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!

Weighing the Week Ahead: Will Earnings Spark a Big Move in Stocks?

The economic calendar is moderate. Fed Heads are out in force. More significant is the start of “earnings season.” There is always speculation about earnings, but this time is special. I expect a focus on the question:

Will earnings spark a break in the trading range for stocks?

Prior Theme Recap

In my last WTWA I predicted a focus on the parade of Fed speakers, with special attention to their apparent economic optimism. That was indeed a recurring subject, highlighted by Thursday’s discussion among the current Fed Chair and three predecessors. One of the “Fast Money” participants even used my mixed metaphor (Fed painted itself into a box). Unlike me, he was not smiling when he said it! Doug Short notes that it was the worst week in the last nine, and also that Q1 GDP estimates are now barely positive. 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. Once again, the Fed participants will be out in force. More importantly, earnings reports begin with Alcoa on Monday and the big banks late in the week. This season might be the most important in recent years. Economic reports reflect only modest growth. The Q1 GDP estimate is plunging.

For equity investors, nothing is more important than earnings and future earnings potential. With stocks in a recent trading range, many wonder whether there is a potential to break out – and in which direction! Options expiration may provide fuel for an explosive move either way. I expect many to be asking:

Can earnings news move stocks out of the trading range?

Background

The earnings story is crucial for stocks. Unlike many who focus on backward or concurrent data, FactSet shows why earnings expectations are important.

forward earnings

To these results one must also add the effect of the P/E multiple.

Viewpoints

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

  • The earnings recession is upon us. Expect an over-valued market to crash.
  • Earnings reports are based completely on financial engineering – ignoring “one-time” charges and expenses for employee options.
  • Earnings reports do not reflect organic growth. Stock buy-backs are but one element of deception.
  • Earnings reports will beat “expectations” but only because these have been maneuvered lower. A lower multiple might be in store.
  • Earnings are a poor indicator. Look instead to revenue, where few companies are doing better.
  • Look carefully for excuses and a weak outlook in the conference calls.
  • Some of the earnings negatives, especially a strong dollar, are less relevant. This will help international companies.

These viewpoints have all been vigorously expressed in recent days, but my sense is that short-term traders are mostly negative on earnings.

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 in a light week for data.

  • Chair Yellen maintained the dovish tone, but still expressed confidence in the economy. This is consistent with the Fed minutes. Our go-to expert, Tim Duy, agrees.
  • ISM non-manufacturing remained positive and also beat expectations.
  • Jobless claims down ticked to 267K, continuing a string of strong results. (Calculated Risk)

WeeklyClaimsApr72016

The Bad

Some of the news was negative.

  • Factory orders fell 1.7%, lower than the prior month, but in line with forecasts.
  • The JOLTs report was viewed negatively by many since job openings were slightly lower. I am more interested in the quit rate, which shows job conditions by measuring voluntary departures. Here is the balanced analysis from New Deal Democrat. Also check out this chart:

blogger-image-526492811

 

The Ugly

The Panama Papers. The news of how the rich and powerful escape taxation has many dimensions. Expect it to remain in the news. Here are a few current themes:

The most popular tax havens, from Felix Richter via GEI:

chartoftheday_4587_the_most_popular_tax_havens_in_the_panama_papers_n

Banks have a “tail risk” because prosecutors may pounce. (ValueWalk)

This is a big story in the U.S. (Value Walk)

And dismiss the conspiracy theory about the Russians being responsible. (Brookings)

I am leaving out the effects on Presidential politics. More to come, but generally not good.

An Ugly Update

In January I cited the Flint water problem as evidence of infrastructure neglect, suggesting that it was something to monitor. This week we have an update from VOX. I cannot do justice to the interactive chart in my static format. Please check it out to see the threat in your own community. I was surprised at the variation even with small geographical changes. Here is the basic map:

Lead Concentrations

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 Ethan Harris of Bank of America Merrill Lynch (via BI) for refuting the conspiracy theory about central banks and the dollar. Those who have been on the wrong side of the market embrace any way to blame the Fed. This is a breath of fresh air.

It is not the only Fed conspiracy theory, but taking on this one is a start.

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 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 notes that their interpretation is that the business cycle will not turn higher. His Big Four update is the single best visual update 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.

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.

Dwaine’s RAVI model forecasts 30% upside for 2016. Readers are invited to contrast this with a typical Hussman article and explain why one should be preferred. More on this in articles to come.

w704

Dwaine also has an interesting animated depiction of unemployment by state.

Barry Ritholtz opines that a recession is not imminent and cites the key elements involved in official recession dating. Barry is one of our frequent and favorite sources. I am delighted that he is helping his wide audience understand this conclusion. Since he has been known to read WTWA on occasion, I am also a bit disappointed. We have been all over this theme since mid-2011. Our top recession forecasters have done much better than his lunch pal from the ECRI. Bob Dieli’s methods have worked in real time for decades and include all of the points Barry cites. When Barry next visits Chicago I would be delighted to take him to lunch with Bob. I guarantee that all would enjoy the experience, and Barry would get to meet the recession forecaster with the best real-time record.

The Week Ahead

We have a light week for economic data. 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:

  • Retail sales (W). Will the gas price effect finally show up?
  • Michigan sentiment (F). Important indicator for employment and spending.
  • Initial claims (Th). The best concurrent indicator for employment trends.
  • Industrial production (F). Will be watched for a sign of a manufacturing rebound.

The “B List” includes the following:

  • Fed Beige Book (W). Anecdotal reports from each region will add color for the April meeting.
  • CPI (Th). This will not matter much until we see a few months over a 2% pace, but market participants are watching closely for any uptick.
  • PPI (W). See CPI above.
  • Crude oil inventories (W). Attracting a lot more attention these days.

There is once again a daily diet of FedSpeak. Friday is options expiration, with the potential to amplify big moves during the week.

I am not very interested in the regional indexes. I am very interested in 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, and the bearish lean. Felix is still 100% invested, catching much of the rebound. The more cautious Holmes lightened up a bit this week, reducing to 85% 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.

Peter Brandt raises a topic well known to pros, but a big source of failure for beginners: Position size. He writes as follows:

Professional traders understand that the goal of trading is to make money, not to be right. Making money in the markets requires losses — a lot of losses. Most traders I know are right no more than 40% or 50% of the time — this means they are wrong and take losses on 50% to 60% of their trades. Being wrong is part of trading.

Read the full post to see how to deal with this.

Dr. Brett keeps bringing it, week after week. Improving your trading is not just a matter of learning rules and avoiding mistakes. He suggests a comparison to an athlete who always competed and never prepared.

The mistake I see traders making is that they spend the lion’s share of their effort on coming up with the next trades–not on the process of winning.  They focus on making money, not on getting better.  It would be unthinkable for them to go a full trading day or week without placing a trade, but they think nothing of going a day or week with no concrete work at the self-improvement that is the source of winning.

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 Fabian’s commentary on when an investor might need a (new or first) financial advisor. Some people are extremely successful in business and expect that skill to transfer readily to investing. That frequently does not work. The list of warning signs is typical of what I see in new clients, just as it is for the author. The entire list is good, but here are a few great examples:

 You get the majority of your investment advice from CNBC or Fox Business.

 You sell everything on EVERY 7% drop and buy back again at new highs.

 You own 17 large-cap actively managed mutual funds and can’t explain why.

 You think owning gold is similar to holding cash.

 Your broker keeps calling about this private REIT with an incredible yield.

 You have a broker.

 You subscribe to 8 different newsletters who all provide conflicting advice, but you do it anyways to stay “diversified”.

 You don’t want to sell that mutual fund that has sucked for ten years straight because of “tax purposes”.

 You own something with a sales load or surrender charge.

 You check Zerohedge and Drudge Report more than Facebook.

Stock Ideas

Apple could hit $150 a share this year. Jack Hough (Barron’s) gets the story from two different Wall Street sources who go beyond the regular analysis of low P/E and $38 per share of cash. Hint: Apple is not just selling devices. The multi-platform service business has started.

Chuck Carnevale has another interesting stock screen. This one considers companies with a smaller market cap, a needed portfolio addition for many. This demanding screen generates a list of good ideas. We have already bought one from the list and others are under consideration.

Strategy

Michael Mauboussin explains why, like Babe Ruth, you need to consider magnitude as well as frequency. Please read the entire article, including this comment from Mr. Buffett:

Warren Buffett, undoubtedly one of the 20th century’s best investors, says that smarts and talent are like a motor’s horsepower, but that the motor’s output depends on rationality. “A lot of people start out with a 400-horsepower motor but only get 100 horsepower of output,” he said. “It’s way better to have a 200-horsepower motor and get it all into output.”

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 how to draw down savings during retirement. It is important for so many people.

Another link from this post is our “best investment advice” for the week. Welcome back from vacation, Tadas!

Market Outlook

Joe Fahmy has four reasons to expect Dow 20K this year, a prediction that “no one on Wall Street” is making. Hmmm.

Why is “everyone is miserable” despite the strength of stocks? There is a lot of FOMO (fear of missing out). (Josh Brown)

Watch out for….

Passive bond funds and ETFs. The rules for these funds require passive, cap-weighted investments. This means that energy exposure got higher as more companies sought financing. At this point there is extra risk. Lisa Abramowicz at Bloomberg has a nice explanation, including current risks.

Market Timing

Even those staying in a single mutual fund do worse than the overall fund performance. Why? Attempted market timing. (Morningstar via WSJ).

IF-AC460_VOLATI_9U_20160331125105

Why such big mistakes? Alan Steel’s entertaining post offers a good explanation:

The truth has become our best kept secret.

Year after year we’re told by the same experts (read: culprits) that the end is nigh, deflation or inflation will be the death of us, the market indicators are bad and the Black Swans are circling.

In early February investors got so nervous thanks to predictions of an impending stock market collapse they sold out billions to rush to bonds and Absolute Return Funds. These have been a herd favourite for the last seven years since the previous “we’re doomed” round of predictions kicked off in March 2009….just before the stock markets shot up.

 

Great Fun

What if some of the most successful investors needed to get funding on Shark Tank? Josh Brown has the witty answer. I can’t do justice to it with a quote, so you’ll just have to read to see how Bezos, Musk and others might have fared. I am still laughing.

Final Thoughts

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

FactSet shows that actual reports almost always beat the expectations at the end of the quarter. (Last quarter was a notable exception). They also show the probable prolonged “earnings recession” with four consecutive losing quarters.

estimate versus actual

Brian Gilmartin is “growing more confident,” that this quarter will mark the earnings bottom. Like FactSet, he notes that the energy sector is key, and he thinks the bottom is in there. Brian did extremely well in avoiding the energy decline for his clients, but he is now gradually building up a position. It is probably wise to pay attention!

Oil and Energy Insider agrees with Brian. (Read to the very end). Their “premium” publication is even stronger concerning this conclusion.

My Take

I agree with Brian that we have reached an earnings trough. It might be another quarter before the investment community joins our conclusion.

There is a chance – and perhaps a good one – that this earnings season will do the trick. Analysts always reduce estimates and companies always hurdle the lower bar. This season includes two significant factors, mostly unnoted by the punditry. Over the years I have read thousands of analyst reports. Your best chance occurs when the herd is wrong about something. I especially like it when the analyst loses focus on the company, ignores their firm’s economist, and decides to play “amateur economist.” Here are the two current factors:

  1. Estimates were built when most non-economists and traders expected that a recession was imminent. We now know that was incorrect.
  2. Estimates included the effects of dollar strengthening. After all, it happened last year, so won’t it continue? That has not happened, so it will not be an (increased) drag on Q1 earnings.

If I am right, earnings will beat expectations by a wider margin than usual. We might even see some positive comments on outlook.

I expect a good earnings season.

Because of cherry-picked spinning, investors watching the reports will probably still have a buying opportunity. At least we know what to watch for: dollar effects, no recession, and outlook.

Weighing the Week Ahead: Is the Fed Too Optimistic?

