The Fastest Way to Improve Your Investment Results

Here is the key concept: Abandon that which is not helpful!

Background

One of my best friends loved “investing” in baseball. He had an opinion about every team and every game. He also had a happy bookie.

He called me after taking a course in baseball betting. He explained that you could improve your results, regardless of your system, but refusing any team that had lost the day before. The course provided the evidence, and it was right. Systems all did worse when recommending losing teams.

I could not resist. I told my friend that if he also passed on all plays involving teams that won they day before, he would have a great system!

Investment Advice

Investors flock to websites providing the least helpful information. The writers are making a fortune without ever providing a single constructive or profitable idea! They collect by preying upon your fears and providing confirmation biases for the conclusions you already have reached.

This is a brilliant business model. It is much better than mine, since I must try to explain the contrarian side, provide evidence, and highlight good ideas.

Here is a suggestion for readers hoping for better results:

Review each source you regularly follow. If you cannot find some helpful advice in the last year, cross it off your reading list. If there is not a single stock recommendation that worked, put the site on double-secret probation!

Conclusion

This brief post might be the best piece of investment advice you will ever see. Most will continue their old habits. They love horror stories and lust for confirmation of their biases. You can choose to be different.

Why You Never See the Best Employment Data

On the first Friday of each month the Bureau of Labor Statistics releases the Employment Situation Report. The data – especially the payroll employment change – is the subject of much speculation, forecasting, and spinning once it is announced. Most sophisticated analysts (like me) regularly report that the sampling error is +/- 120K jobs or so. And that is after the second revision. Few realize that the revisions mostly “top off” the sample responses. There is also non-sampling error, of course, if the current universe of employers is not representative.

The BLS method involves attempting a “count” of the total number of jobs, via a survey, in one month and subtracting it from the prior month. It is not a direct count of change in the number of jobs. ADP attempts a similar estimate using payroll data from their private clients. Today they reported a gain of 246K private jobs. Both are estimates – and only estimates!

The most accurate employment report comes from a source you never hear about, the quarterly Business Dynamics Report. It is based upon the Quarterly Census of Employment and Wages (QCEW), the authoritative final count of all things labor. The QCEW is the basis for the final benchmarking of all the major BLS reports. Why? The data is drawn from local employment offices, not surveys. Businesses are legally required to report all workers. It is the basis for employment insurance, and there is obviously no incentive to overstate employment.

Why Don’t We Hear About This?

No one reports the results of the Business Dynamics Report or the QCEW because we do not have this great and accurate data until eight months later. From the Wall Street perspective, it is “old news.” Here is an important table from the last report.

For our current purposes, the key number is the net employment change of 307,000. I am going to compare that to the estimates made at the time of the original releases.

We should also observe that overall job creation in the quarter was almost 7.5 million jobs. This is very important, but no one seems to know it. Jobs destroyed were over seven million, leaving the net of 307 thousand. This is around 100K per month, and that is all you will hear about.

Please also note that the new jobs come from both additions at current establishments and opening establishments. New jobs from new businesses were 1.4 million for the quarter. The data from this series proves that those complaining about the BLS birth/death adjustment are wrong now, and always have been.

The Estimates

If we fire up the Wayback machine, we can look at the reported employment data from this period. To understand the data, we must realize that the BLS, ADP, (and others) are all making an estimate of the “true job growth.” Their estimates represent different methods, all with pluses and minuses. Let’s see how the two estimates did against what we now know to be “the truth.”

We do not have monthly data for the BED series, but we can see how the two sources did for the entire three-month period. “Truth” was a gain of 307K. Both estimating sources were a bit too high, with the BLS doing better for this round. I have occasionally done this comparison, concluding that the ADP method should also be considered. It would be useful to do this analysis over a longer period. It takes a lot of careful work. (Perhaps if I get a good summer intern, this will be one of the projects. Applications welcome).

Implications for Investors

I understand that investors generally tune out educational posts, especially when a “deep dive” is involved. This is discouraging, since one of my missions is to help people “navigate the noise.” In the case of employment data, it is nearly all noise!

Here are conclusions I have reached, and which you might consider:

  • BLS and ADP both provide useful estimates of employment change. It is a mistake to regard (as most do) the BLS as the “official” result.
  • We should expect variation in the monthly BLS numbers. The survey has a confidence interval of 120K! If the data are real, then the reports should fluctuate around truth.
  • Traders focus on the BLS. They must, since that will be the trading flow. If you are a trader and want to game that announcement, you are on your own. If you are an investor, you should include both reports in your thinking.
  • Do not be bamboozled by those who claim that seasonal adjustments or estimates of new jobs are misleading. I have studied dozens of these claims. None of the writers show any real expertise in data analysis or a proven track record. They are all men on a mission or women on the warpath.
  • The overall path of employment growth remains solid. That will be true even if we get a “weak” payroll employment number on Friday.

And Finally

This topic is (yet another) example of how difficult it is to find real experts. It takes real skill and knowledge. You cannot just read the newspaper.

Other Reading

Your Employment Report IQ – No one knows even 25% of these answers, despite the importance. My favorite prof and greatest teacher introduced me to labor economics. He “approved this message” and said that everyone should read it. While I appreciate the encouragement from a great mentor, the viewership was about 10% of my WTWA pieces – and far less than other pseudo-experts. Trying to help people is an uphill battle!

My best single piece on the monthly employment report. Guessing beans in a jar?

The Quest for Investing Excellence and the Lesson of Dow 20K

The new movement to passive investments is a sharp break from the historical quest for excellence. Many articles claim that no one can do better than the market average. If that is true, you should just throw out your investment library and skip the popular lists of “best investment books.”

This post will suggest a short list of books that would have needed quite different titles. They also would not have become best-sellers! In the conclusion, I will provide some ideas about why this is important for your investment decisions. Here are the hypothetical titles followed by a cover shot of the real book. Suggestions for more examples are quite welcome!

 

In Search of Mediocrity

Market Sheep

The Average IQ Investor

The Little Book that Equals the Market

Common Stocks and Average Profits

Buffett: The Making of a Lucky Investor

Stay Even with Wall Street

Implications

In this series on investment expertise I have (so far) covered the following:

  • There are indeed experts. Sometimes it is obvious, and sometimes they are difficult to find. Consider the case of Phil Mickelson.
  • Forecasting is not always folly. I provide specific examples of expertise, and a checklist for finding the best modeling experts.
  • Dow 20K. The round-number milestone has finally been achieved – at least for today! There are many who are stepping up to claim some credit for their prediction on this front. Some were way too early, and others made the call as we got much closer. Each prognosticator had a method.

My own Dow 20K forecast came when the Dow was at 10,000 and many prominent pundits were calling for Dow 5000! My opinion was controversial at the time. Check out the history of the forecast to remind yourself of how bad things were (unemployment over 10%, and I was ridiculed for suggesting it might fall to 8%).

While it is nice to get some recognition (like this spot from CNBC when we got close to the milestone last month), I see it more as a validation of my methodology. I seek out the best experts. I am constantly looking for excellence. I know that I do not have all of the answers, but my background taught me how to search and to learn. Following superior methods helped to keep my readers and clients on the right side of the market through a long rally hated by most of the punditry and many traders.

There are many paths to trading and investment success. Mine was not the only way, but it was a good way. Having strong evidence and indicators is crucial for confidence.

What Now?

Most of the key factors I see as important are still in place. I summarize them each week. The list of worries has changed a lot but it is still there. The time will come to pull back – but it is not here yet.

 

Weighing the Week Ahead: Will Policy Uncertainty Increase Stock Volatility?

We have a normal calendar for economic data. There will be important news will come from corporate earnings reports. Since this earnings season is part of an inflection point – the end of the earnings recession– it is special. That said, the uncertainty over policy change has market observers both divided and on edge. I expect the earnings news to get less attention than normal. With the queasy, uncertain feeling, the pundits will be asking:

Will policy uncertainty lead to greater stock volatility?

Last Week

Last week the economic news was strong, but with little reaction from stocks.

Theme Recap

In my last WTWA I predicted a close watch on earnings to see if these reports confirmed the improvement in economic data. There was plenty of attention to earnings, but not much on the economic strength theme. Pundits loved to discuss the various Trump appointees and speculate on the stock implications. At some point the market will refocus on the regular themes. For now – like it or not – the Trump effect is a big part of the daily discussion.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. As has been the recent case, both the range and the weekly change were very small. Doug attributes the Friday pullback to an Inaugural Address that offered little for the wealthy. He offers more analysis in his commentary. (Personally, I do not find any of the moves big enough to merit discussion, but there was plenty of commentary).

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for several more charts providing long-term perspective.

Personal Note

Since I will be enjoying a Winter weekend away with Mrs. OldProf and friends, I will probably not write next weekend. As always, I’ll be watching, and may post a brief update if it seems necessary.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

This week’s news was again quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Industrial production rose 0.8%. This beat expectations of 0.6%, but the prior month was revised lower by about the same amount. This series is difficult to interpret in the short run.
  • Philly Fed improved to 23.6 versus the prior month 21.5. This is an exceptional gain for two consecutive months in a diffusion index. It handily beat expectations of 16 or so.
  • Initial jobless claims fell yet again. The series is now at the lowest level since 1973. To my surpriseamazement, some of the punditry is actually finding a way to make this into bad news!

  • Inflation is higher. I understand that many view this as bad news. At some level, it would be. At a time when deflation (more dangerous and harder to fight) has been threatening, a modest rate of inflation is preferred. Scott Grannis has the story, and good charts on other data as well.

  • Homebuilder confidence remains strong. Calculated Risk, our go-to source on all things housing, notes that the reading was “below consensus, but another solid reading.” Anything over 50 indicates that most builders view conditions as good.
  • Housing starts showed a big increase, but mostly because of multi-family. The volatile series remains in the range Bill McBride predicted at the start of the year (4% to 8%). The actual was 4.9%, so the bottom end of the range. More encouraging is that multi-family was down 3.1% for the year while the gains came from the 9.3% increase in single-family.

