Weighing the Week Ahead: Expecting too Much from Central Bankers?

Last week's big story was a stock market rally based upon heightened expectations of further stimulus from both the Fed and the ECB.  So much for my expectation of a low volatility week!

The calendar for this week includes plenty of important data and more earnings reports.  Normally the Friday jobs report would be the most important news of the week.  With last week's big three-day rally in mind, we must ask:

Are we expecting too much from the Fed and the ECB?

In the case of the Fed, the suggestion that action is near came from John Hilsenrath of the Wall Street Journal.  While his article was published in Wednesday's edition, the online version hit just before the market closed on Tuesday, sparking a hundred-point rally in the Dow.  Most of the analysis recapped past statements by FOMC members and mused on the recent data.  The New York Times ran a similar piece hours later.  Nonetheless some speculated that the source was meaningful, and even suggested that Hilsenrath might be "too close" to the Fed.  For these sources the mere fact and timing of the article suggests a near certainty of action.

There were questions raised about the Draghi speech as well, especially when Bundesbank officials seemed not to agree

I'll offer my own expectations in the conclusion, but first let us do our regular review of last week's news.

Background on "Weighing the Week Ahead"

There are many good sources for a list of upcoming events.  With foreign markets setting the tone for US trading on many days, I especially like the comprehensive calendar from Forexpros.  There is also helpful descriptive and historical information on each item.

In contrast, I highlight a smaller group of events.  My theme is an expert guess about what we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios.

This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.

Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!

Last Week's Data

Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:

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

The Good

The good news all seemed to come with an asterisk.

  • ECB chief Mario Draghi vows to do whatever it takes, and assures that it will be enough.  There is additional support from political leaders in France and Germany.
  • Initial jobless claims declined 35,000 to 353K.  This continues a wild series of gyrations, possibly influenced by fewer auto plant closings this year.  It does provide another decline in the four-week moving average, and it looks nothing like recession territory (as noted by Bonddad with some great charts well worth checking).  These data were not part of the survey period for next week's employment situation report.
  • Durable goods orders were up 1.6%.  (The asterisk is that the "core value" which excludes transportation and defense, declined 4.4%).
  • Earnings reports have continued to beat the lowered expectations, and revenues are also a little better.  Here is the chart from Bespoke.

Epsrev

  • Money supply growth (M2) is starting to look stronger at 7% real growth Y0Y. (Bonddad)
  • Home values are higher than last year according to Zillow.  There are several different measurement approaches with differing universes and time frames.  The widely-followed Case Shiller method uses a trailing three-month average, so we should not look for a turn there just yet.

The Bad

 The bad news also earned asterisks, as some stories had mixed features.

  • The Q212 GDP report, 1.5% annualized growth, continues a weakening and sluggish pattern.  I am classifying this as a negative, although it beat (reduced) expectations.  There were also revisions to past quarters.  For a comprehensive look at the GDP report, check out Doug Short's analysis.  Here is one chart showing the revisions.

GDP-2012-revisions

 

  • Pending home sales declined 1.4%.  (More from Calculated Risk).
  • Chinese economic data continues to look suspect.  This is a theme we have covered in several past articles.  Dr. Ed has an interesting analysis of revenue data, concluding that Chinese growth may be weaker than expected.
  • Michigan Sentiment on the final read for July was still very weak at 72.3 (a small increase over the preliminary number).  This is not a good omen for the jobs report, especially in light of the reduction in gas prices.  See Doug Short for his great chart, showing the relationship with recessions. 
  • Sentiment in Europe continues to decline, as noted by Rebecca Wilder.  She has a nice analysis of several indicators and plenty of charts.  Here is a good example.

Pmi_manufacturing

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts.  Think of The Lone Ranger.

This week's award goes jointly to Georg Vrba and Doug Short.  They each take on the most recent effort to scare investors with some obscure technical indicator of dubious provenance.  This time it is perma-bear Albert Edwards warning investors about the "Ultimate Death Cross" taking the S&P 500 back to 666.

Doug Short analyzes this "bizarre concept" which he conclusively demonstrates to be a "worthless indicator for the market or the economy."

Georg Vrba takes the analysis even further.  He shows that Edwards' prediction is almost impossible to accomplish if you actually do the math on the moving averages involved.  In addition, he demonstrates that the current indicator conditions are actually bullish based on historical data.

