Weighing the Week Ahead: Should We Expect September Mourning?

The abbreviated week’s calendar has little important data. The economic news last week leaves open the timing of the next interest rate increase. As vacationing market participants yawn their way back to their desks and trading floors, what will be the focus? A look at the calendar and the end of summer will have them asking: Should we expect September mourning?

I borrowed the title from Alan Steel’s excellent post on this subject. More from him in the conclusion.

Last Week

There was a lot of important economic news. The picture was mixed, but mostly promising. The Fed can move in September or delay until December.

Theme Recap

In my last WTWA, I predicted another weeklong focus on the Fed. I expected every economic data point to get special attention, parsed through the perceived eyes of the Fed. This was the story all week – even on the quiet Friday afternoon. I asked whether the Fed would get a signal to hike rates. At the end of the week, most were answering “no.” I have had a good streak going on guessing the theme, but the week ahead is really a challenge.

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 the market liked the slightly weaker than expected report, observing as follows:

The “bad news is good news” syndrome once again reaffirms the market’s primary dependence on Fed pampering via low rates. The index hit its 0.65% intraday high about 30 minutes into the session. Profit taking sent the index to its 0.13% intraday low in the early afternoon. But the buying returned, and the 500 ended the session with a 0.42% gain.

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.

Please Watch…

…for some upcoming events that might be interesting to WTWA readers.

  1. It is Labor Day weekend. Like you, I am enjoying some family time. Because the employment report is so important to markets, I will publish a little quiz to test your Jobs IQ. It will not be easy. You may keep your results secret or else boast about your knowledge!
  2. I am joining an outstanding group of fellow advisors in a webinar this week. It will be on Wednesday, September 7th at noon EDT. (Sign up here). We meet regularly for our own benefit. This time our leader, Rob Martorana, felt that other might learn from the interchange. The subject is how to interpret financial news. The material is great, and I am looking forward to participating. Please join us if you can. If you miss it, check out the original article. If investors find this to be useful, we will do more.

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 remained very low at 263K and beat expectations. (Bespoke)

  • Hotel occupancy remains at near record levels. (Calculated Risk).
  • Withholding tax collections remain strong. (Barry Ritholtz).

    As the total dollar amount of Federal withholding taxes continues to increase, we should expect to see retail sales and sentiment continue their improvements. This has resonance for GDP as well as the Presidential Election.

  • Factory orders rebounded nicely. Up 1.9%, the biggest gain in nine months. Steven Hansen offers a sharp dissent to the headline figure.
  • Earnings revisions have improved. There is a regular pattern of decline in over-optimistic estimates. Few are experts in studying the pace of these changes and how it is likely to impact the market. That is why we read the work of earnings expert Brian Gilmartin, whose most recent post which explains about this difficult question.
  • Personal income rose 0.4% in addition to positive revisions. Consumer spending also increased 0.3%.
  • Consumer confidence reached an eleven-month high. See Doug Short’s analysis for background, comparisons, and the best charts on the subject.
  • Bullish sentiment remains low, a near-term positive for stocks. Bespoke provides this chart.

 

The Bad

  • Auto sales fell to an annualized rate of 17 million. This was not far from expectations for most companies, but a decline nonetheless.
  • Rail traffic continues to decline. Steven Hansen (GEI) does his typical comprehensive analysis.
  • ISM index moved into contraction, registering 49.4 compared to 52.6 last month. Steven Hansen (GEI) has a comprehensive analysis including comparisons to the Markit PMI measure. It helps to consider the “internals” of the index calculation.

  • Employment gains disappointed. I am listing this as “bad” even though most see the overall story as pretty neutral. (WSJ). I am listing the specifics, but all are within their normal sampling error bands. The bond market reaction was also neutral. Calculated Risk said a “decent” report, which captured mainstream sentiment.
    • The net increase in payroll jobs was 151K. While this still represents reasonable growth, it was significantly below the last two months and also below expectations of 180K
    • Private hours worked declined and hourly earnings increased less than expected.
    • Unemployment remained at 4.9% and labor force participation was stable.

  • ADP reported private sector employment gains of 177K – reasonable but also a bit below expectations.

The Ugly

EpiPens. Rex Nutting gets to the heart of it: Saving lives isn’t Mylan’s business; maximizing profits is. The story has widespread implications. We all want to save lives. To do this there must be an incentive for drug development. When does this cross into exploitation? Should U.S. prices subsidize foreign drugs? It is an important issue on many fronts.

 

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 Ben Carlson, who takes on the apparently compelling statistical link between the Fed and stock performance. Since 2008 more than half of the increase in the market comes on days of FOMC meetings. He notes that this argument was featured in the WSJ, but it shows up in various places.

What happens if you change the starting date of the analysis?

Ben points out that the relationship is mostly a result of 2008.

 

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 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

  • ISM services (T). Continuing strength in the service sector?
  • Fed Beige book (W). Anecdotal evidence adds color to the data for the next FOMC meeting.
  • JOLTS report (W). The Fed uses this to analyze labor market structure. It is less useful for employment growth.
  • Initial claims (Th). The best concurrent indicator for employment trends, but less attention during “employment week.”

The “B” List

  • Wholesale inventories (F). July data but relevant for revision of Q2 GDP.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

There will be some FedSpeak. There may also be news from the G20 conference. See Treasury Secretary Lew’s presentation at Brookings for a preview.

Next Week’s Theme

Last week brought us more quiet trading with no clear message from the data. As people slowly return from vacation, it is a natural time to review events. We will see plenty of stories about how September is the worst month for stocks. Everyone will be asking: Will September bring a market correction?

Michael Brush, writing at MarketWatch, has a typical example, Get ready for a 5%-10% stock-market drop. Expect more such predictions and advice to do something or other to avoid this kind of decline. This week’s Barron’s cover was similar.

Most expect the record streak of low volatility to end. Here are the top worries:

  1. The calendar. This chart from Michael Batnick (who does not present this as a trade) makes the point.

  1. The Fed. Some are worried that rates will rise. Others are worried that the Fed will keep rates too low.
  2. Energy prices. Some worry about a sharp rebound. Others are concerned about another crash.
  3. China.
  4. Europe. The current focus is Italy. The last hot spots (Greece and Great Britain) are OK for now.
  5. The US election. You can worry about either candidate or just the uncertainty.
  6. Congress is back in session (see conclusion*). Note the shaded area of the VIX chart, marking the recent seven-week recess, perfectly coinciding with the record lows in volatility.

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:

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.

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. This week, as he always does after an employment report, Georg updated his unemployment-based recession indicator. No recession is indicated.

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

Top Trading Advice

Brett Steenbarger describes the three main causes of big drawdowns. See if you remember any of them from your own experience. Here is how to think about the diagnosis.

If you’re in drawdown mode, it’s important to ask if the problem is with your betting versus folding or if the problem is sitting at the wrong table or playing the wrong game altogether.

Dr. Brett has another lesson, showing how to milk information from data to find the best trades. Take a look at this chart and then read his analysis.

We have all had losing trades. The Trading Goddess discusses the best way to exit, including the thorny question of stops.

But as soon as you’ve entered the position, the price falls apart and forces you out of the trade when your protective stop is triggered.

Then, as soon as you’re out of the trade, the stock swiftly reverses back up.

After running 5% to 10% higher over the next few days, you’re left in the dust with no position and tear in your beer!

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 final column at The Motley Fool. He has been the best advice choice many times. His work is consistently helpful to investors. He promises that he will keep writing in his new gig, and I hope that is true. This week’s article reviews some of his key lessons. They are all worth careful study, buy I especially like this one:

Progress happens too slowly to notice; setbacks happen too quickly to ignore. The market quickly lost 38% in 2008, and it was huge deal. Books were written about it, and Congressional hearings were held. We’ll be talking about it for decades. The market then slowly tripled from 2009 to 2015, and barely anyone flinched. You had to sit down and show people the numbers to get them to believe you. This is common: Recessions take place over months; recoveries take place over years. It can take decades for companies to become valuable, but bankruptcies happen overnight. Pain hurts more than the same level of gain feels good, but the duration differences between progress and setbacks helps explain why there are so many pessimists amid a backdrop of things getting better over time.

And also this one….

There has never been a better time to be an investor. Ever, in history. More people have access to first-class services than ever before. It’s so important, and we don’t spend enough time realizing how good it is.

Stock Ideas

Chuck Carnevale continues his strong recent series with a look at the “Big Five” Canadian banks. He emphasizes the importance of finding a good entry price! This is a thorough analysis, and you should read it carefully before investing.

Morningstar updates the top buys and sells from their “ultimate stock pickers.” This group was a “net seller” but still holds some favorites. Check out the full article for other ideas.

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 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 made no portfolio changes. Danaher (DHR), which we bought last week, is still interesting and about the same price as our entry.

Energy

With a new trading range for oil prices there is renewed interest in energy stocks. Dan Dicker (Oil&Energy Insider – subscription required) recommends waiting until oil is closer to $40/bbl. He includes an interesting chart showing how some of the Bakken shale drilling sites developed. He writes as follows:

Oil wells cost money to drill and inevitably run dry. They need to be constantly replaced with fresh drilling to maintain output. Those drilling and maintenance costs sometimes overwhelm the returns of the oil being sold, as is the case this year and the previous two, and sometimes the returns greatly outpace the costs, as was the case before the bust in 2014.  We know that most of the independent U.S. oil companies operating in shale have bypassed this current cash burn problem in the short term by raising efficiencies – which lowers costs – and by slashing capex, which sacrifices the ability of potential future replacement.

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 this advice from Jonathan Clements. He explains that people are living longer and must take that into account in setting an investment horizon. He notes as follows:

…your time horizon may extend beyond your own life expectancy. Suppose you are age 80 and you have money you plan to bequeath to your 20-year-old granddaughter, who will then use the inheritance to pay for her own retirement. The investment time horizon for this money might be 50 years, over which the stock market will likely clock dazzling gains.

[Jeff] I agree with this analysis, but I always start by securing enough of a portfolio to assure against life-changing market results. One good place to start is with another source from Tadas, Tim Maurer. He warns against taking too much risk.

Market Outlook

Eddy Elfenbein, continuing to impress on his CNBC segments, explains 5 Signs that Stocks have Room to Run. We turn off the mute and TIVO back when Eddy is on, our highest indication of respect!

Strategy

Michael Batnick (MarketWatch) has a helpful article about what investors could learn from horse bettors. There is a list of ten great ideas, especially for value investors. I especially liked this one:

There is always the temptation to abandon your strategy when it’s out of favor.

“If you begin espousing this approach, you are sure to suffer abuse from your fellow horseplayers. When one of them asks you who you like in a race and you say, ‘I think the 4 is a bigger price than he should be,’ the likely response is, ‘So what? Who do you like?’ Your cronies are apt to tell you that you should be betting on horses, not on prices, and after an inevitable stretch of watching some of their underlays win, you will begin to doubt yourself.”

 

I wrote on a similar theme last week. You might enjoy Why Smart Investors Struggle to Beat the Market.

Ben Carlson explains the importance of rebalancing. If you do not regularly review and execute this strategy, you are missing out on a natural way of selling high and buying low. You are also taking too much risk!

Final Thoughts

Volatility will eventually increase, but there is no reason to expect it right away. Most of the reasons have been recycled all year. Let me comment on the new ones.

  • The calendar. One pundit stated that the reason for weak Septembers was that people were worried about October! Alan Steel covers this topic in a witty fashion. He deals with “the hordes of deviant scribblers…who have made single variable correlations into a media business.” His brief post has plenty of good advice, and you definitely won’t stop reading after the first line about the prune juice and Viagra diet. Take some time to read his other helpful and entertaining posts.
  • Rate increases. James Hamilton has a nice analysis of the concurrent moves of other economic indicators during rate increase periods.

    These 4 episodes have several things in common. First the inflation rate rose during each of these episodes and was on average above the Fed’s 2% target, a key reason the Fed moved as it did. Second, the unemployment rate declined during each of these episodes and ended below the Congressional Budget Office estimate of the natural rate of unemployment, again consistent with an economy that was starting to overheat. Third, the nominal interest rate on a 10-year Treasury security rose during each of these episodes, consistent with an expanding economy and rising aggregate demand.

  • Congress back in session. While the information is accurate, this point is a joke. Mrs. OldProf said that I should footnote and include this line so that everyone would know to laugh. I told her that readers of WTWA know a silly bivariate chart when they see one!

Fundamental factors are more important than the small seasonal effects. The latter often include a couple of large moves that skew the result. The chance of a correction is no higher than it was last month, or the month before.

Weighing the Week Ahead: Showdown at Jackson Hole?

This week’s calendar features yet another light week for data, a lot of politics, and slow summer trading. Something has to fill all of that air time! This week the punditry gets their favorite topic – the Fed. Chair Yellen’s speech on Friday may set the tone for post-election monetary policy. Sometimes there is also a presentation from a non-Fed economist that challenges current policy. Will there be a showdown at Jackson Hole?

Last Week

The important economic news was positive. Despite the impending options expiration, the big story was the lack of action. There has not been a daily 1% move since early July. This is much lower than the normal August volatility. (LPL)

Theme Recap

In my last WTWA, I predicted discussion about whether the oil price/stock price relationship was at an end. My claim is that there was never a solid basis for the correlation, despite the intense focus by traders. It was a good guess about a topic in a quiet week. (A typical example). Both TV and print journalists kept citing oil prices as influences on daily trading. The real story was the lack of volatility. Last week the dead air was filled with a sandwich promotion. This week the news was about a reported theft from athletes at the Olympics. I understand why this story is important for athletics, the host country, the Olympic rules, endorsements and other angles. It has little importance for financial markets. The attention it got highlights the lack of other news.

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 stocks remaining near record highs. 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 fell 4000 to 262K. Claims have now been below 300K for 76 weeks. (Jeffry Bartash, MarketWatch).
  • The first post-Brexit news is positive, as UK employment is stronger than expected (FT).
  • Leading Economic Indicators rose 0.4 percent. This signals continuing slow growth for the next six months. Steven Hansen provides analysis and this chart:

  • Industrial production continued the recent rebound, up 0.7% in July. Calculated Risk has the story.
  • July housing starts – another “solid report” via (Calculated Risk).

 

The Bad

 

The Ugly

Serious consequences from bad information. Here are two quite different examples.

  • The government believes you to be dead and your benefits are ended. What next?
  • Airline passengers, conditioned by recent events, hear something perceived as a shot. An incredible stampede at JFK results.

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 always welcome! For ideas, go to your favorite conspiracy site and look for people doing data mining and/or poets writing about economics.

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 rather slow week for economic data, but plenty of impending big news. While personally I watch everything on the calendar, I highlight only the most important items in WTWA. Focus is essential.

The “A” List

  • New Home Sales (T). A good read on an important sector.
  • Michigan Sentiment (F). The only concurrent data on job creation and spending.
  • Durable Goods Orders (Th). Volatile July data is relevant to confirm the industrial rebound.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (W). Not as important as new homes, but a solid indicator for the overall market.
  • GDP – 2nd estimate for Q2 (F). Old news, but it will be the base for evaluating the rest of the year.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

The big news will be the Yellen presentation at Jackson Hole. Markets will get a hint when the specific topics are announced on Thursday.