 

The Bad

  • Building permits had a slight decline to a seasonally adjusted annual rate of 1,210,000. This is down 0.2% from last month but a gain of 0.7% over last year. I tend to place more weight on this series than most other analysts, so I watch it closely.
  • Earnings season began on a soft note. Both earnings and revenue surprises are below the long-term averages. Only 12% of the S&P 500 companies have responded so far, and there is specific sector concentration. I’ll save the charts until we have more data, but you can check for yourself at FactSet. Also, see specific company commentsfrom Avondale, which follows the conference calls.

The Ugly

California budgeting. I have criticized my own state (Illinois) so often. This week the award goes to California for a $1.5 billion “math error.” Put enough of these together and you eventually have real money. (Everett Dirksen).

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. I welcome nominations from readers. As always, ZH is a fertile source of ideas. Write something!

We also published our annual review of winners. If you take a look at the excellent work reviewed (here and here) you will see the advantage of following these contrarian sources. You will be surprised at how much it can help your investing.

There was a popular recent post about “neglected topics.” The article highlighted the heavy hitters who basically control the agenda of what you see. I tried to respond here. I despair! I welcome suggestions about how to get more exposure for those who do great but unpopular work.
The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

It is back to normal for the volume of economic data, but fewer of the most important reports.

The “A” List

  • New Home Sales (Th). More strength expected in this important sector.
  • Michigan Sentiment (F). Continued strength anticipated. Special interest in future expectations.
  • Q4 GDP (F). The first estimate gets major adjustments, but still attracts plenty of attention.
  • Leading Indicators (Th). Expected rebound from last month’s “No change.” Some swear by this report.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • Existing Home Sales (T). Lacks the economic effect of new sales, but a good read on the market.
  • Durable Goods (F). More stable improvement when the volatile transportation sector removed, but headline rebound also expected.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Fed speakers are still on the trail. Questions will probe the new political environment, with everyone trying to dodge.

Earnings reports will remain important. Early actions from the Trump Administration will capture attention, if only because few know quite what to expect.

Next Week’s Theme

 

It would be nice to have a clean turn to our regular analysis of economic data and earnings. I understand that many (including my readers) are tired of thinking about the Trump Effect. I sympathize, but it is not a good investment strategy. We need to think carefully about what is likely to work, and what isn’t. Since no one really knows what is going to happen (as I suggested a year ago,) the current dubious pundit forecast is more volatility. That will steal the spotlight next week. The key question will be:

Will uncertainty about policy changes lead to more volatility?

The basic positions are simple.

  • Some see the new administration as negative for the market, and some see it as positive. This is frequently interpreted as more volatility.
  • There are several policies on a “hit list.” How rapidly will policy changes occur? Higher volatility?
  • Some speculate that the Presidential Inauguration will represent a market top. The sources look like a list of serial top-callers, but many are embracing the idea.
  • Various worries are somewhat offsetting. Extreme possibilities do not always lead to major changes.
  • President Trump may still prove different from Candidate Trump.
  • There are already executive orders. What are the implications?

What does this mean for investors? As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

We follow some regular great sources and the best insights from each week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

Although dropping last week, the yield on the ten-year note has increased significantly since the election. This has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The C-Score has also dropped. The relationship is not linear, and it remains in the “safe” zone.

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment. (see below).

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies.

Doug Short: The World Markets Weekend Update (and much more).

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed, the source of this interesting chart:

This illustrates the improvement in economic indicators – a consistent recent theme.

Georg Vrba: The Business Cycle Indicator and much more.Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg has been suggesting that the measure still shows a one-year led time. His most recent take has a wide time horizon, but an onset date of October (the chart below). Please note that Georg’s other indicators are still “friendly.”

 

The question is whether this improves over Dr. Dieli’s original concept, which has worked for decades in real time. He is quite open to new ideas, and is constantly questioning whether anything has changed in the key relationships he studies. Even before I saw Georg’s most recent work, I was planning to share this chart from Bob’s regular monthly update. I regard it as the single most important current concept for investors of all types.

A costly investor mistake has been fear, often incited by those with little knowledge and no track record. Stay tuned!

How to Use WTWA (especially important for new readers)

In this series, I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have eight different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

Are you preserving wealth, or like most of us, do you need to create more wealth?

Most of my readers are not clients. While I write as if I were speaking personally to one of them, my objective is to help everyone. I provide several free resources. Just write to info at newarc dot com for our current report package. We never share your email address with others, and send only what you seek. (Like you, we hate spam!)

 

Best Advice for the Week Ahead

The right move often depends on your time horizon. Are you a trader or an investor?

Insight for Traders

We consider both our models and the top sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested, but the sectors are somewhat less aggressive. The more cautious Holmes has taken some profits, but is still about 90% invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). There are always fresh ideas. You can also ask questions and have a little fun. Give it a try.

Top Trading Advice

 

Tweets activate algorithms! High frequency traders pounce on any piece of information. (MarketWatch). Is there a way to benefit? You cannot beat the HFTs once the news is out. You must either anticipate or react. Please also note that the fundamental news does not really matter. It is quite clear that the new administration will be using the Twitter as a bully pulpit, both issuing warnings and claiming credit for the responses. It is a new world for trading.

Are you making success into a habit? A trading journal helps on that front, as Dr. Brett Steenbarger explains. His near-daily posts are must-reads for every trader, and often for investors as well. This week he also inspired our Stock Exchange gang with this one. Whether your trading is close to our approach, you will find it helpful.

Those who join us in reading Brett Steenbarger’s regular posts will enjoy his appearance on Barry Ritholtz’s acclaimed MiB series.

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Chuck Carnevale’s analysis of Broadcom Limited (AVGO). It combines all the many things that Chuck does so well – a great stock idea, a lesson in several types of fundamental analysis, and a tutorial on his first-rate market tools. I usually do not like videos since I can read fast. In this case I recommend that DIY investors grab a cup of coffee and watch the entire video. While Chuck’s tools allow for a lot of flexibility, his approach is very like what we use in screening our candidates. If you are not doing something like this, you should stick to ETFs!

 

Stock Ideas

 

Exxon Mobil (XOM) is buying up Permian Basin assets “on the cheap.” This may not show up in an immediate stock price change, but it is something I have been expecting. Investors should understand the long-term needs of big integrated oil companies, and the floor placed under reserves.

Where should you look? Eddy Elfenbein considers United States Lime and Minerals. (USLM). Eddy writes:

Fourteen years ago, USLM was going for $3 per share. Today it’s at $77. So how many analysts follow it? Zero.

The stock has a market cap of $425 million. I also have to say that I love that name.

Keep that in mind while considering this post from Eli Hoffman, CEO and Editor-in-Chief at Seeking Alpha. Starting with a WSJ article, he carefully explains the motives of many analysts.

I feel quite strongly about these ideas. We NEVER use sell-side research as the basis for ideas. In fact, it is a negative factor in our general rating system. Individual investors need a similar method. I also agree with Eli that Seeking Alpha provides plenty of grist for the mill. While I have my own methods for generating ideas, it is always a valuable checkpoint on the way.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, including four or five specific ideas that we are buying. This week the dip-buying Holmes (who has been very hot) liked Fomento Economico (FMX) a distributor of soft drinks and an investor in the Heineken Group. I objected. In an action of man over model, or person over dog, or boss over worker, I vetoed the trade. Holmes has gone to Mexico (true!) for further investigation. We will be checking his expense account. FMX does not sell Margaritas!

Seeking yield?

How about Blue Harbinger’s latest CEF idea, Diversified Real Asset Income (DRA). This is another fund trading at a discount to NAV. I am always interested in Mark’s well-researched ideas and always curious about the reason for the discount.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. My personal favorite this week is the FT article about the six different investor personalities. There is a lesson in each!

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest has quickly become a must-read for financial professionals. Somewhat to my surprise, the topics are also especially relevant for active individual investors. They frequently join in the comments, adding to the value of the posts for both groups. Gil has several good topics, but I especially liked this treatment of goals-based investing. I have started following the author, Marshall Jaffe. This is a topic that every DIY investor should consider carefully. There is a lot at stake.

Watch out for…

Tweet targets. This company, a 14% loser, came into the sights a noted short-seller. There is an interesting dynamic here. The reputation of the source would have an immediate effect. Any “in the know” pals would be on board. There is plenty of money to be made, whether you have a short position before the announcement, or like the company and buy into the selling.

Final Thoughts

 

Despite the uncertain environment, volatility has been a matter for individual stocks. The overall market forces seem to have found a balance. I do not view volatility as a concern, and suggest caution to those using this as a hedge.

The improving economic data have not (yet?) shown up in the earnings reports. Perhaps it is because the improvement came so late in the quarter. I see more sources noting that earnings seem to be trailing the improving economic news.

There is plenty of temptation to link your investments to the electoral change. My base position is that you should not regard it as important, instead figuring out how to profit from the new policies. Be politically agnostic.

What I am watching.

A psychological element worth following is the improvement in business and consumer sentiment. This was also suggested in reports from the Davos world economic forum. Just as the pre-election negative environment weighed on the economy, confidence could also become a self-fulfilling prophecy.

Sentiment sometimes trumps the reality of economic data.

 

Neglected Investment Ideas

Peter Lazaroff’s series has interesting questions for some of the top investment bloggers. It is getting good attention. I am enjoying it, and I’m sure others are as well. The comments from the heavy-hitters on his list are all very interesting.

Except for one question.

He asks them “What in the world of finance is not getting enough attention?” This is a great question, but he is asking the wrong panel! The collection of top bloggers and the leading curator of financial information basically define the reading agenda. If they really believed that something was not getting enough attention, they would write about it. The answers they give do not really cite anything unique.