30-7-fig2

There is so much misinformation, and so few who work to correct the errors.  We should recognize those who do.

The Indicator Snapshot

It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:

The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events.  It uses data, mostly from credit markets, to reach an objective risk assessment.  The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.

The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread." I'll explain more about the C-Score soon.  We are working on a modification that will make this method even more sensitive.  None of the recession methods are worrisome.  Bob also has a group of coincident indicators. Like most of the top recession forecasters, he uses these to confirm the long-term prediction. These indicators are also not close to a recession signal.

There is a lot of activity from the recession forecasters.  The basic summary is that those with the best records still see little chance of a recession in the next six months or so.  The people that get featured  in the press and on TV are sticking by their guns, even though the evidence is mounting against them.

We are now at the end of the nine-month forecast window that the ECRI adjusted to after their September, 2011 call (recession imminent, maybe already here, and unavoidable) seemed to prove wrong.  Since then they have been adjusting indicators and trying to extend the window, which supposedly ends right now — mid-year 2012.  Instead of agreeing to this, the ECRI has now raised the notion that there is already a recession, but it has not yet been recognized.  For the last two weeks there have been numerous refutations of this claim.  Meanwhile, I recommend this article where I did a rather comprehensive list leading up to last week and also my new Recession Resource Page, which explains many of the concepts people get wrong.

The group using the ECRI data for recession forecasts — with a better fit that the ECRI has themselves — has lowered their "alert stage" based on the most recent data.

The single best resource for the  ECRI call and the ongoing debate is Doug Short, who has a complete and balanced story with frequent updates.

  Indicator snapshot 072812

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions.  This week we switched to neutral.  We have been bullish since June 23rd.

[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

This is a really big week for data, and we also have more earnings news. 

Lesser (but important) items include the following:

  • Personal income and spending (Tues).
  • Case-Shiller home prices (Tues).
  • Chicago Purchasing Managers Index (Tues).

The biggest items are the following:

  • ADP employment report (Wed).
  • ISM manufacturing (Wed).
  • Initial jobless claims (Thur).
  • Employment situation report (Fri).

In addition we have the FOMC announcement on Wednesday and the ECB on Thursday.

It is a jam-packed week for data and potential policy announcements.  The calendar creates some quirks, as I'll discuss in the conclusion.

Trading Time Frame

Our trading positions continued in fully invested mode last week.  Felix is not a range trader, but is excellent at getting on the right side for big moves.  The positions have become more conservative and I would not be surprised to see a move to cash — at least partially — in the coming week.

Investor Time Frame

The successful investment strategy differs markedly from trading.  It is especially important to establish good, long-term positions when prices are favorable. Most individual investors seriously underperform long-term results by selling low and buying high.  Most successful professionals, of course, do the opposite.

This is easier said than done.  With everyone on TV explaining with great confidence what just happened (please check out my article on the "message of the markets") it is easy for the average person to think he is out of step.  For several weeks I have emphasized the folly of attempts at short-term market timing.

There is no magic moment.  Resolving market worries is a process, not an event.

I tried to explain the most important concept for individual investors in this article about the Wall of Worry. I have had many emails from people who had a personal breakthrough in their investing when they understood this concept. If you missed it, I urge you to take a look.  You can contrast this with the many  pundits who claim miracles of market timing.

The market action in the last two weeks has once again illustrated market moves based on unpredictable factors.  Who would have guessed on Tuesday afternoon that the market would be 2% higher on the week?

Our single best strategy through the various gyrations has been buying dividend stocks and selling calls for enhanced yield.  This week provided great opportunities to set new positions early in the week and sell calls against existing holdings late in the week, just as we suggested last week.  Anyone unhappy with bonds should be doing this for a yield of 8-10% with greater safety than pure stock ownership.  Take what the market is offering!

Final Thoughts on Draghi and Bernanke

There is certainly potential for disappointment this week.

While Draghi was decisive in his rhetoric, we were all left to imagine the specific policy actions that might result.  In particular, my concern is one of pace and timing.  Market participants show little patience for the democratic political process, demanding instant gratification.  Draghi may have a different time frame in mind.

David Wessel in the WSJ quotes David Mackie of JP Morgan Chase with a list of possibilities, in descending order of probability.