The calendar continues in something of an alternating mode. Last week had plenty of important data; this week has little. Instead we get multiple speeches from Fed Presidents and Governors and the release of the last FOMC minutes. Little data plus lots of Fed news is a natural draw for the punditry. This week they will be asking:

Is the Fed too optimistic?

Prior Theme Recap

In my last WTWA I predicted a week chock-full of data with a focus on the market reaction. Would good news finally be treated as good? That was a popular topic throughout the week, from Chair Yellen’s speech to Friday’s employment report. Before the opening on Friday, pundits were observing that the solid data was sending stocks lower. By day’s end the market had reversed course, despite weakness in oil prices. The answer to last week’s question is a very tentative “yes.” Doug Short has the full story with an emphasis on April Fool’s Day in 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 has few important reports. Once again, the Fed participants will be out in force. The minutes from the last FOMC meeting will be released. Chair Yellen joins a panel discussion with three past Fed chairs. It is a paradise for pundits. They can spend the entire week on the Fed, their favorite topic. With the background of last week’s news the discussion might have a little more focus. In particular many will be asking:

Is the Fed too optimistic?

Background

There is a huge divergence in opinion about the economy. The data tell one story. Opinion tells another. Compare these two Gallup surveys:

Employment data show strength on every measure. Under-employment is a typical example.

fi5-yc5s90qf0js7j1tiwa

Meanwhile, 29% of Gallup respondents rate current conditions as “poor” and 58% think things are getting worse.

palhthpo70kuyenvrfegvq

Are these opinions too pessimistic?

MRB Partners recent update notes the unwinding of recession fears and the strength of recent data. They suggest that economic surprises will mean upside for stocks and risk for bonds.

Who will be correct?

Viewpoints

The basic themes are familiar.

  • The Fed has painted itself into a box. (TM OldProf mixed metaphor). There is no hope.
  • The Fed has been too optimistic for many years. What is new?
  • The Fed is over-emphasizing markets rather than the economy.
  • The Fed is not clearly communicating plans.
  • The Fed is making appropriate changes, based upon the data.
  • Fed policy really does not matter much. All of the paths are similar.
  • Nothing matters except oil prices.

Challenge Revisited

Your conclusion about how stocks will react is a function of what you believe is driving current market action. We do not get paid for knowing yesterday’s news, but it is important to understand the sources of market reaction.

Last week I suggested a challenge for the week ahead: Would commentators turn to “window dressing” as an explanation for any strength? Friday provided an even better test. In the morning, after all of the key data had been released, pundits observed that “good news was bad.” By the end of the day both the story and the explanations had changed!

The question now is whether Friday’s trading signaled a change in market tone – a willingness to take positive news at face value.

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 good news in a big week for data.

  • Chair Yellen tilted in a more dovish direction, an apparent change from recent commentary. Eddy Elfenbein has key quotes from the speech and a nice explanation. And here is the speech for your own review.
  • High-frequency indicators are stronger, suggesting the end of the “shallow manufacturing recession.” New Deal Democrat’s weekly must-read update of indicators has the whole story.
  • ISM manufacturing turned positive and also beat expectations.
  • Consumer confidence increased to 96.2, beating expectations. Jill Mislinski has the story and this chart:

dshort consumer confidence

  • Pending home sales rose 3.5%. Calculated Risk has the story.
  • Employment gains of 215,000 were solid, as was the ADP private payroll increase of 200K. With the household survey confirming, labor participation higher, full-time employment versus part-time improving, and wages increasing, it was difficult to find something to complain about. The WSJ has the story in fourteen charts, including this one:

BN-NI964_MARCHJ_M_20160401090537

The Bad

Some of the news was negative.

VehicleSalesMar2016

  • Construction spending missed expectations with a loss of 0.5%. It is a volatile series. Steven Hansen takes a deeper look.
  • The oil/equity correlation continues. Bespoke illustrates.

oilspxcorrel

The Ugly

Infrastructure is deteriorating due to lax maintenance since the financial crisis. The latest example concerns structural deficiency in bridges (winning by a nose over Chicago public schools and colleges).

deficient-bridges

 

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 Tim Duy for his work on the economic effects of lower oil prices. This is an important subject for both traders and investors. Nearly everyone expected a stimulus from lower prices, the opposite of the “tax” from prior years. When the result did not develop, it launched a massive and misguided search for explanations, which I described here.

Taking on each specific argument is a challenge. Prof. Duy does a great job of analyzing and explaining a complicated subject. His series of charts makes the argument accessible for a general audience. He highlights some of my regular complaints in this comment and charts from the original source and his own expansion:

This problem, however, just scratches the surface. Look at either of the first two charts above and two red flags should leap off the screen. The first is the different scales, often used to overemphasize the strength of a correlation. The second is the short time span, often used to disguise the lack of any real long term relationship (I hope I remember these two points the next time I am inclined to post such a chart).

Consider a time span that encompassed the entirety of the 5-year, 5-year forward inflation expectations:

6a00d83451b33869e201b8d1b4f7ac970c-500wi

6a00d83451b33869e201bb08cf1d76970d-500wi

Well done!

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 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 notes that their interpretation is that the business cycle will not turn higher. His Big Four update is the single best visual update 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.

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.

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.”

Bob’s employment report commentary shows plenty of data demonstrating that we remain in a time of economic expansion. He cites various factors showing the impact of structural change. There is no better way to track where we are in the business cycle.

With his customary colorful commentary and wit, Josh Brown recalls the multi-year reasons for skepticism about employment:

And the usual bulls*** from the perpetual doom crowd. With a severe case of mission creep, I might add. The argument against life as we know it continuing keeps changing. If you’re lost track, here’s a chronology:

2009: Unemployment still rising!
2010: It’s all census jobs!
2011: Job growth flattening, double dip recession!
2012: “These Chicago guys!” – it’s all fake numbers!
2013: It’s all part-time jobs and bartenders!
2014: Labor Force Participation Rate is too low!
2015: Not enough wage growth!
2016: There are no manufacturing and mining jobs!
2017: ???

Rest assured, it will always be something, until the next recession. Then the naysayers of 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016 will all, in unison, cry out “YOU SEE!”

 

The Week Ahead

We have a light week for economic data. 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:

  • ISM services (T). Will strength versus manufacturing continue?
  • FOMC minutes (W). Theoretically, “old news,” but still watched closely.
  • Initial Claims (Th). The best concurrent news on employment trends.

The “B List” includes the following:

  • Trade balance (T). Important for Q1 GDP.
  • Factory orders (M). Volatile February data with weakness expected.
  • Wholesale inventories (F). More volatile February data expected to be weak.
  • Crude oil inventories (W). Attracting a lot more attention these days.

There is a super-abundance of FedSpeak — a pundit’s paradise. Especially interesting is a Thursday panel discussion bringing together Yellen and three former Fed chairs for the first time (Greenspan, Bernanke, and Volcker).

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, and the bearish lean. Felix is still 100% invested, catching much of the rebound. The more cautious Holmes avoided the downdraft, and during the week increased overall positions to 100% invested. Holmes identifies some good candidates even when the overall market is neutral. 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.

Are you afraid to “pull the trigger” on your trades? Peter Brandt notes that most experienced traders know what they should be doing but often do not execute. Hint: Don’t chase!

What are your trading principles? Dr. Steenbarger challenges you to write down the top five before making the following observation:

Now take a look at how long it took you to think of and write down those five cardinal trading principles.  If it took effort to think of them and took you a while to write them down, then you’ve learned one thing:  Your trading principles are not front and center in your mind.

How do you exit from trades? Adam H. Grimes tells you what you need to know about stops. Holmes was barking approval as I read this one, since he uses all of the techniques described.

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 (recently updated) 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.

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.

If I had to pick a single most important source for investors to read, it would be Morgan Housel’s latest post on more “things he is sure about.” It is a great list – all worth reading. I especially like this one:

Pessimism always sounds smarter than optimism. That’s because pessimism sounds like someone trying to help you, while optimism sounds like a sales pitch — even if it’s usually right.

And also this:

If we could go back seven years and tell everyone that the Dow is near 18,000, unemployment is 4.9% and gas is $1.90 a gallon, they would think we won the lottery and were drowning in prosperity. Instead, we’re complaining about market volatility.

I was actually pretty close to that time frame with my Dow 20K forecast. Everyone did indeed think I was crazy to suggest anything positive, like unemployment getting below 8%. Most people have been unable to stay the course through the ensuing rally.

Stock Ideas

O’Reilly Automotive shows the continuing strength in the auto parts market.

KraneShares has a nice analysis of supply-side reforms in China and news from the “two sessions.” For those who are investing in China, this is must-read information. Hint: Shifting away from over-capacity in coal, steel, and real estate.

Alliance Bernstein analyzes China and the effects on emerging markets, taking a more bullish posture.

Time for emerging markets? (Wasatch Funds)

w704

 

Watch out for….

Excessive concentration in your mutual fund. A leading fund bets too big.

The biggest investor mistakes. You would not try to compete with LeBron James at basketball, so why take on Warren Buffett at investing. Isaac Presley explains. I especially agree with his point about taking on too much risk.

Bad pitches. Speaking of Mr. Buffett, a big baseball fan, it is time to remember that you need not swing at every pitch.

Value Investing
“Davidson” (via Todd Sullivan) explains the key point of today’s WTWA: The divergence between markets and fundamentals. He writes:

Fundamental trends drive whether the news will be better or worse than many anticipate. This is why following economic fundamentals which trend at a relative ‘snails pace’ lets long term investors anticipate whether the ‘news’ is going to be better or worse than that anticipated by Momentum Investors. Using economic fundamentals is the Value Investor approach. I anticipate higher market prices because pessimism continues to dominate the news even in the face of decent economic growth.

William Watts asks whether the value stock gains in Q1 can continue, contributing this chart:

MW-EJ097_value__20160331101952_ZH

(Those wishing to explore this idea further can get my free report on why 2016 can be the year of the value investor. Request via info at newarc dot com. We never use your email address for any other purpose).

Final Thoughts

What should we make of Yellen’s apparent shift?

Ed Yardeni says, “Thanks Again, Fairy Godmother!” He concludes that she (and dovish colleagues) have less confidence in the economy.

Tim Duy writes that she has decided to “save her legacy” by avoiding deflation at all costs.

Ed Hyman suggests

that the next recession may be five or six years away due to the protracted economic cycle. He writes as follows:

 

…recessions usually happen around five years after the Fed’s stance on interest rates changes from easing to tightening. Normally, the Fed begins tightening two to three years after a recovery begins. But the depth and longevity of the Great Recession and the slow momentum of the current 65-month recovery kept the Fed from raising interest rates until December of 2015.

Here is what I make of this:

  • The current debate over the Fed and the economy could go on for years, not just a few months.
  • Many (including politicians of all stripes and parties) gain by emphasizing the negative. It is not just the election, although that provides a focus. News media collaborate.
  • The early stages of Fed policy shifts mean little to stock values, despite some knee-jerk reactions.
  • The Fed will eventually succeed in stimulating inflation. It always does.
  • The eventual reaction to growing inflation will be too late because of the long lags in monetary policy effects.
  • These conclusions are all sharply contrarian.

We will eventually enjoy stronger growth and higher wages, closing the gap between perception and reality. It will happen before the next recession and is therefore actionable now.

Weighing the Week Ahead: Can Markets Finally Celebrate Good News?

The data calendar continues in something of an alternating mode. This week we have a concentration of the important economic releases. We also have daily appearances by Fed members. This provides a daily opportunity for pundits to interpret the news:

Can markets finally celebrate good news?

Prior Theme Recap

In my last WTWA I predicted special attention to housing sector issues in a week without much other data. Instead, the Brussels attacks quickly dominated the news. When there was not much additional information, the stories featured the reactions of one and all. Doug Short notes the three-day losing streak in 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 includes all of the most important reports. Fed participants will be out in forces. There will be plenty of fresh news to ponder.

