Weighing the Week Ahead: Will Trump Policies Extend the Business Cycle?

We have another holiday-shortened week with little fresh data. While there are some Fed speakers on tap, it is not enough to feed the avaricious punditry. There are two competing themes: the spike in inflation and the continuing assessment of Trump Administration policies. Once again, I expect the two to be joined in most commentaries. Pundits will be asking:

Will Trump policies extend the business cycle?

 

Last Week

Last week the economic news was mostly positive, and stocks responded.

Theme Recap

In my last WTWA I predicted a conjunction of two themes as Fed Chair Yellen testified to Congress and President Trump considered candidates for several Fed vacancies. I was only half right. Yellen got plenty of attention from Congressional questioners and revealed that she plans to finish her term as Chair. She also gave some non-specific agreement with some of Trump’s principles about regulation. GOP questioners wanted to talk about the Fed balance sheet. President Trump did not comment about this. This topic will have continuing interest. Presidents are rarely fans of rising interest rates.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the record high and the overall gain of 1.51% for the week.

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

The News

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

This week’s news was mostly positive.

The Good

  • Retail sales increased 0.4% beating expectations of a flat report. December’s data was revised to a 1% gain from the prior 0.6%.
  • NFIB small business optimism shows that “economic growth is coming.” Dr. Ed opines that this must be a Trump effect.

  • Philly Fed survey rose 43.3, crushing expectations of 17.5 and the prior month’s 23.6. The six-month outlook also remains very strong. From the report:

  • Leading indicators remained strong increasing 0.6% and slightly beating expectations.

 

The Bad

  • Industrial production dropped 0.3%, missing expectations for a flat report.
  • Fewer developed market stocks are outperforming – 44% versus the 57% average. Eric Bush of GaveKal explains that this has a negative correlation with the overall market.
  • Kim Jong-un took two provocative actions, two days apart. Jonathan D. Pollack at Brookings wrote “…North Korea’s impetuous young leader, yet again reminded the outside world of his determination to defy international norms by all available means”. The ballistic missile test was a flagrant violation of agreements, and the assassination of his half-brother continues a policy of killing potential rivals. So far, the market has taken little notice of such events or other possible challenges to the new president.
  • Inflation data showed price increases greater than expected (Briefing.com consensus in parentheses). PPI was up 0.6% (0.3%). CPI up 0.6% (0.3%). Core CPI up 0.3% (0.2%).
  • Housing starts declined in January, so I am scoring this as a negative. The prior months were revised higher, and the result was a slight beat of expectations.Calculated Risk, one of the top sources on housing matters, ascribes the shifts to the volatile, multi-family sector. Bill expects starts to increase 3% – 7% in 2017. The range may seem wide, but he is careful to explain the expected error around his forecasts, which have been quite good. See the full post for charts splitting out multi- and single-family.

The Ugly

Malware is winning the race against antivirus software. Users are not taking the most important precautions. Hint: Strong passwords and a password manager. (Slate).

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. This week’s award goes to Josh Brown for his thoughtful analysis of debt, and what it really means. The arguments about excessive debt, the types of debt, and the threats to the system are easily made. It takes only a chart, and most readers are pre-convinced.

Explaining the data requires a deeper, second-order analysis. In his well-sourced aricle, Josh takes a comprehensive look at employment and lending. You need to read the entire post (twice) but the no-nonsense conclusion captures the key point for investors:

When bankers complain, the rhetoric is almost always a caricature of the reality. Today is no different. There’s probably room to streamline or clean up the crisis era regs, but to make the claim that “the banks can’t lend” flies in the face of the actual facts.

The Week Ahead

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

The Calendar

We have a very light week for economic data, with all reports in a three-day period.

The “A” List

  • New home sales (F). Gains expected in this important sector.
  • Michigan sentiment (F). Important indicator for employment and spending.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • Existing home sales (W). Not as important as new sales, but is a read on the overall strength of the housing market.
  • FOMC minutes (W). No surprises expected.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Fed Presidents will be on the speaking trail. Earnings reports continue. Early actions from the Trump Administration have captured the spotlight and will continue to do so.

Next Week’s Theme

 

If the market did not have the extreme Trump focus, the question would be whether incipient inflation suggests the need for more aggressive Fed policy and the probably end of the growth portion of the business cycle.

With the daily parsing of tweets, executive orders, and (somewhat conflicting) policy statements, analysts are scrambling to define and re-define the “Trump Effect.”

In a holiday-shortened, light week for data, I expect a combination of these two themes:

Will Trump Policies Extend the Business Cycle?

Discussion of this topic includes both the policies and the business cycle. Most are not rigorous in separating them.

Scott Grannis does a good job by focusing on the inflation effect and the business cycle. He notes that core CPI inflation has been rather stable, and that it is “a stake through the heart of the deflation demon”.

By contrast, Barron’s focuses on the stock and market effects. In their cover story, they review each Administration move:

Will the week ahead provide any more clarity and focus? Maybe not, but investors should look for the following key points:

  1. Is there evidence of a business cycle peak? Here is Bob Dieli’s take, vividly comparing the disparate opinions:

  1. Will Trump policies extend the cycle? Some are citing confidence from both businesses and consumers as evidence of a return of “animal spirits.” The Trump administration is forecasting much stronger growth than does the CBO. (MarketWatch).
  2. Many Trump moves are generating opposition, sometimes with the Republican party.
  3. Most voters are looking for compromises. This is true of both parties. “The Hill.”

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

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

The C-Score has again moved lower, reflecting more inflation via gasoline prices. The level is still not worrisome.

 

The Featured Sources:

 

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

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

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

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

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

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.

The Brooklyn Investor looks at Warren Buffett’s returns, comparing them to other great investors and probability estimates.

Michael Hartnett’s (BofA Merrill Lynch) methods suggest a “melt-up” of 10%. I can’t argue. When CNBC interviewed me about my 2010 call for Dow 20K, I suggested that the next 8-10% would be pretty easy.

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. All our models are now fully invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). We try to have fun, but there are always fresh ideas. Last week the focus was when and how to “buy the dips” with a current example from Holmes.