  1. European Financial Stability Facility/ European Stability Mechanism purchases in primary and secondary bond markets.
  2. A reactivation of Securities Markets Programme, or SMP, which made bond purchases, on the basis of constructive ambiguity.
  3. A decline in the ECB’s interest-rate corridor, pushing the deposit rate into negative territory.
  4. More long-term refinancing operations with significantly less aggressive collateral haircuts, with the financing rate linked to the pace of bank lending.
  5. A precautionary credit line from the EFSF/ESM for Spain.
  6. A statement removing perceived seniority of EFSF/ESM and ECB interventions.
  7. A full EFSF/ESM bailout for Spain.
  8. An ECB commitment to buy EFSF/ESM debt in the secondary markets.
  9. Large scale asset purchases along the lines seen in the U.S. and U.K.
  10. A reactivation of SMP program with yield targets for Spain and Italy.
  11. ECB taking a write-down on holdings of Greek debt to reinforce that it stands on equal footing with official interventions.
  12. Giving the ESM a banking license.

This is a good list, further explained in the article.  I think we will eventually see several of these items, but only over time.

Despite the "perfect record" of Hilsenrath, I am not convinced about FOMC action this week.  It seems more natural for them to accumulate more data, including Friday's employment report, with some hints coming at the annual Jackson Hole meeting.  This is only a guess.  With more certainty I will predict that many will use whatever the Fed does on Wednesday as an indicator of Friday's employment data.  This is because most market observers make several important mistakes about the Fed, as I explained here.  The Fed will not know the data.

Investment Conclusions

This is a very difficult week for specific investment conclusions.  I did come across an intriguing nugget.

Hedge funds are not profiting from Europe, mostly because there are no trends and there is an unpredictable news flow.  (Maybe they should hire a few recent poli sci grads to assist their quants!)  The Economist observes:

"Perhaps too many people are looking for the next “big short” and instead should be looking for the next “big long”. Mr Paulson (whose fund has done badly of late) was able to buy CDSs cheaply because everyone else was bullish on American housing. Should the euro crisis somehow see a swift resolution, the optimists who defied consensus could be the ones counting their billions."

 [Note to readers using RSS or email:  Please convert to our new feed, since the old one will soon be discontinued.  Thanks!]

Four Common Mistakes about the Fed

The Fed is a favorite target for the financial punditry.  Anyone can and does join in, offering ideas that are completely without evidentiary support.  Meanwhile, there is plenty of factual information about the Fed, but it is widely ignored.

Here are four common mistakes that you frequently see in the commentary from the  pseudo-experts.  These blunders are so widespread that it is pointless to cite a specific source.

The Fed is Sidelined by the Upcoming Election

This one is a persistent theme among those who have absolutely no special knowledge or experience.  Many pundits analyze government organizations by pretending that the policymakers are a small group with a strong common motive and the ability to act in secret.  They basically take their own limited experience about how the world works and assume that they can explain government actions that way.

One reporter from the floor recently reported the latest convoluted notion:  The FOMC would not act at next week's meeting, but would instead delay so that the positive effect of its policy action would not occur before the election.

That is really deep!  Some of the same sources show a chart that quite liberally changes the dates of Fed policy to correspond to market moves.  In some cases the move occurs at the first hint of a policy change.  This is completely inconsistent.

The Fed Acts Based Upon the Stock Market

One commentator recently opined that the Fed would not act right now because the stock market was not really threatened.  The Fed would wait until there was a serious selloff to use its few remaining bullets — maybe 1100 in the S&P.

In fact, there is absolutely no evidence that the Fed acts to prop up the stock market.  The Fed behaves in line with a dual mandate for stable prices and low unemployment.  With prices not a threat, the emphasis is on economic growth.

There is a source of confusion — the Fed embraces the stock market as one source of how well they are doing on the economy.  While the objective is not directly to support stock prices, a successful economic policy would have that result.  The occasional reference to higher asset prices is pounced upon by conspiracy buffs.

How can we tell the difference?

  1. We could listen to Bernanke's testimony, where he has repeatedly stated the economic objectives — and also that the political circumstances are not a factor.
  2. We could go to the official transcripts of the meetings, now available for many years and extending up to 2006.   These are full transcripts.  If someone wants to assert political or stock motivations, let him find the evidence in the actual record.  Put up or shut up!
  3. Forget the stupid conspiracy notion.  The FOMC meetings have many participants, some of whom would be happy to report any secret moves.