In theory, the avalanche of news could lead to a dramatic market move. In practice, it usually works differently. The economic data are mixed. The Fed speakers disagree. Pundits are free to interpret the evidence through the prism of their predispositions. The difference in these viewpoints leads me to conclude that many will be asking:

Will good news be good for stocks?

And of course, the corollary – will bad economic news get a cushion from expectations of slower fed tightening?

Viewpoints

The basic themes are familiar.

  • Good news about the economy is good for stocks;
  • The Fed will react to offset economic news either way – keeping the trading range; or
  • Nothing matters except oil prices.

Challenge

Your conclusion about how stocks will react is a function of what you believe is driving current market action. We do not get paid for knowing yesterday’s news, but it is important to understand the sources of market reaction.

Suppose at the start of last week, people could go “back to the future” and know about the Brussels attacks. What do you suppose would have been their market forecast? In actuality, when everyone knew the answer, we heard many explanations that events like this were now accepted as normal risks. I do not like the very idea that such events are “normal.” I understand the theoretical concept that the market significance is small. With that in mind, my point is how much easier it is to make statements like this after the fact.

Let’s try next week instead. Suppose the market has a significant rally. Many will say that it was end-of-quarter window dressing. But we all know the quarter is ending. If you expect a window-dressing rally, say it now – not as some know-it-all explanation next weekend. If the market declines, I suppose it will be called “profit taking.”

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 some good news in a light week for data.

dshort GDP

  • Market liquidity is much better than people think. (Matt Turner at BI).
  • Initial jobless claims of 265K remained very low. (Scott Grannis)

Weekly Claims 4-wk avg

  • Sentiment is still not bullish, despite the recent rally. This is a positive on a contrarian basis. Bespoke has the story.

AAII-Bullish-032416

  • Trucking tonnage is strong. Dr. Ed reviews the rebound in several recent economic indicators, including trucking.

Yardeni Trucking

  • New home sales increased at a seasonally adjusted annual rate of 512K. This was slightly better than expectations, and has more economic significance than existing sales. Calculated Risk once again notes the “distressing gap” between existing and new sales. The two series tracked closely until the housing bubble and bust. Bill observes that the gap is narrowing and expects the trend to continue.

DistressingGapFeb2016

The Bad

Some of the news was negative.

  • Durable goods orders declined by 2.8%,
  • Existing home sales declined 7.1% month-over-month with a seasonally adjusted annual rate of 5.08 million. Calculated Risk cites low inventory and stress in oil patch regions as contributing factors. The chart below shows the changes in months of supply.

EHSYoYFeb2016

Truth or Fake?

We know that truth can be stranger than fiction. Many probably know the real answers to these questions, but please play along.

  1. A major company unleashes a tweeting robot. It swiftly becomes offensive and bigoted. (Does that mean that it passed or failed the Turing test?) The FT’s Izabella Kaminska has an imaginative and interesting take – a Trading Places-style bet?
  2. Petitioners demand open carry of firearms at the Republican National Convention. (Akron Beacon Journal) The fact of the petition is known. The source and motive is not – at least in theory. Readers and clients who are Second Amendment fans please not that I am raising a point about media coverage. You may decide for yourself on the merits of the petition!
  3. The research team at a major mutual fund is on a mission to create self-serving results. This is one of my occasional attempts at humor. Those who read it joined Mrs. OldProf in a laugh. Maybe you will, too. She also liked “The Rookie” who showed both knowledge and integrity. Maybe I’ll bring the character back.

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. Often the winner has done a single refutation of a specific post. Sometimes that is not enough to make the point. No single statement has enough substance to disprove! To appreciate Jacob Wolinsky’s effort you really need to read the entire article. The subject is Harry Dent, who provides the chart below — and a product to save you from the result!

SP-500-rounded-top-768x578

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 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

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.”

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. His Big Four update is the single best visual update 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.

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.

The Week Ahead

We have a huge week for economic data. 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:

  • Employment report (F). Despite wide error band and revisions, still most important.
  • ISM index (F). Good for overall economy as well – some leading quality.
  • Consumer confidence (T). Conference Board version good for employment and spending.
  • Michigan sentiment (F). Same as Conference Board, but uses the “panel” approach.
  • Auto sales (F). One of the most important elements of the recovery – private data.
  • ADP private employment (W). Strong independent measure of employment.
  • Personal income and spending (M). One of the most important indicators.
  • Initial Claims (Th). The best concurrent news on employment trends.

The “B List” includes the following:

  • PCE price (M). The Fed’s favorite inflation indicator deserves attention.
  • Construction spending (F). Volatile February data, but important.
  • Pending home sales (M). Less important than new construction, but worth watching.
  • Chicago PMI (Th). One of two regional measures worth watching.
  • Crude oil inventories (W). Attracting a lot more attention these days.

There is an abundance of FedSpeak! And just when so many think that so much transparency and multiple voices are a problem. Personally, I find it helpful to look at individual positions, just as we would with other democratic institutions that vote, but many seem to prefer less information.

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, and the bearish lean. Felix is still 100% invested, catching much of the rebound. The more cautious Holmes avoided the downdraft, and has increased overall positions to 25% invested. One of these was a lucky (?) call in Pepco Holdings (POM) two days before the surprise closure of the merger. 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.

Not using Fibonacci ratios? Really?? Adam H. Grimes explains his conclusion and invites traders to join the debate.

Doug Short occasionally highlights the “best stock market indicator” from John Carlucci. The current conclusion is an untradeable market. Holmes nodded and barked when he heard this.

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 (recently updated) 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.

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.

If I had to pick a single most important source for investors to read, it would be this thoughtfully-researched piece from Urban Carmel. He begins with this quotation and comment:

The US economy is stuck in one of the most sluggish recoveries in history. Growth is just 2% and it will remain slow as consumers and companies work off vast amounts of debt. The country has gotten off track and neither political party has any answers.

These sentiments were written in Time in 1992, the year one of the biggest growth eras in American history began. But these same words are often used to describe the current economic environment.

The rest of the article is a delightful compilation of past quotes that seem to fit the current era. It is worth a careful read, and you will find it amusing.

Stock Ideas

Under Armour (UA) illustrates the power of celebrity endorsements. (Jeff Reeves) Upside potential?

The newest academic studies show that dividend growth is predictable. It takes a combination of factors – not just one.

Chuck Carnevale explains why these dividends are important. As he always does, he combines theory, data, and specific ideas.

 

Energy Prices

Oil rebound? Dan Dicker at Oil & Energy Insider (subscription required) has ideas about how best to play a rebound. He likes Exxon-Mobil (XOM) as a buyer of a shale player and Blackstone (BX) because of their independent power to buy key assets.

Here is an interesting chart from their free edition:

54848469-2357-4cca-8eeb-8bad4e03fe6a

 

Watch out for….

Bonds. The Personal Finance Engineer analyzes different asset allocations, testing the value of bonds as a way of reducing portfolio volatility. The answer depends a lot on the Fed’s actions.

My sense is that investors can do better.

 

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 this WSJ article on business development companies (BDC’s). A few years ago this was a popular method for getting additional yield by lending to businesses that did not qualify for regular bank loans. Problems are starting to emerge, and people are bailing out of these funds. There is probably a lesson there.

Market Outlook

Tom Lee, one of the most successful strategists in recent years, notes signs that value stocks and small caps are showing good relative strength since the market lows in February. He believes that the prevailing conventional wisdom of dollar strengthening may be incorrect.

3-28

Brian Gilmartin has similar comments about the dollar, suggesting that Q116 may be the trough in the earnings decline.

BlackRock has also turned bullish on U.S. equities.

(Those wishing to explore this idea further can get my free report on why 2016 can be the year of the value investor. Request via info at newarc dot com. We never use your email address for any other purpose).

Final Thoughts

There is continuing tension among the various market viewpoints. It is both too simple and also unhelpful to turn it all into a game of labels.

Investors must have a fundamental method and stick with it. I track the economy (and especially recession potential) because economic growth drives stronger earnings and higher stock prices. Much of the daily news flow is simply noise, distorted further by the simple mental models used by most participants. The three biggest current mistakes are the following:

  1. Making it all about oil. This viewpoint is sufficiently prevalent that it has created excessive skepticism about economic growth and recession potential.
  2. Making it all about the Fed. It is fun for most to criticize Fed policy, but not very useful. Most of the actual predictions (hyperinflation, market collapse after the end of QE) have not occurred.
  3. Making it all about valuation. The most popular methods of market valuation help to keep the average investor scared witless (TM OldProf Euphemism).

Traders have a more difficult challenge. They must guess which of the prevailing, if erroneous, mindsets will dominate on a given day. Good luck with that!

Weighing the Week Ahead: What’s Up with Housing?

Once again, this week’s economic calendar is very light. There will be plenty of political news and daily doses of FedSpeak. Despite the political stories, I expect the punditry to be asking:

What is happening with housing?

Prior Theme Recap

In my last WTWA (two weeks ago) I predicted a focus on the US Presidential election and the possible implications for financial markets. That was a good guess, with these stories remaining at the forefront of news through two weeks, not just one. Last week included the expected news about the Fed even though the expected news was no real policy change! Doug Short notes the post-Fed rally, as you can see from 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 light and the U.S. has a four-day trading week. The President’s trip to Cuba and South America will make news, but probably not financial news. Daily servings of speeches from Fed participants will provide plenty of material for those who always see that subject as most important.

Despite this competition, I expect attention to the role of the housing market in the current economy. Employment remains strong. Auto sales are solid. Retail sales are good. Business investment and housing remain the biggest economic question marks. At one point both were a real drag on economic growth. More recently the effect has been flat rather than negative. With some key data released this week, I expect pundits to be asking: What’s up with housing.

 

Background

Calculated Risk is the “go to source on housing” according to Paul Krugman. For those who are not fans of Krugman, I have said the same thing many timesJ Bill called both the top of the housing market in 2006 and the bottom in early 2012. Very few can claim that distinction. His blog has become a top source for coverage of economic news, earning widespread respect. We should be paying attention to his perspective this week.

Viewpoints

Those bearish on the housing market (and often on the economy and stocks in general) frequently cite the following points:

  • Increasing housing prices strain the affordability for new buyers;
  • Increasing interest rates also hurt affordability;
  • Many homeowners are underwater on mortgages and cannot sell or buy;
  • Demand is lower because of millennials staying at home or choosing to rent;
  • Homes held in foreclosure proceedings or by speculators provide low-priced competition;
  • Home sales are low because there is insufficient supply.

Those who are bullish observe the following:

  • Interest rates remain at historically low levels, helping affordability;
  • The price rebound has helped many to build home equity;
  • We can expect increasing purchases from young people;
  • The foreclosure and speculative sales are less significant than a few years ago;
  • Increased home prices enable some to sell – trading up or even sideways to take new jobs.

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 “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 some good news last week, but it was only marginally positive.

  • The Fed Decision was – as usual – unpopular with many, but was celebrated by markets. There was no policy change, but the guidance suggested a slower pace of future rate increases. Those who believe that the Fed has no tools left might want to read former chair Bernanke’s latest blog post. (He has some favorable observations about negative interest rates).
  • Retail sales missed expectations a bit on the headline, but beat on the core rate. See this week’s Silver Bullet award for more detail.
  • Inflation data moved toward a more normal range. The core rate has been about 2%.
  • Housing starts climbed. The single family annualized rate was 822K, the best since November, 2007. (Bloomberg)
  • Jobless claims remained low at 365K. Staying in this range means that relative few are losing jobs, but we still need job creation.
  • JOLTS data showed continued strength in job openings and the quit rate. (BI)

The Bad

Some of the news was negative.

  • Housing permits missed expectations dropping 3.1% (Bloomberg).
  • Industrial production fell 0.5%.
  • Michigan sentiment weakened to 90.0 falling from 91.7 in February and missing expectations. Many observers noted that the level was still strong, but I watch this indicator carefully.

