report

BUSINESS
CYCLE
DEVELOPMENTS

BCD RESEARCH, INC
PO Box 2383

McKinney, TX 75070
214.395.3517

BUSINESS CYCLE DEVELOPMENTS

 BUSINESS CYCLE DEVELOPMENTS (BCD) measures several economic variables that behave a certain way

prior to a major change in the direction of the financial markets or the business cycle.

 BCD consists of six Monitors that track the cyclical peaks and troughs for the business cycle, the bond market

and the stock market.

 Each of the six Monitors are comprised of six to ten individual Indicators that measure the rate-of-change of two or

more independent economic variables.

 When a majority of individual Indicators within each Monitor turn negative a compelling message can be made

that a cyclical change will soon occur in the financial markets or the business cycle.

 This disciplined rate-of-change technique enables the Monitors to identify and signal changes in market and

economic conditions far earlier than traditional methods of economic analysis.

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BENEFITS OF BUSINESS CYCLE DEVELOPMENTS

 BCD uses fundamental data to “tell-the-time” of the business cycle, the bond market and the stock

market. Asset managers want to know where they are in each phase of the cycle for the financial
markets and the business cycle.

 BCD identifies cyclical changes before they occur. Asset managers need fundamental information

prior to major changes in the financial markets or the business cycle.

 BCD provides objective monitoring of economic variables, which challenges the consensus view

and in the forecasting business the consensus view will fail.

 BCD provides disciplined signals to the flow of fundamental economic data. Asset managers need

“constants” to measure “dynamics” of the financial markets.

 A real-time record - not a back-test - since 1981.

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MONITORS & INDICATORS

Business Cycle Peak Monitor Interest Rate Trough Monitor

 Personal Income  Housing Starts
 Housing Starts  Liquidity: Deposits & Credit Demand
 Unemployment Claims  Treasury Bill/Bond Composite
 Industrial Material Prices  Producer Material Prices
 Composite Diffusion Index  Monetary Base
 Monetary Base  Durables Production
 Bank Reserves  Liquidity: GDP
 Loan Velocity
Market Peak Monitor
Business Cycle Trough Monitor
 Manufacturing & Trade Sales
 Liquidity: Bank Credit  Advancing Indicators
 Retail Sales  Hourly Earnings
 Advancing & Synchronous Indicators  Personal Income
 Liquidity: Deposits & Credit Demand  Employment Composite
 Liquidity: GDP  Unemployment Claims
 Housing Starts  Liquidity: GDP
 Personal Income  Liquidity: Deposits & Credit Demand
 Bank Reserves  Liquidity: Monetary Base
 Liquidity: Bank Credit
Interest Rate Peak Monitor
Market Trough Monitor
 Manufacturing & Trade Inventories Signal Level: Two out of six (if slowdown)
 Manufacturing Output
 Installment Debt Five out of six (if recession)
 Producer Material Prices  Standard & Poor 500% Trend
 Manufacturers’ New Orders  Liquidity: GDP
 Money Supply  Diffusion Index: S&P Industries
 Diffusion Index: Leading Indicators
 Business Cycle Trough Monitor
 Interest Rate Peak Monitor

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INDICATOR DERIVATION

Liquidity: Deposits/Credit Demand

Deposits for Current Period = Rate of Change
________________________________

Credit Demand for Current Period

Deposits for Base Period
________________________________

Credit Demand for Base Period

WSX1 =Q W = Weighting
5
______________________ S = Seasonal Adjusted- Constant Dollars
X1 = Demand Deposits- Current Period
WSY1 X2 = Demand Deposits- Base Period
Y1 = Credit Demand - Current Period
WSX2 Y2 = Credit Demand - Base Period
______________
Q = Quotient - First Derivative Rate of Change
WSY2

LIQUIDITY: DEPOSITS/CREDIT DEMAND

As this Market Peak Indicator rises, net deposits are expanding at a faster pace than total credit demand. The expanding net deposits provide
ample individual and corporate liquidity to fund the business and equity market advance. Eventually, total credit outstanding becomes a larger part of
the incremental purchase of goods and services and this is unsustainable, as liquidity is deteriorating.

The arrow designates a 2.5% decline from the initial peak levels in this Indicator and this historically has signaled an approaching decline in
equity prices. The average duration from the signal to the market peak is 9 months (+/- 5 mo.). [2-6]

NUMBER OF MONTHS TO S&P 500 PEAK
Lead (-) Lag (+)

S&P Peak: 7/59 12/61 1/66 12/68 1/73 9/76 4/81 10/83 8/87 1/94 7/98 8/00 3/02 2/04 10/07 4/10 3/12 1/14

Ind. Peak: 7/58 7/61 6/63 11/67 3/72 9/75 10/80 5/83 9/86 9/91 12/96 3/99 6/011 10/03 12/06 9/09 1/11 8/13

Sgnl. -2.5%: 11/58 6/62 12/63 5/68 7/72 12/75 1/81 8/83 5/87 4/92 5/97 7/99 9/01 1/04 3/07 1/10 4/11 11/13

Lead Time: -8mo +6mo -25mo -7mo -6mo -9mo -3mo -2mo -3mo -21mo -14mo -13mo -6mo -1mo -7mo -3mo -11mo -2mo

False Signal: A 2.5% decline occurred on 4/79 (off: 8/80); on 3/89 (off: 10/89); on 3/06 (off: 12/06).
Footnote (1): Peak in indicator occurred before the market trough.