Day-in-the-life-of-the-fomc_img01

 

The Fed is Out of Ammunition

A popular theme is that the Fed can do little more because short rates are already at near-zero levels and the perception is that the effect of asset purchases has been reduced.

It is difficult to discuss an erroneous viewpoint without specifying a source, and I do not want to create a straw man.  With this in mind, the Fed critics — who have been on the job for years — did not imagine any of the current actions either.  The "out of bullets" meme is many years old.  Why should we believe them now?

Instead, you could look at commentary from an actual authority, a former Vice-Chair of the Fed.  Alan Blinder, writing in the WSJ, offers five different ideas that the Fed could use.  Any of these surprises could catch traders leaning the wrong way.

The Fed Knows the Employment Data

This is a bonus item.  I predict that whatever the Fed does next week, the talking heads will speculate that it is based on an early read from the employment report.

This idea is completely false, and contravenes official regulations.  The President gets an early look on Thursday afternoon (via the Council of Economic Advisors) and the Fed gets a few data points to help with their Wednesday release on Industrial Production.

That is all!

This was a specific question in a BLS webinar that I attended two years ago.  Here was the answer:

11:01

Angie Clinton (BLS-CES): 

Submitted via e-mail from Paul: Question
QUESTION: What are the rules or law governing the confidentiality of the monthly jobs reports? When is the report/information released to the media (even though it may be embargoed for a few hours). Are DOL officials or other Executive Branch officials permitted to publicly discuss any information about those reports before they are released to the media and public? Thank you.
ANSWER: Thanks for your question Paul. The Office of Management and Budget directs Federal agencies on the compilation and release of principal economic indicators. Statistical Policy Directive Number 3 designates statistical series that provide timely measures of economic activity as Principal Economic Indicators and requires prompt release of these indicators. The intent of the directive is to preserve the time value of such information, strike a balance between timeliness and accuracy, prevent early access to information that may affect financial and commodity markets, and preserve the distinction between the policy-neutral release of data by statistical agencies and their interpretation by policy officials.
According to the guidelines set forth in this directive, the BLS provides prerelease information to the President, through the Chairman of the Council of Economic Advisers, the afternoon before release of the Employment Situation. Statistical Policy Directive Number 3 is available on
http://www.whitehouse.gov/omb/assets/omb/inforeg/statpolicy/dir_3_fr_09251985.pdf .
The directive contains the following language regarding public comment: “Except for members of the staff of the agency issuing the principal economic indicator who have been designated by the agency head to provide technical explanations of the data, employees of the Executive Branch shall not comment publicly on the data until at least one hour after the official release time.”
CES and CPS data are embargoed until the scheduled release date and time. The Federal Reserve has a memorandum of understanding with BLS to obtain specific employment and hours series for manufacturing, mining, utilities, and publishing for purposes of producing estimates of industrial production on Wednesday at 8:00 AM prior to the release. The Council of Economic Advisors receives the news release on Thursday afternoon, the day prior to the release. The Chief Economist at the Department of Commerce and the Secretary of Labor receive the news release at 8:00 on the morning of the release. Members of the press and the staff of the Joint Economic Committee of Congress (if there is a JEC hearing) receive the news release under strict lockup conditions at 8:00 AM on the morning of the release.

Friday June 4, 2010 11:01 Angie Clinton (BLS-CES)

This is quite authoritative, and you will definitely not see it anywhere else.  My fearless forecast is that the conspiracy buffs will be in action on this next week!

Investment Conclusion

The basic conclusion for investors is a familiar one for readers of "A Dash."  There is no substitute for finding actual experts and sources.  Accept no substitutes!

Bernanke will act if additional economic weakness indicates the need.  He will not have advance info on the employment report, so Fed action might not occur at the upcoming meeting.  While it may be fun to speculate on conspiracies and politics, this is not the path to a profitable investment.

Fighting central banks is a losing proposition for investors.

 

Weighing the Week Ahead: How Big is the Economic Slowdown?

After the volatility of last week's "three-ring circus," I expect a quieter trading week.  Based upon evidence from somewhat weaker economic reports and lower corporate revenues, the key question is:  How big is the economic slowdown?

It has taken only a slowing in the rate of growth — not a decline — to convince many that a new recession is upon us.  This is a key question, and we'll have more evidence this week.