3-20-2016 12-00-38 AM

The Ugly

Wild conspiracy rumors. When you read something like this it is best to turn the page. Large-scale conspiracies of central bankers, plunge protectors, or the like have no basis in fact. Too many people would know and find it politically or financially tempting to tell their story. These rumors are most frequently lame explanations by people who have been wrong in their market forecasts. They have to blame someone! Respected media sources should not report such “news” and we should not read it.

 

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 two sources, taking on the same topic but using different approaches. The standard media take is that retail sales have been weak, with little evidence of impact from lower gasoline prices.

Todd Sullivan

brings us another post from “Davidson,” who provides consistently fine analysis. (It would be good to see more of him). He notes that many sources confuse nominal and real data showing the chart and the table below:

 

Screen-Shot-2016-03-15-at-2.07.51-PM-581x420

3-19-2016 8-06-09 PM

Here is the key takeaway:

Retail and Food Service Sales are at the highest levels ever measured and trending higher. Would you believe that today’s pace is more than 35% higher than our last recovery. Comments in the media would lead you to believe otherwise. Perhaps you have heard a number of recession forecasts. I have heard at least a dozen well known investors say a recession will occur before this year is out. My view differs considerably and remains very positive.

 

Our co-winner is Steven Hansen of Global Economic Intersection. He prefers rolling averages of unadjusted data, as shown here:

 

z retail1

 

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 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.

indicator snapshot 031916

Recent Expert Commentary on Recession Odds and Market Trends

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.”

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. His Big Four update is the single best visual update 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.

dshort big four

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.

Dwaine has introduced a new indicator, using only the timeliest data and a distinct improvement over the ECRI approach. Read the entire post for details and a number of interesting charts.

Bill McBride is still not even on recession watch.

The Week Ahead

We have a huge week for economic data. 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:

  • New home sales (W). Key element of economic health and growth.
  • Existing home sales (M). Signals overall market health, while less important for construction.
  • Initial Claims (Th). A lot of attention to the recent volatility in the best concurrent news on employment trends.

The “B List” includes the following:

  • Durable goods orders (Th). Volatile but important data.
  • FHFA housing prices (T). Different segment from the more popular Shiller method, but interesting.
  • Crude oil inventories (W). Attracting a lot more attention these days.
  • GDP third estimate (F). Old news, no change expected, and announced when the markets are closed.

The election stories will still attract attention. We have FedSpeak every day.

 

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, and the bearish lean. Felix is still 100% invested, catching much of the rebound. The more cautious Holmes avoided the downdraft, but has only signaled a few buys in the last two weeks. 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 explains that many traders are “playing the wrong game.” This happens when you work with a system that does not really fit your skills. I have known many traders who struggle for years in this type of situation.

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 (recently updated) 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.

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.

If I had to pick a single most important source for investors to read, it would be Morgan Housel’s post, You May Be A Better Investor Than You Think. He notes that many people unrealistically focus on certain index benchmarks. It is more realistic to look at your own goals. The average investor, either active or passive, doesn’t earn a return even close to the benchmark.

 

For an investor to earn the returns of the benchmark, they would have to own it continuously, for years on end, without touching shares and reinvesting all dividends. They’d have to sit patiently when markets plunged, never selling out of fear, never needing the cash to fund retirement or a house, and never paying an advisor for advice.

How many investors actually behave that way? Few. Nothing close to the average investor.

Take the Vanguard 500 fund. It’s the closest thing we have to a tradable benchmark – an S&P 500 fund with a negligible fee.

The fund has an average annual return of 6.3% over the last 10 years. But the average investor in the Vanguard 500 fund earned 4.4% a year. The difference is due to money coming into the fund when the market is high and selling when it’s low.

Despite this, you may be doing a lot better than other investors who are making bad picks or trying to time the market.

 

Stock and Fund Ideas

Dividend stocks. Morningstar reports the top 10 dividend stocks held by their “ultimate stock pickers.” It is an interesting methodology. We own several names on the list and several others are on our watch list for our enhanced yield program.

Taking a look at emerging markets? (I am). Sovereign Man notes that Singapore is one of the richest countries, but has one of the cheapest stock markets.

How about energy bonds instead of stocks? David Bianco contributed this idea to BI’s periodic feature on the most important charts. Many are worth checking out (and thanks to reader CS for reminding me about this).

david-bianco-and-team-deutsche-bank

 

Energy Prices

The International Energy Agency suggests that lower oil production may have created a bottom in prices. The dollar has stabilized and even drifted a bit lower.

Prof. Jeremy Siegel notes that both of these factors might lead to upside surprises in earnings in the coming year – perhaps an increase of 15%.

Watch out for….

Utility stocks. These have been leaders over the last year, driven by momentum rather than fundamentals. Even Felix has owned the group for brief stretches. Value managers see the stocks as significantly overvalued, and it could get much worse if interest rates rise. (The Capital Spectator)

“Smart Beta.” Bailey McCann writes that many such funds are slightly disguised chasers of performance.

Bonds. It does not take much of an increase in rates to wipe out an entire year of returns. (The FT). AAA corporate bonds in Europe just had the worst twelve months since 1999. The chart tells the story:

cffe8eb6-ec36-11e5-bb79-2303682345c8.img

 

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 Kyle Moore’s discussion of why investors might benefit from professional advice. After citing examples from various fields, he writes:

What the do-it-yourself approach cannot provide is an objective third party who asks the questions you’ve never considered. This third party, whether golf coach or financial advisor, should be someone who can help you determine your goals, provide a clear path toward those goals, and keep you accountable in your efforts to achieve them.

 

Final Thoughts

Following Calculated Risk helps you track some indicators that you do not see elsewhere. How about “detached annual lot deliveries.”

w704

In this post he cites Metrostudy chief economist Brad Hunter, who says that the bullish trend in the lot delivery indicator shows up in several important markets.

I also like the fact that NAHB confidence remains strong. The builders might have some insight into their own business.

Finally, the housing bears seem to have an ever-changing story. Low prices were bad, but so are higher prices. The market was going to be flooded with foreclosure sales. Now there is too little inventory.

It is always best to focus on the major trends rather than short-term blips. The potential for a significant economic contribution in housing is there. The possible drag on the economy seems limited.

Housing could be the sector that gives the economic cycle a further push.

[I am long some homebuilders both personally and for clients].

Weighing the Week Ahead: What are the Biggest Market Worries?

The economic calendar is again light in a holiday-shortened week. There are a variety of important news items, but no dominant theme. I expect the punditry to seize the opportunity by asking:

What are the biggest market worries?

Prior Theme Recap

In my last WTWA I predicted that everyone would be talking about the high and rising worry about a recession. That was one of the most frequent media topics for the week, with some sources even choosing “looming” as part of the description. Fed Chair Yellen grabbed the spotlight for her testimony, but even that centered on economic concerns and what the Fed might do. Friday’s rebound was notable in size, but left plenty of skeptics. As Doug Short notes, the rally came in concert with yet another mystery rally in oil prices. Skeptics saw short-covering action, with issues to be revisited this week. You can see the story in Doug Short’s 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

Earnings season continues, but the economic calendar is light in a holiday-shortened week. In most of the world there will be news on trading on Monday, which will set the tone for U.S. markets. With continuing worldwide volatility, I am not expecting a single issue to dominate next week. Instead I expect the pundits to be asking:

What is the biggest worry for investors?

2016 began with declining stocks and plenty of concerns. New candidates surface each week. Listed below are the most-noted worries. Those getting a lot of fresh attention are listed last. I have omitted the evergreen valuation and disaster scenarios.

  • Stocks show technical weakness
    • Almost breached important technical levels
    • Lack of breadth
    • Friday saved only by short-covering
  • The stock market is clearly signaling recession
  • Earnings growth weak and outlook weaker
  • Strong dollar hurting sales, exports, and earnings of multi-national companies
  • New variants on the “R word”
    • Earnings recession
    • Growth recession
    • Manufacturing recession
    • New recession definitions (e.g., slow growth)
    • Self-fulfilling prophecy recession
  • Falling commodity prices
  • China weakness and capital flight
  • There is an emerging leadership crisis
    • Barron’s cover featuring outsider candidates, Trump and Sanders
    • Early takes on Justice Scalia’s death
  • Negative interest rates
  • Declining dollar
  • End of Fed QE policy

I did the list without even going to ZH for ideas, so there are probably more. Feel free to add anything important in the comments!

Scott Grannis reviews many of the issues in one of his helpful chart packs, accompanied by commentary. He reaches a mildly optimistic conclusion, despite the high level of fear revealed in this interesting indicator:

Walls of worry

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 “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

On balance the news was pretty good last week, despite the market reaction.

  • Initial jobless claims have turned lower. Bespoke has both analysis of the data and great charts, including this one:

021116-Initial-Claims-SA

  • Both job openings and the quit rate were strong. The WSJ reports the voluntary quit rate as the highest in nine years. This shows continuing expansion and confidence in job markets.
  • Bullish sentiment (a contrarian indicator) is back to bull-market lows. (Bespoke).

AAII-Bullish-021116

  • Retail sales were strong. Bloomberg calls it a broad-based advance, highlighting online sales and figures with (low-priced) gasoline excluded.

The Bad

As always, some of the news was negative.

  • Leadership worries. Early primary results have favored “outsider” candidates. In my 2016 preview I said that it was far too soon to draw conclusions about the Presidential election. Even though that was only a month ago, there have already been twists, turns, and surprises. That said, commentators note that markets prefer establishment candidates and stable leadership. Personally, we can and should each express our own viewpoints and vote our consciences. Our personal choices may not always be “market friendly.”
  • Michigan sentiment index declined to 90.7. This preliminary read was lower than last month’s final number of 92.0, and also missed expectations by the same amount.
  • Business sales and inventories are in contraction. Steven Hansen takes on a complex subject, showing many interesting takes on how to view the data. (Unadjusted – blue line, inflation adjusted – red line, 3 month rolling average—yellow line).

7980347ztemp

  • Earnings for Q4 remain disappointing. While the earnings “beat rate” is OK, only 49% of companies are beating on sales. Guidance is 68-17 negative. The blended revenue growth would be slightly positive without energy stocks. (FactSet).
  • Low inflation is bad (?) It is if you are the Fed, trying to raise inflation expectations. Data show an actual decline, although still above the Fed’s target. (WSJ).

BN-MO883_MICHIN_G_20160212112634

The Ugly

Cheating. This is more pervasive and important than you probably realize. We see the occasional story of a dishonest broker or insider trading. There are scandals in sports. Even my own world of top-level tournament bridge was recently rocked by revelations about several of the top professional partnerships.

In all of these cases, there are significant financial incentives. Steven Mazie reports on a scientific study that shows that winning begets cheating. Several different experiments show that winners in one game, randomly determined without their knowledge, will cheat on a subsequent game when having the power to do so unnoticed. And this happens with no financial incentive or even public acknowledgment.

But the upshot is troubling for people who care about the future of humankind. “It is difficult to overstate the importance of competition in advancing economic growth, technological progress, wealth creation, social mobility, and greater equality,” the authors write. “At the same time, however, it is vital to recognize the role of competition in eliciting censurable conduct. A greater tendency toward unethicality on the part of winners … is likely to impede social mobility and equality, exacerbating disparities in society rather than alleviating them.” There may be no way to completely remove this flaw from human nature, but “[f]inding ways to predict and overcome these tendencies” would seem to be a mission well worth pursuing.

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!

 

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 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

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.”

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. His Big Four update is the single best visual update 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.

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.

Econbrowser’s Prof. Menzie Chinn updates a yield-curve based recession model. He notes that the model predicts recessions accurately about 78% of the time and non-recessions at an 85% pace. The current recession probability for the next year is about 9%.

Similarly, see Jim Picerno, who does a similar analysis and concludes as follows:

Meantime, let’s keep reminding ourselves of a salient fact: every US recession has been accompanied by a plunging stock market but not every stock-market plunge has been accompanied by an NBER-defined recession.