Top Trading Advice

 

Dr. Brett is back on the job, with several great posts this week. It is difficult to pick a favorite! He has advice on picking the right instruments to trade, identifying real trader education, and why you need to ask the right questions if you are to learn. Do you, for example track prices right after you are stopped out of a trade? There are several other tough, but valuable questions.

Consider attending his trading workshop at the upcoming NY Trading Expo.

Ralph Vince identifies three factors highly correlated with the price of private property. Traders often forget that guessing when to be short is against the odds.

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Chuck Carnevale’s discussion of MLPs. This is a popular investment for those seeking income. Many just look at the yield. Chuck demonstrates the complexity of these partnerships, explaining valuation, tax considerations, and whether you are simply getting your money back. You should not invest in an MLP without reading this first. In addition to his general warning, he provides several ideas worthy of consideration.

 

Stock Ideas

 

Airline stocks. Warren Buffett? Really? His famous jocular quote was that a capitalist at Kitty Hawk should have shot Orville Wright to save money for his kids. Philip Van Doorn (MarketWatch) presents the story of this changed attitude. Josh Brown explainswhy Mr. B can be flexible while adhering to long-time principles.

Rural broadband? This could be a big beneficiary from an infrastructure plan (Brookings). Also, see my final investing thoughts below.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. This week the dip-buying Holmes sold Nielsen (NLSN) on some strength and add General Electric (GE).

 

Seeking yield?

Blue Harbinger notes that Verizon’s yield has moved higher despite a reasonable payout ratio. I agree, but I prefer to write calls against stocks like this. If you stick to short-term calls (with the most rapid time decay) you can generate a cash flow of 9 or 10%, including both dividends and premiums from call sales. If the stock is called away, you find a new candidate, since you have gained 4-5% in six weeks. If the stock declines, you sell a new round of calls. If you merely break even, in the long term, on stocks, you are meeting your income objective. I do not typically mention trades before we do them, but we are looking at a buy/write against the April 50 call, which closed at 77 cents bid. You will collect a 58-cent dividend in early April. If the stock does not move, that is over 2 ½ percent in a few weeks. If it is called away, you make about 4.5% and can look for a new trade. This is a great idea for DIY investors who understand options. Naturally, this is an illustration, not a general recommendation. Do not consider it without consulting your financial advisor (yada yada)!

 

 

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. The piece about the importance of a will is great. I liked the one helping you teach kids about money. (I tried to do this with poker chips, and you can guess the ending). My favorite was gender control over family finances. Do you think it matters who is earning more? (Hint: Mrs. OldProf regards it as completely irrelevant).

Seeking Alpha Editor Gil Weinreich’s strong series is ostensibly aimed at financial advisors – a must-read for them. It also attracts many DIY investors. The topics are always interesting, and the discussion is often spirited. Active versus passive investing is naturally a current hot topic.

Ben Carlson explains how to consider housing expenses as part of your overall financial plan.

In case you missed it, you might enjoy my brief, mid-week post on The Fastest Way to Improve Your Investment Results.

Watch out for…

Overpriced dividend stocks. SD Davis explains the need for looking beyond the hoped-for payments.

Yield plays with “dividends” that are merely a return of your own capital.

Emerging market bonds. Lisa Abramowicz at Bloomberg explains the risks, including a decline in foreign currency reserves.

 

And more on value investing

Black Rock’s Russ Koesterich demonstrates why this style can work in what is perceived as a tough market. Here is his illustrative chart:

Final Thoughts

 

After years of warnings about deflation and impending recessions, the economy is showing some real signs of strength. For whatever reason, much of the punditry clings to the “end of the up-cycle” thesis, in both the economy and in stocks. Neither economic cycles nor bull markets die of old age.

Inflation concerns are premature. The Fed prefers the core PCE measure, which has less emphasis on housing. It runs “cooler” than the CPI. The Fed has also indicated willingness to exceed the 2% inflation target for some time. They can fight inflation more readily than deflation. I do not expect Trump appointments to reverse this consensus.

Most importantly, the punditry calls it a Trump rally since it occurred at about the same time as the election. There is no analysis of reduced uncertainty or improved fundamentals. The main impact seems to be the promise of reduced regulation.

To summarize, there is a significant improvement in confidence, which is great for the economy and corporate earnings. The reasons for more confidence include many sources.

Investing Conclusion

Finding good ideas from major policy changes is an excellent approach — in theory.

In practice, there are many traps. Too often there are incentives for analysts to be first, rather than to be right. While I have suggested caution on this front several times, it is easier for me. I am not required to fill a TV time slot or write a report for brokerage firm clients. If there is no solid conclusion, I am not forced to act. My approach requires good information, including some which is not yet available. The matrix below is a partial representation of my results. There are more sectors, of course, and I have hundreds of tagged articles in a supporting database. I have preliminary entries for most of the cells. The table below is just an illustration of my approach.

Stock Exchange: How to Buy the Dips

Pure traders love to buy the dips – and of course sell the rips. Everyone wants to buy low and sell high. Is this part of your strategy? Do you know when and how to make that your plan? Today’s Stock Exchange will help. As a bonus, we have some interesting ideas to explore.

Review

Our last Stock Exchange discussed how to distinguish between trading skill and blind luck. The analysis included a description of important elements in model development along with some great sources. As always, the group found some interesting ideas.

Today’s Theme

Buying the dips is prominently featured on the list of trader maxims. It seems so obvious. A stock that you like hits a downdraft. A buying opportunity? Or will this dip beget another dip? Standard instructional sources (Investopedia) make only general comments.

Our regular experts include only one with a dip-buying strategy. For that reason, Holmes gets the spotlight this week, but we have some good ideas from everyone. As usual, I will conclude with a brief observation about the key points.

This Week—How to Buy the Dips

Holmes

I look for stocks that have declined, seem to have bottomed, and are starting to find legs. Once I have a winner, I must then decide when to sell. I also have position size limits, sticking with the best 16 candidates. This week provides a good illustration of my process. I really liked Nielson (NLSN), which I bought at 42.30. There might be more room to run, but I sold it at 44.54.