Next Week’s Theme

This week’s quiet trading might end with a bang. The Kansas City Fed’s annual Jackson Hole conference attracts economists and central bankers from around the world. There may be exploration of new policy ideas or hints at new policy directions. This is especially true when the Fed Chair is speaking. It is not a single, unified message. Some presentations may well feature dissenting viewpoints. While it provides food for the punditry, many market participants would prefer a clear policy statement from a single voice. Instead, everyone will be wondering: Will there be a showdown at Jackson Hole?

Several viewpoints have already emerged.

  1. The conference generally has little market impact, even when the Fed Chair speaks.
  2. Too many voices mean there will be no clear message.
  3. The presentations will be too theoretical to be meaningful.
  4. Sometimes the Conference highlights the start of new plans – Bernanke’s hints about Quantitative Easing come to mind.
  5. A spirited discussion will sharpen opinions on all sides.
  6. The odds on near-term rate increases will be better understood.

There are many proponents for each. 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. 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.

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.

In addition to my first-rate collection of recession watchers – selected as the best in my 2011 analysis – I always monitor other ideas. Here are some key viewpoints:

  • The St. Louis Fed (via GEI, which does a great job of highlighting relevant Fed sources) has a balanced analysis, taking note of the recent weakness in GDP. Examining and rejecting the possibility of a current business cycle peak (the official start of a recession), they conclude: “…(T)he available evidence suggests that the economy, though exhibiting stubbornly weak real GDP growth, continued to expand heading into the second half of 2016.”
  • Menzie Chinn updates his version of the Big Four indicators used by the NBER for recession dating. He notes the improvement in industrial production, and the impact on the overall assessment.

  • Bill McBride, who has had an excellent record through the financial crisis and recovery, still sees no recession through the next half of 2017, in line with our own experts.

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 strongly bullish market forecast. Felix is fully invested, including several aggressive sectors. The more cautious Holmes is now also fully invested.

Top Trading Advice

Should aspiring traders start with “paper trades.” Tadas Viskanta explains why it is better to have some money on the line – even if it is a small amount.

You can appreciate such an experience by watching Adam H. Grimes and the “reality show” involving a beginning trader.

Have traditional market signals lost their value? (Conor Sen)

Dr. Brett Steenbarger had a great week of posts. They are all worth reading and all have ideas you are unlikely to see elsewhere. Two of my favorites:

 

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 Ben Carlson’s advice about How to Survive a Melt Up. He observes that most investors are focused on the risks, giving little thought to the possible upside.

But there’s another risk in the markets that most investors don’t spend too much time worrying about — a melt-up in prices.

It would seem to me that all of the ingredients are in place for a potential U.S. equity bubble. Interest rates are extremely low, central banks around the globe are almost accommodative across the board, there is a substantial need for returns from pensions and retirees and a general lack of alternatives elsewhere to invest. That doesn’t mean it has to happen, but the pieces are in place for upside volatility, something very few investors believe could occur these days.

In fact, if you look back historically at how stock markets have generally performed, they are much more likely to rise substantially than fall substantially in a given year.

Take a look at the odds.

 

Stock Ideas

Chuck Carnevale notes the problem with finding good dividend stocks: Very high valuations. He nurses out an interesting candidate, Kroger, while teaching how to be selective.

The biotech stock rebound might be just getting started (See It Market).

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 Hartford Financial Services (HIG).

 

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 Carl Richards’ take on a Freaknomics theory. People are too cautious about making big changes in their lives. Is it enough to flip a mental coin?

Value Stocks

This approach, successful in the long run, has been out of favor for the last few years. Ben Fischer (Allianz) describes the factors suggesting a change in the recent trend. He also includes this chart in the mean-reverting series:

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

Watch out for….

Tax scams. There is no such thing as a “student tax” and your kids will not be kicked out of school if you do not pay it. The IRS does not seek money or charge card numbers for telephone payments. And they certainly do not take iTunes gift certificates! Sheesh! While my audience at WTWA would not fall for any of these scams, you might be able to help a friend.

And definitely do not fall for bogus citations from Warren Buffett! David Merkel explains.

Emotional decision making is costly. Eric Crittenden Cio writes as follows and provides a supporting chart:

Investors have an addiction. Many of us feel like we can’t help it: we buy high and sell low even though it’s more logical to do the exact opposite. This addictive behavior is dooming us to a rocky investment experience and underperforming portfolios.

Final Thoughts

The continuing laments about the Fed seem concentrated among those who have done a poor job of predicting both the policy and the effects. The most recent variant is the complaint that there is not a unified message, and Fed members are not elected.

If the Fed had (even more) political accountability, rates would never increase! Politicians love low rates. The Committee currently includes a group of appointed officials with Congressional ratification, just as we have for the FDA, SEC, FCC, and other regulatory agencies. It is the nature of committees that the members will disagree, discuss, and compromise.

Instead of complaining about a very normal process of the U.S. style of government, it is more profitable to pay attention and to accept the diversity.

If the underlying data do not do not send a clear message, why should we expect the Fed to declare an unwavering policy? I expect interest rate increases sooner than the market currently believes, and that it will reflect economic improvement.

Weighing the Week Ahead: What Might Derail the Stock Market Rally?

This week’s calendar includes a light schedule for data with an emphasis on housing. Earnings season is in full swing with important reports every day. The early reception has been surprisingly good, creating plenty of mystified pundits. The financial media will be asking: What Can Derail the Rally in Stocks?

Last Week

The economic news was excellent, and the market reaction was strong. The continuing market rebound has caught many off base. This week’s review is mostly positive on economic data.

Theme Recap

In my last WTWA, I predicted that the post-Brexit rally now depended on earnings, especially management discussions of outlook. I noted that there were a record number of appearances by Fed participants as well as the release of the Beige Book, but felt that would be much less important. This proved to be a very accurate guess. In particular, the reception to some key earnings reports was quite strong. CNBC had a couple of short pieces on the FedSpeak, basically proving the expected lack of fresh news.

I hope readers have stayed with the rally during the post-Brexit move. It is important to know what to watch.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. You can clearly see the two big rally days and the quiet Friday. 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.

SPX-five-day

 

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

  • Rail traffic is shows continuing improvement. Steven Hansen helpfully covers the weekly data and various comparisons. Part of the improvement relates to comparisons to weaker 2015 data, so it is not all good news.
  • High frequency indicators have turned better – nearly all of them. New Deal Democrat’s weekly update is very helpful for those wanting a comprehensive survey.
  • The Labor Market Conditions Index (recently weak) has improved. “Fred” has the data.

Labor Market Conditions

  • Wholesale sales improved so I am scoring it as a positive. Steven Hansen goes beyond the seasonally adjusted data, noting that sales are still at “levels associated with recessions’ and there is “degradation in the 3 month averages.”
  • Industrial production rose 0.6%, beating expectations of a 0.2% gain. This is a nice rebound in an important sector.
  • Initial unemployment claims handily beat expectations at 254K. The extremely low level of new jobless claims continues.
  • Retail sales soundly beat expectations with a gain of 0.6% versus 0.2% expected. Ex-auto the results were even better. This was reassuring to those worried about the consumer. (Calculated Risk).

RetailJune2016

The Bad

  • JOLT’s showed a decline in job openings but the important voluntary quit rate was the same. Many observes mistakenly try to use this report to coax out stories about net job growth. That is not the point of this research. It is both slower and less accurate than the regular payroll report. It is much more important for labor market tightness and structure.
  • Congress is leaving on recess. Normally I list this under “good news” but this time there are quite a few issues that were not addressed. After the political conventions the return will be brief. Our legislators naturally need to get back to the campaign trail! Maybe it is time to consider a more efficient way of changing leadership. The Hill has the story about work left undone.
  • Michigan sentiment declined and missed expectations. The experts at Michigan noted concern about Brexit among the high-income respondents. (Steven Goldstein at MarketWatch). This will be interesting to watch. As usual, Doug Short has the best chart summarizing the series.

Michigan-consumer-sentiment-index

 

The Ugly

This week our hearts go out to the French. I am really hoping for a week without ugliness.

 

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 rather light week for economic data, with an emphasis on housing news. While I watch everything, I highlight only the most important items in WTWA. It is important to focus.

The “A” List

  • Housing starts and building permits (T). An important sector, but a modest decline is expected in starts. I am more interested in permits.
  • Leading indicators (Th). A rebound expected in a series widely followed as a recession signal.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (Th). Less important for the economy than new construction, but a good read on the overall market.
  • Philly Fed (Th). Attracting more information as the earliest data with a label from the prior month.
  • 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, as reporting season moves into full swing. The Republican Convention will grab plenty of news. FedSpeak will die down after last week’s thirteen appearances.

And of course, we can expect more updates on international crises.

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. The post-holiday FedSpeak was not threatening. Early earnings reports were OK, but not great.

So why is the stock market reaction so positive? The punditry is already hard at work on this question. I expect the discussion to continue. The market reaction is clearly at odds with what many call “the fundamentals.” If markets keep going higher, the questions will increase. If stocks pull back, we can expect a parade of pundits explaining why.

Either way, everyone will be asking:

What can derail the rally in stocks?

Feel free to join the discussion in the comments, but I see several worry themes:

  • Terrorism. The world is a nasty place and seems to be getting worse.
  • Economic concerns.
    • Deflation – signaled by falling commodity prices, especially cheap oil. Or alternatively–
    • Inflation – signaled by rising commodity prices, especially higher oil prices.
  • Politics.
    • Trump would be a disaster for the U.S. and world economies.
    • Clinton would be a disaster for the U.S. and world economies.
    • Uncertainty. Not knowing who will be elected is a disaster for the U.S. and world economies.
  • Central banks. They painted themselves into a curve, merely delaying the inevitable economic disaster. (I actually heard one of the Fast Money guys use one of mixed metaphors about the Fed. Maybe it was an accident, but he certainly didn’t cite the OldProf!)
  • Market valuation. Markets are too expensive. All of them. Investors cannot expect any reasonable return over the next twelve years (except gold, of course).
  • Technical indicators.
    • Stocks were declining – lacking leadership.
    • Stocks are now overbought and frothy.
    • Stocks are stuck in a trading range.
    • There was a Hindenburg omen – when was that?
  • Weak and mistaken leadership worldwide.
  • Delayed Brexit effects.
  • Global hot spots – South China Sea, Korea

 

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

 

indicator snapshot 071516

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).

Big-Four-Indicators-Since-2009-Trough

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. His latest update describes the elements of the indicator we cite every week.

BCI-Fig-1-7-14-2016

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 continue our neutral market forecast. Felix is once again fully invested, including some more aggressive sectors. That continues to work well during the rally. The more cautious Holmes is still fully invested, in a diverse group of 16 stocks from a universe of nearly 1000, selected mostly by liquidity. Sometimes we have had only 14 or 15 stocks. That is revealing. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now. It is not a resounding endorsement of the overall market, but a vote for opportunistic trading. I am curious about what it will take for Holmes to turn “mildly bullish.”

Top Trading Advice

Who is participating in the current market? How and at what levels? Know the background before trading! (Brett Steenbarger).

When you have met your “goal” for a session or a time period, do you stop trading? There is a great discussion at daily speculations. I have a strong opinion on this one, but I am interested in your comments.

Do you use Twitter in your trading? Finding other opinions? Breaking news? Here are some ideas.

Why a systematic daily approach is important to your trading. Holmes was barking appreciatively at the ideas from Pradeep Bonde, especially the unemotional focus on setups and execution. (Easy for him to say!)

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 Aaron Task’s 3 Reasons the Stock Market Is Rising Even As the World Feels Like It’s Falling Apart. Here is a key quotation:

The World Isn’t Ending: While there’s plenty to worry about—including global terrorism, uncertainty over what Brexit really means, anxiety over how U.S. election plays out, and much more—the global economy is expanding, albeit slowly, and the U.S. looks pretty good relative to other developed economies. (Insert “best looking horse in the glue factory” joke here.) And despite legitimate concerns about anti-globalization forces being on the rise here and abroad, the volume of global trade is expected to rise 2.6% this year after climbing 2.8% in 2015.

An old Wall Street saying also helps explain why stocks have fared well despite all the negative headlines: The market climbs a wall of worry.

You should be more worried about the stock market when “everyone” is bullish and the conventional wisdom says buying stocks (or real estate or any other asset) is a “no brainer.” That is certainly not the case today: UBS says wealthy investors are holding on to record levels of cash and 84% believe the election will have a significant impact on their financial health, Reuters reports.

The entire article acknowledges some current concerns, but brings the story back to data.

Stock Ideas

Chuck Carnevale remains cautious, even including top dividend candidates. Anyone seriously interested in finding great stocks should be following his series closely. It provides suggestions, but also the underlying reasoning and data.

Barron’s has a cover story on Royal Dutch Shell. The analysis covers dividends, cost-cutting, and oil prices. Even if you do not agree with the conclusion, this is an interesting approach.

Barron’s also cites Madison Square Garden as almost 60% undervalued on a sum-of-the parts analysis of trophy properties. Once again, this combines an interesting pick with a useful method of analysis.

2016_07_18_cmyk_NL_

Market Overview and Outlook

Traders see a conspiracy to keep the market higher. (Art Cashin). I believe that Art is accurately conveying a widespread sentiment.

The Fear and Greed Trader has a nice overall market summary, providing a refreshing balance to the normal daily news. It is a comprehensive summary and well worth reading in its entirety, but here is a key quotation:

The new highs are being dismissed for one reason or another. Maybe those that are saying that are on to something. I prefer that investors, do some research, draw a conclusion, and exhort all to run far away from the rhetoric that has been wrong now for months and years.

I don’t know where the S&P can trade to now with any certainty as momentum is hard to quantify. What I do know is that the entire market dynamic has now changed given this breakout.

Eddy Elfenbein is musing about Dow 20,000, which he thinks might happen this year.

I agree that this is a good time to buy or own stocks, even for those who have missed out so far. Please check out my own recent update on the market potential and how to find the best stocks and sectors.

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 simple and accurate message from Carl Richards:

When I first start working with clients, there’s a period of time I refer to as the financial pornography detox. It’s when you’ll get calls from clients wanting to know what they should do based on what some talking head said or some headline they read. Your job as a real financial advisor is to help them detox from this nonsense and understand they don’t need to do pay any attention to this so-called investment news.

Check the full post for the helpful illustration and the full podcast.

Brexit News

There is continuing interest about implications beyond the immediate effects. I follow these developments in three different ways.

  • Fundamental economics. Focus Economics has an excellent update on expectations for the UK as well as implications for other countries. (See also).

focuseconomics_uk_afterbrexit_infographic

 

  • Earnings data. We know the outlook is important. What sort of factors are coming up in the conference calls? FactSet offers this distribution:

FactSet earnings calls

  • Extra “color” from the earnings calls. Avondale does a great job with this. I found the JP Morgan comments on loan demand and spending to be especially interesting.

Value Stocks

Value strategies have lagged for the last few years. This year the trend seems to be shifting. (The Capital Spectator).

R1000.val_.gro_.2016-07-13

Watch out for….

Any story mentioning the “aging bull.” This popular theme has been taken up by some of the best sources – probably because it resonates with the instincts of the average reader. It is now competing with “self-taught in Austrian economics” as the most dangerous phrase in the investment lexicon. I will omit citing the multiple references last week, but do not be convinced. There is no relationship between the length of a bull market and the expected number of years remaining.

Even bond king Gundlach warns about the current risk in bonds, with the setup in the ten-year Treasury the “worst in his career.”

 

Final Thoughts

The simple reason for the market rally? Many stocks were priced as if we were already in a recession. As the economic data refuted this notion, prices partially normalized. There is plenty of remaining room, especially in economically sensitive sectors.

