unemployment benefits each week, giving as close to a real time picture of the job market as there is.
Why we pay attention to it: It’s all about jobs when it comes to long-term economic growth, so investors want to see the claims number heading lower, which would signify continued recovery from the massive job losses of the Great Recession.
What it’s saying now: Uh-oh. After a long decline, it appears claims are on the rise again. The number of Americans who applied for unemployment benefits for the week ended May 15 unexpectedly rose, the first increase in a month. That triggered anxiety about the health of the economic rebound.
Canadian dollar
What it measures: The loonie’s exchange rate in relation to the US dollar.
Why we pay attention to it: Since Canada is a resource producer, the strength of the dollar compared to the greenback often reflects global demand for energy and expectations for industrial growth. When Canadian products — oil, copper and lumber to name a few — are expected to be in demand, the dollar responds.
What it’s saying now: When the prospects for the world economy looked brighter, as they did a month ago, the loonie was on a tear because currency markets anticipated higher demand for resources. The dollar’s sudden drop from par with the greenback to the 94-cent (U.S.) range this week indicates that sentiment has shifted toward slower growth in the world economy
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