J: Welcome back from Mexico. Did you have any trouble at the border?

H: No. I do not fit the profile they are looking forJ

J: It is good to have you back. So why sell NLSN if you still like it?

H: My method is aggressive in taking profits. Notice how the price recovered from the bottom to the point of the initial decline.

J: Most dip buyers would not notice that. They might be looking for a full recovery.

H: A 5% move in a few days is great for a trading program. I also have limits on position size (6%) and number of positions (16). There are often candidates that I like more than my current holdings.

J: So why GE?

H: I like GE for a variety of reasons including a quick and sudden breakdown, a higher low, culminating in a turn higher. I bought this at 29.83 looking for a move back to 31. I can use a tight stop at 29 giving me a better risk reward then holding my NLSN position. Unlike humans I have no emotions about stocks I’ve bought and sold. They’re just mathematical representations of Risk/Reward analysis. Look at the chart.

 

J: Most traders could improve simply by following your discipline on position size.

H: Thanks, boss.

 

Athena

I have identified short term potential in GW Pharmaceuticals (GWPH). We may be at all-time highs here – but when has that stopped me before? Folks probably thought this stock was maxed out when it jumped up near $90 in March of last year. Now it’s trading around $130. I have no doubts about popping in here for a week or two. If it does not work, I’ll move on.

J: Once again you have an idea without any foundation. Have you ever even heard of profits? Look at the chart from Chuck Carnevale’s excellent F.A.S.T. Graphs site.

A: It is obvious that the market knows something that you do not.

J: Are you smoking something?

A: I get high through meditation. It is all that I need.

J: Well your current pick is playing in the legalized pot space. It is a hope and a dream, which could vanish in a …..

A: Enough! Spare me from your lame human pun. Many successful stocks began with a wonderful story and no earnings. You will soon see.

 

 

 

 

 

Felix

I will once again begin with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the most recent reader questions as well as former requests where my rating has moved.

J: AMD is still on top?

F: It leads the reader list, but not my own.

J: I have had some questions about that. Readers want to know your own top picks.

F: If I talked about that here, I would be revealing what I recommend for your clients.

J: That is a problem. I want to be helpful to readers, but it should be a start for their own research. Do you have any fresh ideas of your own?

F: Yes. I have a new investment in Royal Gold (RGLD). I see real long-term potential. This stock got seriously whacked in the fall, which I believe makes it a prime candidate for an investment now. It was valued, perhaps properly, around the $85 range mere months ago. Now, with a slower 2-month recovery, it strikes me as a slow and steady way to climb back to the highs.

J: Gold has been doing well, but earnings are not the key driver. The fundamental chart shows that the earnings growth rate is less than 20, but the PE multiple is 58.3.

F: It is an attractive chart. I could frame it and put it on the wall.

J: Gold works best when there is fear of complete economic collapse or the potential for hyperinflation.

F: I have heard some of those rumors.

 

 

 

 

 

 

 

 

Oscar

I have a new sector pick. This week trading exchanges caught my eye. I’ll use the Intercontinental Exchange (ICE) as an example. This stock has been on an upswing for the last ten months. The 200-day moving average is smooth, and the 50-day moving average is rising at the same rate.

What I like most here is that the stock dipped earlier in the month. That leaves us off the peak, which I’d consider a potential buying opportunity. Outlook on this one remains short term: maybe a month, at the longest.

J: Why are you looking for a dip? You are supposed to find trending sectors.

O: It is trending. Besides, I heard that you were going to feature dip-buying this week. After the Super Bowl I need the extra money from being the featured model. That stupid dog has just been lucky.

J: Each of you must stay true to your method. Your time to be featured will come. Besides this was the happiest week in the sports year.

O: Yes!!! Pitchers and catchers report.

J: The ICE fundamental graph is very interesting – solid looking, but fairly valued.

J: Do you have a sector update for your readers?

O: Yes. Like Felix I have included the most recent requests, as well as anything that had a ratings change.

J: Can readers still learn about their favorite sectors?

O: Definitely! I will include new requests each week.

J: How will you keep busy until March Madness?

O: I understand that there is now fantasy golf.

J: You mean that you can pretend to drive 300 yards? That would be a real fantasy!

O: No. You can pick a pro and put him on your team.

J: I suspect that you will soon be looking for another way to earn overtime pay!

 

 

 

 

Conclusion

Buying the dips is seductive – so obvious. It is much more difficult than it seems.

Holmes has some lessons for us:

  1. Each trade is based upon hundreds of similar charts. This is part of his training and testing.
  2. Each trade has a limited risk, with specific exit criteria.
  3. Overall trading conditions are right before entering the trade.

This last point is crucial. Dip buying works well in a rising market, and is OK in a range-bound market. Holmes did well in the brief dip last January, but his method is not really geared for prolonged selling.

How should a trader deal with that? Like Holmes, you need an exit signal when conditions are not right. Just take a little time off, and don’t lose money in a bad market!

The Stock Exchange features the best technical ideas. We also provide contrasting opinions from fundamental investors. Each method can be profitable and both provide good lessons.

We welcome comments, suggestions, and followers for each character. Even Jeff. I try to have fun once a week in writing this, and I hope you get a chuckle or two from reading it. Here is how to join in.

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 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.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables below, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. 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: Trump V. Yellen Round One

A week featuring the Fed Chair’s semi-annual Congressional testimony, and daily speeches by most of her Fed colleagues, would normally represent a commanding first choice for the upcoming theme. This time is different. (Yes, I know that you are never supposed to say that). The first weeks of the Trump Administration have generated daily news on a wide range of topics, each of which draws attention.

The combination of the two will provide an irresistible topic for the punditry. It will be:

Trump v. Yellen, round one.

Last Week

Last week the light economic calendar provided mixed news, but there was still a rally in stocks.

Theme Recap

In my last WTWA I predicted a discussion about whether the current market optimism was justified. Despite some breaking news during the week, especially about earnings, that theme got plenty of attention.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the new high and the overall gain of 0.81% for the week.