Of course there is plenty to worry about. Everyone should be aware of national and world problems, and try to act constructively. Compassion toward those suffering is in the nature of most people, regardless of their values or religious background.

When you think about investments, the problem is sharply different. It is expected and even desirable that the world is filled with problems. The challenge is to understand which problems are actually meaningful for your investments.

One way to keep your eye on the ball (since it is baseball season) is to evaluate the impact of any events on corporate earnings. Look at overall earnings, sectors, and stocks. Be specific. Do not use any lightweight arguments like “the first domino” or “if you see one cockroach.” Brian Gilmartin’s work is a great source for regular updates on earnings trends, combined with his insights. His latest post notes the reversal in both earnings and revenue, a turning point that he accurately predicted.

If your disciplined investigation cannot determine a link to profits, the news may still be very bad — but not for your investments. Embrace times when everyone else seems to have emotional worries.

Afterword – Worries Circa 2010

From one of my key posts in 2010. Please look at the reasons why so many were depressed about the market six years ago. You probably do not even remember some of them, but they were prominent at the time.

Here is a list of worries that I have noted, in no particular order:

  • ETF liquidation doomsday scenario
  • Flash crash — and overall worries about market manipulation
  • Bush-era tax cut expiration
  • Collapse of the euro and/or European Union
  • The Hindenburg Omen
  • Increase in US budget deficits
  • Ominous head-and-shoulders pattern in market averages
  • Dow 5000
  • Dow 2000
  • Dow 1000
  • The collapse of the US consumer
  • The double-dip recession
  • Sell in May
  • Sell in October
  • Sell, Mortimer, Sell (OK, I sneaked that one in for those who know).
  • The BP spill
  • Fear of Obama
  • Obamacare
  • Weakness in the dollar
  • Strength in the dollar
  • Weakness in China’s economy
  • Strength in China, leading to higher rates
  • Korea
  • Iran
  • Initial claims spiking to over 500K
  • Initial claims falling, but results skewed by seasonality
  • Shadow housing inventory
  • Foreclosure robo signing
  • Overstated and exaggerated corporate earnings
  • Fed blunders — QE II
  • High frequency trading
  • Worldwide collapse and deflation
  • Worldwide hyperinflation

 

The single most important thing for the investor to understand — right now — is the value of worries.  If you are looking for good investment returns, you need a time when others are worried.

The concept of the “wall of worry” is difficult for the average investor.  They seem to think it is bad when there are many worries.  In fact, the lack of worry is a sign of a market top.  Let me simplify.

Here is the image of the market top:  “What?  Me Worry?”

6a00d83451ddb269e20148c6fca9d9970c-450wi

 

Weighing the Week Ahead: Will Earnings Expectations Sustain the Rally in Stocks?

This week’s calendar includes a pretty normal schedule, but not the most important economic reports. There will be an abundance of FedSpeak, with questions about last Friday’s employment data. Despite this, the real story will be the start of earnings season. Expectations are pretty low. Statements about the outlook are always important, but that is especially true right now. The financial media will be asking: Can the profit outlook sustain the rally in stocks?

Last Week

The economic news was pretty good, and the market reaction was even stronger. The continuing market rebound has caught many off base. This week’s review emphasizes Friday’s employment report, since that was the biggest news.

Theme Recap

In my last WTWA, I predicted that the post-Brexit rally might continue if the economic news was good. This could lead to discussion of a possible “summer rally.” After a poor start to the week, the economic data finally turned the trick. From my “final thought” from last week:

Rightly or wrongly, much will depend on the employment report. The economy is the key to future earnings. Recession odds are low, earnings are improving, the oil issue has stabilized, and the Fed is on hold.

In addition to summer rally discussions, there was continuing skepticism – sucker’s rally, bull trap, and similar terms were bandied about. Sometimes I am right about the theme, but incorrect in my expectations. Last week both were on target.

The Story in One Chart

I always start my personal review of the week by looking at the great chart from Doug Short that summarizes the week. Since that post has not yet been updated this week, here is the picture from CNN Money. It was a pretty quiet week until the big Friday rally.

cnn weekly

 

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

  • Rail traffic is showing improvement, but the story reflects some mismatch in holiday timing and weaker comparisons. (Steven Hansen).
  • Las Vegas real estate sales are improving, up 7.1% year-over-year. Calculated Risk notes:

    This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities.

  • Energy prices are lower, with gasoline down 50 cents from last year. The Oil and Energy Insider has plenty of good data. The charts show the forward curve of prices – not just the current spot. U.S. Production continues to decline.

d577d024-1c19-4bb4-b105-28f47c541823

  • Spenders coming back from the mortgage crisis? Victoria Stilwell at Bloomberg makes the case, noting that time has “healed the wounds” allowing more credit for those who had foreclosures.
  • Long-leading indicators have improved. New Deal Democrat has a mid-year summary of ten indicators with demonstrated lead times. This is well worth a look. One nugget among the many good ideas:

    The yield curve remains as positive even now, with the same slope as it had in the middle of the 1970s, 80s, and 90s expansions.  The 5-year spread is even wider than it was during most of the 1960s.

  • ISM services handily beat expectations (56.5 versus 53.3 expected and 52.9 last month). Scott Grannis analyzes the components and has a good chart comparing the U.S. to the Eurozone. He suggests that worries may be over-stated.

US vs Eurozone Serv

  • Employment news was good. We should follow multiple sources on employment, especially because of the volatility and revisions in the “official” data. This week the news was all good, but perhaps not as good as the initial market reaction would suggest.
    • The ADP reported a gain of 172K private jobs, beating expectations of 152K. This is an important independent source.
    • Initial jobless claims hit a new low at 254K, beating expectations by 14,000.
    • Non-farm payrolls recorded a stunning net gain of 287K, exactly the opposite of last month’s result of 11K after revisions. This was good news, but not as good as it seemed. It requires a deeper look.
      • Commentary varied widely. For details, check out the summaries at Bloomberg and The Wall Street Journal. The bearish pundits either denied the strength, said that the market was not prepared for a rate increase, or both. Bullish commentators saw Santa in July, a reassuring number that would not cause the Fed to react.
      • Many fine sources showed balance. This report was not as good as it seemed, nor was last month’s so bad.
      • The charts are always interesting. Here are some of the most important from The WSJ and Bob Dieli’s monthly employment report (subscription required). To summarize from the WSJ, the change in earnings growth is still disappointing; most net job creation is full-time, the number of those wanting but not getting full-time jobs has declined significantly. From Dr. Dieli, the overall path of growth is the main theme. The duration of unemployment is an important and often-neglected story. Both sources have many more helpful charts and plenty of analysis.

2016-07-09_19-16-59

 

2016-07-09_19-19-18

2016-07-09_19-17-53

dieli employment

dieli duration of unemployment

 

The Bad

  • China rollover risk. Tom Orlik at Bloomberg Intelligence analyzes the current situation and the need to roll over $24 trillion in debt.

    The amounts involved, the maturity mismatch between assets and liabilities, and the fragile state of final borrowers all increase the chances of a misstep — and the severity of an impact should one occur. That underlines the importance for the government to maintain buoyant nominal growth, ample liquidity and low interest rates.

  • Manufacturing orders declined by 1%. Steven Hansen (GEI) has the full story with multiple takes on this data series. He sees more of a mixed picture.
  • The worldwide yield curve is flattening. Ed Yardeni discusses this story, concluding that while not recessionary, it bears watching.

FIG1

The Ugly

Three days of violence. Like everyone else, I was sickened and saddened by events. Leaders of all stripes had comments. My own favorite professor, Neil Browne, always emphasized the need for Asking the Right Questions. Although he has allegedly retired, his mission continues. He posted a thoughtful and insightful perspective.

 

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 fairly normal week for economic data. In my calendar I highlight only the most important items, helping us all to focus.

The “A” List

  • Retail Sales (F). Will this reflect improved sentiment and employment?
  • Industrial production (F). A volatile data series–closely watched given the recent manufacturing weakness.
  • Michigan Sentiment (F). Good read on employment and spending.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • China Q2 GDP (F). It is amazing how quickly this number is generated….
  • CPI (F). May start to get some attention if the expected increase occurs.
  • PPI (Th). See CPI.
  • Fed Beige Book (W). Descriptive reports from various Fed districts, prepared for next FOMC meeting.
  • Business inventories (F). May data, but relevant for GDP.
  • Wholesale inventories (T). Volatile May data – a factor in GDP calculation.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

The big story will be corporate earnings. Fed fans can enjoy appearances from at least six of the regional Presidents. Expect each to be asked if Friday’s employment data changes the likely timing and number of rate increases.

Next Week’s Theme

Markets seem to have digested the Brexit story. The economic data have quieted recession worries. We can expect plenty of post-holiday FedSpeak, but little real news from those sources. It is the start of the Q2 earnings season. There are questions about both the top and bottom lines, but expectations are pretty low. The real question is about the future.

Everyone will be asking:

Can the profit outlook sustain the rally in stocks?

Feel free to join the discussion in the comments, but I see three key questions:

  1. Will the outlook for earnings be stronger?
    1. Optimists note that the dollar has stabilized, as has the decline in energy. Earnings expert Brian Gilmartin has emphasized these themes, while still noting the sequential declines in revenues and earnings.
    2. Pessimists emphasize the “earnings recession” and the sluggish second-quarter economy.
  2. Will stocks respond if the earnings outlook is good?
    1. Optimists note ultra-low valuations in many economically sensitive sectors. These stocks have room to run skepticism wanes.
    2. Pessimists point to lagging sectors that seem to lack upside. And of course, the familiar themes about overall market valuation.
  3. Will fundamental improvement be supported by the technical analysis followers?
    1. Optimists see a potential breakout from the long-run trading range.
    2. Pessimists see an overbought market.

 

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

indicator snapshot 070816

 

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.

This week 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.

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. His latest update describes the elements of the indicator we cite every week.

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.

As we review the weekly indicators it is important to maintain perspective. A 20% chance of a recession would be average. It is not a reason for fear, since it says that a recession is very unlikely. There will be a time to exercise more caution, but we are not yet close to that point. There are many very questionable recession stories right now.

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 continue our neutral market forecast. Felix remains almost fully invested, including some of the currently-popular fixed income sectors. That is working well. The more cautious Holmes is still fully invested, in a diverse group of 16 stocks from a universe of nearly 1000, selected mostly by liquidity. That group is also responding well. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now. It is not a resounding endorsement of the overall market, but a vote for opportunistic trading.

Top Trading Advice

Worried about the Bloodbath of 2016 and post-Brexit fallout? The Trading Goddess has your back with ten suggestions. My favorite is the pocket chain saw.

Wondering when to sell? Adam H. Grimes helps with the question of when to take profits.

Brett Steenbarger shows the preparation needed for trading. (Start at 3 AM? Hmm). He does describe the need to have a balance including some quality time away from the market.

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 (HT Abnormal Returns), it would be Phil Huber’s Fun With Strikethroughs: Wall Street Maxim Edition. He takes on the common misperception that good investing can be accomplished through a few simple rules, and he does so adroitly with humor. You will enjoy the entire list, but here is my favorite:

As goes January, so goes the year nothing.

Stock Ideas

Chuck Carnevale is cautious, even including the dividend aristocrats. He carefully describes his valuation concerns while highlighting the best candidates.

Philip Van Doorn (MarketWatch) has more stocks that were hammered by Brexit yet still favored by analysts. Those shopping for laggards may wish to take a look.

Market Overview

Shawn Langlois’ excellent “Need to Know” column features a variety of interesting market perspectives. This week’s “the call” segment featured Joe Fahmy’s four reasons for the Dow to hit 20K this year. (Check out www.dow20k.com for a prediction on this subject made in 2010 – when the Dow was at 10K).

Laszlo Birinyi publishes an excellent monthly newsletter (subscription required). He covers many analytic methods, but he features a collection of past media stories on the market. It is a helpful way to keep perspective. Take this one for example:

[Jeff] This might sound like something from last month, but it was actually written in 2010.

[Jeff] Maintaining the right long-term perspective is one of the biggest challenges for investors. I cite this striking example not to highlight the error of a single analyst. It was mainstream — a prevailing opinion published in a leading source.

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. This week, during his well-deserved vacation, he invited suggestions for good posts that had not gotten much attention at the time of original publication. This produced a number of high-quality ideas that he featured throughout the week. I am not surprised. My sense of something that is really good does not always resonate with readers. Other bloggers share this experience.

I am featuring one of these posts as this week’s best. In addition, please check out Wednesday’s article on Portfolio Management, and have a look at my suggestion. Cullen Roche’s piece on fear and negativity also has a timeless quality.

Watch out for….

The so-called “safe” stocks. These stocks are so overbought that it was a prevalent theme in this week’s investment advice.

Ian Bezek warns about utility yield chasing.

Ellie Ismailidou and Anora Mahmudova (MarketWatch) have a similar warning.

Corporate bond yields are also threatened (Barron’s).

Barron’s questions the fundamentals of the utility business – slowing growing demand vs. supply.

Final Thoughts

 

Stocks will eventually respond to an improving economy. We might have to wait for third-quarter earnings reports, another three months. An improved outlook will speed up this process, since stocks have tracked forward earnings. Improving the outlook will improve those projections.

Jeremy Siegel explains how stabilizing energy stocks, low interest rates, and improved earnings could lead to a 15% increase in stocks.

Years ago we could expect conference calls to “talk up” both current news and future prospects. A skeptical attitude was a healthy approach! More recently, CEO’s seem more interested in keeping expectations low. The financial community will pounce on negative statements and extrapolate to similar companies. It should be a great story.

The rotation from yield stocks to cyclical names and financials is the best opportunity for long-term investors.

But even more patience might be required.

 

Weighing the Week Ahead: What Does the Brexit Vote Mean for Financial Markets?

This week’s economic calendar is a little light on data, but it packs plenty of important news. Last week I suggested that the Brexit build-up would become the dominant theme. Nothing has changed. Expect daily stories on three Brexit themes:

  1. What UK voters should do;
  2. Predictions about the result; and
  3. Consequences for financial markets.

While financial media will cover all, my attention will be on the third. What Will the Brexit Result Mean for Financial Markets?

Last Week

There was little economic news. The biggest change was the reaction to the FOMC meeting.

Theme Recap

In my last WTWA, I predicted a week divided between two themes—first the Fed, and then Brexit. It was indeed a two-story week, with an overlap in the middle. The Fed decision was greeted positively for a few minutes, and then the tide shifted.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. You can clearly see the slightly delayed reaction to the Fed announcement. 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.

SPX-five-day

 

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

  • Sea container counts are showing some rebound from the recent soft patch, but we remain well off the highs. (Steven Hansen at GEI).
  • Earnings estimates are strengthening. Check out Brian Gilmartin’s analysis for a detailed look at which sectors and by how much.
  • Fund manager asset allocations to equities remain near an eight-year low. On a contrarian basis, this is bullish for stocks. (Urban Camel).

fund-managers-asset-allocations-percent-cash-june_baml

  • Retail Sales were strong, in both real terms and per capita (New Deal Democrat). More people are shopping online, which makes interpretation of sales more challenging. Doug Short has multiple charts and a “Big Four” update. Ed Yardeni has the online story.