I'll offer my own expectations in the conclusion, but first let us do our regular review of last week's news.

Background on "Weighing the Week Ahead"

There are many good sources for a list of upcoming events.  With foreign markets setting the tone for US trading on many days, I especially like the comprehensive calendar from Forexpros.  There is also helpful descriptive and historical information on each item.

In contrast, I highlight a smaller group of events.  My theme is an expert guess about what we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios.

This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.

Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!

Last Week's Data

Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:

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

The Good

It was, as expected, a busy week for news and data.

House-price-changes-distribution-by-county-NY-Fed-2912-July-17-400px

  • Bullish sentiment "falls off a cliff" according to Bespoke.  This is a short-term market positive.

AAII Bullish Sentiment 071912

  • Corporate earnings have been beating (lowered) expectations, much as we have expected.  Some major companies (especially GE) have given relatively positive outlooks, despite the expectation that most would be conservative.
  • Rail and sea traffic are positive.  See Steven Hansen's articles (Rail, Sea).  Ports of LA and Long Beach are building at a "furious pace."  (Calculated Risk).

The Bad

 There was plenty of negative news from our three-ring circus last week.

  • Bernanke's testimony showed no immediate inclination for more stimulus.  Since traders are more skeptical about the economy than is the Fed, this caused instant, but temporary, selling.
  • Corporate revenues (contrast with earnings above) are worse than expected.  My colleague Scott Rothbort at Wall Street All Stars writes an excellent daily column.  He notes that the weaker dollar helps costs and hurts revenue for many companies.  This seems to have escaped the notice of less discerning analysts.
  • Earnings expectations for 2012 are still declining.  Brian Gilmartin tracks this carefully at his new blog — highly recommended.
  • Conference Board Leading Economic Indicators moved lower.  Their interpretation is that the economy has a steady but soft pace while sailing through "strong headwinds."  Doug Short has a good analysis and an interesting chart showing the rate of change in this index and past recessions.

CB-LEI-ROC

  • Initial jobless claims spiked higher, back to the 180K  380K range,  reflecting the auto company seasonality.  This suggests that last week's improvement was a one-time effect.
  • Fiscal cliff rhetoric is bad.  No sign of progress before the election.

The Ugly

There was a lot of ugly stuff happening last week, but I want to stick to the world of investments.  The most dangerous thing for the individual investor right now is the apparent safety in the quest for yield.  I warned a month ago that investors should build a ladder from individual bonds rather than owning funds.  Many will be surprised by actual losses from their bond funds, despite the past performance.

I was delighted to read Barry Ritholtz's fine article in the Washington Post, also recommending a bond ladder approach and warning about some alternatives.  This is important and deserves the visibility before it is too late.

In "Con Job," Tom Brakke shows how apparent high-yielding funds are really giving investors their own money back in the guise of yield.  Check out the great chart.

 

The Indicator Snapshot

It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:

The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events.  It uses data, mostly from credit markets, to reach an objective risk assessment.  The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.

The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread." I'll explain more about the C-Score soon.  We are working on a modification that will make this method even more sensitive.  None of the recession methods are worrisome.  Bob also has a group of coincident indicators. Like most of the top recession forecasters, he uses these to confirm the long-term prediction. These indicators are also not close to a recession signal.

There is a lot of activity from the recession forecasters.  The basic summary is that those with the best records still see little chance of a recession in the next six months or so.  The people that get featured  in the press and on TV are sticking by their guns, even though the evidence is mounting against them.

We are now at the end of the nine-month forecast window that the ECRI adjusted to after their September, 2011 call (recession imminent, maybe already here, and unavoidable) seemed to prove wrong.  Since then they have been adjusting indicators and trying to extend the window, which supposedly ends right now — mid-year 2012.  Instead of agreeing to this, the ECRI has now raised the notion that there is already a recession, but it has not yet been recognized.  For the last two weeks there have been numerous refutations of this claim.  Meanwhile, I recommend this article where I did a rather comprehensive list leading up to last week and also my new Recession Resource Page, which explains many of the concepts people get wrong.

I'll have more on the most recent work in this week's conclusion.

The single best resource for the  ECRI call and the ongoing debate is Doug Short, who has a complete and balanced story with frequent updates.

  Indicator snapshot 072112

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions.  This week we continued as "bullish," although it is a pretty close call.  These are 30-day forecasts.