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

The News

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

This week’s news was again mixed, with a tilt to the positive side.

The Good

  • JOLTS signaled a healthy labor market. Many try to use JOLTS as a measure of job growth. This is unhelpful, since there are better measures for that. It is an example of writing about what you think people want to hear. The data are best interpreted as a measure of the health and structure of the labor market.
    • The quit rate is seen as a measure of health, since it reflects those who voluntarily leave jobs, expressing confidence in other opportunities. There is a nice discussion of JOLTS and several charts from Nick Bunker.

  • The Beveridge Curve is the most important interpretation, emphasized by Yellen. What we really want to know is the tightness of the labor market. Here is a nice explanation from 2012, noting what is needed for labor market improvement and the general counter-clockwise movement after a recession. (Readers looking for a Silver Bullet Award might want to check out the very lame interpretation at ZH, where one of the Tylers only discusses the gap, not the trend or slope. The most recent update is a month old, from the BLS.

 

  • Corporate earnings. I am scoring this as a slight positive. I want to discuss it, so I put it somewhere. The results are mixed. Earnings are below expectations, revenues are higher, and outlook (always negative) is not as bad as the long-term average. There is a year-over-year gain for a second consecutive quarter, not seen for two years. (Factset). Brian Gilmartin also highlights the leading sectors. He also has something you will not find anywhere else – an analysis of the impact on earnings from a border tax. Great work!

The Bad

  • Michigan sentiment dipped to 95.7 on the preliminary estimate, down a bit from last month’s 98.5 and missing expectations. This month’s report has a special feature that we need to know – divided perceptions based upon politics. From the Michigan report:

    When asked to describe any recent news that they had heard about the economy, 30% spontaneously mentioned some favorable aspect of Trump’s policies, and 29% unfavorably referred to Trump’s economic policies. Thus a total of nearly six-in-ten consumers made a positive or negative mention of government policies. In the long history of the surveys, this total had never reached even half that amount, except for five surveys in 2013 and 2014 that were solely dominated by negative references to the debt and fiscal cliff crises. Moreover, never before have these spontaneous references to economic policies had such a large impact on the Sentiment Index: a difference of 37 Index points between those that referred to favorable and unfavorable policies. These differences are troublesome: the Democrat’s Expectations Index is close to its historic low (indicating recession) and the Republican’s Expectations Index is near its historic high (indicating expansion). While currently distorted by partisanship, the best bet is that the gap will narrow to match a more moderate pace of growth. Nonetheless, it has been long known that negative rather than positive expectations are more influential in determining spending, so forecasts of consumer expenditures must take into account a higher likelihood of asymmetric downside risks.

  • High frequency indicators are a touch more negative. New Deal Democrat does an excellent weekly update. I always read it and any serious investor should join me.

The Ugly

Scamming 9/11 heroes and NFL concussion victims? Pretty low, if true. Some will go to any lengths to make a buck. (CBS news).

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations are welcome! For inspiration, you might test yourself on the misleading visualization techniques described by Nathan Yau. I see these daily, and so do you. The most common in financial posts is this one:


The Week Ahead

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

The Calendar

We have a normal week for economic data.

The “A” List

  • Housing starts and building permits (Th). Little change expected in these important leading indicators.
  • Leading indicators (F). Popular economic gauge expected to remain strong.
  • Retail sales (W). Little is expected from the January data.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • Industrial production (W). A small gain is expected in the volatile series.
  • Philly Fed (Th). Popular report is the first look at February data.
  • PPI (T). Starting to run a bit hotter. That will attract more attention if it continues.
  • CPI (W). See PPI above.
  • Business inventories (W). December data affecting Q4 GDP. Favorite spin target: Voluntary or involuntary build up?
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Chair Yellen give s her semi-annual Congressional testimony on Tuesday (Senate) and Wednesday (House). The presentations are the same and the order alternates. If you don’t know why, then you missed that class in Congressional Government! There are also appearances by a host of other Fed Governors and Presidents. Questions will probe the state of the economy, the new political environment, and the likely pace of rate hikes.

Earnings reports will remain important. Early actions from the Trump Administration have captured the spotlight and will continue to do so.

Next Week’s Theme

 

During the campaign, Candidate Trump had plenty of criticism for the Fed and for Chair Yellen. Since the election, he has had much less to say. With Fed Gov. Daniel Tarullo’s resignation, the President will now have three openings to fill (out of seven). Next year he can replace Yellen as Chair. Although technically her term continues, most resign when replaced as Chair. He has the power to change the style, background of members, and policies.

Yellen is testifying before Congress this week on Tuesday and Wednesday. While the topic is the state of the economy, we should expect some aggressive questioning. Will her testimony or answers draw a Presidential tweet (which we are calling a T-Wop)? The punditry will find this combination irresistible. I expect plenty of media coverage for a clash that will probably be repeated. We can think of it as:

Trump v. Yellen, Round One

The basic possibilities are interesting, but mostly speculative so far. Here is what Trump might do.

  • Trump will support some of the various moves to “audit” the Fed and reduce its power.
  • Trump will T-Wop Yellen this week, and remove her at the first opportunity.
  • Trump will resume the Fed criticism, and start his process for filling the vacancies.
  • Trump will moderate criticism while Yellen is still at the reins.
  • Trump will seek candidates that have some traditional credentials.
  • Trump will decide to keep Yellen as Chair.

Here is what Yellen might do.

  • Make an aggressive statement criticizing some Trump policies.
  • Avoid “Trump” issues in the statement, but provide some frankly critical answers to questions.
  • Announce that she plans to stay on the Fed if replaced as Chair.
  • Suggest that the Fed policy is changing in a way that Trump sought.
  • Make conciliatory remarks about the direction of Trump policy, especially economic stimulus.

What fun! Expect the pundits and their guests to go wild.

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

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

 

The Featured Sources:

 

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

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

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

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

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

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. The most recent update is for the Business Cycle Indicator.

Eddy Elfenbein notes that the early commentary is in: S&P 2018 earnings estimates at $148. Nearly everyone will regard that as too high, but others will start citing it. This happens even more after the third quarter of each year.