If you really want to consider what is neglected, you need to look a bit lower than the most recognized bloggers. Topics that these people write about – but which do not attract notice – are the real answer to this question.

I certainly do not pretend to have the only answer, but I do have a good one. In my regular Weighing the Week Ahead feature I sometimes award a “Silver Bullet” to someone who took up an unpopular cause and provided corrective information. Their articles are not popular and have no natural audience. The authors do great work without reward, so I try to recognize them. Some might disagree with my choices, but not my intent.

Each year I do a review of these outstanding posts. I always hope that my preview will get a lot of buzz — not for me, but for those I try to recognize. None of the most popular bloggers linked to these posts…..something that really surprised me. I guess that I am not the right one to bestow any awards. Tadas, or Josh, or Barry could do it better, and with much more impact.

In case you are interested, here are the posts for last year’s winners: Part one and Part two.

And if Peter had asked, my list of neglected topics would be quite different – emphasizing things that really did not get any attention!

2016 Silver Bullet Awards Part Two

Each week I try to give special attention to those who do important work, even though it is probably unpopular. These contributors are so important, and their work is so helpful, that we recommend taking another look at the end of the year. (Part One is here).

 

7/13/16

In a WTWA first, CNBC anchor Sara Eisen earned a Silver Bullet Award for her excellent interview with Fed Vice-Chairman Stanley Fischer (Transcript and video via CNBC). As we wrote at the time:

One-by-one she asked all of the key questions in the current debate over Fed policy – potential for negative rates, Brexit impact, does the Fed make decisions based the economic impact abroad, the state of the economy, recession potential, employment, George Soros, and the strong bond market. Whether or not you agree with Vice-Chairman Fischer, it is important to know what he thinks.

Sara Eisen displayed first-rate journalism, as expected from a Medill School graduate. Unlike so many other financial interviewers she did not argue with her subject nor push her own agenda. She did raise all of the current Fed misperceptions common in the trading community. Her preparation and poise helped us all learn important information. It was well worth turning off my mute button and dialing back the TIVO.

8/13/16

We gave the Silver Bullet to Justin Fox for his writing on one of the most persistent myths – the manipulation of government statistics. His whole post is available here, but we particularly liked this bit:

First, because I know a little bit about the people who put together our nation’s economic statistics. The Bureau of Labor Statistics, Bureau of Economic Analysis and Census Bureau are run on a day-to-day basis by career employees, not political appointees. Even the appointees are often career staffers who get promoted, and many have served under multiple administrations. When top statistics-agency officials do leave government, it’s often for jobs in academia. Credibility with peers is generally of far more value (economic and otherwise) to these people than anything a politician could do for them.

To those with even basic experience in civil service, the political manipulation theory makes little sense.

9/3/16

Ben Carlson won a Silver Bullet for investigating the apparent link between Fed meetings and stock performance. While many (including at least one WSJ writer) took the rumor at face value, Ben asked a clever question: What happens if you change the starting date of the analysis?


As it turns out, any relationship between the two is likely a result of 2008.

9/11/16

Menzie Chinn was a big winner this year. Professor Chinn, a Wisconsin economist, debunked many annoying data conspiracies in one fell swoop. In so doing, he also illustrated how an inappropriate use of log scales can mislead readers.

We called his piece the most profitable thing for investors to read that week – if you missed it, be sure and catch up!

9/17/16

By late in the year, it was increasingly apparent that individual investors were misreading the VIX as a “fear indicator” rather than a measure of expected volatility. Chris Ciovacco did an excellent job in making that distinction. His image here is particularly persuasive.

Runner up awards to Jeff Macke and Adam H. Grimes for their similar conclusions on the same subject.

10/8/16

Shiller’s CAPE method has often caused some eyebrow-raising on A Dash, most notably since he doesn’t use it himselfJustin Lahart of the Wall Street Journal thought to analyze just how this method (and others like it) would work in practice:

For New York University finance professor Aswath Damodaran, this is the real sticking point. He set up a spreadsheet to see if there was a way that using the CAPE could boost returns. When the CAPE was high, it put more money into Treasuries and cash, and when it was low it put more into stocks.

He fiddled with it, allowing for different overvaluation and undervaluation thresholds, changing target allocations. And over the past 50-odd years, he couldn’t find a single way he could make CAPE beat a simple buy-and-hold strategy. In the end, he doesn’t think it represents an improvement over using conventional PEs to value stocks.

“This is one of the most oversold, overhyped metrics I’ve ever seen,” says Mr. Damodaran.

Mr. Shiller agrees that the CAPE can’t be used as a market-timing tool, per se. Rather, he thinks that investors should tilt their portfolios away from individual stocks that have high CAPEs. But he says he isn’t ready to modify his CAPE for judging the overall market.

10/23/16

With the blogosphere in full election season fever, some started to worry that the 2016 stock market gains were a precursor to something much worse. We gave the Silver Bullet to Ryan Detrick of LPL Research for discrediting this argument with two easy charts:

11/5/16

We make a special effort to recognize writers trying to debunk the endless onslaught of recession predictions. Bill McBride of Calculated Risk did this very effectively, with a few key points:

Note: I’ve made one recession call since starting this blog.  One of my predictions for 2007 was a recession would start as a result of the housing bust (made it by one month – the recession started in December 2007).  That prediction was out of the consensus for 2007 and, at the time, ECRI was saying a “recession is no longer a serious concern”.  Ouch.

For the last 6+ years [now 7+ years], there have been an endless parade of incorrect recession calls. The most reported was probably the multiple recession calls from ECRI in 2011 and 2012.

In May of [2015], ECRI finally acknowledged their incorrect call, and here is their admission : The Greater Moderation

In line with the adage, “never say never,” [ECRI’s] September 2011 U.S. recession forecast did turn out to be a false alarm.

I disagreed with that call in 2011; I wasn’t even on recession watch!

And here is another call [last December] via CNBC: US economy recession odds ’65 percent’: Investor

Raoul Pal, the publisher of The Global Macro Investor, reiterated his bearishness … “The economic situation is deteriorating fast.” … [The ISM report] “is showing that the U.S. economy is almost at stall speed now,” Pal said. “It gives us a 65 percent chance of a recession in the U.S.

The manufacturing sector has been weak, and contracted in the US in November due to a combination of weakness in the oil sector, the strong dollar and some global weakness.  But this doesn’t mean the US will enter a recession.

The last time the index contracted was in 2012 (no recession), and has shown contraction several times outside of a recession.

We strongly recommend reading the original post in its entirety.

11/27/16

Jon Krinsky of MKM and Downtown Josh Brown both earned the Silver Bullet award in late 2016, for taking on myths about currency strength and stock performance. In sum: there is zero evidence of a long-term correlation between stocks and the dollar.

12/31/16

Our final Silver Bullet award of the year, given on New Year’s Eve, went to Robert Huebscher of Advisor Perspectives. His full article is definitely worth a read, but choice excerpts follow below. Good financial products are bought, not sold!

But I caution anyone against buying precious metals from Lear Capital. It is not an SEC-registered investment advisor and its web site states that there is no fiduciary relationship between it and its customers.

And also…

For example, Lear will sell you a $10 circulated Liberty gold coin (1/2 ounce) for $753.00 (plus $24 shipping). I did a quick search on eBay and found a circulated Liberty coin selling for as low as $666 (with free shipping).

Buying silver is no different. Lear will sell you a pre-1921 circulated Morgan silver dollar for $30 (plus $10 shipping). On eBay, I quickly found one of these for $22.00 (plus $2.62 shipping).

Conclusion

As always, you can feel free to contact us with recommendations for future Silver Bullet prize winners at any time. Whenever someone takes interest in defending a thankless but essential cause, we hope you’ll find them here.  Have a Happy New Year and a profitable 2017.

Weighing the Week Ahead: Time to Look Past the Gloom?

We have a huge week for economic data. The Fed is now on hold until after the election. The election can still go either way. It is easy to find something to worry about. That said, the fourth quarter is usually good for stocks.

Should investors look past the gloom?

Last Week

There was plenty of economic news, and it was generally positive. The election had a lean to Clinton, which the market seems to like, but not a decisive verdict. There were two wild cards – the rumors about an OPEC deal and the concerns about Deutsche Bank. Both introduced day-to-day volatility, but not a lasting effect. The jury remains out on both.

Theme Recap

In my last WTWA, I predicted a focus on the first presidential debate, wondering if this would provide a clear path for investors. That was half right. The debate dominated discussions early in the week and post-mortems continued for a couple of days. There was no clear KO, so the election effects are still in doubt.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a flat week and a rocky path.

Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective. You can easily see the whipsaw on the OPEC and Deutsche Bank stories. In a break from recent trends the market traded inversely with oil early in the week before the “OPEC rally.” Some attributed this to the debate. The Deutsche Bank story sent markets lower on Thursday, with many seeing another “Lehman moment.” One day later, the pundits explained why the circumstances were not the same as in 2008. Who really gained from the scary stories on Thursday?

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The Good

  • Earnings are set to improve. Earnings guru Brian Gilmartin has been on this theme for weeks and adds to the evidence. Dr. Ed Yardeni joins in, suggesting that Q2 was the trough.

  • Congress avoided a government shutdown. The Hill explains how. Are prospects for compromise better?
  • Trucking increased sharply. Calculated Risk has the story.
  • Global activity is stronger. Scott Grannis suggests that stable oil prices might be the reason. Readers may remember that I mentioned the possibility of a “sweet spot” in oil several weeks ago.
  • New home sales were strong, beating expectations and up almost 21% year-over-year. Calculated Risk explains why this is important for the economy.
  • Chemical activity is stronger. I noticed that several sources are now following this data series. Calculated Risk shows the leading quality of the indicator, represented in this chart:

 

The Bad

  • Pending home sales declined 2.4%, missing expectations.
  • Restaurant performance decreased 1% from July. Several sources are citing a “restaurant recession.”
  • Deutsche Bank faces a large fine, possibly requiring more capital. Many worry about effects on other banks. Some hedge funds have reduced trading and maintaining collateral with DB.
  • Durable goods production showed no increase.

