Stock Exchange: Reading into Retail Moves

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • Highlight several technical trading methods – including current ideas;
  • Feature advice from top traders and writers; and,
  • Provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some earnings season ideas, please join in!

Review

Our last Stock Exchange looked at consumer discretionary spending. If you missed it, a glance at your news will show that the key points remain relevant.

This Week – Amazon Apocalypse in Retail?

Amazon (AMZN) made waves again last week with its announcement that it would partner with Sears (SHLD) to sell Kenmore branded appliances. The announcement sent shares of competing appliance sellers like Best Buy, Home Depot, Lowe’s, and Whirlpool tumbling (BBY, HD, LOW, WHR) while bolstering Sears. Best Buy and Home Depot have acquired a reputation with some as being relatively ‘Amazon-Proof’, and for investors with such opinions these moves may represent a opportunity. It’s worth noting that Whirlpool is one of the main manufacturers of parts for a variety of Kenmore products, although it remains to be seen if it’s 30+ year partnership with Sears will survive.

Between its purchase of Whole Foods Market (WFM), filing a trademark for a prepared meals service (bludgeoning Blue Apron (APRN)), and freshly announced partnership with Sears, Amazon is attracting a lot of attention from the punditry and even some from regulators. Barron’s cites Reuters’ report that The FTC recently opened an investigation, as part of its review of the company’s purchase of Whole Foods, into claims by Consumer Watchdog that Amazon uses deceptive discounting practices.  The word ‘antitrust’ continues to be whispered with increasing volume, and more and more with a bone to pick are finding this to be the moment to pile on with. The same day the FTC announced its investigation, David Kahan, CEO of Birkenstock Americas fired off a letter to the company’s retail partners accusing Amazon of “Modern Day Piracy” and attacking “All Brands”. The letter accuses Amazon of running Birkenstock’s blockade of sales to it by buying from resellers instead, and warns retail partners to steer clear or risk ending their relationship with the German shoe company.

Rupert Hargreaves’ piece published earlier this week on ValueWalk, does an excellent job examining some of the concurrent dynamics affecting brick and mortar retail. It isn’t pretty.  He covers the precipitous drop in retail traffic over the summer, how consumer behavior with private-label credit cards and store closures exacerbate each other’s effects, and the major disadvantage brick and mortar stores face in having to deal with issues like shoplifting and robberies. For more, you’ll have to check out his article. While retail stores are closing and laying off workers, Amazon is hiring, listing 50,000 full time positions across its fulfillment network nationwide.

Expert Picks from the Models

We’re joined again by one of our favorite guest experts on the stock exchange: Blue Harbinger (also known as Mark Hines) who we were lucky enough to have for last week’s edition of The Stock Exchange as well. Blue Harbinger specializes in independent investment research, and we’re glad to have his thoughts again this week.This week’s picks happen to center around retail, similar to last week’s focus on related discretionary spending and luxury goods.

Holmes: This week I like L Brands (LB), the fashion retailer. This stock’s dip since January is the sort of set up I like to see when sniffing out a good deal. From the chart below you can see LB is below both its 50 and 200-day moving averages, and has received support at the $43-level. The price moving above the 50-day average at $49.81 would be encouraging. With limited downside and plenty of upside potential, I hope I’ve brought the humans a solid pick.

BH: L Brands is a profitable business but it has a lot of debt, and retail will be challenged going forward. In particular, L Brands has exposure to “B and C” brick and mortar retail stores, and these spaces will be challenged as the proliferation of online retail continues.

H: What are B and C stores? I have to admit I’m not familiar with these terms, or the details of L Brands’ capitalization structure. I do know what works for me, however, and this is it! Plus, I’ve read that Victoria’s Secret and Bed Bath & Beyond customers, L Brands’ flagships, are some of the most loyal in retail. That’s good, right? Loyalty has to count for something…

BH: I do believe the company’s brands give it some competitive advantage and allow for premium pricing (Victoria’s Secret and Bath & Body Works account for over 90% of total L Brands sales). However, sales fell 6% in June, below consensus estimates, and this feeds into the narrative that all “brick and mortar” stores are going to get “Amazoned.” I don’t necessarily believe this narrative is true (plenty of prime location stores will continue to do just fine), but the company’s plans to increase exposure (including “less-than-prime” retails spaces) is concerning. L Brands spends a lot of money maintaining its stores and training its employees in order to provide an exceptional customer experience, but brand preferences change over time and less foot traffic to some of its expensive locations doesn’t bode well.