 

The Week Ahead

We have another quiet week for economic data. 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:

  • Housing starts and building permits (W). Potential for more gains?
  • FOMC minutes (W). Even when you think there is nothing more to learn……
  • Industrial production (W). A sign of improvement in this sector would be very encouraging.
  • Initial Claims (Th). A lot of attention to the recent volatility in the best concurrent news on employment trends.

The “B List” includes the following:

  • PPI (W). No sign of inflation. It would take a few “hot months” to get serious attention.
  • CPI (F). See PPI.
  • Philly Fed (Th). Gaining more attention as the first read on the prior month.
  • Crude oil inventories (W). Attracting a lot more attention these days.

There is some FedSpeak on tap, but less than usual. Presidential campaigning will be intense before next weekend’s primaries. The Chinese holiday is over, and some expect news on Monday, when U.S. and Canadian markets are not trading.

Earnings reports are still in full swing.

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, and the bearish lean. Felix is still 100% invested, but with more conservative choices than last week. The more cautious Holmes is still about 1/3 invested. For more information, 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.

When might human traders do better than computers? Rob Carver has a thoughtful comparison. As a manager employing computerized decisions in some programs, the topics reflect my own experience. The question of when a human should “override” a model decision is especially interesting. I frequently consider this when reviewing the decisions of Felix and Holmes.

Brett Steenbarger continues to suggest important and novel ideas about trading. This week he writes about having the macro wind at your back, and how to handle that happy news.

More importantly he gives some tips on how to spot the moves of big institutions.

It’s a common mistake to become tunnel visioned during times of market stress and only follow the position(s) you are trading.  That blinds us to the waxing and waning of macro themes and the influence of large market participants.  You may not trade the markets thematically yourself, but it helps to have those themes at your back–and certainly not in your face.

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 (recently updated) 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.

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.

If I had to pick a single most important source for investors to read, it would be this short post from Tadas Viskanta. He speaks clearly and effectively to investor concerns about how they are doing and second-guessing decisions. He notes the weak start to the year by some famous investors, and also advises tuning out the so-called “authority figures” on financial TV. His key advice? Cut yourself some slack!

 

See also the Investment News report on some of the top fund managers, down 20-25% in spite of their long-term success records.

 

Stock and Fund Ideas

Three Warren Buffett picks are on sale. (Matthew Frankel at TMF).

Ben Carlson cites data showing the historical rebound of global stocks following a bear market. He also supplies a list of what has been working and what has not – at least so far.

Tough times for solar stocks. (ETF.com).

 

Energy Prices

Last week. (MarketWatch)

Long term. BP’s annual energy outlook is a great data source.

1455039323847

Watch out for….

Guaranteed income certificates. David Merkel has a nice post on investment charlatans with a good specific example.

Non-traded REITs and BDC’s. FINRA accuses broker of bilking Native Americans for over $11 million.

Special care is required when investing in these vehicles. You had better know what you are doing, and understand the risks.

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 this advice from Carl Richards (NYT) about the need to accept uncertainty. Check out the stories about medical examples. You might also review my recent piece on the costly craving for explanations.

Final Thoughts

Investors do not understand worries, uncertainty, and scary headlines. If there were no “headwinds” then the market would be more richly valued. Most people have heard the expression, “wall of worry” but few understand it.

Almost six years ago, when the DJIA was at 10K and many were expecting it to go to 5000, I made my controversial Dow 20K call. There were many market worries, which are now mostly history. Instead, we have moved on to a new list of challenges. (Check out the story here).

The market gradually rises as fears are surmounted and earnings rise. There will be a time to become more cautious, or even bearish. That time will be indicated by data, not by fear-inducing headlines and speculation.

For many weeks I have noted that traders and others with a very short time frame should reduce risk. Investors should be seeking opportunity.

My noted neighbor to the North is Brian Wesbury. (Wheaton and Naperville once contested the location of the County Seat. Wheaton took the records and Naperville folks met at the Pre-Emption House to plan a raid. Somewhere during the night, the plans became muddled. Rumor has it that strong drink was involved).

Brian also wrote this week about whether recession was “looming” and how to interpret the market action. His conclusion (similar to mine last week):

This is a correction, not a turning point for the stock market.  Our models, with stocks driven by interest rates and corporate profits, not sentiment, suggest the market is still significantly undervalued.

It’s not often you get recession level prices when there is no recession.

Put money to work, don’t run away.

Weighing the Week Ahead: Is a Recession Looming?

The economic calendar is light and it is the start of the week-long Chinese New Year. This means some media time and space that must be filled. Needing an attention-getter, I expect the punditry to be asking:

Is a recession looming?

Prior Theme Recap

In my last WTWA I predicted that everyone would be talking about whether the stock market correction was over. That was one of the most frequent media topics for the week, especially at the lows on Wednesday and again on Friday. As expected, answers varied and we still don’t know for sure. The early-week strength, mid-week rebound, and Friday selling in Doug Short’s 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

Earnings season continues, but the economic calendar is light. Because of the Chinese New Year, we will not have stock or economic news from there. With plenty of recent economic data and scary forecasts to digest, pundits are pondering the worst. When that happens they ask everyone (regardless of qualifications) the same question:

Is a recession looming?

With economic data, especially in manufacturing, weaker than it was for most of 2015, many wonder what this portends. Listed below are popular bearish arguments from a variety of sources:

  • The recession has already started.
  • The stock market is clearly signaling recession.
  • Falling commodity prices have signaled a recession.
  • Declining oil prices have started a death spiral.
  • China economic weakness will drag down the rest of the world.
  • Emerging market weakness will drag down the rest of the world.
  • Energy company bankruptcies will drag down banks.
  • The Fed is out of bullets.

The bullish arguments are more concentrated in the economic community:

  • The economy shows only modest growth, but not a recession.
  • A U.S. recession has never resulted from global weakness.
  • Historically reliable indicators do not show a recession.
  • Key economic indicators followed in dating recessions have not peaked.

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 “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

On balance the news tilted to the negative side last week, but there were a few bright spots.

  • Federal receipts (and spending) are 3% higher. This is usually a positive economic sign. (CBO via GEI).
  • The Fed may be walking back the tough talk from last month. (Tim Duy).
  • Private payrolls grew by 205K according to the ADP report. James Picerno notes that while the level is solid, the pace is declining.

adp.03feb2016

The Bad

Most of the economic data tilted negative.

  • Earnings reports have disappointed. Even growth ex-energy is only 2.1% and sales growth barely positive. Earnings expert Brian Gilmartin provides data, analysis as well as a look at forward earnings. Bespoke notes that the overall stock reaction on earnings day has been slightly positive. Take a look at their lists of the biggest winners and losers.
  • ISM manufacturing was about as expected at 48.2, but it is the fourth consecutive month below 50.
  • ISM services remained in expansion at 53.5, but that was slightly lower than expectations.
  • Initial jobless claims edged higher, but Calculated Risk notes the level is still not bad.

WeeklyClaimsFeb042016

  • Ford F150 sales were down 5% on a year-over-year basis. It is still the best-selling U.S. vehicle, and is also popular with construction companies and small businesses, which is why I watch it as an economic indicator.

F150-Sales-YTD-2016-013116

  • Employment gains disappointed, at least on the overall non-farm payroll gain. The story was actually mixed, since the unemployment rate and earnings were both higher. Everyone should remember that the “headline number” has an error band of over 100K, even after revisions. I like the WSJ summary of the report, featuring twelve charts.

The Ugly

Martin Shkreli. His smirking non-testimony before a House committee was bad enough to make the Representatives seem attractive by comparison. My concern? A rational debate on drug pricing is needed. Between this guy and the candidates, we can expect months before this will happen. Meanwhile, what about the drugs that deserve investment — right now.

 

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 Paul Hickey of Bespoke Investment (via Pradip Sigdyal of CNBC). Over the last few years we have frequently heard about high margin debt on the NYSE. The argument was that the degree of leverage signaled danger. The accompanying charts seemed to show coincident peaks, but people saw what they wanted to see.

 

Although declining margin levels are often cited as a bearish signal for the market, Hickey believes that it is a small concern given the indicator’s coincidental nature. On the other hand, the prospect of rising rates spooks investors much more, and holds them back from buying stocks.

“Margin debt rises when the market rises and falls when the market falls,” Hickey said. “If you look at the S&P 500’s average returns after periods when margin debt falls 10 percent from a record high, the forward returns aren’t much different than the overall returns for all periods.”

 

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 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 main 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

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.”

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. His Big Four update is the single best visual update 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.

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.

Dwaine has a new article providing a first-rate analysis of various recession indicators. It is well worth a careful read and a study of the charts. Here is his conclusion, and a chart showing his version of the “Big Four” indicators.

To summarize, despite many pockets of disconcerting co-incident indicator weakness, many brought on by the energy and commodities complex, the risk of near-term recession appears low. Although many short-leading indicators are showing recession there are not enough of them yet to warrant a confident recession call. What remains highly elusive is finding long-leading data that points to recession.

Recession odds are rising, as is commentary surrounding recession. Most of this commentary centers around “cherry picking” this or that indicator or sector to bolster an argument but rarely covers broad-based assessments.

2016-02-03_1900

Peterson Institute and Market Valuation

I regard the equity risk premium from the Indicator Snapshot table as an important measure of market perceptions about the economy and earnings. A problem with many discussions of stock valuation is that they completely ignore expected inflation and interest rates. Olivier Blanchard and Joseph E. Gagnon, both top economists with many years of relevant experience, now at the Peterson Institute for International Economics, clearly explain this point.

…(T)he deviations of the P/E from its historical average are in fact quite modest. But suppose that we see them as significant, that we believe they indicate the expected return on stocks is unusually low relative to history. Is it low with respect to the expected return on other assets? A central aspect of the crisis has been the decrease in the interest rate on bonds, short and long. According to the yield curve, interest rates are expected to remain quite low for the foreseeable future. The expected return on stocks may be lower than it used to be, but so is the expected return on bonds.

The way to make progress is to compute expected returns on stocks and bonds, and look at the equity premium, pre- and post-crisis. With this in mind, table 1 compares expected real returns on stocks, constructed in three different ways, with expected real returns on bonds, constructed in two different ways. To smooth out temporary fluctuations, the measures are based on averages of four quarterly values in each year. We compare expected returns as of 2015 with those of 2005, a time when there was little concern about overvaluation in stock prices. Our results would be similar if we had compared with any year in the mid-2000s.

You can debate how much of an adjustment to make for interest rates, but not whether some consideration is needed.

blanchardgagnon20150201-figure1-1

 

The Week Ahead

We have a relatively quiet week for economic data. 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:

  • Retail sales (F). Any sign of life in this important indicator?
  • Michigan sentiment (F). Important concurrent read on employment and spending – a bit off of the peak.
  • Initial Claims (Th). The best concurrent news on employment trends, with emphasis on job losses.

The “B List” includes the following:

  • Wholesale inventories (T). Volatile December data has GDP impact.
  • Business inventories (F). See wholesale inventories.
  • Crude oil inventories (W). Attracting a lot more attention these days.

Fed Chair Yellen testifies about the economy – Wednesday the House Financial Services Committee and Thursday the Senate Banking Committee. The statement will be the same, but the questions will be different. Market observers will be searching for hints about a changed attitude since the last Fed meeting.

Tuesday’s New Hampshire primary will have a big impact on the prospects for candidates, but probably not much market impact. Things will get more interesting when the primaries move on to different regions and larger states.

Earnings reports will also remain important.

 

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, and the bearish lean. Felix increased from about 80% invested to 100%, but 2/3 is in foreign ETFs. The more cautious Holmes is about 1/3 invested. For more information, 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.

holmes

Hedge funds are hiring poker pros. (When I started in the business it was bridge players). The analysis of risk and reward combined with speedy decision making is common to both. Garrett Baldwin has an interesting and informative article as part of a series.