 

The Ugly

Potential hacking of US elections. While it is unlikely to change the outcome, it is important that results are perceived as legitimate. (Yes, I have heard of Mayor Daley). Even Nixon accepted the 1960 results. The CFR opines that Congress should warn Russia.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. This week I want to highlight Evidence Soup, by Tracy Allison Altman. She definitely has the right idea in her work. This week’s theme of whether immigrants disrupt US employment is both important and timely. She highlights evidence that supposedly disproves this notion, but there is a lot of work in evaluating it. I sympathize with this challenge. What do you think?

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a very big week for economic data. While I watch everything on the calendar, you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • Employment report (F). Rightly or wrongly, even rather small changes create large reactions.
  • ISM Index (M). Rebound expected in a private indicator with some leading qualities.
  • ADP private employment (W). A strong measure of employment changes, deserving of more respect.
  • Auto sales (M). Private data on an important growth sector.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • ISM Services (W). Not as interesting as the manufacturing index, but only because the series is shorter.
  • Construction spending (M). Important sector, but August data.
  • Trade balance (W). Important part of the GDP calculation for Q3.
  • Factory orders (W). Volatile August data, but an important sector.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

Did you get enough FedSpeak after the FOMC meeting, the press conference, the speeches last week, and the Yellen Congressional testimony? No? If not, you will have several more opportunities to get even more transparency and clarity this week!

Next Week’s Theme

Despite warnings to sell in May, the worst month of August, and the dangers of September, stocks have posted another positive quarter. The fourth quarter is positive over 80% of the time. But wait! To some the list of worries seems more important than usual. The biggest include the following:

  • Election uncertainty
  • Recession chances/economic weakness
  • Length of the bull market
  • Misleading corporate earnings

These factors have most market participants in a gloomy mood. The market resilience this year will have the pundits wondering: Is it time to look past the gloom?

The ever-witty Alan Steel wonders if sentiment is detached from reality.

Yes, and it’s always been that way; the consensus of opinion and the investor herd move in exactly the wrong direction at exactly the wrong time.

That’s because investors rarely focus on anything beyond what they’re hearing and seeing today.

And in the words of our good friend Mike Williams of Genesis Asset Management in Chicago, “It’s not what’s now that matters, it’s what’s next.”

Bill Kort uses actual reader counts to demonstrate the effect of negative headlines – SELL ALL STOCKS!!!. He notes, “The articles I publish with overtly negative titles draw far more readers than those with neutral to modestly negative elements”.

As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also the best insights from each week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

The recession odds (in nine months) have nudged closer to 10%.

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies.

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

The ECRI has been dropped from our weekly update. It was not so much because of the bad call in 2011, but the stubborn adherence to this position despite plenty of evidence to the contrary. Those interested can still follow them via Doug Short and Jill Mislinski. The ECRI commentary remains relentlessly bearish despite the upturn in their own index.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation.

James Picerno takes up a frequent question about the slope of the yield curve: Is it still relevant given the heavy-handed central bank involvement in the markets. My own thoughts are in the comments.

How to Use WTWA

In this series I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have six different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

Are you preserving wealth, or like most of us, do you need to create more wealth?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

Best Advice for the Week Ahead

The right move often depends on your time horizon. Are you a trader or an investor?

Insight for Traders

We consider both our models and also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This is the place to get some ideas from the best technical analysis – and you can ask questions!

Top Trading Advice

Brett Steenbarger continues to provide a great piece of trading advice every day. It is always difficult to pick a favorite. One of the big trading questions is how much risk to take. How do you decide? Brett writes:

There are risk-averse traders who never make significant money.  There are risk-seeking traders who blow up.  Then there are smart traders who take calculated risks.  They make selective bets.  Like the skilled poker player, they know when they have a good hand and they know how and when to bet that hand.

Related, from Adam H. Grimes – why forecasting volatility is important.

Also – how not to “outthink” yourself when you hit a bad stretch.

Repeat after Bella: ALWAYS have a good entry price!

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Morgan Housel’s explanation of the difference between a bubble and a cycle.

According to various media sources we now have at least 14 bubbles:

A new real estate bubble.

A bond bubble.

A tech bubble.

A VC bubble.

A startup bubble.

A stock bubble.

A shale oil bubble.

A healthcare bubble.

A dollar bubble.

A college tuition bubble.

A Canadian housing bubble.

A central bank bubble.

A social media bubble.

A China bubble.

One economist recently gave up and just said “Everything’s a bubble.”

At a conference I attended a few years ago, Yale economist Robert Shiller said something amazing: The word “bubble” wasn’t even in the economic lexicon 25 years ago. Not in textbooks, not in papers, not in schools. But now we have bubbles everywhere.

Read the full article for Morgan’s excellent analysis of how to distinguish real bubbles from hype.

Stock Ideas

 

When you read Chuck Carnevale’s articles – and you should – prepare for a stock idea combined with a great lesson. This week Chuck analyzes Consolidated Edison (ED), a popular choice among retirement investors. He explains why valuation is a key to understanding whether it is a sound investment. A few minutes spent with this post and a cup of coffee can save you megabucks!

Abba likes Delta (DAL). We do, too, but we have calls written against the position.

Peter F. Way’s interesting approach highlights current opportunities in chip stocks. As always, he has plenty of ideas, but you need to read the entire post for a full analysis and a list of interesting ideas.

Political commentary on drug prices have put a lid on biotech stocks. Michael Brush (MarketWatch) notes the decrease in such commentary and cites a number of “catalysts around the corner” for the sector. Buyouts ahead?

Our newest trading model, Holmes, has been contributing an idea each week, something we recently bought for clients. I will mention it here, but you can see it sooner (along with other interesting ideas) if you read my new weekly column, the Stock Exchange. I have a “conversation” with disciples of our four trading models. This week we took up the two most popular trader questions:

  1. Technical or fundamental analysis; and
  2. Ginger or Mary Ann

Since each model has a different personality and style, there are often disagreements – especially with me! While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position. This week Holmes added several stocks, including DuPont (DD). See the Stock Exchange for a more complete analysis and ideas from the other experts.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is Tony Isola’s list of “deplorable” investments. I see the ads for many of these and become ill. If there was only some way to help individual investors before they lose a lot of money on an overpriced, illiquid asset. Here is a list of products that provide big fees to those offering them, and significant restrictions on the buyers:

  • Equity-Indexed Annuities – How about an investment with limited upside but large potential for a substantial loss? Throw in a 10% sales charge and no dividend participation (50% of historic market returns) and we have the ingredients for a deplorable retirement scenario.
  • Funds with 12b-1 Fees – Fund size and investment returns are negatively correlated. Investors are paying a fee to brokers designed to increase assets and reduce returns. Kind of like paying a restaurant to give you food poisoning!
  • Proprietary Mutual Funds – This is cross selling at its most heinous. Never buy a mutual fund created by a broker’s employer- this is the ultimate perverse incentive.
  • Non-Traded REITs – A false promise of safety combined with 10% upfront commissions, this is a true sucker’s bet. Just because something is not traded doesn’t mean it cannot go down in value. By the way, their publicly traded cousins have vastly outperformed this group over time, because of greater transparency and lower fees.
  • Commodity Funds – High risk combined with low returns rarely ends well. These products specialize in something called “Contango.” Investor translation: Nearer dated futures’ prices are lower than the longer dated ones, or more commonly known as buy high and sell low, rinse and repeat.
  • Variable Annuities – These are often sold on the pretense of guaranteed income and tax-deferred growth. In reality, very few investors need this product fraught with complexity and egregious fees. These are often placed inappropriately in tax-sheltered accounts; investors do not need both a belt and suspenders.
  • Front-Loaded Mutual Funds – Investors pay a premium of 5.75%, and an additional 1% a year in fund fees to purchase an investment that is almost guaranteed to underperform an unmanaged index fund costing .05%, annually. There is NEVER a reason to pay this fee.
  • Over-Niched ETFs – Healthcare Shares Dermatology and Wound Care ETF and Pure Drone Economy Strategy funds are all that needs to be said. The prosecution rests its case.
  • Hedge Funds – 2% annual fees combined with 20% of yearly profit makes it pretty hard for investors to bring home any type of meaningful positive returns. While there is a small minority of hedge funds that are worth the steep price, they are either closed or have account minimums that rule out everyone except for the Bill Gates’ crowd.
  • Market Linked C.D.s – The ultimate vanilla investment has been hijacked by Wall Street. Unless you enjoy paying a 3% commission and having the possibility of losing principal due to early withdrawal, run away from anyone who approaches you with this nonsense. Purchasing a complicated structure that will underperform your Credit Union’s basic offering is a deplorable choice.

Great work.

Less dramatic but also important is a Morningstar article on how to consider Social Security as part of your retirement planning. For many investors, even those with significant planning and savings, this can play an important role. You need to get it right.

And last but certainly not least in a great week for personal finance readers, check out Gil Weinreich’s three-part series on the issues facing those who “can’t afford retirement”.

Market Outlook

Eddy Elfenbein looks at the tough streak for value investing, and also the recent improvement.

Watch out for…

Overconfident forecasts. Tony Isola explains the dangers in coin-flip market timing strategies and predictions based upon politics.

Pension Partners underscores this advice, highlighting the danger of blindly following a “guru.”

Final Thoughts

 

Concerning the debates, there are three different methods of scoring.

  1. Points on specific issues – the method for formal debates. You look at each issue and determine who got the better.
  2. Technique. This is how we coach. You look for opportunities to insert carefully prepared “blocks.” These have pre-tested language and evidence.
  3. Change of opinion. This is, of course, what ultimately matters.