Some investors may be lured in by L Brands low price-to-earnings ratio, but I suspect it’s low for a reason (i.e. business is facing challenges).

BH: Given the choice between L Brands and RH, L Brands seems much healthier, but realistically I am not interested in investing in either one.

H: Take RH up with  RoadRunner, it’s his pick this week, and was Athena’s a few weeks ago. While I can’t speak for the bird or our resident goddess, I’m comfortable sticking to my pick, and my method works for me.

Felix: Broadcom (AVGO) is my pick for the week. While it may be hard to see the value of a stock that looks like it’s already on a tear, I’ve done my homework on this one. Put plainly, I think it has a long, long way to go. Take a look at its 12 month chart and you’ll see what I mean. Although I’m focused on the chart, I still know there’s long term growth in semiconductors to beat the band, and the company has excellent cash flow. Broadcom is showing me it can keep this up.

BH: I like the amazing long-term growth potential of the semiconductor industry, and in one way or another Broadcom is going to be a part of that (Broadcom differentiates itself as a leader in the design of new capabilities and products where high margins are believed to be attainable). However, I have a variety of near-term concerns ranging from the fiercely competitive semiconductor industry, to the company’s high valuation multiples, the delay of the big Brocade (BRCD) deal, and the fact that Broadcom almost has more cash flow than it knows what to do with right now considering its target 50% free cash flow payout ratio (i.e. dividends and share buybacks) which isn’t necessarily all that bad of a problem to have.

F: It doesn’t sound like all that bad of a problem to have at all… It’s not usually the sort of thing I focus on, but you’re making me think this is an even better pick than it seemed at first glance. It has its hands in so many industries in the technology sector! I like the diversification.

BH: It also has some concentration risk with Apple/Foxconn (more than 10% of revenue in 2016). Further, it’s a high beta stock thereby subjecting investors to market price volatility, and the technology sector to which it belongs probably cannot keep rallying forever.

In a nutshell, this might be a good Rip Van Winkle stock to sleep on for the next 10 years because if you can avoid stressing out over the volatility then your future self will probably thank you for owning it.

F: It’s precisely long term holding that I’m interested in, although a little shorter than 10 years. While you might think the volatility would bother a fussier investor like me, I take solace in my method and don’t let it bother me.

Road Runner: My pick of the week is Restoration Hardware (RH). Regular readers probably remember that Athena picked RH a few weeks ago. It’s nice to think I came across the same pick as a wisdom goddess, but by a completely different method! Unlike Athena, I look for stocks that are at the bottom of a rising trading channel, and if you look at the chart below you can see why I like RH. It’s been in a steady rising channel since early March, and is at the bottom of the channel again at 71.60. I expect the price of RH to continue to rise back above $75, but will only hold the position so long.

BH: I don’t like RH (formerly known as Restoration Hardware). This luxury home furnishings company just completed an extraordinarily aggressive share buyback program (they bought back nearly 50% of the shares outstanding in less than six months), and that drove the price way up (it more than doubled) and the valuation (price-to-earnings) is way up too.

RR: I don’t care about valuation, share buybacks, or other fundamental aspects, but I can appreciate that RH isn’t the pick for everyone right now.

BH: According to Stock Rover, however, next year’s sales growth forecast is only around 6%. The recent actions of the company seem very aggressive (especially since they used some expensive debt to buy back the shares). The market also believes there’s something odd going on with RH considering short interest has risen dramatically to an enormous 63.2%. Further, it’s concerning that RH’s cost of capital is higher than its return on capital, which basically means it is destroying value for each new dollar it invests. And considering RH could suffer significantly (they could have liquidity problems) under even a slight recession, this stock just seems expensive and risky. Perhaps management has something interesting up its sleeve, but I am staying away.