The Atlanta Fed notes that their GDP Now model has been running too hot due to net exports. A change might be in the works.

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. All our models are now fully invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). We try to have fun, but there are always fresh ideas. Last week there was a great discussion about whether your trading results are skill or luck. Do you know? And BTW, Athena likes AMD.

Top Trading Advice

 

Are you (like me) missing Dr. Brett already? Consider attending his trading workshop at the upcoming NY Trading Expo.

Signal Plot explains how to measure your trading performance – and you must do this.

17 Trading Resolutions for 2017. Yes, it is a little late, but you can join in just as others quit going to the gym. Dave Landry has a nice list of ideas. Some of these seemed wise, but others sounded like the Delphic Oracle. What do you think?

Trading methods not working? Here is an idea. When you hear about a hot IPO look for a stock with a similar name. Buy it on the confusion/greater fool theory! It worked for those buying dating site Snap Interactive (STVI). This is not the first such occasion. (I hope readers can recognize tongue-in-cheek).

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 this post from Seeking Alpha Editor Gil Weinreich, Are Bonds Bad? How about Funds? He cites Evan Power’s analysis of the current retirement risks, responding to a Kiplinger article that retirement was now 10 times riskier.

Wow! This is a great discussion of a topic with widespread significance. With all of the scary stories about retirement, it is helpful to read something that is calm and analytical.

Gil’s daily column is a must-read for financial advisors and usually valuable for individual investors as well.

Stock Ideas

 

Eddy Elfenbein’s best ideas are in his new ETF (CWS), which is off to a nice start. That does not stop him from making valuable commentary on news, markets, and other stocks. Last week he mentioned Ingredion (INGR), an intriguing idea.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. This week the dip-buying Holmes (who has been very hot) liked Casey’s (CASY). In a big surprise, Holmes sold the next morning, so I did a rapid update for readers. This is very unusual behavior, but it is only one of sixteen Holmes positions. Holmes is worth watching.

 

Seeking yield?

Lee Jackson suggests five dividend stocks that should do reasonably well in a market correction. These are the kind of stocks where we “enhance yield” with sales of rapidly-decaying near-term calls. We make four times as much from the call sales as we do from the dividends.

Chuck Carnevale does a deep dive on Pfizer. I agree, but I see it as another call-selling candidate.

Portfolio Management

David Merkel provides important advice about rebalancing your portfolio. I love it, and not just because the featured band is from one of my old schools. The band is great and the “Tuba March” is awesome.

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. This week may be the finest entry in a long series. I strongly recommend a look at the great links cited. Look at all the posts on the fiduciary rule. The average investor needs to understand who is selling and who is acting in his interest. For retirees or near-retirees, the Michael Kitces post is very valuable. Most people do not think about the priority of various retirement needs, but they should!

 

Thinking about Social Security?

Jesse Rothstein has a nice explanation of the tradeoffs in choosing when to start benefits.

 

Watch out for…

Trading the VXX, a “nearly perfectly-engineered tool to separate worried investors from their money. It is the unfenced swimming pool of ETF/ETNs.” See Paul Kedrosky’s tweeted chart.

Warnings about value traps (from 24/7). Once again, one person’s value trap is my candidate for selling near-term calls. There is always a way to profit if you are right about the major stock characteristics.

And more on value investing

From Validea. You need mental toughness. Strategies that work very well in the long term will have dry spells.

 

Final Thoughts

 

Before turning to the Fed, I want to comment on a major news theme from last week, in line with what we expected. Is the Trump Rally running out of steam? Some might find this ironic when results remain strong. Here is the three-part problem:

  1. Pundits and investors, seeking a simple post-election explanation for the stock rally, attributed it to Trump policies.
  2. Now that some of these policies seem delayed, they expect markets to get softer.
  3. But what if the rally was a return to earnings fundamentals and the elimination of pre-election uncertainty, as I suggested last week (with some support from Dr. Ed)?

What about the Fed?

Once in office, Presidents always like low interest rates. Trump will probably replace Yellen, but with whom? If the cabinet provides any precedent, we can expect some non-Ivy League, non-economists. I have frequently argued that most intelligent people with a reasonable background would be part of a Fed consensus after their appointment. The importance of the issues, the venue, and the evidence presented by staff all nudge in this direction. I once had the chance to suggest this idea to former Dallas Fed President Bob McTeer, and he agreed. (It is easy to draw out a confirming answer in such conversations, but we talked at some length and I really wanted to know).

Parsing through the possibilities described above, I expect to see little change in Fed policy. The new President will wind up appointing people with traditional credentials, but perhaps with different policy viewpoints. He will not reappoint Yellen, although people forget that the Fed Chair is often appointed by Presidents of both parties. (Greenspan and Bernanke are the most recent examples). He will not aggressively push for a change in policy. In fact, some are already claiming that the modest Fed rate increases are anti-Trump. Yellen will probably not remain after her term as chair, unless the new appointees are jarringly different in methods or policy preferences.

The Fed news has dramatically different significance for traders and investors.

For traders, this week will be especially difficult to game. Since that community has over-emphasized the Fed for the entire rally, unable to explain the gains any other way, there might be some big fluctuations. Since there is little precedent for this, we cannot even guess what the content-based algorithms will do.

For investors, it is another opportunity. Since the events have little real impact on expected earnings and the economic cycle, we can have shopping lists ready. My portfolio rebalancing has raised my cash levels. It is not fear of a correction, but a natural process.

Stock Exchange: Finding Your Trading Sweet Spot

Our last Stock Exchange (two weeks ago) discussed diverse ideas from our experts, and also explained why I vetoed one of the recommendations. When trading using models, you can link directly to a platform if you do many trades and have a very short time frame. Otherwise you should not blindly follow the model. A human who understands the factors used by the model can identify when a situation is truly exceptional.

The current market environment is all about Trump – perhaps excessively so. Everyone worries about what companies are vulnerable to a tweet (which we will call a T-WOP, HT @corporatecommie). Each day includes more speculation about companies that might benefit from policy changes.