As someone who has judged hundreds of debates and followed them closely in all presidential elections, I thought that Secretary Clinton did better on point one and decisively better on point two. Being a coach for Mr. Trump would be very frustrating! He really likes to wing it.

That said, there was no knockout blow or major blunder. Voters are not watching this like debate judges. Mr. Trump’s message obviously resonates with many. The polls show a slight move toward Clinton, but the issue is still open with two debates to go.

Recession odds are low. Every week we see wannabee analysts who have no track record. This includes those at big-name firms. Understanding the economic cycle is one of the biggest advantages for the astute investor.

Bull markets (and economic cycles) do not die of old age. This is another great misconception. The odds of four heads in a row is 1/16. What do you think it is after you have already flipped three?

Energy earnings have colored overall results. We need to look forward.

The current market worries are no worse than ever. For perspective, look back at how negative everyone was when people criticized me for suggesting Dow 20K.

A list of negative headlines does not represent fundamental analysis. TV know-it-alls “explaining” yesterday’s news provide no edge. The best investments come from recognizing and ignoring bogus advice.

Weighing the Week Ahead: Should We Fear the Fed?

The calendar has little important data. Friday’s sharp selling was widely attributed to the fear of a Fed rate hike in September. Is it time? Should we fear the Fed?

Last Week

There was not much news, and it was another mixed picture.

Theme Recap

In my last WTWA, I predicted a continuing discussion of the Fed and the timing of the first rate increase, combined with concern over a September market correction. The first part was pretty accurate all week, but the market remained quiet. The modest trading range ended spectacularly on Friday., The “C” word is now on the lips of many.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. The overall range, once again, is very narrow. Doug’s take is that Friday was all about the Fed. He writes as follows:

Today’s action essentially confirms the metaphor of an equity market infant nursing on mother Fed’s breast. The selloff was triggered initially by hawkish remarks by the normally dovish Boston Fed President Eric Rosengren, a voting member of the FOMC. But more surprising was the announcement of an unannounced speech by even more dovish Lael Brainard at the open of the FOMC week, which runs counter to the general policy a silent Fed prior to the FOMC meeting end.

As you will see in today’s “Final Thought,” I have a very different interpretation, still consistent with the data.

Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis and several other charts providing long-term perspective.

A Two-Question Quiz

  1. The recent Purchasing managers index for manufacturing recently registered 49.4. Last week’s “services” index came in at 51.4. Each data series has a long-term relationship with GDP. Which of these reports implies the higher rate of economic growth? Which one implies an impending recession? [See conclusion for the answer.]
  2. Suppose you are in an NFL “survivor” pool. You just need to pick a team that will not lose that week. No point spread. What are your odds of making it through two weeks? You may pick the biggest favorite each week.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The Good

  • Initial jobless claims fell to 259K, down from the prior week and continuing recent low levels.
  • The Beige Book was mildly positive, providing support for the modest growth scenario.
  • Framing lumber prices remain strong. (Calculated Risk).
  • Sentiment remains bullish. Dana Lyons looks at the ISE Call/Put ratio to refute the idea of a “frothy” market.

  • Durable goods orders had a solid rebound from earlier weakness, increasing 4.4%
  • The JOLTS report registered a new high in job openings and continued strength reflected in the quit rate. This shows the number of people voluntarily leaving their jobs. Josh Brown has a good discussion of this point. The labor market structure from the report is less encouraging. The ratio of unemployment to job vacancies confirms non-recessionary conditions, but also a mismatch between available jobs and workers. (Simple explanation here. Also a good chart via The Daily Shot).

The Bad

  • Employment benchmark revisions showed a decrease of 150K jobs over a one-year period ending last March (BLS). While this is a preliminary report, it is usually a good estimate of what we will see in the actual revisions this coming March. Essentially, this means that the job growth over the one-year period ending last March was over-estimated by 150K jobs, described as 0.1% of the labor force. It is a much larger percentage of the reported net job growth. I frequently cite this report as the most accurate count, but one that arrives too late to be of interest to those in the news and financial communities. If you missed my challenging quiz on the employment report, please take a look.
  • Rail traffic had another bad week. Steven Hansen (GEI) reports on the 5.7% decline for the month of August.
  • ISM non-manufacturing dropped to 51.4. As Bespoke notes, this was the biggest monthly decline since 2008.

Here is some color from the actual report:

WHAT RESPONDENTS ARE SAYING …

“Relatively stable August, with no sharp increase or decrease in sales or pricing. Labor availability and cost remains a very high focal point.” (Accommodation & Food Services)

“Overall, the oil and gas industry remain in [a] ‘wait and watch’ mode. The price of oil has impacted investment considerably.” (Construction)

“No significant changes to report. Still on track for expansion efforts to begin fourth quarter 2016.” (Finance & Insurance)

“Still recovering from the current downturn in the renewable energy market which is expected to pick up in the fourth quarter.” (Professional, Scientific & Technical Services)

“Stable with some increase in construction activity.” (Public Administration)

“The business environment has softened a bit over the last month. There are now opportunities to fill in the marketplace.” (Retail Trade)

“Midyear [is a] slow time for us, summer build is over, fall is historically light, holiday peak build September and October for peak time November and December.” (Transportation & Warehousing)

“Good, but slowing from previous months.” (Wholesale Trade)

 

The Ugly

North Korea is a multiple winner of my “ugly” award. The recent nuclear test is viewed as completely unacceptable by most of the world. Can leaders find an action that peacefully accomplishes widespread objectives? Will those having the most influence over N. Korea cooperate? These are important questions, beyond our normal concerns over investments.

Jonathan D. Pollack (Brookings) has a good explanation of why the recent test is different and more threatening than those in the past.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. This week’s award goes to Wisconsin economist Menzie Chinn, who earned a belt full of bullets in a single article. The context is a post for a class in economics. Since so many current financial commentators take pride in not having taken Economics 101, it is a great illustration of why they are wrong! So many mistakes of this sort are made by financial pundits, including intentional misrepresentations. Prof. Chinn illustrates one of the most frequent errors – not using log scales in charts when they are appropriate. Note the deception it would generate in this example, which actually shows a constant rate of increase.

He also debunks the data conspiracy stories, using several links and good explanations. This post might be the single most profitable thing for investors to read this week.

 

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have another light week for economic data. While personally I watch everything on the calendar, you do not need to! I highlight only the most important items in WTWA. Focus is essential.

The “A” List

  • Retail sales (T). The biggest report of the week. The odds of a rate hike will increase if this is positive.
  • Michigan sentiment (F). Consumer confidence has been strong, helping to support the stock market.
  • Initial claims (Th). The best concurrent indicator for employment trends. Quiet strength is the long-term trend, so a spike would be worrisome.

The “B” List

  • Industrial production (Th). Volatile data with a big gain last month. Not much is expected, but this remains important.
  • CPI (F). Still not important, but this number will start to approach the Fed’s 2% inflation target as year-over-year gasoline prices stabilize.
  • PPI (Th). See CPI above.
  • Business inventories (Th). July data, but it is another piece in the Q2 GDP puzzle.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

FedSpeak will enter the pre-meeting blackout period after Monday. Fed Governor Lael Brainard has been dovish, so her Monday presentation will get plenty of attention.

Next Week’s Theme

Last week brought us more quiet for the first part of the abbreviated week. Friday was a very different story. The sharp decline, ending a two-month string of quiet days, commanded attention. What was going on?

The instant conclusion was fear of a September rate increase from the Fed. That sets the tone for next week. Everyone will be asking: Should we fear the Fed?

Normally I recommend spending very little time on yesterday’s news. As I wrote a few months ago, investors do not get paid for this knowledge – only pundits who get to sound smart after the fact!

This week is a bit different. Having a good sense about what happened Friday is important to our advance preparation. Here is an abbreviated sequence of events:

  • Stock futures were set up for a flat opening, just as we had seen all week.
  • Boston Fed President Eric Rosengren, repeating a speech made in August, stated that gradually removing accommodation was the best way to extend the duration of the recovery. The Boston Globe states that this pushed the Dow 400 points lower.
  • Stock futures moved lower by about ½ of one percent when the speech was reported.
  • Since markets are not expecting a September rate increase, and only a 60% chance of one before the end of the year, the original move attracted a lot of discussion.
  • When the Dow declined a little more, CNBC started running the headline that Fed fears were slamming stocks.
  • Several commentators cited the possible end of the Fed support for asset prices. Art Cashin fed the fire, noting in mid-afternoon that if stocks were down 300 on just the hint, an actual increase might take them down 1000.

You will see plenty of commentary on these themes. Feel free to add your own thoughts in the comments, including anything I have missed.

As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also the best insights from each week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Think risk first, reward second. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

The recession odds (in nine months) have nudged closer to 10%.

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation.

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

The ECRI has been dropped from our weekly update. It was not so much because of the bad call in 2011, but the stubborn adherence to this position despite plenty of evidence to the contrary. Those interested can still follow them via Doug Short and Jill Mislinski. The ECRI commentary remains relentlessly bearish despite the upturn in their own index.

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he further explains the possible turning point in earnings. Most people will not understand this until it is too late to profit.

 

How to Use WTWA

In this series I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have six different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

Are you preserving wealth, or like most of us, do you need to create more wealth?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions or suggestions for new topics.)

Best Advice for the Week Ahead

The right move often depends on your time horizon. Are you a trader or an investor?

Insight for Traders

We consider both our models and also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested.

Top Trading Advice

Brett Steenbarger is posting many great ideas. Traders should make a daily visit. I sense another book coming! My favorite this week is How to Extract Greater Profits from Our Trading.

If we don’t see the market gain a second wind after our having made an initial entry, the conditional probabilities of getting the move in the other direction continue to increase.  We are getting further confirmation that buyers can push the market no higher or sellers can push prices no lower.  It is when we see that our initial position is not getting torched and subsequent market behavior is in line with our thesis that we can add a second unit of risk to the trade.  We extract more from our trading by being largest when we’re “rightest” and smallest when we’re wrong.