Brett Steenbarger continues to deliver help to traders that they could not get anywhere else. His seven tips for getting to the next level are quite helpful. I especially like #1.

1)  My profitability has improved since I’ve focused on consistency rather than profitability.  I’ve honed in on what are good trades for me and where my profits have come from.  I just want to be consistent in trading those good trades.  If I can do that, the profitability will come.  And if I want greater profitability, I should size up the good trades, not take other, more marginal trades.

 

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 (recently updated) 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.

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

Other Advice

Here is our collection of great investor advice for this week.

If I had to pick a single most important source for investors to read, it would be a short but important post. Bespoke shows what can happen to high multiple stocks, using data from this earnings season.

 

decilespe

 

This naturally raises the question of how you can avoid such disasters. I recommend using Chuck Carnevale’s F.A.S.T. Graph tool. Here is an example of what you could learn:

lnkd fastgraph

Helping you to avoid this 45% haircut:

LNKD

 

Stock and Fund Ideas

AAPL is frequently recommended as a cheap stock. Charles Sizemore goes beyond the typical arguments in concluding that “It’s ridiculous!”

MLP’s may still have plenty of downside. (Kevin Kaiser via Barron’s)

Resource prices may have bottomed says Jeremy Grantham (!) in the analysis of the positives from low oil prices.

 

Interpreting Research Results

The Psy-Fi Blog explains the weakness in most current stock research.

Here’s what ought to be a really boring idea – we need scientists in general and psychologists and economists in particular to stop hypothesising after results are known (HARKing, geddit?). Instead they need to state what they’re looking for before they conduct their experiments because otherwise they cherrypick the results they find to confirm hypotheses they never previously had.

By coincidence, I wrote a similar post on the same day. My emphasis is on how costly it is to insist on some post-hoc explanation of surprising phenomena.

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 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 this advice unconventional advice from Allison Schrager – you might not always want to max out your 401K contribution. The article provides a good analysis of key factors in retirement planning, and the tradeoff with keeping some emergency cash.

Final Thoughts

My weekly prediction (guess?) for WTWA typically raises a theme question with a variety of possible answers. Even if it is the topic of the week, it is often not resolved. I offer my own conclusions, but sometimes do not have a strong opinion.

This week is different. My extensive research into the best methods for recession forecasting provides the basis for some confidence. The methods I highlight have worked the well, and done so for a long time.

The market is pricing in recession odds of nearly 50%. There are so many negative headlines, often misleading.

The “Oilmageddon” term coined by some Citi analysts captured the headlines. You had to read to the very end of the articles to see that this is something they suggested might happen. (CNBC interview). Their actual prediction was that it would probably be avoided by some appropriate policy adjustments. Scott Grannis notes that such problems are usually self-correcting and suggests that the best policy would be to get out of the way. Those predicting the inevitable increase of the dollar would do well to consider this chart:

Screen Shot 2016-02-02 at 12.37.09 PM

In sharp contrast, the best sources see recession odds of 10% or lower. This is the greatest opportunity left in this business cycle, since you can buy many value stocks with single-digit multiples. Great analysis from John Alberg and Michael Seckler (via Advisor Perspectives—read by advisors, but also interesting for individual investors).

 

Everyone wants to know when to expect the value rebound. I do not expect a single, mind-changing event. This is a change that will happen gradually, as evidence is reflected in higher earnings.

Weighing the Week Ahead: Is the Correction Over?

Stocks once again made a sharp turnaround late in Wednesday’s session. The “mystery” rebound took the S&P 500 up 3.5% in about two days of trading. Despite the important economic releases and heavy earnings calendar next week, expect the punditry to be asking:

Is the correction over?

Prior Theme Recap

In my last WTWA I predicted that everyone would be watching for a dovish tilt from the Fed. That was certainly the big story for the first part of the week, including several programs that used the “dovish tilt” phrase. Even after the Fed meeting, speculation about the “real meaning” of the FOMC statement remained newsworthy. The initial reaction was that the message was indeed a dovish tilt. The brief rally quickly turned negative. By day’s end the agreed theme was that the Fed had not gone far enough. Or maybe was signaling weakness. Or maybe they were confused. You can see the turnaround in stocks from Doug Short’s 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

There is a big economic calendar this week, featuring the employment report on Friday. There is also a continuing flow of major earnings reports. Despite this I expect the debate over last week’s market action to remain at center stage. Everyone will be wondering –

Is the correction over?

Since the decline from the market peak is now below 10%, the market is out of correction territory. Since there is so much disagreement about what brought the rebound, no one really knows if the improvement in stocks will stick.

Listed below are popular arguments from Thursday and Friday. I expect support for each as we try to interpret the big week of news.

  • The surprise cut in rates from the Bank of Japan.
  • Fed “clarification” of the statement in subsequent appearances.
  • Stronger oil prices.
  • End-of-month buying.
  • Short covering.
  • Some improvement in earnings reports.
  • Some improvement in the late-week economic data.

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 “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

On balance the news was pretty good last week.

  • Initial jobless claims decreased to 278K. The less volatile four-week moving average dropped slightly. The recent drift higher had attracted some attention as a possible warning about weaker net job growth. The overall level remains encouraging, but last week’s report is not part of the time period for Friday’s employment report.
  • New home sales hit the highest level in almost a year. The annualized rate was 544K, significantly higher than expectations. Scott Grannis sees room to run. See the other dozen charts in this post.

Housing Starts

  • Consumer confidence was strong in the Conference Board version – 98.1
  • Chicago PMI surprised at 55.6. This is a sharp rebound from the low levels of the past few months, including the prior read of 42.9

 

The Bad

Some of the economic data was disappointing.

  • Q4 GDP grew only 0.7% slightly lower than reduced expectations. While “old news” it is still a discouraging base for future growth. New Deal Democrat finds a few positives in the report.
  • Pending home sales disappointed with a gain of only 0.1% and a downward revision for the prior month. (Calculated Risk)
  • Consumer sentiment was disappointing according to the University of Michigan survey. Doug Short is the authoritative source on sentiment and economic links, with a package of excellent charts.

dshort michigan

  • Durable goods orders fell 4.3% with the year-over-year decline in the core rate even worse.

 

The Ugly

The “doomsday clock” remains at three minutes before midnight.

 

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.

 

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 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. (Email requests to main 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

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.”

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. His Big Four update is the single best visual update 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.

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.

Mark Thoma has an excellent analysis – clearly written and not requiring an economics degree to understand – of the problems in measuring well-being through the GDP. A few minutes with this article will illustrate the why the measure can be either exaggerated or understated.

The Davos discussion, however, is pointed at a different flaw in measured GDP: its inability to fully capture the benefits of technology. Think of a free app on your phone that you rely upon for traffic updates, directions, the weather, instantaneous information and so on. Because it’s free, there’s no way to use prices — our willingness to pay for the good — as a measure of how much we value it.

As a result, GDP statistics won’t capture the benefits we gain from free apps, just as it has difficulties accounting for changes in the quality of goods over time.

And finally, the pseudo-experts are at it again, with plenty of ill-informed recession forecasts. I explain how to find real experts in this post. The market mispricing of recession probability may well be the biggest current trap for the average investor.

James Picerno also offers some great advice on this topic. Hint: Beware of those who cherry pick a few data points to serve their agenda.

The Week Ahead

We have a relatively quiet week for economic data. 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:

  • Employment report (F). Will recent strength continue?
  • ISM index (M). Based on last week’s Chicago PMI, some see a move back above 50.
  • Personal income and spending (M). Key take on households.
  • ADP employment change (W). Good alternative to the “official.”
  • Auto sales (T). Will the strength continue?
  • Core PCE prices (M). The Fed’s favorite inflation measure has been very tame.
  • Initial Claims (Th). The best concurrent news on employment trends, with emphasis on job losses.

The “B List” includes the following:

  • ISM services (W). Not as established as the manufacturing index, but also important.
  • Factory orders (Th). December data. Often volatile and recently weak.
  • Construction spending (M). December data. Also volatile but recent strength.
  • Productivity (Th). Q4 data, but important for GDP growth.
  • Crude oil inventories (W). Attracting a lot more attention these days.

In the wake of the meeting Fed speakers will be back in action. Expect questions about what they actually said and did they mean it? Corporate earnings reports will remain in the spotlight. News from around the world is a continuing wild card, with U.S. stock futures often showing big moves in pre-market trading.

And last but not least, there will finally be some actual Presidential voting in the Iowa caucuses on Monday.

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 five 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?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

We continue both the neutral market forecast, and the bearish lean. Felix increased from about 50% invested to 80% on Thursday. The more cautious Holmes is about 1/3 invested. For more information, 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.

Brett Steenbarger continues to deliver help to traders that they could not get anywhere else. We all know that psychology is important to our performance, but can we learn to use frustration as a positive factor?

To stay proactive, we need to use frustration as a cue to stop and reflect, not as a spur to act.  Frustration can become our friend if it becomes our prod to improve who we are and what we do.

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 (recently updated) 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.

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

Other Advice

Here is our collection of great investor advice for this week.

If I had to pick a single most important source, it would be The Conversation’s discussion of psychology and whether negativity can generate a self-fulfilling prophecy. The article does a nice job of comparing economic facts with the anchoring biases of observers.

 

Stock and Fund Ideas

Barron’s has a cover story recommending bank stocks. They mention all of the big banks that you know and several regional choices that you might not. The regional banks include some of our holdings. I like the concept, and prefer regional names right now. They are not as much of a target for government, and you may also be able to dodge significant energy exposure.

Barron’s last roundtable issue has many stock ideas from their well-known participants. Even if you are not a regular subscriber, you might enjoy this issue. While I make my own decisions, I usually get some ideas that I have not seen elsewhere.

“Peak auto?” Some are wondering, but Ford had a breakout year. Joann Muller of Forbes takes a deeper look at the company’s report, including issues for 2016. Not only did Ford have record profits and the best-selling vehicle in the U.S., the F-150 pickup. Some might be surprised at the strength in China sales.

 

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 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 this advice from Carl Richards of the New York Times. He emphasizes the importance of having a financial plan and sticking to it, tuning out the crazy forecasts.

Every year, right around this time, all the big brokerage firms, economists and banks come out with projections of what’s supposed to happen next in the financial world. This year is no exception. Especially prominent in the news has been the Royal Bank of Scotland warning, in no uncertain terms, that people should “sell everything” and prepare for a “fairly cataclysmic year ahead.”

You hear something like this from RBS, and it’s so clear, right? “Sell everything.” “Cataclysmic year.” Those aren’t vague terms. If you’re a normal human being, hearing news like this is disconcerting. A pit forms in your stomach, and you don’t know what to do. You certainly feel like you should be doing something, but what?

Fast-forward a few days. You’re thinking it over, trying to decide what to do, and you tune into the news again to see what RBS is suggesting. But you don’t hear from RBS. Instead, you get an update from Goldman Sachs. Goldman Sachs — and they’re smart too — reports that they see an 11 percent upside in the “S&P 500 after an ’emotional’ sell-off.”

 

China

Fears are exaggerated says Steve Roach, former Chairman of Morgan Stanley Asia. (False Alarm on China) The transition to a new growth model “does not spell an imminent crisis”.

 

Final Thoughts

I often wish that I could do a little test with market experts. They get to see the news for the day in advance – reported earnings, the text of Fed statements, whatever. From this information they must predict the closing market levels.

The results would be surprising to most. The certainty you hear in the day’s end news reports makes absolutely no sense. Wednesday was a great example. The evening news said that the Fed did not change a key interest rate and hinted that the pace of rate increases might be slower. (Fair enough). The second sentence said that the market was expecting more. No one knew that beforehand, despite countless hours spent discussing expectations.

When you are reporting the news you must try to “explain” everything, whether the fit is good or not. The Bank of Japan surprise interest rate cut is another example. Since markets rallied strongly after the announcement, most people inferred causality. It takes some creative thinking to make this into a huge positive story for U.S. stocks.