RR:  You’re chasing down the wrong things to convince me, I look at the chart and like what I see! Our readers are probably more interested in RH’s large short interest or their cost of capital being higher than its return on capital than I am. Thanks for the warning that it might be an ACME Brand trap, but for my purposes it’ll be just fine! How about you Oscar, what have you got?

Oscar

Oscar: I don’t have anything new this week. As Jeff reminds us to not reach when opportunities are not in our wheelhouse. Sometimes the wisest thing to do is nothing at all. Besides, it gives me more time to watch the games. Athena told me to let you know she’s out again this week, and that she’ll report in when she has a new idea. She sure seems to have good ideas for vacations!

Conclusion

Although news of investigations, acquisitions, and cries of impending doom can unsettle investors, it’s important to remain calm and not adjust their methods hastily or in fear:

  • Don’t reach! If the market climate does not fit your trading methods, it is better to wait than to reach for unsuitable trades. For those with particular views on a few large retailers, the market just gave them a nice opportunity to express those views. Volatility is an opportunity if you’re patient!
  • If the unusual volatility creates an opportunity, be ready to hit it out of the park. It’s harder to do this if you have little dry powder available.

There will always be winners and losers in disruption. It is a tale as old as time. For patient and prudent investors there will be myriad opportunities to profit from the rise, and fall, and rise of online retail behemoths, resilient retail, and the entire cast of characters.

Here is a summary of the cast of our own characters. Find your own favorite!

Stock Exchange Character Guide

 

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum One month Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

Weighing the Week Ahead: Will a Big Week for Data (finally) Bring Volatility?

The holiday-shortened week ahead features many economic reports, including the most important. The biggest news is at week’s end, so both market participants and pundits will have time to settle in after the long weekend. When they get around to the calendar, I expect many to be asking:

Will we finally see some volatility?

Last Week

Last week the economic news was mixed, but the market showed strength anyway.

Theme Recap

In my last WTWA I predicted a quiet week for data with plenty of talk about the Fed. That was a reasonable guess, but there was not really a dominant theme. There was some discussion about the Fed balance sheet and policy changes, but it was competing with plenty of other news.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market performance.


While there were not many big swings, the 1.4% gain for the week also took markets to intra-day highs.

The News

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

The economic news last week was mixed, but the market reaction was positive.

The Good

  • Q1 GDP revised higher to 1.2%. This is backward looking, of course, but a small positive.
  • Indicators in all time frames show continuing strength. New Deal Democrat’s summary is a great source. This week’s conclusion:

    The nowcast for the economy remains positive, as does the near term view, with both stocks and jobless claims leading the way.  The longer term forecast remains neutral to positive, shading a little closer to neutral based on the tightening yield curve, less robust growth in real money supply, and the miss in corporate profits.

  • The Philly Fed index improved again. Steven Hansen (GEI) has the analysis.

  • Q1 Earnings show continued strength. This includes not only earnings and revenue, but profit margins. FactSet explains. Also see earnings guru Brian Gilmartin the in the quant section (below).

  • Initial jobless claims beat expectations and registered a decline in the widely-followed four-week moving average. For a full analysis see Steven Hansen (GEI).

The Bad

  • New home sales declined 11%. Most sources cited a normal decline from the gains in March as well as weather. The Capital Spectator has a solid and typical explanation. That said, this was a disappointment and deserves careful attention next month. Calculated Risk opines that it was a reasonable report, noting that sales are up 11.3% compared to the same four-month period last year. It is always difficult to interpret highly volatile reports.
  • Durable goods orders dropped 0.7%, the first decline in five months. (MarketWatch).
  • Existing home sales dropped 2.3%. Calculated Risk notes the effect of lower inventory on this report. Bill sees this as the key market factor.

The Ugly

Terrorism in London (UK home to 23,000 jihadists?) and Egypt lead the week’s “ugly” news. This is another “headline” event that is important, but not currently deemed to be a “market” story.