Dr. Brett is also helping with the psychological aspects of your trading – Three Trading Techniques for Building Positive Trading Patterns.

Paul Tudor Jones: Decide on your stop point before you enter a trade. Finance Trends discusses this and some other advice from the great trader. Holmes is barking approvingly.

Another piece of advance preparation is asking yourself whether the prospective trade really has enough edge. Don’t forget to keep the volatility of expected results in mind! Adam H. Grimes takes up this question and provides links to some prior related work.

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be the WSJ warning about “structured CD’s.” (subscription required, but you can find it if you Google the title). Many unwitting investors are biting on a pitch that you can double your money in six years with no risk. Some of those needing early access to funds actually lose money on the CD. Performance data are not available for this product, unregulated by the SEC. The WSJ managed to get some results, and they are abysmal.

Stock Ideas

Chuck Carnevale has some good lessons about how to select dividend stocks. For the buy-and-hold income investor he seeks continuity of the dividend as well as limited volatility in the underlying stock. His analysis is rich with stock ideas — some to consider and some to avoid. I hope DIY stock-pickers are reading Chuck’s stories closely. It is important to learn technique and analysis, not just follow someone else’s stock picks.

Abba – no not ABBA – likes T. Rowe Price (TROW). His analysis is based upon a dividend valuation model. I also like the stock, but we write calls against the position to enhance yield.

Market Folly monitors the moves of big investors with good attention to the most recent moves. Warren Buffett now has nearly 80 million shares of Phillips 66 (PSX).

Ready for some biotech stocks? Bret Jensen serves up regular ideas in his forum. His most recent update includes a key stock in the news, Valeant (VRX), which we own as a trade for technical reasons.

Our newest trading model, Holmes, has been contributing an idea each week, a stock we bought for clients a few days ago. I will mention it here, but you can see it a little sooner if you read my new weekly column. I’ll have a “conversation” each week with all three of our models. Since each has a different personality and style, there are often disagreements – especially with me! While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas may be a starting point for your own research. Holmes may exit a position at any time, and I am not going to do a special post on each occasion. If you want more information about Holmes and exits, just sign up via holmes at newarc dot com and you will get email updates. This week’s Holmes added several stocks, including Cardinal Health Care (CAH).

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. This was a really great post. There are several great choices worth reading, including my pick for best advice of the week. My personal favorite is the timely and entertaining advice from Tim Maurer, How Fantasy Ruins Football (and Investing). He discusses several popular financial fantasies. He writes:

Fantasy: Gold is a good hedge against inflation. (Or a good hedge against currency risk, or a good investment. Just take your pick.)

Truth: Of the many traits often attributed to gold as an investment, the only one that really holds up is that the precious metal historically has risen in price when stocks are in deep decline. People tend to buy gold when they are scared (and sell it when they aren’t). But good luck shaving off some of your bullion for bread when The Hunger Games start (or when any dystopian tween books series becomes a reality).

Felix disagrees. That is what makes a market!

I also really liked Ben Carlson’s list of things he learned in his 30’s, especially numbers 9 and 10 (negotiating and saving).

Gil Weinreich of Seeking Alpha takes a helpful look at the “retirement crisis.” There is plenty of good advice. Gil’s series is aimed at investment advisors, but has also attracted many DIY investors, including some who are quite skeptical. It is a good dialogue which figures to help both groups. I am trying both to share and to learn.

Market Outlook

The trade for the next 35 years? Short bonds and long equities! Rupert Hargreaves of ValueWalk reports on Deutsche Bank’s advice and rationale.

Most investors are ill-positioned for this scenario. HORAN Capital Advisors reports on the continuing dramatic shift between stock and bond fund flows.

Final Thoughts

 

There really wasn’t any fresh news on Friday, but there must always be an explanation. Consumers demand it! It is a requirement for news reporters. I am reminded of an old book from my student days –a description of how reporters covered a Presidential campaign. The news world was very different in those days. Without instant communications the various news services had quite different deadlines. The wire services had to be the fastest and Walter Mears of the AP was regarded as the best at determining the lead from a complex story. Everyone also wanted to know how the NYT was going to play any news. The Rolling Stone version of the story (from 1972) is an enjoyable read and captures the flavor. Why is it relevant now?

News executives expect solid work, usually judged by reports of other leaders in the field. If you are going to deviate from the accepted lead, you need some special analysis. This is great for investors if they are able to look a little beyond the obvious and tune out the noise. Remember the following:

  • Simple dominates – even if it is simplistic.
  • Any recent event is a candidate to be the cause.
  • Support for popular themes and theories is encouraged. Oil prices were down over 2%, for example. For many this signals economic weakness. Ignore the recent increase in prices.
  • Don’t worry if the timing seems a bit wrong. You can explain that. The market was “digesting” the information. Or it was a “delayed reaction.”
  • And finally – make it into a big story!

A Reality Check

Not everyone bought into this theme. A number of investment managers questioned the logic. It is hard to sound intelligent when the market is plummeting, unless you have an instant explanation. I do not question Art Cashin’s trader take. There was a lot of money available to traders who perceived the potential for a big directional move. The algorithms joined in, technical levels were violated, and many were waiting for a break from the recent trading range. Those who profit from making sure that people are “scared witless” (TM OldProf) piled on.

Investors have time to analyze and to think more carefully about the causal model. The trading community believes that the economy is weak and fears that the Fed will tighten rates at a bad time. Both elements are necessary. Not only does the Fed see a stronger economy; it is committed to start with modest moves. The early stages of a cycle where very low rates are increased is bullish for stocks and bearish for bonds.

The overwhelming majority of investors made no trades on Friday. Many did not even know what happened until it was over. The vast majority of others are not going to take any action next week. This is good. Investors who try to compete with traders are playing a game they cannot win.

Quiz Answers

  1. The manufacturing index of 49.4, if annualized, corresponds to an annual increase in real GDP of 2%. The ISM non-manufacturing index of 51.4 similarly corresponds to real growth of 1%.

    One way to think about this is that the economy is still growing even when the secular decline in manufacturing is continuing.

  2. About 50-50. Even a two-touchdown favorite in the NFL is only about 75% to win. .75 squared is your chance of winning both games. Why should you care? People naturally take apparently obvious events and turn them into sure things. They become way too confident.

Weighing the Week Ahead: Have Stock and Oil Prices Decoupled?

This week’s calendar features another relatively light week for data, a lot of politics, slow summer trading, and options expiration. Something has to fill all of that air time! Expect more Olympic coverage, political commentary, and light features. There will be the usual Fed chatter. To the extent that there is real market discussion, I am looking for a new topic: Have Oil Prices Lost Their Impact on Stocks?

Last Week

The important economic news was mixed as was the market reaction.

Theme Recap

In my last WTWA (two weeks ago), I predicted discussion about whether the earnings recession might end in Q3. I suggested we would need to fasten our seatbelts for a showdown on the economy and earnings, probably in quarter three. That might prove out, but we certainly did not need seatbelts last week! We had quiet summer trading with light news and plenty of people on vacation. CNBC interspersed Olympic coverage and even found time to have multiple segments featuring a sandwich on Friday.

Politics, global events, and competition intersected.

Mosquito

 

There was some support for my earnings thesis from our two key sources:

FactSet noted the distribution of earnings results by sector and the continuing overall beat rate.

Brian Gilmartin analyzed the forward curve for earnings, including some important implications.

The Story in One Chart Short

I always start my personal review of the week by looking at this great chart from Doug Short. The overall range is very narrow, with little overall change. Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis and several other charts providing long-term perspective.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The Good

  • Gasoline prices are expected to move lower, perhaps as low as $1.92 by year’s end. (EIA forecast via Calculated Risk).
  • Initial jobless claims remain low and even declined by 1000. (See Doug Short for charts and analysis).
  • Mortgage rates are back at the lows, 3.375 for “flawless scenarios.” (Calculated Risk).
  • The JOLTs report showed improved labor market conditions. Most sources are not covering this accurately. It is not an alternative method for estimating net job growth. It does show the trend in job openings, the structure of the labor market, and the voluntary quit rate. Nearly 3 million people each month are voluntarily leaving their jobs, double the number in 2009.
  • Producer prices fell more than expected, 0.4%. Some are citing this as bad news. The bad news will come when stimulus overshoots.
  • Michigan sentiment remained strong, slightly beating expectations. Doug Short does the best analysis and has the most informative chart:

DShort Michigan Sentiment

The Bad

  • Railroad growth remains slow. Zacks explains that this has translated into lower earnings, partly because of the energy sector.
  • Productivity fell 0.5%. Gains in productivity are essential for economic growth.
  • Retail sales disappointed, with no growth month-over-month. It was also a significant miss of the 0.4% expected gain. Doug Short analyzes this disappointing report. As always, he provides helpful historical perspective, including the chart below. It seems to show a return to the pre-recession pace of growth, but without every closing the gap to the prior trend line.

The Ugly

Public retirement commitments. Robert Pozen, in a Brookings op-ed, highlights these costs, and the main reasons:

The unfunded liabilities for retiree healthcare for the 30 largest US cities exceeds $100bn, according to the Pew Charitable Trusts, a Philadelphia-based non-profit organisation. The unfunded liabilities for the 50 US states exceeds $500bn, according to Standard & Poor’s, the rating agency.

Retiree healthcare plans are uniquely American. They exist because the US has never offered universal healthcare before Medicare, the national social insurance programme, at age 65.

Many employees of cities and states retire between 50 and 55, so local governments usually provide them with highly subsidised healthcare between retirement and Medicare, and sometimes beyond.

For a more general analysis of the threat from retirement costs, see Mohamed A. El-Erian’s article on the “titanic risks.”