How should traders find a sweet spot in this environment?

This week includes both new ideas and reviews of some past highlights. Everyone can benefit from finding the trading model most relevant for your own style.

Let’s look at the ideas from our experts. As usual, I will conclude with a brief observation.

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables below, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. 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!

This Week—Finding Your Trading Sweet Spot

Holmes

This week I’m buying good ol’ U.S.A. Macys (M). This stock probably needs no introduction, main street retail store.

This chart strikes me as a great money-making opportunity. My major concern is that this stock keeps making lower lows, but in the meantime it can have some terrific rallies. I see no reason it can’t get back to the mid-30’s. It’s a little comforting to know that there are 18 analyst holds on this stock and their target price is STILL 36. That is consistent with what the charts are telling me.

I’m buying here with tight stop, 29.25, and looking for a move back into the mid-30s. Giving me a nice risk/reward setup.

J: I agree with you about ignoring the analyst ratings. I use it as a contra-indicator. Did you read that recent WSJ article?

H: You know that I do not read! I reach great conclusions from looking at charts. You humans read, but mostly to reaffirm your existing biases.

J: I am delighted that our clients caught this at a lower price, but do you realize the stock was up over $1.50 today?

H: No. I am enjoying the beach in Mexico. I sent in my pick, but that is like working overtime.

J: Oscar’s turf accountant would call your choice “past posting.”

H: Sorry. You are the one who set the schedule for Thursdays. I made the pick earlier, and it is still a good buy.

J: There is a rumor of a possible takeover. Did you know about that?

H: No. I just know a great rebound chart when I see one.

J: Are you going to have any trouble returning from Mexico? The U.S. is taking a hard look at those returning from other countries.

H: My papers are all in order. I’ll be back in the office in a week or so.

 

Athena

I admit it. I still have no new picks. We do not have the fresh, strongly-trending stocks that I prefer. I’m still holding most of my most recent picks, and I have room for one more buy.

J: Maybe you could give us an update on one of your current holdings.

A: Fair enough. I recommended United Rentals (URI) on 12/22, after buying it myself a few days earlier.

J: Isn’t this one of your few picks where I agreed?

A: Yes, I seem to remember that you said the pick was OK, but you did not own it yourself. I have held this one through a month or so of sideways movement, but now it’s starting to pay off in a big way. We’ve seen an increase of roughly 20% in the last two weeks. That means it’s about time for me to hop off this one (as fun of a ride as it’s been).

 

J: That certainly worked well. How are you doing overall?

A: Not as well as the fussy guy and the dog, but that will change soon. I think I am Vince’s favorite.

Felix

I will once again begin with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the top overall vote getters from our (free) subscription list as well as some new requests I got during the week.

J: The list has some interesting changes. I see that AAPL (which we own) is still in “hold” territory despite the major rally after its earnings report.

F: My ratings came before the report. How about AMZN? That did not do so well. My approach is geared to the long term, usually more than one year.

J: Fair enough. Do you have something new for us this week?

F: No.

J: What? I took a long weekend, but the rest of you were supposed to keep working. Only Holmes was on vacation.

F: I worked, but there are no new choices. Patience is called for.

J: Are you trying to get dropped from the weekly discussion?

F: You would not dare! My performance leads the group. In addition, I provide updated information to my many fans. You should be giving me a raise. I am on the job while the dog is in Mexico.

J: OK, we’ll let the readers decide whether they still want your opinions.

 

 

 

 

 

 

 

Oscar

My pick for this week is the Defense sector, shown here by the SPDR S&P Aerospace & Defense ETF (XAR). I liked this one back in early December too – but I got out before the downslide. Now that the price has had a few weeks to level out, I feel more comfortable getting back into this sector.

For my next “investment” – I’ll bet that Belichick can’t put together a defense to stop the Falcons. But that really is another subject…

Here are my ratings for the top reader interests. Keep the questions coming. My sectors are aggressive, but have less risk than Felix’s picks. I avoid the bad news from random, single-stock moves.

J: Interesting. Do you see evidence of that?

O: I hear about it. People are very worried about something called “tweets” that seem to hit their stocks for no reason. Playing sectors reduces that risk.

J: Interesting. The Tweeter-in-Chief has T-Wopped a few of the defense stocks, but most still believe in his support for higher defense spending.

O: I only follow sports tweets, but I know which sectors have legs, and which will fail down the stretch.

J: You really like the Falcons?

O: My week’s pay is on the line!

 

 

 

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 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. Each week features a different expert or stock.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Conclusion

The current trading environment is treacherous. Many frustrated traders are bailing out. Or have blown out. Political opinions about policy have proved to be a dangerous foundation for trading and investing.

Our models provide a range of diverse ideas, all successful. Pick one that you like. Use it as a counterpoint for your own method. And keep control of position size and risk.

The Stock Exchange does not have all the answers, but it provides good ideas and a stimulus for your own trading.

Why You Never See the Best Employment Data

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

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

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

Why Don’t We Hear About This?

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

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

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

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

The Estimates

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

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

Implications for Investors

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

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

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

And Finally

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

Other Reading

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

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

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

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

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

 

In Search of Mediocrity

Market Sheep

The Average IQ Investor

The Little Book that Equals the Market

Common Stocks and Average Profits

Buffett: The Making of a Lucky Investor

Stay Even with Wall Street

Implications

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

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

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

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

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

What Now?

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

 

Finding Investment Excellence

There is a lot of recent buzz about active management – basically showing that excellence is difficult to achieve. The conclusion is popular, especially among those who have no aspiration to beat average.

I cannot do this in a single post, but I must start somewhere. As I often do, let me start with something far away from financial markets as the original illustration. As the TV lawyers say when wandering off course, “Your honor, just give me a few questions and I’ll connect it all up.”

Experts Exist

Let us suppose we have a difficult situation, not unlike a complex market. In this case, you are golfing. Your ball is in the rough, and there is a danger of going over the green on your approach shot.