Noteworthy

Did you know that 40% of millennials use Facebook’s feed as their sole source of news? Decades ago Walter Cronkite warned that the public relied too much on TV news. Things change.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. This week’s award goes (once again) to Josh Brown. He is often a candidate and one of the most frequent recipients. This week he describes a Fast Money guest who “came on to discuss the Plunge Protection Team urban legend as a bonafide explanation for why the market has been acting the way it has”. He goes on to write:

Now obviously, the existence of a Plunge Protection Team (or PPT), is demonstrably ridiculous. Especially when you consider the fact that we’ve seen the market cut in half twice during the last 17 years, with dozens of instances of 10 and 15 percent corrections all along the way over the last 29 years since the end of Reagan’s term. The idea that there could be some clandestine, bipartisan shadow organization, with enough money to prop up a global stock market, and the solemnity required to faithfully do so across a half-dozen Presidential administrations and all manner of Congressional configurations, is akin to believing in the Area 51 myths or the moon landing hoax.

Readers will certainly note the relevance to this week’s theme. Read the entire post for more background and some great comparisons.

The Week Ahead

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

The Calendar

We have the biggest week of the year for economic reports – and it is jammed into a holiday-shortened week.

The “A” List

  • Employment report (F). Job market tightening? Implication for wage costs?
  • ISM index (Th). Good concurrent read on economic changes with some leading qualities as well.
  • Consumer confidence (T). Conference Board version has been very strong. A slight decline is expected.
  • ADP private employment data (Th). Non-government source is a good alternative to the official report, and often changes expectations.
  • Auto sales (Th). Even greater interest in recent months as the “peak auto” debate continues.
  • Personal income and spending (T). Continuing growth expected. Consumer spending remains crucial to economic growth.
  • Initial jobless claims (Th). Continues with record low levels. Not part of the Friday data sample.

The “B” List

  • Pending home sales (W). While not directly tied to construction spending, it is a good read on the housing market.
  • Fed Beige Book (W). Anecdotal evidence from each Fed district will be in front of FOMC members at the June meeting.
  • Construction spending (Th). April data. Rebound from the March decline is expected.
  • Trade balance (F). Deficit is expected to increase by 1 or 2%. More interest in this topic because of current debate over trade policy.
  • Chicago PMI (W). A hint for the ISM report, this index has been very strong.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

There is daily FedSpeak on the schedule.

Next Week’s Theme

In a sharp change from the last few weeks, we have a big calendar for economic reports. These include the most important. They come in a holiday-shortened week, with a relatively slow start. Last week I noted that the A Teams would head for the beach on Friday. It was indeed a very quiet day. It might be Wednesday before action is back to normal!

If this combination can’t generate some action, what will? Pundits will be asking:

Is it finally time for some volatility?

As always, there are several viewpoints.

  • The lack of volatility is a bad omen. Just as night follows day, we should expect the worst. (Citations omitted to protect the guilty!)
  • Much is wrong in the world. The Fed is raising rates and plans to cut the balance sheet. Why no reaction? (Ben Levisohn, Barron’s).
  • The market is broken and manipulated. Normal trading strategies do not work. Discussed and refuted by Brett Steenbarger.
  • The move to passive investing has quashed volatility.
  • Lower volatility is a known coincident effect of bull markets. Nice analysis from The Fat Pitch.

As usual, I’ll have more in my Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

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

The Indicator Snapshot


The Featured Sources:

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

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

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

Georg Vrba: The Business Cycle Indicator and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. His interpretation suggests the probability creeping higher, but still after nine months.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. In his most recent post, Brian notes that long-term estimates remain strong – double-digit percentage increases. The expected downward revisions have recently been absent.

Doug Short: The World Markets Weekend Update (and much more). His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.

The Brooklyn Investor has some reassuring comments about bubbles.

Marc Chandler notes that the oil price-stock correlation has broken down. I say, “At last.” This never made any logical sense, but it worked because it was working!