Noteworthy

There is a lot of current discussion about the “typical” American community. FiveThirtyEight provides some interesting data on both cities and states. You will find the results interesting. Much to my surprise, I am living in the state with demographics closest to the country overall.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. This week’s award goes to Justin Fox, writing at BloombergView. He takes on a popular myth that just won’t die – the manipulation of government statistics. Like Fox, I have some personal experience in working with the career civil servants who analyze data. The notion that they do whatever a (temporary) political leader instructs is very costly to investors who believe it. The article takes up various accusations and stories, with plenty of good discussion. Here is one key argument:

First, because I know a little bit about the people who put together our nation’s economic statistics. The Bureau of Labor Statistics, Bureau of Economic Analysis and Census Bureau are run on a day-to-day basis by career employees, not political appointees. Even the appointees are often career staffers who get promoted, and many have served under multiple administrations. When top statistics-agency officials do leave government, it’s often for jobs in academia. Credibility with peers is generally of far more value (economic and otherwise) to these people than anything a politician could do for them.

I would add that any shenanigans would be the basis for articles and books by those leaving the agencies.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have another moderate week for economic data and the end of earnings season is near. While personally I watch everything, I highlight only the most important items in WTWA. It is important to focus.

The “A” List

  • Building permits and housing starts (T). Permits are a good leading indicator.
  • FOMC minutes (W). No one really expects any fresh news, but the punditry will find something.
  • Leading indicators (Th). Still highly regarded by many, despite the various redefinitions. Continuing strength expected.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Industrial production (T). Improvement expected in this lagging series, important to GDP.
  • CPI (T). Inflation data remains a secondary indicator. It will take a few hot months to bring it to the fore.
  • Philly Fed (Th). A rebound expected. This result has earned growing respect.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

There is plenty of FedSpeak for those who have been missing that. Options expiration on Friday may delay the exodus to the beach for some.

Next Week’s Theme

Quiet calendars and slow trading offer time for collective introspection. There will be plenty of political discussion, tempting investors to draw unwarranted conclusions about their money. I have noted a new theme in the discussions of the Pundit in Chief and the Senior Stock Trader: Some head-shaking over the daily divergences between oil and stock prices. I might be a little early with this expectation, but it is worth thinking about. Expect the pundits to be wondering:

Has the Correlation between Oil and Stock Prices Broken Down?

Eddy Elfenbein noted the breakdown. I am always encouraged when he reports observations consistent with my own. Here is his chart:

sc08102016d

This week’s problem has two parts:

  1. What will happen to oil prices?
  2. Will stocks follow?

For now, let’s stick to the first question, where there are plenty of opinions:

  • Oil supply and demand is now in rough balance. (“Davidson” and some other experts).
  • Oil is going lower – back below $30. There is still a glut and higher prices reflect a short squeeze.
  • Oil is going much higher. The oil glut is smaller than expected leading to a target of $80. Current trading reflects only momentum, not fundamentals.

….and many similar opinions on all sides.

As always, I’ll have a few ideas to add in the conclusion.

Quant Corner

We follow some regular great sources and also the best insights from each week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Risk first, rewards second. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

The Featured Sources:

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he expresses more confidence about growth in earnings.

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

The recession odds (in nine months) have nudged closer to 10%.

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

The ECRI has been dropped from our weekly update. It was not so much because of the bad call in 2011, but the stubborn adherence to this position despite plenty of evidence to the contrary. Those interested can still follow them via Doug Short and Jill Mislinski. The ECRI commentary remains relentlessly bearish despite the upturn in their own index.

It is time for another update of Doug Short’s Big Four. The start of another recession would be marked by a peak and significant decline in these indicators. Most investors should take a frequent look at this chart instead of the headlines in the financial press!

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation. This week Dwaine has his own interpretation of the “Big Four” indicators – a recent narrow miss. Despite this, he concludes:

To conclude, looking at the individual co-incident monthly data used by the NBER shows a far more pessimistic view currently than when looking at a syndrome of conditions. But the co-incident data in this particular indicator and the recession probabilities we are registering are not as bullish as the employment data would have you think. In fact, taking our proprietary implementation of the Big-4 index, and comparing it to the last 8 expansions, shows just how meek this recovery has been:

How to Use WTWA

In this series I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. For most readers, they can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have six different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

Are you preserving wealth, or like most of us, do you need to create more wealth?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions or suggestions for new topics.)

Best Advice for the Week Ahead

The right move often depends on your time horizon. Are you a trader or an investor?

Insight for Traders

We consider both our models and also the best advice from sources we follow.

Felix and Holmes

We are continuing with a bullish market forecast. Felix is fully invested, including several aggressive sectors. The more cautious Holmes is now also fully invested.

Top Trading Advice

Traders are worried about the next two months, notes Steven M. Sears (Barron’s). Trading desk chatter about Chair Yellen’s upcoming Jackson Hole speech, a possible rate hike, and mean-reverting behavior in volatility. This has them buying call options on the VIX, popularly known as the fear index. Should you join this trade? I am not making a recommendation, but merely raising an idea for consideration. I do not share the concern about the impact of a rate hike. I also note that several of those quoted are selling derivatives.

Dr. Brett asks, Can Successful Trading Be Taught? He answers “yes” and explains how.

In another great post he explains how to “train your brain.”

We should all seek information from people with the right expertise and the right experience. What could be better than a clinical psychologist, a teacher, a coach of traders, and decades of personal trading experience? Every trader I know would benefit from Brett’s books as well as his blog.

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be some ideas that “keep on giving.” This contradicts the page view theory of posting: Look for “actionable investment advice.”

How to Read Financial News: Tips from Portfolio Managers is worth reading and re-reading. Robert J. Martorana is an insightful author and organizer. He was the editor (I called it ‘ringmaster”) when I wrote for TheStreet.com’s Real Money site. He has organized regular conference calls among advisors, bloggers, and investment managers who all have great ideas and strong credentials. Recently he took some of the calls and turned them into a first-rate educational piece about reading financial news. I am delighted to be included. I hope others find the ideas as useful as I do. If it is popular, perhaps Rob will do more of these.

Another good post on this theme is from Morgan Housel, who describes things that he is “pretty sure about.” It is a great list. My favorites are the following:

Recessions and bear markets are very easy to predict, except for the timing, cause, magnitude, duration, location, and policy response.

Look at today’s five largest companies in the world. Fifteen years ago, one of them didn’t exist, one was a tiny start-up, one was a belittled relic of the dot-com bust, another was fighting to stay relevant after flirting with bankruptcy a few years before. I suspect the next 15 years will be even more extreme.

If you tell people what they want to hear, you can be wrong indefinitely without penalty. This explains the careers of many pundits.

Stock Ideas

Oil exploration stocks? Peter Way has an interesting approach to analyzing the upside/downside risk of this sector.

501110-14709376100679758

It is not too late to buy dividend stocks. Philip Van Doorn explains how to sort through the risks.

David Van Knapp has a “periodic table” of dividend champions. You need to read the entire post to appreciate this. Here is part of it:

223670_14707064705187_rId14

Holmes will begin contributing an idea each week, a stock we bought for clients a few days ago. I will mention it here and Holmes will also post it each Friday at Scutify.com. While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas may be a starting point for your own research. Holmes may exit a position at any time, and I am not going to do a special post on each occasion. If you want this information, just sign up via holmes at newarc dot com and you will get email updates about exits. This week’s Holmes pick is Eastman Chemical (EMN).

Market Overview and Outlook

The consensus market forecast is now Dow 20,000 (sort of). Victor Reklaitis explains at MarketWatch.

Should you hedge against a crash? Marc Faber is (once again) predicting a 50% market crash. Some are outbidding him by calling for 80%! Barry Ritholtz takes up this topic providing a list of his past predictions and this chart:

Should you hedge against Zika? Josh Brown, expressing realistic concern about the virus, emphasizes the need to separate such events from your investment decisions.

Michael Harris suggests, “The frequency of articles in the financial media and blogosphere with calls for a stock market collapse is often a good indicator of a bullish market”. Read the full post for discussion and a chart of events this year.

Should you sell the market high? HORAN Capital Advisors does a complete analysis.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are several great choices worth reading, but my favorite is the NYT article from Ron Lieber, explaining how to maintain your 401(k) – ignore it! You can do better if you follow the risk indicators on WTWA, but most people who closely follow their statements buy and sell at exactly the wrong times.

Election Effects

Expect many more articles on the impact of the election and what stocks you should own. I am sticking with my year-long viewpoint: This is all overdone. The new president, whoever is elected, will face a struggle in passing an innovative agenda. No such analysis can be complete without considering the likely makeup of Congress – and that is just for starters. Barron’s has a cover story featuring a likely Clinton election and analyzing the policies. The NYT analyzes the difference in tax policies.

Value Stocks

If you missed my special post on this topic, addressing the “value trap” question, please take a look.

Watch out for….

Surprises in ETF trading costs. Chris Dieterich (Barron’s) notes that the explosive growth in choices has led to many niche funds without liquidity. He cites some examples where the bid-ask spread imposes a higher cost than the management fee!

Utility stocks. James Picerno wonders whether the “wobbly rally” signals a bubble.

Fancy ideas now aimed at the “little guy.” Some of the big guys are cutting allocations.

Final Thoughts

The correlation between oil prices and stocks never made any sense. Some traders prefer commodity prices as an economic indicator. They are skeptical of the official data. The fact that oil prices represented a supply story rather than weak demand did not stop many from hitting the recession panic button. HFT algo’s picked up something that was working, and a lot of hot money started following this trade. If you were a trader, you had to take notice. On some days CNBC would view oil traders who said they were watching stocks, as well as stock traders who were watching oil. When a trade is working, you should not go too deeply into the reasons.

Investors got the chance to buy some great stocks at lower prices.

Fundamentally, lower gas prices are good. Past price surges were frequently described as a consumer tax with no corresponding benefit. Whether people spent or saved the extra cash, it had a positive effect. Since all transportation costs were lower, everyone was helped, not just drivers, although the effects are difficult to calculate.