If you are a golfer, you will get a laugh out of Golf Digest’s 26 most difficult shots. I have experienced all of them. The “shot over water” was especially intimidating at Butler National, where I asked my caddy about the drop zone. He wisely told me, “You need a better swing thought.” That was great advice!

Here is an example of Phil Mickelson hitting a 64-degree wedge. It is not a cherry-picked result. A google search will show many other similar shots.

The commentator observes that Lefty might be the only one who could hit that shot.

Finding the Expert

I hope everyone is convinced that there are experts in golf. In fact, there are experts in any field. In most cases there is a problem of “Untangling Skill and Luck” as Michael Mauboussin astutely poses it. In the case of Mickelson’s flop shot, the skill is evident. Many important cases are more challenging. What about someone with a model that provides a 10% improvement in forecasting hurricanes? Or earthquakes? The social gain from such expertise is important, but it might be difficult to identify.

If you are an investor in search of excellence, this is the challenge. For over ten years I have taken pride not in my own expertise, but in the ability to spot the best experts in various fields. That is now more important than ever for those who want more than mediocrity.

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

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

Will policy uncertainty lead to greater stock volatility?

Last Week

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

Theme Recap

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

The Story in One Chart

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

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

Personal Note

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

The News

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

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

The Good

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

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

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

 

The Bad

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

The Ugly

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

 

The Silver Bullet

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

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

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

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

The Calendar

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

The “A” List

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

The “B” List

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

     

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

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

Next Week’s Theme

 

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

Will uncertainty about policy changes lead to more volatility?

The basic positions are simple.

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

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

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

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

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

The Featured Sources:

 

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

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

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

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

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

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

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

 

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

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

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

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

Top Trading Advice

 

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

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

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

Insight for Investors

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

Best of the Week

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

 

Stock Ideas

 

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

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

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

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

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

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

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

Seeking yield?

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

Personal Finance

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

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

Watch out for…

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

Final Thoughts

 

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

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

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

What I am watching.

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

Sentiment sometimes trumps the reality of economic data.

 

Neglected Investment Ideas

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

Except for one question.

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

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

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

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

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

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

Weighing the Week Ahead: Will Q4 Earnings Confirm Recent Economic Strength?

We have a light calendar for economic data and a short week of trading. The biggest news will come from corporate earnings reports. Some financial stocks reported on Friday, but this is the first big week for Q416. Earnings season is always important, but sometimes it is special. This week the pundits will be asking:

Will improving corporate earnings confirm perceptions of a stronger economy?

Last Week

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

Theme Recap

In my last WTWA I predicted a punditry focused on the incoming Trump Administration. The confirmation hearings provided a lot of fresh news, and there was not much going on in daily trading. My guess that people would be “digging down” for clues about policy changes was a pretty good one.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. As you can readily see, both the range and the weekly change were very small. You can also see the 1% intra-day move during the Trump press conference.

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

The News

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

This week’s news was quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments. This is a good week to illustrate the problem with the so-called “economic surprise” indexes. So much depends on how you determine the expectations. If conditions are good, they are good, even though some expect continued improvement each week.

The Good

  • Mortgage applications up 5.8%, despite concerns that higher rates would hurt the market. This is a very nice surprise.
  • Jobless claims at 247K continues at an extremely low level.
  • Michigan sentiment at 98.1 on the preliminary survey remains very strong (although a slight miss on expectations).
  • Sea container counts end the year on a strong note. Steven Hansen (GEI) does his expected deep dive into the data, providing plenty of long-term analysis. Here is a key table:

  • NFIB small business outlook surges. Scott Grannis has the story, including references to consumer confidence as well.

 

The Bad

  • Retail sales? More spin – good or bad?

U.S. retail sales disappoint at end of the year (MarketWatch) at 9:10 ET.

Holiday retail sales rise 4% to beat NRF expectations (MarketWatch) at 10:29 ET.

 

  • Gasoline prices are up about 20% year-over-year. New Deal Democrat has the story.
  • Business inventories? Some regard this as bad because of the m/o/m increase of 0.7%. Last week I called this a very spinnable number. Inventories are either wanted or unwanted. Going into the number we knew that the level was depleted. This is really a neutral report.

The Ugly

Volkswagen Diesel Scandal. We now know that this was the responsibility of important executives – not just low-level employees or a faceless corporation. Fiat Chrysler is also charged, but claims important differences.

 

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. There is week’s award goes to David Moenning (a nomination from a reader, Lasrman) for his helpful discussion of “Alts.” He writes as follows:

The pitch is strong. “Alts,” as they are called, are touted as a source of diversification, a way to create non-correlated portfolios, and a means toward potential risk reduction during severe market declines. I’ve heard some folks even suggest that alts are a way to produce a solid “riskless” returns!

And….

…who doesn’t want to own an investing strategy that is designed to produce a nice, steady 6-8% return without the vagaries associated with the traditional asset classes?

And the problem….

Investopedia goes on to note that most of these alt strategies are designed for sophisticated investors. “Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex natures and limited regulations of the investments,” the website says.

[Jeff] The most attractive track record I ever saw was from Bernie Madoff – consistent strong returns and minimal drawdowns. It was too good to be true. David’s experience is quite like mine. I get pitches for these products on a regular basis. Some of them are theoretically sound and might work. The average investor does not have the skill to evaluate them.

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

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

The Calendar

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

The “A” List

  • Housing starts and building permits (Th). The most important leading data in a key sector.
  • Industrial production (W). The expected rebound would improve overall confidence in the economy.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Beige Book (W). The Fed’s district-by-district look will be scoured for signs that rate hikes might come more quickly than expected.
  • Philly Fed (Th). Earliest read on the new month has gained more respect in the past year.
  • CPI (Th). Interest in the inflation reports is building, but the worrisome stages are not imminent.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Fed speakers are still on the trail, with appearances every day. Chair Yellen will make two appearances.

Earnings reports will be the most important news.

Next Week’s Theme

 

It is a short week, with a light calendar of data. The Trump story continues as confirmation hearings shed a little more light on possible policies. There will be plenty of FedSpeak.