Yardeni online shopping

  • Housing showed strength. The picture remains complicated and a bit mixed.
    • Housing starts met expectations, had revisions for prior months, and an increase of 9.5% over last year. (Calculated Risk)
    • Doug Short analyzes the secular trends in both building permits and housing starts.Housing-Permits-and-Starts-population-adjusted

     

    • NAHB builder confidence increased to 60, up from 58 and well above the expansion signal of 50. (Calculated Risk)

The Bad

  • Industrial production fell 0.4%. This remains the weak spot in the economic data.
  • Foreigners are selling U.S. equities. The pace is an all-time high according to Torsten Sløk, Ph.D., Deutsche Bank Securities via Barry Ritholtz. Check out the chart.
  • The rail contraction continues. Steven Hansen at GEI has his regular update on this story.
  • Jobless claims edged higher. But still reasonable at 277K.
  • Lowered Fed expectations recognize slower growth. Most market participants do not expect lower interest rates to solve this problem. Bloomberg has a good summary of the Yellen conference, including various viewpoints.

 

The Ugly

Continuing violence and terror. The mass shooting casualties have been getting worse.

 

massshoot_jun16a-1

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.

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 relatively light week for economic data, but a big one for news. I highlight only the most important items, helping us all to focus.

The “A” List

  • The Brexit vote (F). The vote is Thursday, but results will not be available until Friday trading.
  • New home sales (Th). Can recent strength continue?
  • Michigan sentiment (F). Good indicator for employment and spending – remains near highs.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (W). Less direct impact than new home sales, but a good read on the housing market.
  • Durable goods (Th). A decline is expected in this volatile series, but how big?
  • Bank stress test results (Th). Mostly important to a few banks, but also a measure of overall financial health.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

Chair Yellen will provide her semi-annual Congressional testimony to the Senate on Tuesday and the House on Wednesday. The question periods will be closely watched. You might think there is nothing left to learn after last week’s FOMC decision and press conference, but any fresh hints will get attention. We also have a resumption of appearances by other Fed participants.

 

Next Week’s Theme

 

Anyone whose breath can fog a mirror is being asked about his or her opinion of what the Brits should do. That is a lively topic, but not one for us.

The outcome of the vote is important, but the prospects seem to change daily. Again, not a good topic for us.

While the financial media theme for the week ahead will be broader, the key point will be:

What does the Brexit vote mean for financial markets?

I have read scores of articles on this topic, watched webinars from experts, and listened to (some of) the punditry. While it is part of my job, most investors do not want to do this. I will try to provide a few key points as background. Read some of these links, draw your own conclusions, and compare them with mine at the end of this post.

  1. How does Brexit compare to other perceived crises? Josh Brown notes the $140 billion of net equity outflows and compares the VIX level to prior incidents. Concerns are higher than for interest rate hikes or the Presidential election. (Bloomberg)
  2. Some suggest that we should expect chaos – and then damage control. (Bloomberg)

Bloomberg Damage Control

  1. The impact on U.S. markets should be modest. (CNBC and also David Merkel)
  2. Brexit would hurt trade, the global economy and stocks, and especially revenues from certain sectors.

FactSet UK Revenue Exposure by Sector

  1. Last but certainly not least, a chart-based background guide to Brexit (The Economist) Here is a sample:

20160227_woc220

And a tabular summary of the issues:

20151024_WOC501_2

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). Monthly reports including both an economic overview of the economy and employment.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature the 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. His latest update features his unemployment rate recession indicator. A recession is unlikely “any time soon.”

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 interest can still follow them via Doug Short and Jill Mislinski. The ECRI commentary remains relentlessly bearish despite the upturn in their own index.

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.
  • Felix and Holmes – 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 our neutral market forecast. Felix is fully invested, but the sector balance has become more aggressive. Many sectors remain in the penalty box. The (usually) more cautious Holmes is once again fully invested. Holmes uses a universe of nearly 1000 stocks, selected mostly by liquidity. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now. It is not a resounding endorsement of the overall market, but a vote for opportunistic trading.

Top Trading Advice

Dr. Brett explains why your trading psychology is reflected in your daily life, and vice-versa. Learn how this can be important to achieving your trading goals. As an example he writes as follows:

I was recently driving on a highway and the road split into two sections, each going the same way.  The left fork was a single lane labeled express; the right fork was a double lane labeled local.  My trip was several hours in duration but I immediately took….

Which one would he choose, and why?

Adam H. Grimes provides insight on strategy vs. tactics. He defines the difference, but also provides some specific techniques.

In this case, we need to be very precise: tactics refer to how, where, (and maybe why) we execute at the specific prices we choose. Strategy, on the other hand is the big picture perspective. First, get the strategic view right.

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, it would be “Davidson’s” take on Brexit (via Todd Sullivan). Here is the key point:

High fear of financial collapse! Major investors saying “Get out!”, ‘Brexit’ forecasts dire for European economy! In the US, top investors say Fed has lost control and the economy or something will spiral out of control. These are only a few of the current basket of concerns. And then there is our current Presidential election fare and the terrorist attack in Orlando.

In reality, this week’s concerns have not been much different than what we have seen since the current economic recovery began in 2009.

He then produces charts on a series of key economic measures: employment, real personal income, retail sales, job openings, and the housing rebound. Please check out the charts, supporting the thesis that data trumps sentiment.

The conclusion?

While the world frets and then frets some more, economic activity has continued to expand. Eventually, investors have never failed to turn more optimistic and remain so for several years. It is this period of optimism from which excess economic activity derives. It should be readily apparent that while economic activity continues to expand, optimism and economic excess is not part of the current equation. It could said that “Excess pessimism does not produce excess economic activity!” There is no economic correction on the horizon. This does not mean that we could not have a dip in market prices at any point in time for other reasons. Dips should not matter for long-term investors. I anticipate taking action only once economic fundamentals indicate a correction is likely.

 

Stock Ideas

David Fish updates the list of Dividend Challengers. There are many specific ideas, so check it out.

Chuck Carnevale emphasizes the importance of valuation on your entry point, even when buying a great dividend stock. He has a great example of how waiting for the right entry point (even though a dividend was missed) actually added to total dividends in the long run.

 

Energy Perspectives

We have some interesting themes this week. Figuring out the stock implications will require some more thought. I am working on it, and I welcome comments.

  • Peak Fossil Fuels for Electricity, by Tom Randall at Bloomberg. Watch out for both coal and natural gas. Eight key points, including the upcoming domination of solar.

-1x-1

  • Billions in proven shale oil reserves suddenly become “unproven.” (Bloomberg) Hint: Improved accounting rules.
  • Don’t count on nuclear power. (EIA) The first new reactor just came online after more than 40 years of planning and construction. It is the first new one in twenty years. This chart shows the typical length of time

chart2

 

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, but my favorite this week is Andrew Comstock’s What is the most important financial advice you would pass to your children. The advice garnered from a number of experts is somewhat inconsistent, but thought-provoking. In general, young people need to balance passion and earnings, current consumption versus the future, and borrowing versus saving. My own thought? You need to look forward to your work if you expect to do well.

For both young and old: 51 Things You Shouldn’t Do from John Clements.

For millennials: You need more realistic expectations about future returns.

Watch out for….

Chasing last year’s winners via annual sector rotation. Josh Brown has a nice post showing the prevalence of this performance chasing. He emphasizes, “The data is unambiguous.” His analysis and charts show why this does not work. (Felix objects that sector rotation works, but a shorter time frame is needed).

Yield stocks, the crowded trade. William Smead covers this point, while also noting the declining significance of Fed Stress tests and the potential for banks and the housing market.

9a85d9ad1d9f032c9fe14cfc3e5e5e5fe7d12d1d

 

Final Thoughts

 

Brexit is not another “Y2K” as Barron’s suggested this week, but the uncertainty has had an exaggerated effect. Here are my own conclusions:

  1. The outcome is approximately a coin-flip, making any planning difficult. Either resolution will reduce volatility.
  2. The referendum is advisory, which will be emphasized more next week. Members of Parliament will be informed by voter frustration, but may not accede to the specific plan.
  3. A Brexit would take years of negotiation to accomplish, with many of the agreements most important to the European and world economies re-established.
  4. The actual stakes are smaller than most think. I get some information from confidential sources, and I respect their restrictions. A strong and popular (but unquotable) source did some polling of experts. Likely immediate S&P 500 range is 2 ½% downside and 2% upside. The extremes might be slightly larger. This range fits my own expectations. It is all guesswork, of course, but probably better than the vague notions about dominoes dropping and world trade ceasing.
  5. There may be a surprise outcome from a positive vote. British leaders may use it to negotiate some EU rule changes.

And finally, as you navigate the week ahead remember this:

The most newsworthy stories are frequently not the most important for your investments!

Weighing the Week Ahead: The Fed, Brexit, and the Markets

This week’s economic calendar is back to normal, with Wednesday’s FOMC announcement the highlight. Last Friday’s trading put the Brexit effects on the front burner, so I expect two themes for the week ahead. The first few days will be all about the Fed and any hints about the pace of rate increases. After the Fed meeting the emphasis will shift to the Brexit build-up, culminating next week.

Expect some punditry magic. The regular Fed experts will morph into Brexit gurus by Thursday morning!

Last Week

There was little economic news. What we had was encouraging. Once again, markets were pretty firm—until Friday!

Theme Recap

In my last WTWA, I predicted plenty of attention to the weak employment report and the implications for stocks. That was a pretty good guess for the early part of the week. There were some who joined me in noting the problems with this report and also plenty who created those “rolling over” curves that are so popular. Every day there was another story from a big-name trader or manager expressing concern about the weak global economy. (More on that topic in the Investor section below).

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. You can clearly see the quiet market, at least until Friday! 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.

SPX-five-day

 

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

Households Balance Sheet

 

  • Consumer sentiment from the Michigan survey remains solid. The Doug Short chart (via associate Jill Mislinski) has a great combination of history, the GDP relationship, and past recessions.

 

Michigan-consumer-sentiment-index

 

The Bad

  • The rail contraction is getting worse. Steven Hansen (GEI) has the update.
  • Brexit odds increased. A poll showed a big shift, with a ten percent lead for the “Leave” faction. The immediate reaction was the this (questionable) chain: lower pound à lower Euro à stronger dollar à lower commodity prices à implication of slower growth à RISK OFF!!
  • Downbeat economy makes June action by the Fed unlikely. Our go-to Fed expert, Tim Duy, looks at the data in the wake of the employment report. He also provides a Fed preview, highlighting labor conditions.

-1x-1

 

The Ugly

The candidate reaction. I have seen many elections where people were unhappy with the choices, but nothing quite like this. 10% of homebuyers say they will consider moving if their candidate loses. It is probably an exaggeration, but still an interesting reflection on the times.

 

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 New Deal Democrat at the Bonddad Blog. Not only did he take on an extremely popular and deceptive chart, he put the research together and reacted in a timely fashion. Here is the bogus chart:

blogger-image--1828015261

 

The chart quickly spread as the “Doomer graph du jour.” I saw it on several sites. There is widespread lust for “evidence” of a new recession. Charts like this are frustrating – so many misleading stories, so little time.

The Silver Bullet winners should get appropriate and timely recognition.

As is often the case with these bad charts, the original author does not provide either data or sources! Everyone who wants attention and confirmation bias republishes the chart. NDD demonstrates that the timing of the recession calls is completely wrong if one accounts for the actual availability of the data. This is a common amateur blunder.

I encourage you to read the painstaking efforts to reconstruct and explain the data at Bonddad and also Matt Trivisonno’s blog.

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 fairly big week for economic data and news. I highlight only the most important items, helping us all to focus.

The “A” List

  • FOMC rate decision (W). The Yellen press conference will get close attention.
  • Housing starts and building permits (F). Will the rebound continue?
  • Retail sales (T). Of special interest in the wake of weak earnings from some retailers.
  • Industrial production (W). A highly volatile series, but important.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • CPI (Th). Inflation is not getting much attention. It will take a few hot reports before this regains significance.
  • PPI (W). See CPI above.
  • Business inventories (T). April data, but relevant for Q2 GDP.
  • Philly Fed (Th). One of the two regional surveys that has some market impact.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

Beyond the FOMC meeting itself, there is no FedSpeak.

Next Week’s Theme

 

It is a rather normal week for economic data, with the FOMC announcement on Wednesday at the highlight. I expect the Fed to be the focus for the first part of the week, with attention shifting to Brexit on Thursday. Next week will feature an even larger Brexit focus. We therefore have a twin theme:

Will the Fed signal any change in the pace of rate increases?

Will the Brexit odds change, and what are the implications?

There is little to add on the Fed issue, which is probably the most over-analyzed in history.

Concerning Brexit, we have three questions (at least):

  1. What are the odds of the June 23rd vote? The most recent poll shows a 10% bulge for Leave, but the bookies do not really endorse this.
  2. What are the issues? It is helpful to understand both the facts and what people believe to be at stake – things like immigration, membership costs, trade relationships, impact on health care, and availability of employment. Does any of this have a familiar sound? Putting aside whatever opinion you might have, what are the implications?
  3. What are the Brexit consequences? For Britain, for Europe, and for the rest of the world?

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

Indicator Snapshot 061016

 

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). Monthly reports including both an economic overview of the economy and employment.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature the 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. His latest update features his unemployment rate recession indicator. A recession is unlikely “any time soon.”

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. You can still follow them via Doug Short and Jill Mislinski. Their commentary remains bearish despite the upturn in their own index. While no one really knows what is in the black box, I suggested years ago that they incorrectly emphasized too many commodity series, falling victim to multi-colinearity. Commodity prices fooled them in 2011. Now they seem to be ignoring the rebound.

Big-Four-Indicators-Since-2009-Trough

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.
  • Felix and Holmes – top artificial intelligence techniques in action.
  • Why 2016 – The Year of the 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. (Please send any 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 our neutral market forecast. Felix is fully invested, but the sector balance has become more conservative. Most sectors remain in the penalty box. The (usually) more cautious Holmes is almost fully invested. Holmes uses a universe of nearly 1000 stocks, selected mostly by liquidity. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now. It is not a resounding endorsement of the overall market, but a vote for opportunistic trading.

Top Trading Advice

 

Anora Mahmudova (MarketWatch) exposes a deceptive chart pattern – the head-and-shoulders. I am interested in hearing from traders about this, but these complex charts seem open to misinterpretation. We rarely hear about failing setups.

Pradeep Bonde has some good advice for improving on a daily basis. He notes that it takes five years for traders to develop the needed skill.

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, it would be a split decision. There is plenty of dangerous and deceptive information about the alleged warnings of big fund managers. Some of these were incorrect, while others were just misleading. In one case the always-bearish prognosticator, Mr. Dow 5000, cannot decide if the Fed has engineered deflation or hyper-inflation. (A supernova can either implode or explodes, he explains). It is all going to blow up somehow, so you should own his bond fund instead. OK….

Here are some helpful articles. If you read them, you will have some inoculation against hype.

  • Ichan is out of Apple while Buffett is in. Valuation guru Aswath Damodaran looks at time frames, methods of analysis, and the perspective of traders versus investors. It is tough work for most readers, but if you want to make good decisions as an individual investor, you need to understand this.

AppleIcahnBuffetteffect

 

As well as the entire process —

Price vs value simple picture

 

  • Soros reports related to his family office. We don’t know why or when viewpoints might change. (Josh Brown)
  • Soros has (supposedly) been wrong on many prior “turning point” occasions. (Cullen Roche)
  • And last, but I hope not least, I have demonstrated that government filings are completely worthless. Because they do not report short positions, you only see a part of each trade. This is especially bad on option positions, where the media report long positions in puts (a short instrument) without description of the entire spread. The notion that being short a put is actually a long position in the underlying befuddles nearly everyone. Even the most prominent media sources provide absolutely no help on this subject. Instead the reporters are assigned a story about the Soros put holdings. My multiple articles on this have not gotten much attention, despite the careful research and examples.