How to Use WTWA (especially important for new readers)

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

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

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

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix, Holmes, and Friends

We continue with a strongly bullish market forecast. Most of our models are fully invested. The exception, Road Runner, is fussy about entry criteria. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our five technical experts, and some rebuttal from a fundamental analyst. This week our dip-buying Holmes model discusses why he is trading Biogen (BIIB). RoadRunner plays upward trending channels and likes Align Technology (ALGN). See the post for charts and a lively discussion.

Top Trading Advice

New Trader U features a guest post from Rayner Teo. You may find some of the ten lessons controversial, but all are interesting.

Do you over-emphasize each trade? Dr. Brett has the touch for explaining important concepts. This post is both entertaining and informative. He explains why single people should go on many first dates and few second ones. (Maybe Mrs. OldProf will now see why I was sending Valentine’s flowers to several women in the days before we got engaged). Brett’s great advice is to view first trades as “small and exploratory”.

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Wade Slome’s frank and accurate discussion of the difficulty in making predictions. He cites a list of the regular flops – Schiff, Whitney, Mauldin, Roubini, Greenspan, and Merton & Scholes. Pedigree is not the test here for these “radical forecasters.”

He has a great list of quotes on predictions, and this advice:

Rather than paying attention to crazy predictions by academics, economists, and strategists who in many cases have never invested a penny of outside investor money, ordinary investors would be better served by listening to steely investment veterans or proven prediction practitioners….

In the quote, he goes on to cite Billy Beane – not my idea of a market forecaster, but the concept is solid. There are experts. They do not always have precision forecasts, but it is often enough to provide an edge.

Finding the best experts is an important challenge.

Stock Ideas

Chuck Carnevale takes up the mystery of Amazon’s (AMZN) valuation. Stock strength, dominant sales position, relatively low earnings and high PE. How should we explain this anomaly? Chuck concludes:

Historically, Amazon has not been an especially profitable company. On the other hand, it has generated extremely high revenue and operating cash flow growth. So far, the market has been willing to give it a pass on earnings. Unfortunately, I have never owned the stock but find myself wishing that I had.

Nevertheless, I think it’s only fair to offer some caution. Before an investor makes a buy, sell or hold decision on Amazon, they should at least consider whether the market will be willing to continue to overlook their lack of profitability. So far so good, caveat emptor.

Mark Gerstein’s latest stock screen unearths a handful of “tasty” restaurant stocks.

Merrill’s list of five stocks with higher price targets due to “blow out” earnings. (Lee Jackson).

The top ten from Morningstar’s “ultimate stock pickers.”


Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. I agree with Oscar and Holmes about the current potential in biotech.

Eddy Elfenbein explains that markets may react excessively to news-driven events. Waiting it out in Cognizant Technology Solutions (CTSH) made good sense, as you can see from his chart. (Eddy’s ETF, where you can buy his picks with one trade and a low fee, is also doing very well).


Investing for Yield

Simply Safe Dividends suggests Iron Mountain (IRM), a storage REIT that seems to be in a growth market.

Blue Harbinger reveals another of his “attractive high-yield blue chips for contrarians.” It is publicly traded Enterprise Products Partners (EPD).

Currency Effects

While most investors do not trade directly in currencies, they should follow the impacts on stocks. Stocks benefit differentially based upon dollar strength. The recent weakness has been a big story.

“Davidson” (via Todd Sullivan) sees continuing signs of economic strength, supporting the dollar.

Graduates

Interested in a finance career, starting with your liberal arts degree? Here is some advice. It makes sense to me. Writing skills and critical thinking are always important.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is about retirement. The White Coat Investor offers the top 5 reasons NOT to retire early.

Seeking Alpha Senior Editor Gil Weinreich continues to provide advisors and investors alike with intriguing ideas and links. I particularly enjoyed his discussion about behavioral finance. In addition, his post about the challenge of finding “Alpha” is a close runner-up for best of the week. Gil explains about the changing CFA curriculum and the dangers of blind data crunching. This is a very complex topic, but Gil is right on target with his concern.