Despite these factors, the start of earnings season should give the punditry a break from All Trump, all the time. Because of recent economic strength, people will be skeptically searching the earnings news for signs of weakness or a negative outlook. The key question will be:

Do Earnings Reports Confirm a Stronger Economy?

The basic positions are simple.

  • Reports normally beat estimates, and there is plenty of potential this season (FactSet)

  • Some recent laggards are looking strong—energy, tech, financials (Brian Gilmartin).
  • Corbin Perception suggests that expectations are very high. This is an interesting collection of survey data. Read the full report, but here is a nice summary:
    • Heading into 4Q16 earnings season, 85% of surveyed investors expect results to be in line or better than consensus, an increase from 78% last quarter
    • Expectations for improving organic growth surpasses worsening for the first time in more than a year
    • Investor sentiment towards the U.S. has improved dramatically; 70% now forecast higher U.S. GDP while recession fears have pushed out
    • Rate hikes drive sector views: participants most bullish on Financials while Utilities and REITs see dramatic pullback in sentiment
    • 67% of investors report feeling better about the U.S economy post-election; recession fears off the table for 2017
  • Earnings are inflated by peak profit margins and bogus analyst forecasts. “Organic” growth is low and so is revenue growth. (I see these comments, but we would all appreciate some credible sources).

 

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

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

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

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

The Featured Sources:

 

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

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

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

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. His most recent research update suggests some “mixed signals” from labor markets.

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

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

Davidson (via Todd Sullivan) notes that Markets Do Not Peak Until Spread Shifts To Zero

The indicators in this fine post are consistent with what we see from our regular sources. Many of these subsume the concept mentioned.

 

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

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

Top Trading Advice

 

Sir Michael Hintze suggests that “Trump volatility” is good for active managers. This is also true for investors and traders. Check out Eddy Elfenbein’s account of the Trump press conference effects on healthcare.

Adam H. Grimes has advice aimed at new traders, but everyone can benefit. a useful and timely post for traders turning the page on the calendar. While the focus is on motivation, he has several specific suggestions. He analyzes each of the following important points:

Decide if you want to trade or gamble.

Have an open mind, but a critical mind.

Understand what “proof” looks like.

If you want to trade, bet size is really important.

Psychology matters, but these things are more important.

Dr. Brett Steenbarger illustrates how to make Internet discussions work well. He links to the Grimes post and extends some of the arguments. An intelligent discussion of important factors is one of the most important sources for traders (and investors). He has almost daily posts. Any serious trader should read them all. Another great example from this week shows how to turn failure into strength.

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

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Morgan Housel’s account of his dinner with Daniel Kahneman. It is a nice summary of Kahneman’s basic ideas – all worth reading. Morgan has a great sense for what is important and what you need to know about it. Here is my favorite quote:

On education changing thinking: “There are studies showing that when you present evidence to people they get very polarized even if they are highly educated. They find ways to interpret the evidence in conflicting ways. Our mind is constructed so that in many situations where we have beliefs and we have facts, the beliefs come first. That’s what makes people incapable of being convinced by evidence. So education by itself is not going to change the culture. Changing critical thinking through education is very slow and I’m not very optimistic about it.”

 

Stock Ideas

 

Do you believe that managers with a ten-year success record might have good ideas? If so, look at these picks. (We own several of them, which encourages me to put the rest on our watch list).

Many stocks are attractive, despite the popular valuation perception. Rupert Hargreaves reports the Jefferies take. Hint: Cyclicals and value look good.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, including four or five specific ideas that we are buying. This week the dip-buying Holmes (who has been very hot) likes Michael Kors (KORS). Check out the post for my own reaction, and more information about the trading models.

Seeking yield?

How about Raytheon? William Stamm describes the dividend hike and the potential.

Kohl’s 5% looks safe. (Josh Arnold). This is one where we enhance yield by selling near-term calls.

But watch out for companies where the dividend might not be safe. Can you depend on 5.7% from Blackstone? (Brian Bollinger)

And a key question: Should dividend investors be worried about rising interest rates? Rebecca Corvino provides some great links.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. My personal favorite this week is Megan McArdle’s post on the importance of saving. Investors should understand that the 401(k) is not a substitute for the old guaranteed benefits plans.

I have often commented that when Tadas has the time to write a standalone post, it is a special treat. This week he wrote about the “evidence-based” movement, the endurance of outmoded ideas, and what it all might mean for investors. A general conclusion is that many investors should minimize fees, choosing cheap robo-advisors or doing some basic rebalancing on their own.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest has quickly become a must-read for financial professionals. Somewhat to my surprise, the topics also stimulate comments from active individual investors. It has added to the value of the posts for both groups. Gil engages the same topic as Tadas – the need for financial advisors. (and also here).

This is a topic that hits close to home. I am quite sure that an intelligent investor who never made the common mistakes could avoid the fees of a professional advisor. I even provide a way for investors to check this out. Just ask for our free report, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! If not, you might be losing 4-8% each year. Less than 1% of my regular audience consists of clients. I started writing to help average investors, and that remains my principal motivation. I am disappointed to see what seems like an increasingly commercial approach by so many of my friends. I know that they all seek to provide excellent and special service.

 

Final Thoughts

 

As the Q2 and Q3 earnings seasons began, I wrote about the possible end of the “earnings recession” and an inflection point in forward earnings. Those events have come to pass, but we now have a new concern: the outlook. Conference calls and the company’s guidance is always interesting, but this quarter is special. Companies cannot know what the policy changes will be, nor can they predict the effects on their business.

In each week’s “Final Thoughts” I offer opinions based upon facts. Sometimes my conclusion is a description of what I find important to watch. So it is this week. My scorecard for earnings season will look for the following company characteristics:

  • Confidence. I expect most to have a murky outlook, with no reason to set the future bar very high.
  • Important trade relationships – imports or exports. Comments on these fears may create some buying opportunities.
  • Concern about a stronger dollar. Everyone is teed up to watch for this, and we should as well.

Earnings reports help us interpret the strength of the economy using non-government data. In this earnings season, it is especially important to know the story as well as the numbers.