Stock Ideas

We have some diverse suggestions this week.

Think outside the box with James Altucher. He brainstorms on how we can profit now from something we know is coming: the driverless car. This fits my definition of something you will not read about in tomorrow’s paper.

I tried to provide another example (Finding the Best Contrarian Stocks), answering some reader questions from last week about why I preferred banks to utilities.

Sometimes you know the theme from current events, but you might not know the best stock play. I am not a big fan of anonymous authors, but sometimes follow them until I am convinced of the quality. Valuentum explains why Palo Alto Networks is more attractive than one might originally think. Hint: free cash flow. We reached the same conclusion a few weeks ago.

Sector Ideas

Energy prices have been less wild, which is probably good for investors. Some experts are even picking up my recent theme that $50 oil may be something of a barrier, with current prices representing a “sweet spot” for the economy. Oil Insider asks, Have Oil Prices Hit the Sweet Spot? (subscription required, but here is a key chart).

92d34a40-10f3-45ea-b190-fbd2753d56d3

 

Anyone interested in energy eagerly awaits the annual Statistical Review of World Energy from BP. Here is a key summary chart:

BP Oil Consumption and Production

Housing has been one of my favorite themes this year, and it got plenty of attention this week.

  • Housing is “eating the economy” says Conor Sen. Here is a key part of his case for further expansion:

    One way to show how much more growth housing, and construction more generally, has in front of us is to look at construction’s share of total employment. It’s currently 4.6%, and in every cycle ever it’s gotten to at least 5%. Given 1) the size and hence housing needs of the Millennial generation in years to come, 2) the lack of construction, of single family especially, since the financial crisis, 3) the potential for infrastructure spending from the next president, whether it’s the Hillary/Dem version or the Trump “build a wall” version, 5% seems like a reasonable conservative target for how high this will go over the next 3-5 years.

    tumblr_inline_o8axtpc21f1rufy3f_500

     

  • Ben Carlson asks, Has There Even Been a Better Time to be a Homebuyer? After describing interesting data showing the difference between today’s houses and those built in 1973, he summarizes:

    Houses today also have wireless Internet connectivity, better appliances, and are generally more energy efficient. They aren’t making enough of them in my estimation — and I may be stating the obvious here — but new homes today look better, have more features and are higher quality than those built in the past.

    To summarize — houses today have fewer people living in them with more space, more bedrooms, more bathrooms and more comfortable living conditions.

    But wait…there’s more.

    Mortgage rates are at record lows:

    Screen-Shot-2016-06-06-at-11.16.55-AM

  • Ivy Zelman, a leading housing expert noted for frank and accurate analysis, did an interview with Barron’s. Here is a key quotation:

    Barron’s: April new home sales soared 17%. Where are we in the housing recovery?

    Zelman: Four years in. The first increase was in 2012. There are multiple years ahead. We are still 35% below a normalized level of starts, and that’s for a single-family. Every cycle is different. This cycle will be elongated, and the slope of the recovery is flatter than what we thought the trajectory would look like when we called the bottom in 2012. Builders have been slower to see the growth. There’s a shortage of shelter. We’re pretty indifferent whether shelter should be owned or rented. We’re just saying there isn’t enough. The U.S. is at a 30-year low of inventory available for sale. We are predicting double-digit housing-starts growth this year, next year, and in 2018.

    The interview includes a number of stock ideas, including two which we own (LEN and CAA).

  • Robert Shiller (via Mark Thoma) says that fears of being priced out of housing are “overinflated.” In analyzing fears based upon quite different factors, Prof. Shiller wonders, “(W)hy do people still worry that home prices are getting out of reach? The answer can’t be found in the housing data”.

Biotech is worth a look.

  • Charles Pennington notes the long-term success of biotech, using the Fidelity biotech fund as evidence. A better buy than in 1988?
  • Chuck Carnevale has five candidates for consideration. As always, he carefully notes which stocks might be better for a given investment objective. And of course you get a master class in using the F.A.S.T Graphs method. Here is one chart for one example. You need to read the entire post to appreciate the depth of the analysis.

     

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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, but my favorite this week is an article from Morningstar’s Russ Kinnel, 20 Common Investing Mistakes. It is a nice analysis of how emotions interfere with decision making and the need for planning. Here are two of my favorites, both very common:

Mistake 2 | Basing sell decision on cost basis.
You bought fund A at $10 and now its net asset value is at $5. You bought fund B at $10 and now it’s at $20. Which should you hold, and which should you sell? I have no idea. The amount you paid is relevant only to tax planning. What matters is which will have better returns over your investment horizon. If the answer is fund B, then sell fund A (you’ll have a tax benefit if it’s in a taxable account) and put the proceeds in fund B. The problem is that people have an emotional attachment to the price. Some are afraid to book losses, and others are too anxious to sell a winner for fear that they’ll miss out on gains. What matters is whether the funds have strong fundamentals.

Mistake 17 | Misreading your own abilities.
People who treat gambling addicts say that it’s the big winning bet that hooks gamblers. They get high and want to repeat that high. Fund investors can be a little like that. They remember that one time they accurately called the direction of the market or picked a sector fund, and they forget all the times their calls were off. Go back over your past investments. See what you do well, and figure out a solution for the areas where you didn’t do well. Maybe your individual stock picks aren’t that great overseas, so you should buy a foreign fund. Maybe your bond fund blew up, so you should change the way you pick bond funds and tone down the risk.

I try to include good advice for young investors, but there is a real shortage of material. MarketWatch has seven good tips for those in their 30’s. Many boomers wish they had known these when they were younger!

Watch out for….

Hedge funds (and similar opportunities). Rachael Levy explains, The secret to investing in hedge funds.

Cambridge Associates is one of the biggest investment consultants advising pensions and others on which funds to choose.

Their secret to picking hedge funds: avoid almost all of them.

“We think about 5% of the entire universe could be on a list of potential funds to look at,” Joe Marenda, a managing director at Cambridge, told Business Insider.

 

Final Thoughts

 

There could be a lot of volatility this week – important for traders, but pretty meaningless for investors. At least for those who keep their heads.

I expect nothing meaningful from the Fed meeting, but that will not stop the punditry. There will be massive efforts to infer something.

The Brexit story will include updated odds and I expect it to be the theme next week. I have no special insight about how this will turn out. I am watching my sources closely, especially concerning the possible economic impacts. I was accurate last week in noting this has something to watch, but no one really has a good handle on the implications.

Traders can try to guess the outcome and the reaction. Investors should approach the week ahead with a shopping list. Get ready to take advantage of opportunities. In this WTWA I tried to provide special emphasis on stock ideas. I hope it will provide some ideas for your own research.

Weighing the Week Ahead: Is Small Employment Growth Big News for Stocks?

This week’s economic calendar is the lightest in recent memory. After Monday, FedSpeak fans will be disappointed, since we are entering the quiet period before the next FOMC meeting.

Like nature, pundits abhor a vacuum. To fill it they will be asking:

Is the weak employment report big news for stocks?

Last Week

Most of the economic news was fine – until Friday morning! The weak employment report, widely viewed as the most significant economic data of the month, clearly changed the market perspective. Astute market observer Eddy Elfenbein described the instant market sector rotation from financials (which I like) to utilities (which I hate). This is going to change, but what it will take is a key question.

big06032016g

 

Theme Recap

In my last WTWA, I predicted that the big discussion would be about the risk/reward for stocks and possible breaking of the recent trading range. That did get some attention – at least as much as anything else other than politics – until Friday morning. New highs now seem to be on hold.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He 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.

SPX-five-day

Special News

Abnormal Returns is one of our regular sources and references, helping all of us on many occasions. This week Tadas is supporting a great cause, charity: water. Check out the description at Abnormal Returns, where you can either purchase T-shirts with the new logo, or join me in making a direct contribution.

Please also be sure to check out the special offer at the end of today’s post – a reader opportunity that I have sought for many months.

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

  • ADP private employment report showed a solid gain of 173K, and the prior month was revised higher.

Change-in-Nonfarm-Private-Employment-May-2016

NAPM vs GDP

  • The Fed’s Beige Book showed overall economic improvement. Steven Hansen reports (but does not show much enthusiasm for the news).
  • Wage growth is improving. The Atlanta Fed report came before Friday’s news, but presumably it will get even better.

6a00d8341c834f53ef01b8d1f0ee1f970c-500wi

  • Sentiment remains negative, and that is a positive for stocks. The Bespoke Premium service (check it out!) provides this chart:

Bespoke sentiment

 

The Bad

  • Consumer confidence (via the Conference Board) declined from the prior month (92.6 vs 94.7) and also missed expectations. I regard consumer confidence as important, so declines are worrisome.
  • Auto sales disappointed. Trucks and SUVs were strong, but passenger cars very weak. The WSJ has a good report.

BT-AJ025_CARSAL_16U_20160601174539

  • The yield curve is flattening. Dr. Ed asks if this is a “global yellow light.”
  • Employment growth weakened. By all measures, and despite the deceptive decline in unemployment, the May employment situation report disappointed. The WSJ has a collection of reactions from economists. Conclusion: A dud! Business Insider has a similar compendium. Some highly respected sources suggested that the results were even weaker – perhaps a negative number – if the seasonal adjustments were accurate. The following chart is from the BLS report:

CES0000000001_933544_1465097389712

The Ugly

Defective air bags. Bloomberg’s feature story, Sixty Million Car Bombs: Inside Takata’s Air Bag Crisis, describes the story behind the development and sale of a product that proved to be dangerous. Warnings from some within Takata were not heeded. The company denies that “data integrity problems” revealed in documents from the U.S. Senate investigation were directly related to air bag ruptures. This is a fascinating article that shows the temptation to cut corners when big profits are at stake. It will take three years to replace all of the defective air bags.

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. Think of The Lone Ranger. No award this week. Nominations are always welcome!

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 an extremely thin week for economic data. I highlight only the most important items, helping us all to focus.

The “A” List

  • Michigan sentiment (F). Information about consumption and job creation you can’t get elsewhere.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • JOLTS Report (W). Mostly misinterpreted. Not an indicator for job growth, but rather the labor market.
  • Wholesale inventories (Th). Has impact on Q2 GDP.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

A Monday appearance by Chair Yellen will have an impact before noon, setting the context for the rest of the week. There is a little other FedSpeak, but we are entering the quiet period before the next meeting.

Brexit news will also grab attention.

Next Week’s Theme

It is a very light calendar. Like nature, pundits abhor a vacuum! There are pages to paint with pixels and airtime to fill with opinion. The space available is always about the same, even if the need is reduced. CNBC has gone to reality TV and features at night, and it is creeping into the daily schedule. My solution of TIVO and mute is a good way to avoid the reports on the stress in the nine-figure real-estate market and whether the latest blip in some indicator should change my market attitude.

You will learn more watching those good ol’ boys from West Texas!

My exasperation… [Mrs. OldProf noted my jaw setting and reminded me to restrict my opinions to the conclusion. Thanks to her and please check there.)

Friday’s employment report seemed sharply different from other recent economic news. The key question for the week will be:

Is the weak employment report big news for stocks?

There are four promising themes for speculation:

  1. Is the employment data the best read on economic growth?
  2. Will the weak report influence Fed policy?
  3. Does Fed policy really matter?
  4. Will market perceptions be more important than any of the factual questions?

The super-bearish opinions will emphasize the weak economy, the Fed in a box (corner, rock and hard place or whatever) and the need to hike rates regardless of conditions.

The mainstream is expecting Chair Yellen to dial back, if only because of market perceptions. We will get our first clue about the Fed on Monday.

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

Indicator Snapshot 060416

 

The Featured Sources:

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

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). Monthly reports including both an economic overview the economy and employment. After each employment report Bob Dieli provides a complete, balanced, “no-spin” analysis. Here is a typical chart from this week’s report:

Dieli Employment Change

(Find out more in today’s conclusion).

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature the 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. His latest update features his unemployment rate recession indicator. A recession is unlikely “any time soon.”

Fig-8.-6-3-2016

 

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

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 and no cookie-cutter approach. 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.
  • Felix and Holmes – top artificial intelligence techniques in action.
  • Why 2016 – The Year of the 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. (Please send any 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 our neutral market forecast. Felix is fully invested, and continues with fairly aggressive sectors. Most sectors remain in the penalty box. The (usually) more cautious Holmes is almost fully invested, with fifteen positions. Holmes uses a universe of nearly 1000 stocks, selected mostly by liquidity. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now. It is not a resounding endorsement of the overall market, but a vote for opportunistic trading.

Top Trading Advice

 

Adam H. Grimes has some great advice on trading a quiet market. So many traders go wrong in such times. Of his five points, I especially like the last:

Quiet markets are boring, but focus is rewarded. No one wants to talk about some market that is sitting in a 2% range for weeks, and the media quickly loses interest when markets go into consolidation. You, as a trader or investor, cannot. No one is going to do this work for you. It’s hard work to maintain focus when that focus is not rewarded today, tomorrow, or even next week, but you must do so. Know where the opportunities are, and monitor market conditions for shifts that might mark significant inflections. For some traders, a daily look at a handful of markets is enough, but other traders might consider setting alerts or using other screening tools.

Dr. Brett has another great contribution that most traders have never considered. The language we embrace to describe markets colors are thinking and prevents flexibility. He writes:

The traders I see making money are employing language differently to make sense of frequently-changing markets.  For example, several traders I know are trading shorter-term strategies and longer-term strategies and adjusting the weighting of those based upon how markets are moving.  A good example was yesterday’s trade in the ES futures.  We had early selling off the weak jobs number, but many sectors of the market displayed buying interest.  The advance-decline line was unusually strong, given the decline in the average, and we never hit a selling extreme of -800 or less in the NYSE TICK measure.  This was a useful tell that the selling was part of sector rotation, not part of a general bear/risk-off move.  Recognizing this made it much easier to take profits on short positions early in the day and not get whipsawed by the afternoon strength.

In a topic that has broad interest, Bloomberg’s Sheelah Kolhatkar asks why Phil Mickelson did not get busted for insider trading. When I was teaching new traders at the Chicago options exchange, one of my first classes was to bring in a legal expert on this topic. Information flowed wildly – in the rest rooms and elevators, but most of it was wrong or unhelpful. Meanwhile, if something worked, what was the risk?

Needless to say my companies and students never used such information and they all understood why. Traders need to know about this. Did you hear about the plumber who got a tip from a top executive? Free bathroom remodeling? Sheesh!

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, it would be Chuck Carnevale’s warning about buying over-valued stocks. He carefully points out how even good companies can be poor stock purchases if the price is too high. I cannot agree more. As part of our stock screening we always use Chuck’s tools, and you should, too! Here are some examples of good companies at bad prices.

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The full article has more examples as well as some current “buy” ideas.

 

Stock Ideas

Here is an update on Morningstar’s ultimate stock pickers. These reflect “conviction buys” which are new or large positions from top managers. The information lags a little, but no one is “talking his book.”