[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

There are a number of minor releases this week, including some regional Fed surveys.  The biggest items are the following:

  • New home sales on Wednesday, since there is plenty of interest in potential housing growth.
  • Initial claims (Thursday) especially given the recent wild fluctuations.
  • Durable goods orders (Thursday).
  • Advance GDP estimates for Q2 (Thursday).  This is important even though it is backward looking and will be subject to significant revisions.

Trading Time Frame

Our trading positions continued in fully invested mode last week.  Felix is not a range trader, but is excellent at getting on the right side for big moves.

Investor Time Frame

The successful investment strategy differs markedly from trading.  It is especially important to establish good, long-term positions when prices are favorable. Most individual investors seriously underperform long-term results by selling low and buying high.  Most successful professionals, of course, do the opposite.

This is easier said than done.  With everyone on TV explaining with great confidence what just happened (please check out my article on the "message of the markets") it is easy for the average person to think he is out of step.

There is no magic moment.  Resolving market worries is a process, not an event.

I tried to explain the most important concept for individual investors in this article about the Wall of Worry. I have had many emails from people who had a personal breakthrough in their investing when they understood this concept. If you missed it, I urge you to take a look.  You can contrast this with the many  pundits who claim miracles of market timing.

The market action last week, once again illustrated market moves based on little change in the underlying information, especially after Bernanke's testimony.

The best strategy through the various gyrations has been buying dividend stocks and selling calls for enhanced yield.  Anyone unhappy with bonds should be doing this for a yield of 8-10% with greater safety than pure stock ownership.  Take what the market is offering!

Those who had calls expiring worthless last Friday can now do a new round of sales.

Final Thoughts on the Slowdown

The recession forecasts have a lot of traction, despite the lack of supporting data.  I was reminded of the attraction of intuition by the continuing comments of golf analyst Curtis Strange, talking about the "heavy air" at the British Open.  This seems plausible to most, but is actually wrong.  Humid air is less dense than dry air, and in the absence of other variables, humidity adds slightly to distance.

You cannot get a bet down on that error, but you can act on the misleading recession forecasts.

Many people confuse continuing below-trend growth with a recession.  As investors, we are interested in the effect on corporate earnings and stock prices, both of which have done well despite the sluggish recovery.  A recession starts at a business cycle peak.  A slowing rate of growth does not signal a peak.  This is completely counterintuitive, so it makes the average person vulnerable.

It is in the interest of many to promote the recession talk:

  • The "out" party (and Dems would and did do the same thing when they were out);
  • The media (selling page views and ratings);
  • Those who have made a big reputational play (like the ECRI); and
  • Those selling fear and gold.

There was even more excellent work this week on the recession front, all featuring solid quantitative work.

The Bonddad Blog looked at initial jobless claims before past recessions and found little evidence that current circumstances are similar.

Dwaine van Vuuren looks specifically at the four main indicators used by the NBER in determining the start of recessions.  This is different from the recession forecasting model he has developed, since it is more of an analysis of current conditions, what he calls a "confirmation of last resort."  Most will need to read the article carefully, but the verdict should be pretty clear.

Doug Short also looks at the big four indicators.  As usual, he has many helpful charts showing quite clearly the difference between current conditions and past recessions.  The entire article is great, and recessionistas should study the charts carefully.  Here is one that summarizes the key elements:

Big-Four-Indicator-Average-Since-1959

Here is Doug's answer to his own question of whether the Big Four are rolling over:

"As of the latest data, no, they are not collectively rolling over. Here is the big picture since 1959, the same chart as the one above, but showing the average of the four rather than the individual indicators. This chart clearly shows the savagery of the last recession. It was much deeper than the closest contender in this timeframe, the 1973-1975 Oil Embargo recession. While we've yet to set new highs, the trend has collectively been ever upward."

Investment Conclusion

Most investors spend too much energy trying to form their own conclusions about the economy.  I am surprised by the strong feelings I see in comments, emails, and private conversations.

Unless you have your own macroeconomic model and plenty of experience, you have no basis for your personal opinion about recessions.

Unless you have significant experience in evaluating quantitative models, you have no basis for choosing among the various expert forecasts.

I do not have a macro model, but I try each week to help people find the best experts in various fields.  There will eventually be another recession, of course, but the evidence is not there yet.