The CFA curriculum change leaves the impression that finding alpha today requires this elephantine effort at data crunching. Even if not, I think it’s better to take hawkeyec’s approach, following a simple plan whose success is not dependent on trying to outsmart everyone else.

(Hawkeyec is an astute and regular commenter whom I follow at Seeking Alpha. For convenience, here is the cited comment.)

Watch out for…

Mall REITs. Again. Last week we featured Brad Thomas. This week we have a nice analysis from The Peridot Capitalist. The somewhat contrarian viewpoint describes how some mall owners are evolving. Like last week’s citation, it shows that investors should look more deeply rather than making a decision on the entire group.

Analyst sell signals. Ten stocks cited by John C. Ogg.

Final Thoughts

Much of the ongoing market discussion centers on a mystery: Why are stock prices higher than many think they should be?

The explanation has gone through many variants during the long bull market. The latest versions relate to market manipulation, low volatility, and ignoring the obvious geopolitical risks.

Perhaps the explanation is much simpler. I discussed this in a recent post on Occam’s Razor and Valuation. Check it out for the full list of the ever-changing excuses for failed valuation methods.

What should we consider instead?

  • Expected earnings are increasing nicely – now at a double-digit pace. These have been better predictors than any of the oft-cited bearish valuation methods.
  • The chance of a recession, the biggest historical threat to markets, remains very low.
  • The list of “geopolitical concerns and headwinds” does not translate into an impact on earnings.

And especially: Beware of those who twist good news into bad!

It is quite normal for financial stress to be low when times are good. Why expect high volatility? Good times eventually get worse, but good news is not itself an effective forecast of trouble.

Those who reason this way remind me of Chauncey Gardiner, the simple-minded hero of one of the all-time great movies, Being There. Everyone believes his “wisdom,” derived entirely from television and gardening!

This might be the best summer investment movie. Few things could help the average investor more than recognizing the slogans and old news in the typical commentary.

Weighing the Week Ahead: Can Employment Continue as the Engine of the Economy?

Market data has remained mixed.  The weak Q1 GDP is not consistent with some of the most important measures.  This week I expect pundits to be asking:

Will the jobs report signal continued strength?

Personal Note

In response to reader interest I am trying to do an abbreviated WTWA when I am away.  I will include the update of indicators and a few ideas about what I am watching.  Some noted that this would also provide a forum for some of our “regulars” to congregate.

Theme Recap

In my last WTWA I predicted a week of rebuilding the wall of worry.  Some problems have been avoided, even if not completely solved.  There are always new ones, and we did get some of that discussion last week.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market performance for the week.  Once again, there was little change for the week.

Whatever the news, the net market effect was (once again) very small.

The News

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

The Good

The best news is the strength of the earnings rebound. This is true both for year-over-year results and forward expectations. (Brian Gilmartin).

While the government shutdown deadline was merely extended for a week, I am encouraged by the handling of this issue.  The market hated this uncertainty on the past.

The Bad

The soft GDP numbers and uptick in initial jobless claims (not the time reflected in Friday’s payroll report) were the worst news.

The Ugly

Still Korea.

What to Watch For

Everyone wants to evaluate the Trump agenda, especially reflecting on the first 100 days.  I do not expect movement on any of the big issues without some participation by Democrats.

The key economic reports are ISM, the ADP private employment, and the official employment report.  It is a big week for data.

While there is no change expected from the FOMC meeting (and no press conference), everyone will be watching for hints on the pace of rate hikes.

 

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

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

The Indicator Snapshot

 

 

The Featured Sources:

 

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

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

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

Georg Vrba: The Business Cycle Indicator and much more.  Check out his site for an array of interesting methods.  Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal.  His interpretation suggests the probability creeping higher, but still after nine months.

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

Doug Short: The World Markets Weekend Update (and much more).  His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.  The latest update now includes the employment data.

 

Final Thoughts

 

Here is an update on my “Trump Matrix.”  Last week’s timber tariff decision shows why it is important to track what the administration can easily accomplish versus what requires cooperation with other governments or Congress.