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Searching For The Leading Indicators

There's no shortage of economic data, but can any provide you with a solution?

FROM THE EXECUTIVE EDITOR
Jim Thomas

Now that the economy tops all other national issues, the media crank out what appears to be an unending stream of reports, all of which attempt to unravel the mysteries of the economy. Most of these reports focus on a subset of the economy that can be held as a projection for the economy at large.

The steady beat

My favorite financial predictor is the Billboard music charts indicator, investigated by Phil Maymin, an assistant professor of finance and risk engineering at the Polytechnic Institute of New York. Prof. Maymin tells us that chart-topping music has a steady beat during periods of high market volatility. In better times, the beat of a song may vary. So in 1987, the last great market crash, U2 came in at number one with the regular rhythm of "With or Without You."

Prof. Maymin claims that, on average, using past beat variance as an investment strategy would be profitable, based on his collection of 50 years worth of data. I assume rational investors would avoid this strategy, although I'd agree we'd be better off with a rhythmically-unsteady Frank Zappa song on the charts.

Unlike recorded music, live music consumption is either a poor (or inverse) indicator of market volatility. We won't know until a professor crunches the numbers. StubHub.com, which sells event tickets on the secondary market, reports that its gross dollar sales grew 40% in 2008, with the average ticket price rising $3 to $159. (Yes, disposable income is alive and well.) The highest grossing tours of the year included Bon Jovi (known for steady rhythms) and Bruce Springsteen.

The perils of prediction

Even with reliable data, it can be tricky to make decisions based on where you think the economy is headed. For example, many consumers locked in on energy prices during the summer, fearing that costs would rise during the fall and winter. So far, the strategy has backfired, as home heating oil could cost 25% less this winter, reports public radio station WBUR in Boston.

Those entertained by statistics or trivia can enjoy the glut of data that track anything from gun sales to beer consumption (both up in 2008). By comparison, those who are looking for solid financial planning advice may find very few choices. I would guess that's because when it comes to building a strong optometric practice or a financial future, smart practitioners start with a solid plan of investment that doesn't change all that much — regardless of what song captures the number one spot. OM