2200.00 P eak Rate -3 mo LIQUIDITY:DEPOS ITS/
of Change CREDIT DEMAND
S 1800.00
& -2.5% S&P 500 1.180 Deposits / Credit Demand
P De cl ine 1.130
1.080
1400.00 -2.5% P eak Rate 1.030
De cline of Change 0.980
5 0.930
0 P eak Rate -2.5% 15
0 1000.00 of Change De cline

600.00 08 09 10 11 12 13 14
07 Dark Shading: Recession - Light Shading: Slowdowns

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INDICATOR BUILD UP & SIGNAL

December 1984 – November 1987

STOCK MARKET PEAK MONITOR

380.0 15
14
S&P 500 13
-34% 12
11
330.0 10
9
280.0STANDARD & POORS 500S&P 500 10 8
# PEAK INDICATORS7
230.0 7 8 6
7 5
180.0 66 4
5 3
2
130.0 Market Peak 4 1
Indicators 2 0

1

80.0

85 86 87
S hading: '87 Bear Market - Histogram: Market Peak Indicators

7

STOCK MARKET PEAK MONITOR

1800 S&P -32% S&P -8% S&P 500 20
1600 Ndq -38% Ndq -19% 18
1400 16
14 # PEAK INDICATORS
1200 Sell Sell 12
1000 5/17/02 7/19/07 10
8
S & P 500 Sell S&P -57% 6
2/25/04 Ndq -60% 4
2
800 MARKET PEAK 0
INDICATO RS
20
600 18
16
400 14
12
200 03 04 05 06 07 08 10
02 8
6
2000 S&P -16% S&P -19% S&P -10% 4
1750 Ndq -21% R2M -30% R2M -13% 2
1500 0
1250 Sell S&P 500 S&P -6% 15 # PEAK INDICATORS
1000 1/6/10 Ndq -8%
Exte rnal Shocks: R2M -9%
S&P 500 750 EU Crisis, Sell
500 1/26/12 Sell
250 Faile dBCA & 1/24/14
GDP Re visions
0 MARKET PEAK
09 July 2011 INDICATO RS

10 11 12 13 14

SHADING: BEAR MARKETS – HISTOGRAMS: MARKET PEAK INDICATORS

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STOCK MARKET TROUGH MONITOR

S & P 500 1600 S&P -32% S&P -8% S&P 500 S&P -57% 12 # TROUGH INDICATORS
1400 Ndq -38% Ndq -19% Ndq -60%
1200 MARKET 11
1000 2nd Buy Buy TRO UGH 08
2/12/03 9/17/04 INDIC ATO RS 10
800 1st Buy
600 9/17/02 04 05 06 07 9
400
200 03 8

0 7
02
6
2000 S&P -57% S&P -16% S&P -19% S&P -10%
1750 Ndq -60% Ndq -21% R2M -30% R2M -13% 5

1500 S&P 500 4 # TROUGH INDICATORS

S&P 500 1250 Buy S&P -6% 3
1000 2/24/09 Ndq -8%
R2M -9% 2

750 Exte rnal Shocks: Buy MARKET Buy 1
EU C risis, 5/23/12 TRO UGH 3/24/14
INDICATO RS 0
Buy Failed BCA, &
6/10/10 16
GDP Re visions 15
July 2011 14
13
500 12
11
250 10
9
0 10 11 12 13 14 8
09 7
SHADING: BEAR MARKETS – HISTOGRAMS: MARKET TROUGH INDICATORS 6
5
4
3
2
1
0
15

9

BUSINESS CYCLE PEAK MONITOR

INDUSTRIAL PRODUCTION 101.0 Non-Durable Non-Durable Industrial Production 16
99.0 Index -1.6% Manufacturing Index -16.9% 14
97.0 12
95.0 Index 10
93.0 8
91.0 Kat rin a 6 # PEAK INDICATORS
89.0 4
87.0 Non-Durable 2
85.0 Index -1.0% 0
02
Business C ycle 16
95.0 Pe ak Indicators 14
12
INDUSTRIAL PRODUCTION 92.0 03 04 05 06 07 08 10
8
89.0 Non-Durable Non-Durable Non-Durable 6
Index -1.1% Index -1.2% Index -0.7% 4
86.0 2
Non-Durable 0 # PEAK INDICATORS
83.0 Manufacturing
09
Index