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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, but my favorite this week is from Larry Siegel, the Gary P. Brinson Director of Research for the CFA Research Foundation. He takes on a difficult but important topic – the expected return from various asset classes. A recent study by the McKinsey Global Institute has attracted plenty of attention, mostly because of the downbeat forecasts. The range of factors is apparent from this fascinating deconstruction of all that goes into determining equity returns. It is taken from the original study and repeated by Siegel to assist in the analysis.

MGI decomposition

 

You need to read the entire article to understand this, but it is worth the effort. Here is his conclusion:

Investors who expect a miracle from the markets – who think that 3% or 5% savings rates will get them close to their goals or that 10% savings rates will assure them a luxurious future – will be disappointed. Those conditions never existed. One would have had to have perfect foresight – and a lot of money early in life – to buy at the bottom in 1982 and then never sell until the top in 2000 or 2007 or 2015, availing oneself of the full glory of the largest bull market in history.

But investors who save diligently, buy and hold diversified portfolios of stocks and bonds and focus on their very long-term goals will do fine. A bias toward equities is justified, given the exceedingly low expected returns on bonds. Even with growth as low as we’ve experienced over the disappointing period since the end of the global financial crisis, the equity risk premium implied by McKinsey’s forecasts is 4%, enough to justify an above-average allocation to equities. With higher growth rates, the equity risk premium implied by McKinsey’s forecasts is even higher: 4.5%.

 

Dividend Stocks

Is it time for a stress test?

Energy Stocks

Our best source on the economics of the energy markets is Prof. James Hamilton. His update this week is worth careful reading by anyone interested in oil prices or energy stocks. Since there has been such a high correlation between oil prices and U.S. stocks (the bogus economic proxy), we are all forced to be interested. This chart from his excellent article is worth special attention:

china_oil_imports_May_16

Watch out for….

The Brexit threat. Polls put the vote (June 23rd) at 50-50. The bookies make it 30% in favor. This is a threat worth watching, since good studies suggest a major hit to exports if it passes. (Econbrowser). Two questions remain:

  • How much of this is already anticipated?
  • How much will extend to the rest of the world?

Marc Chandler cites three political events before the vote.

Expect more on this topic next week.

Some net-lease REITs. Brad Thomas explains what to look for as well as three to avoid.

 

Final Thoughts

 

How much did Friday’s employment news change the fundamental picture of economic growth? Or the prospects for stocks?

Not very much.

There are three key points:

  1. Any single report is of marginal significance – even employment.

A single employment report is but one flawed indicator of what is happening. It carries such significance not because it is especially accurate, but because we would really like to know the answer!

[picking up from above] My exasperation hit a peak Friday morning when the pundit-in-chief complained about revisions in the employment report. I was astounded to realize how little he knew about how the information was collected and compiled. As Cramer himself would put it: “HE KNOWS NOTHING.” Why does he think Fed economists would have fewer revisions? Sure we can track a package across the county. Should we all wear a bar code? We have excellent data with an eight-month lag. Getting data monthly is difficult and costly. (Should have kept the mute on!)

There is a huge margin of error on the net job growth (+/- over 100K) as well as the various subcategories. This is sampling error — after all revisions. Some companies never respond to the survey. Historically the growth of new businesses replaces those that drop out – plus a little more. I have explained this many times, most recently here, but you never see it mentioned by the punditry. The temptation to discuss pseudo-facts is just too juicy.

There are several estimates of employment growth, including the ADP, that are just as good and perhaps even more accurate than the BLS approach.]

  1. The Fed understands point #1. They have 350 expert economists who do not need to pontificate on TV. They understand surveys, sampling, birth/death models, and alternative methodologies. They place much less emphasis on a single number than the market.
  2. Nevertheless, the Fed does not want to surprise markets. Many recent Fed decisions have reflected not the best information, but the Fed guess about the market perception of information.

Everyone expects that a June rate increase is off the table, and probably July as well. The exact timing does not really matter, but I still expect two hikes before the end of 2016.

The Biggest Investor Challenge

I am often asked what is the biggest challenge for investors. If you think about it, the answer is obvious. Staying invested despite the barrage of negative hype has been a daunting challenge for most. Staying the course requires confidence in your approach and your sources. There is no information more valuable than knowing where we are in the business cycle.

Everyone seems to be itching to make a “big” call about the market or a recession. This will make them famous and rich.

It is better to rely upon someone with a genuine, long-term record. Bob Dieli’s regular reports provide the explanations and data that will give you the confidence to stay invested while that is right – as well as plenty of warning when it is time to change course. It is a very valuable resource. After many months of cajoling Bob has agreed to offer my readers a one-month free trial and a discount on subscriptions. Please give it a try. The reports are witty as well as informative. You will swiftly learn why I am such a fan.

Weighing the Week Ahead: What is the Risk/Reward for Stocks?

This week’s economic calendar is loaded, and packed into a holiday-shortened week. There will also be plenty of FedSpeak, encouraging the favorite game of not just reporting data, but wondering how the Fed will see it.

When it comes time to put it all together, pundits will be asking:

What is the risk/reward tradeoff for stocks?

Last Week

The news was very good, and the market responded.

Theme Recap

In my last WTWA, I predicted that the pundits would be focused on the oil price rally and what it meant for investors in stocks. That was a good call, with the theme continuing through week’s end. Several sources even cited both the recent strength and the apparent ceiling at $50/barrel. As a bonus, the strong housing data revived the “springtime for housing” theme from two weeks ago. Despite the competition from election news, these were important stories. If you prepared in advance, you were better able to handle the news.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He 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.

SPX-five-day

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 most important economic and market news was quite good.

The Good

  • Q1 GDP was revised higher, up 0.8% instead of 0.5. This is old news, but it does provide a slightly stronger base for the year. More importantly, the current data suggests that Q2 will be much stronger – some estimates now reaching 3 %.
  • Jobless claims declined again, to 268K. People are not losing jobs, especially when considering the higher working population. We also need job creation. Bespoke has the story, and a great chart.

     

052616-Initial-Claims-SA

  • Industrial production jumped 5.8%, the most in eighteen months. Utilities were behind much of the gain.
  • The Michigan sentiment index showed a surprising increase of 5.7 points, for the highest reading in nearly a year. Jill Mislinski provides a complete analysis and Doug Short’s chart. You can readily see that the index is back at healthy levels, topped only by the Y2K era.

Michigan-consumer-sentiment-index

 

  • Housing data showed real strength.
    • Pending home sales popped 5.1%. (Calculated Risk)
    • New homes sales had the best showing since 2008. Inventory is now down to 4.7 months. (Calculated Risk)

NHSApr2016

The Bad

  • April durable goods fell 0.8%, worse than expectations of a 0.3% decline. (BI).
  • Transportation “stunk in April” according to New Deal Democrat. It has certainly been the worst part of the economic story. Check out the full post for details. Steven Hansen at GEI has a thoughtful analysis suggesting that this was a “huge recession which never came.” Think about coal.
  • Puerto Rico debt measure is stalled in the Senate after progress in the House. This represents more than the specific issue. It is something of a litmus test for Speaker Ryan’s ability to negotiate. That is the real market significance.

     

The Ugly

The vulnerability of government technology. The multi-year pressure on government spending has had a definite effect on equipment. Upgrades that would be routine in business simply do not happen in government. It is a vicious cycle. The older the equipment and software get, the higher the maintenance costs. Barbara Kollmeyer has a good analysis of the problem, including this chart.

MW-EN838_gao226_20160526041302_NS

This problem is deeper than general obsolescence. The determined hackers are looking for vulnerable systems. There is a likely collision course, already seen in prior attacks.

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. Think of The Lone Ranger. This week’s award goes to Narayana Kocherlakota, former President of the Minneapolis Fed. Many of those who have moved on from a roles as official participants in Fed meetings are speaking out. This valuable information gives us an inside look. Sometimes the message is that we are making too many unjustified inferences. Kocherlakota writes:

Timing alone, though, hardly merits so much attention. To understand why, consider two possible scenarios. In one, the Fed starts raising rates in June and then adds another quarter percentage point at every second policy-making meeting (once every three months) for the next three years. In the other, the Fed waits until the second half of 2017 and then adds a quarter percentage point at each of the next 12 meetings. The second path represents slightly easier monetary policy, but most economic models would suggest that there would be almost no difference in the effect on employment or inflation.

It is possible that no information will be more important for investors over the next two years or so.

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 four-day week for economic data. (Dare I say YUGE?) I highlight the most important items, helping us all to focus.

The “A” List

  • The employment report (F). Remains the biggest news of all.
  • ISM index (W). Great read on an important sector. Concurrent with some leading qualities.
  • Personal Income and spending (T). April data, but a continuing rebound here is important for economic expansion to continue.
  • Auto sales (W). A strong indicator of economic growth. F150 sales? Many believe this is linked to construction and small business.
  • Consumer confidence (T). This is the Conference Board version. It provides information on job creation and spending plans that you will not get elsewhere.
  • ADP private employment (Th). This independent read on private employment growth, using contemporaneous data, deserves more attention.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Fed Beige Book (W). The anecdotal report that will inform participants at the upcoming Fed meeting will not tell us much, but pundits will find something!
  • PCE prices (T). The Fed’s favorite inflation measure. Not much change expected.
  • Construction spending (T). Volatile April data is still relevant because of the importance of this sector.
  • ISM services (F). Not quite as important as manufacturing, but only because the data series is shorter. Will recent strength continue?
  • Trade balance (F). April data relevant for Q2 GDP calculation.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

Not much will be happening at the start of the week, with many slow to return from a long weekend. Expect volume to pick up.

There is also a full slate of Fed speakers, including Chair Yellen.

Next Week’s Theme

 

It is a big economic calendar and a holiday-shortened week. There will be a trifecta of questions:

  1. Economics. Will the recent data rebound continue?
  2. The Fed. Will strong data increase the pace and timing of rate increases?
  3. Stocks. How will stocks react? Will good news be good?

The pundits will circle around these topics. Even the pundit-in-chief seems to be shifting with the winds. They will analyze the data, emphasize how important Friday will be for the Fed, and wind up asking:

What is the risk/reward tradeoff for stocks?

 

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

 

Indicator Snapshot 052816

The Featured Sources:

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

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he observes that more people are using forward earnings, and many are thinking about 2017.

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). Monthly reports including both an economic overview the economy and employment.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature the 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.

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

Noteworthy this week:

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 and no cookie-cutter approach. 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.
  • Felix and Holmes – top artificial intelligence techniques in action.
  • Why 2016 – The Year of the 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. (Please send any 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 our neutral market forecast. Felix is fully invested, and with more aggressive sectors. Most sectors remain in the penalty box. The (usually) more cautious Holmes is once again fully invested. Holmes uses a universe of nearly 1000 stocks, selected mostly by liquidity. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now.

Top Trading Advice

Dr. Brett Steenbarger emphasizes emotion-free trading. He writes:

The emotionally intelligent trader can prepare for frustration, fear, greed, and other seemingly disruptive states.  By anticipating them, rehearsing our response to them, and channeling their energy constructively, we turn our experience into a powerful trading asset.

Holmes is barking enthusiastic agreement, and Felix is nodding wisely!

12 good points from Paul Tudor Jones (via New Trader U). They are all worth considering, but my favorite is #9:

“Always think of your entry point as last night’s close.”

 

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, it would be the overall market outlook from David Templeton at HORAN Capital Advisors. He covers many of the themes I regard as most important, but readers will enjoy getting the message from different sources.

In particular, he deals with the common argument about good news: The Fed will raise rates. He writes as follows:

Historically though, the initial moves in rate increases by the Fed is pursued to get rates back to a more normal level. As a result, when interest rates are increased from a level below 5% stocks tend to rise. In short, below the 5% level there is a positive correlation between interest rates and stocks.

correlation rates market

Stock Ideas

Chuck Carnevale has a terrific follow-up to his prior article on Emerson Electric (EMR). Individual investors who do their own stock picking should read this carefully. Not only does he provide great analysis and advice about entry points, it illustrates what your research should cover.

Time to buy Europe? Jason Zweig (WSJ) recounts all of the bad news, as well as the depressed stock levels. Is it time to “buy low?”

And for income investors – always consider the dividend kings. Here are eighteen companies that have increased dividends for at least 50 years. If that level of income is enough, this kind of stock may be the answer. Philip Van Doorn (MarketWatch)

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, but my favorite this week is from Ben Carlson for his discussion of Social Security Benefits. Here are but two points from a great post. You should read it all.

  • Social Security is a more important part of retirement than many realize, covering more than half of the needs for most people.

Screen-Shot-2016-05-09-at-9.35.14-AM

  • Waiting longer for benefits generally helps, if you are able to do it.

Screen-Shot-2016-05-20-at-4.19.39-PM

The article also has some links to good sources. Your financial advisor should be considering the Social Security contribution when figuring out your retirement needs and asset allocation.

Older investors pick their biggest mistake – not starting early enough in saving for retirement.

Value Stocks

How about AbbVie as a retirement holding? Looking at the numbers shows value, but perhaps no immediate catalyst. Where others see “value trap” I see an opportunity for enhancing good dividend yield by selling near term calls. Take what the market is giving you!

Energy Stocks

There is not a specific recommendation here, but the information is important. I am watching it, and so should you. What companies begin to profit at various levels of oil prices? (The Daily Shot)

5731ace1-a511-4e58-90cf-70fe183dad33

Watch out for….

Safety stocks. Seth Masters asks, Are “Safety Stocks” Truly Safe? Many of the relevant sectors have been part of the recent quest for yield. With investors fearful about a weak economy – or even recession – something with a dividend yield looks great. If the economy improves, it is a different story, as this chart shows:

 

w1056

Bonds. In the “man bites dog” department, even Bill Gross is going negative on bonds. Mr. Dow 5000 is still not recommending stocks.

 

Final Thoughts

 

The risk/reward debate includes many viewpoints, but the worries usually dominate.

  • These stories are more newsworthy, so they get higher ratings. Barry Ritholtz has a good article on “click bait.” One of his examples is the repeated story about George Soros buying puts. I have two different posts (here and here) showing the error of this approach, but the scary stories get the readership.

1200x-1

 

  • The negative predictions call for extreme outcomes (market 50% over-valued – various sources, we are already in a recession – Peter Schiff’s claim this week, Europe and the rest of the world will crumble, or maybe it will be China. There is just enough plausibility in the arguments that many people are “scared witless” (TM OldProf euphemism) If you think the downside is 50% and the upside only 2%, what would you do?
  • The positive arguments are generally modest and restrained. Ed Yardeni (who also accurate downplayed the recession worries in January) sees a 10% upside for stocks in the next year. The Fast Money gang acted like he was crazy. “What needs to happen for that?” was the question. Not much, he explained. A little earnings growth, no recession, and a little inflation. It was a modest claim.
  • Politicians of all stripes find it useful to highlight dissatisfaction. This political approach is effective when running for election, but it is dangerous for investors. It is easy to think about societal ills rather than improving your investments. You cannot improve public policy by making poor investment decisions and losing your money!

For a change, why don’t we ask what could go right? (The Barron’s cover story this week is on the right track, repeating some of our main themes — but perhaps not analyzed as thoroughly. It is always helpful to have more voices helping investors).

  • The economy is not headed for recession, and actually shows promise on the big-purchase items like autos and homes.
  • Employment is good and improving.
  • Earnings may have troughed with the energy crash (apparently) behind us. Meanwhile, energy prices remain relatively low.
  • Interest rates remain low – this makes companies more profitable and stocks more attractive.
  • The dollar strength seems to have leveled off, helping the earnings of multi-national companies.
  • Economic and market cycles do not die of old age. A “mature” cycle has the same survival potential as a new one, despite the appealing metaphor of the doddering old person.