When the market responded negatively to lower prices many started reaching for explanations. Attention turned to those living and working in oil production areas, as well as banks making loans to them. This was true enough and easier to see than the larger, but diverse effect on consumers.

A New Chapter?

With the rebound in oil prices, will the punditry cite this as a reason for higher stock prices? I am not counting on that, but two months ago I highlighted the idea that oil prices might have hit a “sweet spot.” Energy company earnings will be better. The potential for higher production places a brake on price spikes. It provides a healthy environment for the economy and the stock market.

The oil/stock relationship may be fading, but count on the trading world to find something new!

Explaining small daily moves in the market averages is like analyzing why a snowflake fell on you rather than the person walking next to you. The many words and hours spent doing this are worse than worthless. The process creates a false sense of logic and order which may well cause mistakes in future decisions.

Weighing the Week Ahead: Earnings Recession Ending Next Quarter?

This week’s calendar includes a little data, a lot of politics, slow summer trading, and the last of the earnings reports. I expect financial media to focus on an earnings season post-mortem by asking: Has the Earnings Recession Reached a Turning Point?

Last Week

The important economic news was excellent, and the market reaction was positive.

Theme Recap

In my last WTWA (two weeks ago), I predicted a focus on what the U.S. elections might mean for stocks. With major conventions in both parties and saturation coverage of anything said, that was a pretty easy forecast. My own final thoughts included the idea that there were not yet any clear implications. Since the major averages are about where they were in my prior post, the market seems to agree.

The business of figuring out what a President will do is pretty tricky. Morgan Housel uses historical data to rank past presidents on various criteria – stock market, profit growth, GDP, and inflation. Even knowing your history, the results will surprise you. The “best” presidents on these measure often started at a time when things were pretty bad.

The politics digested, the market turned to the biggest data of the last two weeks, the monthly employment report. The news relieved some continuing concern about the economy.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. While the range is pretty narrow, you can clearly see the early weakness and Friday’s rally to a new all-time high. Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis and several other charts providing long-term perspective.

 

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The Good

  • Initial jobless claims remain low. There was a slight miss of expectations this week, but Calculated Risk provides the overall perspective.

  • Chemical activity hits a new high. Scott Grannis continues to follow solid indicators that most others miss. This one has a good record and “points to stronger growth than is widely perceived to be the case.”

  • Vehicle sales beat expectations, but some complained that higher incentives were required.
  • Employment increased solidly and more significantly than expected with a net gain of 255K payroll jobs and even more strength in the individual survey. While some are, as usual, seeking nits to pick, these data were an encouraging signal about economic strength. Expect the dialog to shift back to Fed policy. Bloomberg has good coverage.

The Bad

  • Rail traffic declined again. Steven Hansen covers the story including non-seasonally adjusted data in several time frames.
  • ISM services Index dropped slightly to 55.5, a little below estimates.
  • GDP growth was only 1.2% in Q2, significantly lower than expectations. Prof. James Hamilton has an objective analysis of what is going on. Hint: Inventories are crucial, and difficult to gauge. See also Bloomberg on the inventory story.
  • ISM Index dipped slightly but remained in expansion territory. Calculated Risk has the analysis and this chart:

The Ugly

Printed firearms on airplanes? The TSA caught this example, but there is a technology war going on. If you read the TSA Blog, you will see how many loaded weapons discovered at checkpoints.

 

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations are always welcome. There is plenty of misinformation to refute!

 

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a moderate week for economic data, as earnings season winds down. While I watch everything, I highlight only the most important items in WTWA. It is important to focus.

The “A” List

  • Michigan sentiment (F). Good read on jobs and spending.
  • Retail sales (F). Consumer spending remains as a key factor for economic growth.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Wholesale inventories (T). Volatile June data, but an important part of gauging GDP.
  • Business inventories (F). More June data with implications for GDP adjustments.
  • JOLTS report (W). Important to understand labor market structure – not job growth.
  • PPI (F). This will become important after a few hot months – but not yet.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

The big story will still be corporate earnings. We have a little FedSpeak. Expect questions to focus on whether a policy change is more likely after the employment report. Don’t expect much new information before Yellen’s Jackson Hole speech. More politics, of course, but without a clear implication for markets.

Next Week’s Theme

Markets seem to have digested the Brexit story, and surprisingly shrugged off the terrorist violence. The economic data have quieted recession worries, and even turned positive. In the slow summer trading I expect more attention to analyzing earnings. Everyone will be asking:

Has the Earnings Recession Reached a Turning Point?

  • The bearish side will emphasize multiple points;
    • The streak of losses continues
    • Profit margins remain high, and (theoretically) vulnerable
    • Earnings results reflect stock buybacks and other financial engineering
    • And other points about how earnings are calculated.

In many ways, this debate will hinge upon forward expectations for the economy, business investment, and future profits.

As always, I’ll have a few ideas to add in the conclusion.

Quant Corner

We follow some regular great sources and also the best insights from each week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Risk first, rewards second. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The Featured Sources:

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he expresses more confidence about growth in earnings.

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

The recession odds (in nine months) have nudged closer to 10%. This does not completely reflect Brexit effects, so we may get a further revision.

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

The ECRI has been dropped from our weekly update. It was not so much because of the bad call in 2011, but the stubborn adherence to this position despite plenty of evidence to the contrary. Those interested can still follow them via Doug Short and Jill Mislinski. The ECRI commentary remains relentlessly bearish despite the upturn in their own index.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation.

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

How to Use WTWA

In this series I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. For most readers, they can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have six different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

Are you preserving wealth, or like most of us, do you need to create more wealth?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions or suggestions for new topics.)

 

Best Advice for the Week Ahead

The right move often depends on your time horizon. Are you a trader or an investor?

Insight for Traders

We consider both our models and also the best advice from sources we follow.

Felix and Holmes

We have moved to a bullish market forecast. Felix is fully invested, including some more aggressive sectors. The more cautious Holmes is still about 80% invested. The recent strength has moved Holmes into the bullish camp, and we expect an increase in the number of candidates.

Top Trading Advice

Are you worried about “missing” a trade? Do you switch your system a lot? Do you make “boredom trades?” If your answer to any of these is “yes” you should read this post from Adam H. Grimes.

Is your trading affected by high-frequency models? Do you need to change your methods? Josh Brown has some answers and what you should be thinking about.

Brett Steenbarger distinguishes between successful discretionary traders and successful quantitative traders. Which are you?

Successful discretionary traders I’ve known and worked with have been distinguished by their level of market understanding.  Successful quantitative traders I’ve encountered have excelled at analysis and prediction.  Sometimes the successful discretionary trader makes use of predictive models as inputs to decisions; the successful quantitative trader will ground models in sound market understanding.  At the end of the day, however, quants trade their predictions and discretionary participants trade their understanding.  One trades universal patterns; another trades insights specific to what is observed here and now in a particular market.

 

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility! Mixing insurance and investments is a terrific way to kill two birds with one stone.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Tony Isola’s discussion of widely believed lies. He includes a great list. I like so many entries that it is tough to pick a favorite. I’ll go with “Mixing insurance and investments is a terrific way to kill two birds with one stone”. What is yours?

Stock Ideas

The Zika virus is prominent in the news. While we all sympathize with the victims, we can also invest in companies working on a cure. Angus Nicholson of IG has some interesting suggestions for biotechs set to win big.

Chuck Carnevale turns his focus to dividend growth stocks in healthcare. This is an attractive sector, and he provides nine timely ideas in Part 1 of 3. This entry was excellent and we look forward to the future installments.

Holmes will begin contributing an idea each week, a stock we bought for clients a few days ago. I will mention it here and Holmes will also post it each Friday in a Scuttle at Scutify.com. While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas may be a starting point for your own research. Holmes may exit a position at any time, and I am not going to do a special post on each occasion. If you want this information, just sign up via holmes at newarc dot com and you will get email updates about exits. This week’s Holmes pick is Enbridge (ENB).

 

Market Overview and Outlook

Josh Brown explains (Rules-based tactical vs wizardry and witchcraft) why you should not attempt to imitate big-firm pronouncements by following their calls.

Eddy Elfenbein also weighs in on market timing, reporting the dramatic difference in a Fidelity study.

Avondale’s weekly Company Notes Digest is especially useful during earnings season. You do not have time to listen to all of the conference calls and you certainly cannot count on the media coverage. This is a good way to find important themes. (terrorism more important than Brexit). Also why Aetna is leaving the health insurance exchanges. And much more.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are several great choices worth reading, but my favorite is Jason Zweig’s important warning about the risks of too much stock in your 401-K account. He writes:

Since June, four dozen companies whose stock fell by at least half in 2015 have filed disclosure forms to the Securities and Exchange Commission on their 401(k) and other savings plans. By my estimate, workers at these companies lost $1 billion in 2015 by over-investing in the stock of their own employer.

This is very important. I frequently see such risks in the accounts of potential clients. It is one of the first things we fix.

Value Stocks

Since value stocks have lagged, many strong voices have suggested that the market message is that the economic cycle is over. I covered this subject last week. If you missed it, please take a look. I provide discussion of several stocks recently dissed in the media.

Watch out for….

For those at or nearing retirement, here are eleven common Medicare mistakes.

Final Thoughts

Over the past several weeks we have gotten quite a bit of new evidence to guide our investing. I see four major themes:

  1. Most investors seem to be looking beyond concerns about uncertainty and matters without quantifiable market impacts – Brexit, the election, terrorism.
  2. The economic data looks better than it did in the second quarter.
  3. Earnings expectations seem to have made a trough.
  4. Some sectors are much more promising than others both because of potential earnings growth and current valuation.

The biggest concerns relate to improving earnings, the need for more business confidence, and a resulting increase in corporate investment.

We are entering a period where we can expect a showdown on the economy and earnings – probably in Q3, despite the upcoming election. Fasten your seatbelts!