Business C ycle
Pe ak Indicators

10 11 12 13 14 15

DARK SHADING: RECESSIONS – LIGHT SHADING: SLOWDOWNS

10

BUSINESS CYCLE TROUGH MONITOR

INDUSTRIAL PRODUCTION 100.0 Non-Durable 16
Index -1.6% 14
95.0 12
Ka tri n a Industrial Production # TROUGH INDICATORS
90.0 Index -16.9%

85.0 Non-Durable Non-Durable 10
Manufacturing Index -1.0% 8
80.0 6
02 Index

96.0 B u s iness 4
94.0 Cycle Trough 2
92.0 0
90.0 In di ca tors
88.0 16
86.0 03 04 05 06 07 08 14
84.0
82.0 Non-Durable Non-Durable Non-Durable
80.0 Index -1.1% Index -1.2% Index -0.7%

INDUSTRIAL PRODUCTION 09 12 # TROUGH INDICATORS

10

Non-Durable 8
Manufacturing 6
4
Index 2

Business Cycle
Tro u g h

In di ca tors

10 11 12 13 14 0
15
DARK SHADING: RECESSIONS – LIGHT SHADING: SLOWDOWNS

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INTEREST RATE PEAK MONITOR

10 YR TREASURY NOTE 6.00 Non-Durable Non-Durable T otal 12 # PEAK INDICATORS
5.00 Index -1.6% Index -1.0% Industrial Production 11
4.00 10
3.00 03 10 YR Inte rest Rate -16.9% 9
2.00 TREAS URY Pe ak Indicators 8
1.00 10 08 7
YIELD 6
02 5
4
4.00 3
3.00 2
2.00 1
1.00 0
0.00
04 05 06 07
09
10 YR TREASURY NOTE Non-Durable Euro Crisis, Non-Durable Non-Durable 16
Index -1.1% Faile dBCA Index -1.2% Index -0.7% 15
14
& 10 YR 13 # PEAK INDICATORS
TREAS URY 12
GDP 11
Re visions YIELD 10
9
Inte rest Rate 8
Pe ak Indicators 7
6
11 12 13 14 5
DARK SHADING: RECESSIONS - LIGHT SHADING: SLOWDOWNS 4
3
2
1
0

15

12

INTEREST RATE TROUGH MONITOR

10 YR TREASURY NOTE 6 Non-Durable T otal 14 # TROUGH INDICATORS
5 Index -1.6% In dust rial 13
4 P ro duct ion 12
3 03 11
2 -16.9% 10
1 10 YR 9
TREAS URY Non-Durable 8
02 Index -1.0% 7
4 YIELD 6
10 YR 5
3 10 TREAS URY 4
3
2 YIELD 2
1
10 YR TREASURY NOTE 1 04 Inte rest Rate 06 07 08 0 # TROUGH INDICATORS
Tro u g h
0 Non-Durable Non-Durable Non-Durable 12
09 Index -1.1% In di ca tors Index -1.2% Index -0.7% 11
10
05 9
8
Euro Crisis, 7
Faile dBCA 6
5
& 4
GDP 3
Re visions 2
1
Inte rest Rate 0
Tro u g h

In di ca tors

11 12 13 14 15
DARK SHADING: RECESSIONS – LIGHT SHADING: SLOWDOWNS

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HISTORICAL PERFORMANCE

BUSINESS CYCLE
 PEAKS: Since 1960 the Business Cycle Peak Monitor has signaled every business cycle peak in advance – an

average lead time of four months.

 TROUGHS: Since 1959 the Business Cycle Trough Monitor has signaled every business cycle trough in

advance – an average lead time of four months.

INTEREST RATES
 PEAKS: Since 1959 the Interest Rate Peak Monitor has signaled every peak in interest rates in advance – an

average lead time of four months.

 TROUGHS: Since 1951 the Interest Rate Trough Monitor has signaled every interest rate trough in advance –

an average lead time of four months.

STOCK MARKET
 PEAKS: Since 1959 the Market Peak Monitor has signaled every market peak in advance – an average lead time

of four months.

 TROUGHS: Since 1959 the Market Trough Monitor has signaled every market trough in advance – an average

lead time of five months.

NOTE: BCD did not signal the sudden and externally induced oil
shock of 1990. Then the business cycle, interest rates and
stock market all peaked simultaneously.

14

BENEFITS REVIEWED

 BCD uses fundamental data to “tell-the-time” of the business cycle, bond market and stock market.
 BCD identifies cyclical changes before they occur.
 BCD provides objective monitoring of economic variables, which challenges the consensus view.
 BCD provides disciplined signals to the flow of fundamental economic data.
 A real-time record – not a back-test – since 1981.

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