The market could easily gain 10% next year, and the year after that. Picking value stocks could increase your potential, since the economic skepticism has created recession pricing.

Most do not understand this key point: We could be having the same debate two years from now! Or even three.

And stocks could be 50% higher.

Weighing the Week Ahead: How Should Investors React to the Oil Price Rally?

This week’s economic calendar is pretty light. Market participants will be looking to an early getaway for the long weekend. While there will be plenty of entertaining FedSpeak, I expect a different topic to be at the fore. Pundits will be asking:

Should investors react to the oil price rally?

Last Week

The news was pretty good, but the stock market was not.

Theme Recap

In my last WTWA, I predicted that the punditry would be asking whether it was “springtime for housing”. That was the recurring topic as housing news was reported on several different days and garnered plenty of discussion. Competition came from the Fed Minutes, some dramatic earnings reports, and the election race.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He 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.

SPX-five-day

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 economic and market news, on balance, was pretty good.

The Good

  • Housing starts increased to a 1.172 annual rate, beating expectations. Calculated Risk has a complete analysis. I am especially interested in single-family building permits, a good leading indicator. Bob Dieli’s monthly economic report always updates this chart:

Dieli Building Permits

 

  • Existing home sales were up 5.45 million (SAAR), the top of the Calculated Risk range for a solid report. Bill writes:

    Note that January and February are usually the slowest months of the year and March and April are the beginning of the “selling season”.  This is a solid start to the year.

    EHSNSAApr2016

  • Jobless claims down ticked to 278K, in line with estimates and below the 300K level that some have been citing. (The four-week moving average was up slightly).
  • Industrial production rose by 0.7%. Eddy Elfenbein has a good report, noting that this interrupts the downtrend since November, 2014. He also points out the effect on the Atlanta Fed’s GDP forecast for Q2, now up to 2.8%
  • Sentiment remains very negative. Urban Carmel summarizes asset allocations and economic skepticism. Ben Eisen of the WSJ cites four stats, including the fund flows in the chart below. Schwab’s Liz Ann Sonders agrees. She notes only negative questions from both investors and advisors, “all almost bordering on Armageddon.”

w1056

The Bad

  • The Philly Fed indexremained negative and essentially unchanged, -1.8 on the diffusion index. Employment improved dramatically, but remained marginally negative. The outlook fell a bit but remained strongly positive. There was little market reaction.
  • Fed minutes showed more chance for a June rate increase. Our go-to Fed expert, Tim Duy, sees a June hike as a bit less than 50-50 but July as quite possible. The Fed remains more confident about the economy than most market participants.
  • LA port traffic declined. Calculated Risk uses a rolling twelve-month average to control for seasonality. The decline was 0.7% for inbound traffic and 0.8% for outbound. Steven Hansen opines that this raises recession concerns.
  • Rail traffic “moves deeper into contraction”. Steven Hansen looks at a variety of rolling averages, including some analysis that adjusts for the declining coal shipments.

The Ugly

State and local pension funds. Chicago provides an example. A decision of the Illinois Supreme Court struck down an “overhaul” of the system, adding $11.5 billion to the deficit, now $18.6 billion. The fund covers 70,000 workers and in the absence of any changes, will run out of money in ten years. (Crain’s Chicago Business)

Noteworthy

Try this financial literacy quiz designed by economists from Wharton and George Washington. (via Shawn Langlois) I am confident that WTWA readers will do well. Keep in mind that less than 1/3 of the population could get all three questions right!

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. Think of The Lone Ranger. This week’s award goes jointly to Gene Epstein of Barron’s and New Deal Democrat of the Bonddad Blog and xe.com. Both take on the frequent current scary articles about the “flattening” yield curve, citing the yield difference between the ten-year and two year notes. That spread is currently 0.94 percentage points. Those on a mission often cherry-pick the part of the curve to analyze, and cry alarm whenever it gets a little smaller.

Epstein points out that until the curve actually inverts (a spread of less than zero) there is not a reliable recession indicator.

2016_05_23_cmyk_NL_

NDD has a great article with plenty of charts. He calls out the “doomers” with this commentary and chart:

In the last week or so there have been a spate of articles – from the usual Doomer sources but also from some semi-respectable sites like Business Insider vans an investment adviser or two ,see here ( https://lplresearch.com/2016/05/19/is-the-yield-curve-signaling-trouble-… ) – to the effect that the yield curve is flattening and OMG RECESSION!!! Here’s a typical Doomer graph – that draws a trend line that ignores the 1970s and neglects to mention that 2 of the 4 inversions even within the time specified don’t fit:

image_686

I wish that more publications would recognize the Silver Bullet winners and writers like them. It is difficult to call out weak and biased posts. There is little reward for good and courageous analysis.

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 modest week for economic data. I highlight the most important items, helping us all to focus.

The “A” List

  • New home sales (T). Continuing strength in housing?
  • Durable goods (Th). Important April data. Continuing recent strength?
  • Initial claims (Th). The best concurrent indicator for employment trends.
  • Michigan sentiment (F). Best for job growth and prospective spending. Strength continuing?

The “B” List

  • Pending home sales (Th). Unlikely to match last month. Not as important as new sales, but a read on the market.
  • GDP second estimate for Q1 (F). This will get attention, but it is old news by now with Q2 more than half over.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

There is plenty of FedSpeak, including a Friday appearance by Chair Yellen. Things will be slowing down by Friday as some slip away early for a long weekend marking the unofficial start of summer.

Next Week’s Theme

 

It is a pretty light economic calendar. In addition to the daily dose of analysis by pseudo-experts on the Fed, I expect to see some serious discussion about energy prices. Will the oil rally continue? What does that imply for investors and traders?

Voting a tentative “No” is Dana Lyons, who cites technical resistance and concludes as follows:

Will the oil rally stop here? We have no idea – but we wouldn’t be surprised to see the rally get clogged up, at least temporarily.

tumblr_inline_o750onwm8P1sq14jh_500

Oil & Energy Insider is also cautious but more bullish, mostly citing fundamentals. Their free edition includes this analysis:

Oil prices bounced around this week, flirting with $50 per barrel but stopping short of that key threshold. The major supply outages in Nigeria (now at 900,000 barrels per day) and Canada (more than 1 million barrels per day) continue to put upward pressure on oil prices as they are erasing the supply overhang. Still, much of that will be temporary. The EIA poured a bit of cold water on the rally this week, reporting a surprise uptick in oil stocks. At the same time, U.S. production continues to slowly erode. The markets are more confident than at any point in recent weeks that prices won’t crash back into the $30s, but more movement to the upside is not a given.

Their premium edition (which requires a subscription) is headlined Fundamentals Starting to Underpin Oil Price Rally. They cover a wide range of considerations, but include key questions: When might we expect Nigerian supply to rebound? Most investors would find their analysis quite helpful:

–    The Niger Delta Avengers have attacked pipelines and platforms in Nigeria, knocking 800,000 barrels per day offline.
–    Between 2006 and 2009 Nigeria suffered a similar level of attacks and outages, and a sweeping amnesty policy helped bring an end to the violence. The new President Muhammadu Buhari has taken a tougher line, ending patronage that existed in security contracts for many militia members, a move that has contributed to the resurgence in pipeline attacks.
–    Nigeria’s cash reserves are running low as its economy slows. Reserves have plunged from $49 billion in 2013 to $27 billion recently.
–    Eni (NYSE: E) suffered the latest attack this week. Fellow oil majors Royal Dutch Shell (NYSE: RDS.A) and Chevron (NYSE: CVX) have also seen their infrastructure taken out from explosions.
–    Nigeria’s oil production is at its lowest level since the 1980s. The attacks show no sign of letting up, and as of now the Nigerian government is unwilling to back down.

 

 

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

Indicator Snapshot 052016

The Featured Sources:

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

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he observes that more people are using forward earnings, and many are thinking about 2017.

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). Monthly reports including both an economic overview the economy and employment.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting approaches to asset allocation. This week Dwaine opened to the public one of his subscriber-only research reports. He notes that one of his recession indicators has moved up to 60%. He goes on to explain that he uses a group of six different methods as his preferred approach. He writes as follows:

Another way to look at the RFE is to average the current recession probability showing on each of its six model components, which is currently showing a 14.6% probability of recession. This model appears to have served well in the past, with zero false positives above readings of 0.20.

2016-04-26_1743

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods.

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

Noteworthy this week:

Hedge funds are using artificial intelligence to analyze the Fed minutes. Guess who can do it faster – you or them?

Peter F. Way reports on the hedging techniques of “big money” traders, identifying candidates with the best risk/reward balance. Apple?

501110-14632831049172328

 

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 and no cookie-cutter approach. 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.
  • Felix and Holmes – top artificial intelligence techniques in action.
  • Why 2016 – The Year of the 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. (Suggestions and questions welcome!)

 

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 our neutral market forecast. Felix is about 75% invested, and with less aggressive sectors. REITs and utilities have moved near the top of the list. The (usually) more cautious Holmes remains almost fully invested. Holmes uses a universe of nearly 1000 stocks, selected mostly by liquidity. Even when the overall market is neutral, there will often be some strong candidates.

Top Trading Advice

Dr. Brett Steenbarger has important advice about Seeing Beneath the Market Surface. He writes:

Markets move higher, markets move lower.  The question worth continually posing is, “Is the market getting stronger or weaker?”  This is a meaningful question because a market that moves higher can be getting weaker and a market that moves lower can be getting stronger.

Read the entire post as he explains how to apply this approach.

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, it would be this Forbes article by Brett Steenbarger (and not just because he has some kind words about WTWA, but thanks!) As a psychologist and trading coach he sees things missed by others and explains them very well. I share many of his themes, but often cannot communicate them as well. People need to be open to new ideas and unemotional in executing the plan.

Few can meet these tests.

Stock Ideas

Chuck Carnevale has a timely post on cyclical stocks. He shows how to use his tools to analyze valuation in this difficult sector. When can these stocks be right for dividend-oriented, conservative investors? Emerson Electric (EMR) is his illustration. If you agree with our experts that a recession is not imminent, cyclical stocks are a good place to shop.

How about Kroger? Hale Stewart makes this a good example of how to search for a good stock – find an interesting sector, a cheap stock, and a catalyst.

Retailers that might profit from the “Amazon effect.” (Philip Van Doorn) Hint: they need to change their business model.

Marc Gerstein has some interesting contrarian retail plays. Marc always uses some science in his method. Here he identifies desired characteristics, develops a screen, and looks for a catalyst. It is another article that goes beyond simply delivering stock ideas (although it does that). Stock screening meets Peter Lynch.

How about solar? If energy prices improve, solar stocks do as well. Travis Hoium has an interesting argument favoring First Solar (FSLR) over some alternatives.

Outlook

Why is it so attractive to be negative on your investments? One good answer lies in Morgan Housel’s explanation of volatility and how it can take investors off course. It is so easy to think about an account in terms of how far we are from the past high. In fact, that is the condition over 87% of the time. Each year includes a lot of big moves that seem small when you later look at the long-term stock chart. He uses 1998 as a year of major gains, but only if you were able to ride out the major swings. I like this chart showing time spend below the prior high:

sp6_large

 

 

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 this special edition. There are always several great choices worth reading, but my favorite this week is from Carl Richards at Investment News. He suggests that a good financial advisor helps clients by turning off the news spigot. (If you do not use a financial advisor, I recommend that you turn it off anyway! You might make an exception for WTWA).

There’s a valuable role for us to play as real financial advisers, that of the human curator. Do our clients really need to spend hours sorting through their feeds and trying to decode the headlines or could we be doing that for them? What should they be paying attention to?

For instance, one friend shared with me that when he turned off the financial news spigot, he calculated that he saved two to three hours every night. Do the math and it ends up being a savings of 40 or so days each year.

Value Stocks

Time to buy again? They are cheaper than the broad market and that seemed to be the story last week.

Watch out for….

Boeing (BA). Barron’s warns that demand for fuel-efficient aircraft has declined.

Bonds and fund redemptions. If the ten-year note increases one percentage point, to something like 2.8%, you will immediately lose 9% on your investment. It would take a few years to make that up, even if rates moved no higher.

Investment big-shots using a platform to talk their book. Are they really there to help you? This is an interesting summary of recommendations at the recent SALT conference, which was breathlessly covered in the media. Most of the topics would require a lot of research, but the Sherwin-Williams (SHW) recommendation (You can’t buy paint online) caught my attention. It took about five seconds to discover the error of this assertion.

13F filings. Here is one example that highlights stocks from David Einhorn. This, and nearly everything written about 13F reports is misleading. This WSJ article headlining George Soros is especially misleading. I explained this carefully (for the second time) but no one cares. We can think of it as our secret!

Final Thoughts

Knowing economics helps to understand energy pricing, but the payoff for that knowledge has been delayed. In my most popular article ever on Seeking Alpha, I noted a few basic facts about energy including the relatively small gap between supply and demand. We are now observing the closing of that gap. It could (and will) continue in one of three ways:

  1. Reductions in supply through economic forces. U.S. producers responded, but most others have not – so far at least.
  2. Increases in demand through a growing economy. This is happening with record miles driven in the U.S. and many new consumers worldwide.
  3. External shocks, through weather, disasters, or war.

The same economic effects may well push against a price increase. The reduction in rig counts, for example, seems to have paused for the first time in eight weeks. Bespoke has one of their great charts using data from the primary source on drilling activity, the Baker-Hughes weekly report.

052016-Baker-Hughes

 

Even if $50/barrel represents an intermediate high for oil prices there are important favorable consequences:

  1. The savings to the consumer, compared to recent years, remains large;
  2. The fears about failing companies and job losses, exaggerated and localized, will be less of a story.;
  3. The concern about banks failing due to oil company bankruptcies will be reduced.

Current oil prices may represent a sweet spot both for the energy sector and the overall stock market.

Weighing the Week Ahead: Time to Sell the News?

The economic calendar is moderate. Fed Heads are mostly on the bench. The Doho oil conference (combining OPEC and non-OPEC producers) will be the first major news for the week ahead. Markets have already anticipated the outcome, just as they have the trend of first- quarter earnings. It is a classic test of the theme:

Is it time to sell the news?

Prior Theme Recap

In my last WTWA I predicted special attention to corporate earnings reports and a possible break of the trading range. The first part was true throughout the week, and the second part was in play on Friday. Doug Short comments on the increased volatility and also notes the good overall week and the volume spike on options expiration. See his discussion and context as well as his excellent weekly chart. (With the ever-increasing effects from foreign markets, you should also add Doug’s World Markets Weekend Update to your reading list).

SPX-five-day

Doug’s update also provides multi-year context. See his full post for more excellent charts and analysis.

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.

This Week’s Theme

The economic calendar is moderate. There are few scheduled Fed distractions. Earnings season will be in full swing. This reporting period might be the most important in recent years.

Last week gave us a preview. The talking heads at pundit central were constant asking why the market moved higher in the face of moderate or bad news on the “fundamentals.” At the start of the week –and maybe by the time you read this—the Doho outcome will be known. By week’s end we will have much more information on earnings. Both themes set up the popular question for next week:

Is it time for investors to “sell the news?”

Background

My approach to introducing this week’s theme was to discuss the Iraq War and the non-stop CNBC coverage of Iraqis pulling down a statue of Saddam Hussein, basically with no tools. (Some believe that the whole thing was staged, making it an especially good example for my purpose). Futures had popped at the opening. It took an hour or so for the statue to come down. What do you think was the result?