My conclusions are based on probability, not certainty. Stocks continue to trade with oil because the correlation is working. Economic data continue to show modest growth with recession odds very low. Corporate earnings are most important. With that backdrop, investors can makes some logical decisions. But they might not work right away!

No one knows whether the correction is over.

Weighing the Week Ahead: A Dovish Tilt from the Fed?

Stocks managed a mid-day rebound from a 566-point decline in the DJIA. Among the suggested reasons was more help from central bankers. With a light economic calendar, I expect Fed speculation to compete with earnings in the week ahead. Everyone will be wondering:

Will the Fed signal a dovish tilt?

Prior Theme Recap

In my last WTWA I predicted that everyone would be watching earnings reports carefully, wondering if they could provide a floor for stocks. There was indeed a lot of attention to earnings, but that news did not seem to support the stock market. The stock rebound coincided with a mysterious rally in oil. (Could some really have been confused by the shift from the expiring front month contract? Really??) You can see the mixed story for stocks from Doug Short’s 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

There is a fairly light economic calendar this week, featuring the FOMC decision on Wednesday. Despite the continuing flow of earnings reports, speculation about the Fed will dominate market discussion until after the meeting. Everyone will be wondering –

Will the Fed signal a dovish tilt?

No one expects a change in rates at this Fed meeting, but the language in the statement will be carefully parsed for signs that the path of future increases will be less aggressive. Here are the key viewpoints:

  • The Fed is out of touch with the economy, increasing rates at the wrong time. What is needed is more QE.
  • The Fed must reduce the implied four rate hikes to one or two, in line with market expectations.
  • Higher U.S. interest rates, just as other countries are reducing theirs, will strengthen the dollar. This will hurt the U.S. economy as well as provide more pressure on commodities.
  • Fed policy matters little right now. It is all about oil prices.
  • The Fed sees a stronger economy than do market participants. There will be no hint of a more dovish policy.

You will see vigorous proponents for each of these viewpoints.

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 “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

On balance the news was pretty good last week.

  • People are driving more. This is good news since it provides more satisfaction without additional cost. Calculated Risk notes that gas prices are down about seventy-four cents per gallon while miles are up 4.3%.

RollingNov2015

  • ATA truck tonnage improved by 1% over last year. The organization’s chief economist, Bob Costello, cautioned that the overall results for the year were not that strong. He cited high inventories in the supply chain.

01 19 16 -- Tonnage Graphic for Web Posting

  • Existing home sales were very strong. Calculated Risk explains the positive effect of changes in regulations, as well as the needed and likely increase in inventory.
  • High frequency indicators have improved. New Deal Democrat has an excellent weekly report that includes many items you might otherwise miss. I always read it, and you should, too.
  • The earnings news has been pretty good. Bespoke reports the data. Long-time earnings expert Brian Gilmartin notes that reports often improve as the season continues.

epsrevs

The Bad

Some of the economic data was disappointing.

  • Initial jobless claims increased again, this time to 293K. The less volatile four-week moving average also moved higher. I watch this closely. It remains at encouraging levels, but the move bears watching.
  • Housing starts and building permits declined. Calculated Risk, our go-to source on all things housing has the full story, great charts and analysis. Bill McBride believes that next year will see a reduction in the ratio of multi-family starts. New Deal Democrat was a bit more positive.
  • Sea container counts remain weaker than last year. Steven Hansen (GEI) reports.

z container4

The Ugly

A weakened European Union. Just as the economic issues were looking better, there is a new issue – immigration and open borders. (News from Davos).

 

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, but perhaps someone will identify the errors in this post, which was widely-publicized early in the week.

Please take a look at our review of last year’s winners. I think you will find the summary fun to read, and the lessons still quite timely.

 

A Little Fun?

I hope that our annual Hot and Not Hot post will bring a smile to your face. It also might stimulate a few investing ideas, as you recognize how much trends have changed in the last year.

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 using our new model. While it is in the same tradition as Oscar and Felix it has 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 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. We have decided that “Oscar” does not fit the new approach, so my marketing department is working on a different name – perhaps a dog breed, a symbol, or a famous fictional character.

The new method is intelligent and careful about new opportunities and quick to exit when there is danger. What fits these characteristics? Suggestions welcomeJ

Interested readers can get the program description as part of our new package of free reports, including information on risk control and value investing. (Email requests to main 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

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.”

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. His Big Four update is the single best visual update 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.

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 published a research note helping to identify the probability of future new lows by using the number of times the market broke support. There was a further decline after publication, but history still suggests about a 90% chance that we have seen the worst of it. Dwaine carefully notes that we are moving into the part of history where we have fewer past cases.

2016-01-19_1441

The pseudo-experts are at it again, with plenty of ill-informed recession forecasts. I explain how to find real experts in this post.

I am delighted to note that Bill McBride of Calculated Risk also joins in this myth-busting. He cites his own (very accurate) history on the economy. He has a modest and carefully-reasoned argument with a conclusion I strongly endorse:

So right now I expect further growth for the next few years (all the austerity in 2013 concerns me, especially over the next couple of quarters as people adjust to higher payroll taxes, but I think we will avoid contraction). [CR 2015 Update: We avoided contraction in 2013!] I think the most likely cause of the next recession will be Fed tightening to combat inflation sometime in the future – and residential investment (housing starts, new home sales) will probably turn down well in advance of the recession. In other words, I expect the next recession to be a more normal economic downturn – and I don’t expect a recession for a few years.

Scott Grannis refutes those worrying about economic weakness like 2008. Here is a key quote and an interesting chart:

Bottom line, the underpinnings of financial markets look reasonably solid, and that offers the promise that the turmoil in the oil patch will be resolved without plunging the world into another 2008-style crisis.

TED spread

The Week Ahead

We have a relatively quiet week for economic data. 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:

  • FOMC rate decision (W). No policy changes or a press conference so the focus will be on language.
  • Q4 GDP (F). Will it have a “one-handle”?
  • New home sales (W). Important read on construction and the economy.
  • Consumer confidence (T). The Conference Board version has been strong.
  • Michigan sentiment (F). Will the final read for January maintain the preliminary strength?
  • Initial Claims (Th). The best concurrent news on employment trends, with emphasis on job losses.

The “B List” includes the following:

  • Chicago PMI (F). More widely followed when it comes a weekend before the national ISM report. Recent weakness worrisome for many.
  • Pending home sales (Th). Not as important as new construction, but still a good overall read on the housing market.
  • Crude oil inventories (W). Attracting a lot more attention these days.
  • Durable goods orders (Th). Volatile December data, but still important.

No FedSpeak until after the meeting, and then not much. Corporate earnings reports will remain in the spotlight. News from around the world is a continuing wild card, with U.S. stock futures often showing big moves in pre-market trading.

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 five 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?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

We continue both the neutral market forecast, and the bearish lean. We stepped up to about 50% invested in trading programs on Wednesday – not catching the bounce perfectly, but close. There are often plenty of good investments, even in an expected flat market, but the cash has provided a nice cushion for both Oscar and Felix in the last few weeks. For more information, 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).

Do you think you need a trading coach? You probably do! Dr. Brett gives some ideas about being your own coach, including a daily review of your best and worst trades.

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 (recently updated) 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.

Other Advice

Here is our collection of great investor advice for this week.

If I had to pick a single most important source, it would be Chuck Carnevale’s advice on how to avoid “value traps.” As he notes, this term is often used quite carelessly, applied to any stock that is cheap on a P/E basis but is currently out of favor. Here is a key quote:

 

The value opportunity occurs when price drops farther than temporary or cyclical fundamental deterioration warrants. In other words, the market overacts to normal cyclicality. This is where focusing on the dividend can identify a value opportunity rather than a value trap. If the dividend continues to rise in spite of cyclicality in earnings, attractive value is created representing opportunity, not a trap.

As always, Chuck provides some great examples.

On the theme of price movement versus fundamental analysis, you might enjoy the contrast from Josh Brown about “closet technicians.”

Stock and Fund Ideas

What about airline stocks? Shouldn’t they be enjoying lower fuel prices? The Trading Goddess explains that some misguessed on hedging plans. She provides some ideas about which airlines.

International Paper – cheap and recession-resistant. (Barron’s)

Barron’s Roundtable issues (this week and last week) have quite a few stock ideas from their well-known participants. Even if you are not a regular subscriber, you might enjoy this issue. While I make my own decisions, I usually get some ideas that I have not seen elsewhere.

Energy

 

Leading oil economist Prof. James Hamilton looks at production from various countries, concluding that the current imbalance will not be easily corrected. He expects cuts in U.S. production as well as continuing low prices.

 

 

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 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 this advice from Susan Dziubinski of Morningstar – five financial habits to break in 2016. The top item? Checking on your portfolio too often.

 

Market Psychology, Timing, and Outlook

Investors pull $24 billion in equity funds in January. (MarketWatch).

Scott Rothbort identifies the market bottom with the help of some interesting anecdotal evidence. You will enjoy the stories. (My Gut Feeling)

Michael Batnick provides helpful data showing that drawdowns are quite normal, even in good years.

George Soros is bearish. He doubts that the Fed will raise rates and has concerns about China.

 

Watch out for…

Dividend stocks with payout ratios that are too high. (Barron’s)

Those selling hot IPOs. (Josh Brown)

Final Thoughts

Last week I said, “Traders may still need some fancy footwork in the next few weeks”. That was an understatement! Our trading models were all more aggressive at mid-week, but with reduced size. That caution seems reasonable.

Stock traders are taking cues from oil prices. Oil traders are watching stocks. There is plenty of guesswork involved!

Turning to investors, I want to modify last week’s two questions:

  1. Is this the start of something big, as so many are warning? The reason for our quant corner is to evaluate the risk of stock declines beyond the “normal” correction of 15-20%. We look at fundamental valuation, recession odds, financial risk, and technical concerns. When something is threatening but does not fit these categories, I provide a human element (as I did at the time of the threatened “fiscal cliff”).

    None of our risk indicators signal danger.

  2. Can we expect mid-week help from the Fed?

I doubt it. The Fed world view is quite different from that of most market participants:

  • More confidence in actual economic data as opposed to market prices.
  • Much less emphasis on “supporting markets” than most believe.
  • Little concern about a recession and more concern about tightening labor markets.
  • Less perceived responsibility for worldwide events. Two mandates are enough.

Those expecting help from the Fed this week face disappointment.

2015 in Review: Hi-Yo, Silver!

1388287952-0For years, it’s been a staple of our Weighing the Week Ahead series to recognize analysts who go above and beyond in their coverage of the issues. We congratulate these writers with the Silver Bullet Award – named in honor of the Lone Ranger, who lived by a strict code: “…that all things change but truth, and that truth alone, lives on forever.”

In 2015, we gave out the Silver Bullet Award 21 times – the most ever in a single year. Despite the constant fearmongering from some bloggers and media personalities, more and more people are providing individual investors with the tools they need to make informed decisions. Our winners are summarized below. Readers may also want to check into our 2013 and 2014 compilations, as many of the same issues persist to this day.

Have any thoughts or predictions on what will dominate news cycles in 2016? Know of a great analyst flying below our radar? Feel free to post in the comments with any suggestions or nominations.

 

 

January 4, 2015

Our first Silver Bullet of the year went to RL at Slope of Hope for his examination of charting “techniques” in the post 2008 recovery.

RL notes:

What can we conclude from all the above? Well, first of all that making long-term trend predictions is not recommended, no-one knows what is awaiting for us in the future. Bull or Bear Market, inflation or deflation, you name it. What we can do, is to predict market trend extensions with statistical analysis, comparing past trends and current trends and that is in fact what we do with our RL models. We do not know if the market can go to 3000 in the next few years, it’s possible if all of a sudden a lot of investors, after staying on the sidelines since 2009, decide to join this 5 years long rally (how about that for a “confirmation signal”?). What we do know (based on our statistical models) is that the market is overbought right now, and it has been rising ~500 points in the last 2 years, although the strongest rise was in 2013, and in 2014 the speed of advance was a little bit slower (maybe a sign that the rally is faltering?).

