The other is the Index of Leading Economic Indicators or LEI, which predicts economic conditions during the next few months, generally assumed to be six months or so.  It has been positive for four straight months now, which is very bullish.  But, most investors don’t know that it is composed of ten “sub-indicators.”  They are:

1. the average weekly hours worked by manufacturing workers
2. the average number of initial applications for unemployment insurance
3. the amount of manufacturers’ new orders for consumer goods and materials
4. the speed of delivery of new merchandise to vendors from suppliers
5. the amount of new orders for capital goods unrelated to defense
6. the amount of new building permits for residential buildings
7. the S&P 500 stock index
8. the inflation-adjusted monetary supply (M2)
9. the spread between long and short interest rates
10. consumer sentiment

This month’s LEI would have been ever more bullish, if building permits had not been such a drag, but that was easily offset by the strengthening labor market.  However, the increasing spread between long term and short term interest rates (#9) is driving the LEI, and that is very bullish.  A flat yield-curve is one where interest rates for debt maturing in ten years is about the same as debt maturing in three months.  That is not good.  A negative yield curve is one where ten year debt pays a lower rate of interest than three month debt.  That is very bad and is a strong bearish signal.  A positive yield curve is one where borrowers pay a higher rate of interest for longer-term debt, which is normal.  It is a signal that the economy is improving so much that borrowers are willing to pay a higher rate and is very bullish.

The generated optimism from the economic data continues to push the stock market to new highs, surprisingly immune to the geopolitical risk of an Iraqi collapse.  In the list of ten sub-indicators above, geopolitical risk is not mentioned.  The LEI is certainly a good indicator of the U.S. economy and probably an indicator of the U.S. stock market, but it ignores what happens when we hit a geopolitical “air-pocket.”  Like the pilot says . . . always keep your seat belt fastened!