Mrs. OldProf advises me that this example is boring and pedantic (who, me?) She recommends instead a song that was (amazingly) written in fifteen minutes. If Cat Stevens had been on time for their date, the song might not ever have been written!

We can never know about the days to come
But we think about them anyway, yay
And I wonder if I’m really with you now
Or just chasin’ after some finer day

Anticipation, anticipation
Is makin’ me late

220px-CarlysimonAnticipationartwork

 

Viewpoints

The basic themes, moving from bearish to bullish, are as follows:

  • Stocks have increased dramatically for no apparent reason. It is a classic time to sell.
  • Doho expectations make no sense. The “positive” side has been built into expectations. A likely negative outcome will hit oil prices, the recent correlate for all risk-on assets.
  • Earnings achieved the customary result – beating dramatically lowered expectations. It means nothing.
  • Economic data remain weak and international threats abound.
  • The earnings recession is upon us. Outlook updates have been poor. Expect an over-valued market to crash.
  • Strength in the face of mediocre news is a positive. Next step? Breaking the trading range.
  • The bad news has been “baked in.” Perceptions of fundamentals are pretty negative. A weaker dollar will help.

These viewpoints have all been vigorously expressed in recent days, but my sense is that short-term traders remain pessimistic about both earnings and energy prices.

As always, I have my own opinion in the conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

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:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

There was a little good news.

  • The CPI remains low and gradually rising — 0.1% on both headline and core.
  • The crude oil “glut” is narrowing. “Davidson” (via Todd Sullivan) notes the narrowing of the 1% gap between supply and demand. He cites various sources suggesting that the gap is narrowing – a massive change in perceptions from the IEA in only a few weeks. The significance?

    What this says is that most of what one hears is tied to trends in oil prices and not to fundamentals. The behavior of the majority of investors, perhaps more than 95% of investors, is to assume that price trends carry economic information and then look to determine which fundamentals they think are responsible. Herd mentality is always a strong force when individuals do not know how to read fundamental data.

  • Long leading indicators have improved, although the overall picture is still mixed. (New Deal Democrat).
  • Jobless claims down ticked to 253K, beating last week and also expectations by a solid margin. Doug Short and Jill Mislinski have analysis and one of his amazing charts that combines short term, long term, recessions, two time frames, each weekly result, and the four-week moving average.initial jobless claims

 

  • Bullish sentiment moves even lower despite recent market gains. (Bespoke).

AAII-Bullish-041416

 

The Bad

Most of the news was negative.

 

  • new-eng-weo-tableSeveral big banks fail the “living will” test. (Reuters)
  • Retail sales disappointed, dropping 0.3 % (0.4 ex-gasoline). Calculated Risk elaborates.

RetailMar2016

  • U.S. Q116 GDP downgrades continue. The NY Fed has now joined Atlanta in doing a rapid update of current GDP. Other central banks discuss business conditions, but not attempting a specific forecast. The official GDP data comes much more slowly after revisions from the underlying sources are complete and a benchmarking process followed. Do the fast techniques cut some corners? How good are these estimates? Barry Ritholtz has a skeptical take on this process, reminding us:

    The old joke seems to apply here: Do you want it fast, cheap or good? Pick two.

-1x-1

  • Industrial production fell 0.6%, slightly lower than the prior month and badly missing expectations of “unchanged.” Steven Hansen looks at the data using his customary wide array of methods.
  • Michigan sentiment of 89.7 (preliminary reading) was down 1.3 from the March final and missed expectations by 2.3 points. Doug Short associate Jill Mislinski has a comprehensive review, quoting the Survey’s economist Richard Curtin.

    None of these declines indicate an impending recession, although concerns have risen about the resilience of consumers in the months ahead. Consumers reported a slowdown in expected wage gains, weakening inflation-adjusted income expectations, and growing concerns that slowing economic growth would reduce the pace of job creation. These apprehensions should ease as the economy rebounds from its dismal start in the first quarter of 2016. Overall, the data now indicate that inflation-adjusted personal consumption expenditures will grow by 2.5% in 2016.

dshort Mich Sentiment

The Ugly

The IRS is especially vulnerable to hackers (Robert Hackett, Fortune). Few know that the IRS has about one million cyberattacks per day! One IRS employee, charged with helping those whose identity had been stolen, actually helped the hackers.

Is it time to refocus priorities? Perhaps increase appropriations? My sense is that many government computers are old and vulnerable.

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.  Think of The Lone Ranger. This week’s award goes to Steven Saville who exposed the bogus, fear-inducing post at everyone’s favorite disaster site. The article about an emergency Fed meeting followed by a Yellen conference with both the President and Vice-President probably caused many individual investors to exit the market and got traders on the wrong side. The latter group may have covered quickly. They needed to.

The Fed mythology preys upon people’s greatest fears. Saville cites a Bloomberg article in November on the same theme. These are absolutely routine meetings where the Governors consider suggestions from the regional Presidents.

You need to be a real expert to know the difference between “expedited procedures” and “emergency.”

 

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. Beginning last week I made some changes in our regular table, separating three different ways of considering risk. For valuation I report the equity risk premium. This is the difference between what we expect stocks to earn in the next twelve months and the return from the ten-year Treasury note. I have found this approach to be an effective method for measuring market perception of stock risk. This is now easier to monitor because of the excellent work of Brian Gilmartin, whose analysis of the Thomson-Reuters data is our principal source for forward earnings.

Our economic risk indicators have not changed.

In our monitoring of market technical risk, I am now using our new model, “Holmes”. Holmes is a friendly watchdog in the same tradition as Oscar and Felix, but with a stronger emphasis on asset protection. We have found that the overall market indication is very helpful for those investing or trading individual stocks. The score ranges from 1 to 5, with 5 representing a high warning level. The 2-4 range is acceptable for stock trading, with various levels of caution.

The Holmes risk indicator improved from “mildly bearish” to “neutral”. We score this as 3 rather than 4 in the table.

The new approach improves trading results by taking some profits during good times and getting out of the market when technical risk is high. This is not market timing as we normally think of it. It is not an effort to pick tops and bottoms and it does not go short.

Interested readers can get the program description as part of our new package of free reports, including information on risk control and value investing. (Send requests to info at newarc dot com).

In my continuing effort to provide an effective investor summary of the most important economic data I have added Georg Vrba’s Business Cycle Index, which we have frequently cited in this space. In contrast to the ECRI “black box” approach, Georg provides a full description of the model and the components.

For more information on each source, check here.

Recent Expert Commentary on Recession Odds and Market Trends

Georg Vrba: provides an array of interesting systems. Check out his site for the full story. We especially like his unemployment rate recession indicator, confirming that there is no recession signal. He gets a similar result with the twenty-week forward look from the Business Cycle Indicator, updated weekly and now part of our featured indicators.

Doug Short: Provides an array of important economic updates including the best charts around. One of these is monitoring the ECRI’s business cycle analysis, as his associate Jill Mislinski does in this week’s update. She cites a recent speech by ECRI co-founder Lakshman Acuthan who notes that the current business cycle is a “Grand Experiment” but with flawed assumptions. The review of the ECRI is comprehensive and provides an interesting comparison with Recession Alert, one of our featured sources. Chart lovers will love this regularly updated article.

Doug’s Big Four update is the single best visual review of the indicators used in official recession dating. You can see each element and the aggregate, along with a table of the data. The full article is loaded with charts and analysis. As you can see, the indicators show a mixed picture, but not the conditions for a recession.

Dshort big four

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting systems. These include approaches helpful in both economic and market timing. He has been very accurate in helping people to stay on the right side of the market. This week Dwaine has an update on the labor market which he describes as “not as strong as you think.”

 

The Week Ahead

We have an average week for economic data, with an emphasis on housing reports. While I highlight the most important items, you can get an excellent comprehensive listing at Investing.com. You can filter for country, type of report, and other factors.

The “A List” includes the following:

  • Building permits and housing starts (T). Housing, especially new homes, remain as a crucial sector. Rebound continuing?
  • Leading indicators (Th). A solid increase is expected. Many follow this report, despite various changes in calculation methods.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B List” includes the following:

  • Existing home sales (W). Less immediate economic impact, but still helpful as a read on an important sector. A further rebound expected.
  • Philly Fed (Th). One of two regional indexes worth watching. I remain unconvinced about the fundamental basis, but the markets react.
  • Crude oil inventories (W). Attracting a lot more attention these days.

There is not much FedSpeak. We may start with a hangover from options expiration.

There will be a continuing focus on corporate earnings!

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have six different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

WTWA often suggests a different course of action depending upon your objectives and time frames.

Insight for Traders

We continue both the neutral market forecast, but our overall rating moved to “neutral” from “mildly bearish”. Felix is still 100% invested. The more cautious Holmes continues to better the market while taking a lot less risk and is now back to 100% invested. Holmes uses a universe of nearly 1000 stocks, selected mostly by liquidity. Even when the overall market is neutral, there will often be some strong candidates. Holmes holds a maximum of 16 positions at one time. For more information about Felix, I have posted a further description — Meet Felix and Oscar. You can sign up for Felix and Oscar’s weekly ratings updates via email to etf at newarc dot com. They appear almost every day at Scutify (follow here). I am trying to figure out a method to share some additional updates from Holmes, our new portfolio watchdog. (You learn more about Holmes by writing to info at newarc dot com.

Dr. Brett keeps bringing it, week after week.  Do you have an R & D program?

 

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. Major market declines occur after business cycle peaks, sparked by severely declining earnings. Our methods are focused on limiting this risk. Start with our Tips for Individual Investors and follow the links.

We also have a page summarizing many of the current investor fears. If you read something scary, this is a good place to do some fact checking. Pick a topic and give it a try. Feel free to suggest new topics if your “fear” is not on the list.

Many individual investors will also appreciate our two new free reports on Managing Risk and Value Investing. (Write to info at newarc dot com).

Other Advice

Here is our collection of great investor advice for this week. It was especially difficult to screen for WTWA since there were so many good articles. Please enjoy!

If I had to pick a single most important source for investors to read, it would be David Foulke’s post at Alpha Architect. The new rules on fiduciary responsibilities for investment advisors are confusing to many. He provides a helpful quiz showing the hidden brokerage and insurance links obscured by several popular advertisements. This is both entertaining and extremely valuable. Here is one of many examples that confuse or obfuscate.

2016-03-16-15_30_49-Life-Insurance-Retirement-Investments-_-Prudential-Financial

 

Stock Ideas

10 mid-cap stocks from Chuck Carnevale’s screening. He demonstrates that all have plenty of upside.

Eddy Elfenbein identifies twelve stocks with sales growth over 60 straight quarters.

Barron’s has auto news on the cover (25% upside?) and feature stories on both Ford and GM. (Makes sense to me).

Strategy

It all starts with setting your goals. Ben Carlson shows that investors want to protect wealth. But they also want to increase it. It is a dual mandate that is difficult for many to navigate on their own.Screen-Shot-2016-03-30-at-8.48.32-AM

 

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 this special edition. There are several great posts, but I especially liked the advice about The “Rosemary’s Baby” of Investment Products by Tony Isola. He explains well the drawbacks from indexed annuities, a popular current “product”:

So when all is said and done, fixed-index annuity investors receive the following:

Bond like returns with many unnecessary layers of complexity

Hedge fund like fees.

Steep surrender charges greatly reducing liquidity. Translation, you can’t sell this crap when you might need to.

Counter party risk that is unnecessary. Since you are transferring your risk to an insurance company, an investor is at the mercy of the insurer’s financial situation. Insurance companies can go bankrupt.

The upside is capped and often reset. This means the market can go up 15% but an investor’s maximum gain may be 5%!

And also:

There is no chance you will travel faster than the guy next to you if you are rowing against the current and he isn’t. When it comes to fixed-indexed annuities, the current is twice as strong.

High fees and the exclusion of dividends will literally sink your investment boat before the race even starts.

[Jeff] It is difficult to help people who have purchased these products. The sales agent has gotten signatures on disclosures that are densely written and difficult to interpret. This advice is important for many investors who are encouraged to think that all problems are solved with this approach. It can be fine for some investors, but they need a guide not prepared by the salesman. As Mr. Buffett notes: Don’t ask your barber if you need a haircut!

Commodities

Have we made a bottom in commodities? BHP Billiton chief executive Andrew Mackenzie has an upbeat take on commodity prices, believing the worst may be over. The Pundit-in-Chief dismisses the evidence from Billiton’s model. What do you think?

2016-ytd-from-recent-lows-all-prices-template

Watch out for….

Active bond funds with (apparently) high returns. Pimco executive Dan Ivascyn explains,
“Investors are gravitating toward income-generating high dividend ETFs which sometimes don’t have restrictions on lower credit quality.”

Larry Swedroe elaborates in discussing Unconstrained Mutual Funds, writing as follows:

Unconstrained mutual funds are permitted to own global bonds, currencies, high-yield bonds, structured bonds and even equities. Many utilize leverage, derivatives and swaps, taking short positions as well as long ones. In other words, in addition to their typically high expense ratios, unconstrained funds are often highly complex. Unfortunately, complexity often carries risks that may offset the very risk-reducing benefits bond investors seek and dilute fixed income’s role as a portfolio’s primary risk-mitigating component.

As one example of the risks involved, Morningstar data shows that as of year-end 2014, the average fund in the “unconstrained” category had 40% exposure to investments rated below investment grade (or that didn’t have ratings). This compares with less than 7% for the average intermediate-term bond fund. What’s more, there isn’t any such exposure in the Barclays U.S. Aggregate Bond Index.

[Jeff] It is difficult to judge risk/reward when the risks are difficult to determine!

 

Market Timing

You are likely to pick the wrong time to invest as well as the wrong stocks! (Morgan Housel). One stock has earned a quarter trillion dollars in profit since 2012 without much change in price. Another has earned nothing while the stock has tripled. He has several other great examples.

But disagreeing with popular sentiment is easier said than done. Few things feel better than fitting in, and having a viewpoint that goes against everyone around you is a mental battle not one person in a ten can maintain for long. Rather than identifying extremes in current sentiment, it’s easier to justify the market’s mood no matter what it is.

 

If your perspective is short-term, you need to figure out what everyone else thinks now as well as what they will think tomorrow.

Even value investors can be tricked by chasing the best returns from the prior year. (Morningstar).

 

Final Thoughts

Our top sources – Brian Gilmartin and FactSet are always mandatory reading, but especially so during earnings season.

FactSet shows the relative exposure to dollar strength. In Q1, the effect was still strong. Whether it will continue is a key question.

FactSet Earnings by Global Exposure

 

Brian Gilmartin notes the importance of the Doho conference and also maintains his position that this this quarter will mark the earnings bottom.

My Take

For traders, it is difficult to figure out either the trend or the contrarian position. Markets have moved higher for little apparent reason and many are positioned for selling. Bloomberg quotes traders as questioning whether oil could possibly move higher after the meeting.

I expect the options “hangover” but no lasting effect. We are prepared to do some buying into a soft Monday market.

For investors, I see many value stocks still trading at recession prices. For an investment portfolio you should embrace the opportunity to do some buying. We have recently trimmed stocks that hit price targets, so we are shoppers on weakness.

For our Enhanced Yield program (selling short-term calls against dividend stocks) we see many positions that will work in a flat market.

Don’t be stubborn. Take what the market is giving you!