In our view, this strong pace is not sustainable in the long term and some correction inevitably will come, although it does not have necessarily to be a 3-years Bear Market, it may be a 3 months correction, or a quick crash followed by a recovery, etc. What we can do is to gauge the market trend extension from a TIME and PRICE point of view with our model and this is an honest method to gauge the short and medium-term market direction

March 1, 2015

Nicholas Colas and Jessica Rabe of Convergex took on Jeff Gundlach’s assertion that equities have never risen for seven years in a row since 1871. With due respect to Mr. Gundlach, the authors primarily took issue with the dataset (courtesy of Robert Shiller) he had used to draw his conclusion. Colas and Rabe write:

“Gundlach used a well-known dataset from Robert Shiller for his findings, but it is not suitable for calculating calendar-year returns since it does not capture exact month-end levels. The S&P 500 actually rallied for eight consecutive years from 1982 to 1989 based on price returns and total returns. The index was also up for nine straight years from 1991 to 1999 using total returns. Therefore, the S&P 500 may have a few more years to run before breaking any records, but volatility will likely rise as well…Whether the stock market finishes the year in positive territory is anyone’s guess, but it wouldn’t be unprecedented.”

April 5, 2015

Barry Ritholtz dug up an old Onion article, as an analogue for what passes as analysis in the financial blogosphere. Readers may be reminded of Sidd Finch.

“Given this line’s long history of jaggedness, we really should take a wait-and-see approach,”Fortune magazine associate editor Charles Reames said. “And even if this important line continues its upward pointiness, we must remember that there are other shapes, colors, numbers, and lines to consider when judging the health of the economy.”

Reames also warned that the upward angle of the line, which most analysts agreed was approximately 80 degrees, may have been exaggerated by the way the graph was drawn.

“The stuff that’s written along the bottom of the graph is all squished together, making the line look a lot more impressive than it is,” Reames said. “Had that same stuff been spread out more, the line would have looked a lot less steep.”

April 11, 2015

Bill McBride (AKA Calculated Risk) ended 2014 by asking himself ten questions about the state of the economy. His quarterly reviews helped to measure economic progress over time, in line with his expectations. This innovative approach to interpreting data earned Bill our Silver Bullet Award.

“At the end of last year Bill made a series of ten forecasts about the economy with a full post on each. He provided a three-month update this week. While early in the year, I found it quite impressive. It is more measured than the optimistic economic predictions and much better than those always seeing the worst from any report. See for yourself, and you will understand why I emphasize this source each week. If you are interested in economic growth, housing, employment, the Fed, or oil prices there is something for you.”

April 19, 2015

Ed Dolan’s thorough deconstruction of ShadowStats is one of our favorite blog posts from 2015. From the way he picks his target, to his measurement of the data – his post reads like a step-by-step guide to winning a Silver Bullet. We found this excerpt particularly interesting:

“As mentioned above, Williams’ ShadowStats inflation series incorporates an additional 2.0 percentage point correction to reflect methodological changes that are not captured in the CPI-U-RS series. I would like to examine that number more carefully in a future post, but for the sake of discussion, we can let it stand. If so, it appears to me that, based entirely on Williams’ own data, methods, and assumptions, the adjustment for the ShadowStats inflation series should be about 2.45 percentage points below CPI-U, rather than the 7 percentage points he uses.

In my view, Williams alternative measure of inflation would be more convincing if he were to make this correction. It would also be less likely to feed the anti-government paranoia of some of his followers, who allege that the BLS is falsifies source data and manipulates reported indicators in the way that Argentina and some other countries appear to do.

It is worth noting that Williams himself makes no such claim. He is a fierce critic of BLS methodology, but he acknowledges that the agency follows its own published methods. He argues that the BLS has adopted methods that produce low inflation indicators, but not for motives of short-term partisan politics. Rather, he sees the choice of methodology as driven by a longstanding, bipartisan desire to reduce the cost of Social Security and other inflation-indexed transfer payments. It would be hard to deny that he is at least partly right about that motivation.”

April 26, 2015

The “what if?” question plagues individual investors and fantasy football fans alike. While the sports fans can afford to indulge in flights of fancy, investors probably shouldn’t. David Fabian won the Silver Bullet for writing to this effect very effectively:

Lastly, I think it’s important for investors to forget the “if/then” narrative that seems to be a psychological barrier to living in the present and investing for the future.

If the Fed had never….

If big banks had never….

If stock buybacks had never….

Stop worrying about what the world might look like if those things had never happened, because they did and we are where we are. Focus on the present and the things that you can control in order to get the most out of your investment portfolio.

June 08, 2015

We frequently warn individual investors to keep their politics and their investments separate. Morgan Housel earned himself a Silver Bullet by illustrating this with a clear, relatable example. The market has seen significant gains since 2008. If you’ve been sitting on the sidelines, you’ve missed some big opportunities.

Take these two statements:

“11 million jobs have been created since 2009. The stock market has tripled. The unemployment rate nearly cut in half.  The U.S. economy has enjoyed a strong recovery under President Obama.”

“The recovery since 2009 has been one of the weakest on record. The national debt has ballooned. Wages are stagnant. Millions of Americans have given up looking for work. The economy has been a disappointment under President Obama.

Both of these statements are true. They are both history. Which one is right?

It’s a weird question, because history is supposed to be objective. There’s only supposed to be one “right.”

But that’s almost never the case, especially when an emotional topic like your opinion of the president is included. Everyone chooses the version of history that fits what they want to believe, which tends to be a reflection of how they were raised, which is different for everybody. We do this with the economy, the stock market, politics — everything.

It can make history dangerous. What starts as an honest attempt to objectively study the past quickly becomes a field day of confirming your existing beliefs.

June 13, 2015

Regular readers know that we like to carefully scrutinize mainstream financial media. Needless to say, we got a kick out of Cullen Roche’s colorful guidelines for financial journalists. They’re all well worth reading, but our favorites are quoted below.

I.  The Stop Scaring People Rule. Scaremongering is not to be tolerated except during the middle of a financial crisis or nuclear war. Writing scary articles for the sake of conjuring emotionally driven page views is not a legitimate business model and is generally counterproductive.

III. The Crash Call Rule. That pundit who comes on TV predicting financial Armageddon every week is not a “guru” and is directly contributing to poor financial decisions. Please refrain from interviewing him regularly. Also, see Rule I.

IX. The Bubble in Bubbles Rule. If you feel the need to use the word “bubble” please reconsider. This word is only allowed to be used by a select few financial experts (Robert Shiller, Robert Shiller & Robert Shiller).  If you are not one of the names listed in the previous sentence please do not use this terminology.

June 20, 2015

Declining profit margins are a prime target for perma bears in the blogosphere. You’d think after an “expert” calls nine of the last three recessions, this one would go away – but we’ve been fighting it for years. Pierre Lapointe received the Silver Bullet for taking on the crowd.

“It can take a long time before contracting margins begin to hurt stock prices,” Lapointe and colleagues Alex Bellefleur and Francois Boutin-Dufresne wrote in a report yesterday. They cited the 1982-1987 bull market, which took place even though earnings as a percentage of GDP were among the lowest since World War II.

“It isn’t at all clear that margins will contract further from here,” they wrote. “They could stabiglize and remain near current levels for some time. This wouldn’t be a disastrous scenario for equities.”

July 04, 2015

Beyond errors in the investment world, we like to caution our readers to think carefully about all kinds of data. Math Professor Jordan Ellenberg, of the University of Wisconsin-Madison, provided a fascinating article about the misuses of numbers. We gave him the Silver Bullet based on his conclusion:

All these mistakes have one thing in common: They don’t involve any actual falsehoods. Still, despite their literal truth, they manage to mislead. It is as if you said, “Geraldo Rivera has been married twice.” Yes—but this statistic leaves out 60% of his wives.

In the era of data journalism, truth is not enough. We need people in the newsroom who can check not only a number’s value but also its meaning. Unless we can ensure that, we’re going to be reading a lot of data-driven stories that are true in every particular—but still wrong.

July 18, 2015

Zero Hedge is one of the least credible yet oft-cited websites sucking up oxygen in the financial blogosphere. Their supporters are apparently pervasive, which is why we had to give Fabius Maximus a Silver Bullet for his thorough deconstruction. The full article is of course excellent: his commentary ranges from exposing half-truths, conspiracy-mongering, selective use of data, and outright deception.

ZH is an ugly version of Wal-Mart or Amazon. It would be sad but insignificant if ZH was exceptional. But ZH is a model of successful web publishing, probably taking mindshare from mainstream providers of economic and market insights. I see websites using its methods proliferating in other fields. For example, geopolitics has become dominated by sites that provide a continuous stream of threat inflation as ludicrous as the worst of ZH.

July 26, 2015

On a lighter note, we greatly appreciated a video done by Jimmy Atkinson at Dividend Reference. His guide to useless (but entertaining) stock market indicators comes with an important lesson attached. Below is one example particularly relevant to hockey fans in the Chicago area.

August 02, 2015

Michael Batnick won a Silver Bullet this year when he abated growing fears about market tops. His careful analysis (backed up by solid data) is a huge asset for individual investors looking for edge.

Conventional wisdom goes that prior to market tops, the major averages become more reliant on just a handful of stocks to lead the rally. When stocks are making new highs, it’s important to look at breadth indicators because indices can pull a nasty trick of masking what is actually happening to the majority of stocks. For instance, the S&P 500 is up 2.3% YTD, however, the average S&P 500 stock is down 0.7%.

Observers with a mission fail to note that divergences often resolve to the upside. Here is an interesting table, showing both frequency and the range of gains.

August 22, 2015

We at “A Dash” applaud anyone willing to challenge the so-called conventional wisdom. We gave Barry Ritholtz a Silver Bullet this year for taking on the Death Cross.

…yesterday’s decline triggered the dreaded Death Cross, as the index’s 50-day moving average crossed below the 200-day moving average. The other major indexes haven’t yet succumbed to the Death Cross horror, though the S&P 500 is heading in that direction.

In a research note late yesterday, Bespoke Investment Group observed that this was the first time this has happened since Dec. 30th, 2011, or in 903 trading days. They also note the modest statistical significance of the Death Cross. Looking at the past 100 years, they wrote that “the index has tended to bounce back more often than not.” Shorter term (one to three months), however, these crosses have been followed by modest declines in the index.

How modest? The average decline is 0.17 percent during the next month and 1.52 percent the next three months. By comparison, Bespoke notes, during the past 100 years the Dow averages a 0.62 percent gain during all one-month periods and a 1.82 percent rise during all three-month periods.

In an e-mail I asked Justin Walters of Bespoke to expand on the details. He wrote: “Most of the time these crosses don’t mean much of anything. This one the forward performance numbers are a little more negative than we would expect to see over the next one and three months, but it’s basically 50/50 whether we go higher or lower.”

August 30, 2015

Our final award of the year went to Michael Batnick and Todd Sullivan (citing “Davidson) for two separate articles on the same theme. Both illustrate the danger in the way the Shiller CAPE ratio is presented to investors. Batnick notes:

When Shiller says 15-16 is where CAPE has typically been, what he really means is this is what the average has been. However, what he fails to mention is that over the past 25 years, the CAPE ratio has been above its historical average 95% of the time. Stocks have been below their historical average just 16 out of the last 309 months. Since that time, the total return on the S&P 500 is over 925%.

Sullivan shows that the profit estimates in the data are flawed because of accounting changes. He shows that large and completely implausible changes in “earnings” were actually the result of the FAS 157 rules.

Conclusion

As always, you can feel free to contact us with recommendations for future Silver Bullet prize winners at any time. Whenever someone takes interest in defending a thankless but essential cause, we hope you’ll find them here.  Have a Happy New Year and a profitable 2016.