Stock Exchange: How to Use Backtests Effectively

 

Everyone interested in managing their own money ought to keep an old idiom in mind: if it seems too good to be true, it probably is. Unfortunately, greed is a powerful motivator. It’s tempting to see a new model with an incredible backtest and think this could be the answer.

Experienced investors know that there’s often a drastic change between a model’s backtest and its first live run. You can usually find that point by checking for where the 45-degree angle increase in value drops off into sideways movement (and generally underperforms the market).

This week, we’ll take a deeper dive into how you can minimize these problems using professional techniques.

Review

Our last Stock Exchange revisited a common theme: making stock picks according to a set time frame. Our models suggested finance and software stocks in the short-term, and energy for the long-term.

Let’s turn to this week’s ideas.

This Week— *crickets*

We usually arrive to find the gang happily enjoying their weekly poker night. Instead, all we’ve got are Felix and Oscar’s weekly rankings with a “gone fishin’” note on the counter. Strange behavior.

We decided to give Vince Castelli a call to investigate. Vince is our modeling guru, a brilliant scientist who spent the bulk of his career as a civilian employee for the U.S. Navy. During his time there, he’s had hands-on experience with modeling techniques vital to national security – not something you can find in the classroom. He knows these models better than anyone; after all, he designed them.

Jeff: Vince! What is this about giving everyone the week off?

V: I didn’t give them the week off. There were new no new fresh signals.

J: Is there something wrong with the gang? They encompass five different methods. How can there be no fresh ideas?

V: A key feature of all models is recognizing the best times to trade. When volatility increases trades become less predictable.

J: What do you mean? The VIX is lower this week. Volatility is down.

V: That measure is for amateurs. Trading volatility includes both upside and downside. That bogus fear gauge emphasizes only the downside. Predictions are affected by extreme movements in either direction.

J: Since we do not have current picks to feature, maybe we could discuss how you developed these models.  There was an excellent recent article from Ben Carlson about what you cannot learn from a backtest. It reminded me of the TV ads suggesting that anyone can discover a system and trade their way to a fortune.

V:  If only it were that easy.

J:  Ben’s description made me think of some suburbanites wandering into the woods with massive chain saws.  The power of the tools far exceeds their skill in using them.

V: I see it all of the time.

J:  I would like to take up a few of Ben’s points and get your reaction.  How about this:  How many bad backtests came before the good ones?

V:  This is a great question.  Most people do not know the right questions to ask the model developer.  That one is crucial.

J:  How would you answer?

V:  Our method preserves multiple out-of-sample periods.   We develop models on our development data, saving pristine time periods for the test.  We verify that the strength of results continues.  You cannot just look at backtest results; you must know the developer’s method.

J:  Here is another good point — Data availability at the time.   Isn’t it easy to “peek ahead” or to exclude data from failing company?

V:  It certainly is.  You need to have data that includes the failed and merged companies.  The average person at home will not pay up to get this.  It introduces a deceptive, positive bias.

J: Ben also raises an interesting point about friction.  He writes:

It’s almost impossible in a backtest to completely account for costs and frictions such as taxes, commissions, market impact from trading, market liquidity, etc. Sure, you can estimate these frictions, but you never truly understand how these things will affect your bottom line until you actually have to execute buy and sell orders.

V:  This is the first point where I really disagree with him.  Why is it almost impossible?  You should definitely include commissions and a slippage factor.  If your trades are a small percentage of the market volume, the impact from trading is negligible.  Taxes vary by the type of account and the investor.

J:  Interesting point!  “Almost impossible” is strong language.  For someone who knows the ropes, this kind of test might represent real edge.

V:  That is what I do with each of my creations!

J:  Some of Ben’s other points relate to psychological factors.  The trader bailing out of the system in the face of losses.  Or concern about real money.

V:  That is strictly a matter of confidence in the system.  If it has been developed properly, you should not do a lot of fretting.

J: Thanks for joining us, Vince. I’m sure your comments will help readers make more sense of our series.

V: Any time!

Conclusion

One important point was not mentioned in Ben’s article – simplicity.  The temptation for the untrained modeler is to introduce as many variables as possible, hoping to find correlations that others have missed.  What they find is misleading. Computers are powerful enough to discover apparent links between variables when there is actually no relationship. A great model uses as few variables as possible.  The backtest may not seem as good, but the real-time trading will be much better.

Quantitative modeling is an extraordinarily complicated field. In some ways, the way to find success here is similar to finding success in the investment world as a whole. Find the right experts, learn their methods, and try to make sense of the data for yourself. Backtesting can be effective or dangerous – it depends on the skill of the developer.

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

2016 in Review: Best of the Silver Bullet Awards Part One

Since the earliest days of A Dash of Insight, Jeff has brought attention to journalists and bloggers who dispel myths in financial media. We congratulate these writers with the Silver Bullet Award – named in honor of the Lone Ranger, who lived by a strict code: “…that all things change but truth, and that truth alone, lives on forever.”

In a year rife with misinformation and disinformation, it is fitting that we gave out a record 23 Silver Bullet Awards in 2016. For that reason, we’ll be doing this year in two parts; our winners for the first half of the year are summarized below. Readers may also want to check into our 20132014, and 2015 compilations, as many of the same issues persist to this day.

Have any thoughts or predictions on what will dominate news cycles in 2017? Know of a great analyst flying below our radar? Feel free to post in the comments with any suggestions or nominations.

1/3/16

It didn’t take long to find our first Silver Bullet winner of 2016. Matt Busigin took on US Recession Callers ahead of the ISM data release:

Through a combination of quackery, charlatanism, and inadequate utilisation of mathematics, callers for US recession in 2016 are embarrassing themselves. Again.

The most prominent reason for recession calling may well be the Institute of Supply Management’s Manufacturing Purchasing Manager Index. The problem with this recession forecasting methodology is that it doesn’t work.

As we now know, the US economy did not slip into a recession in 2016 – lending further credence to Busigin’s critique of these methods.

2/7/16

Paul Hickey of Bespoke Investment earned the second Silver Bullet award of 2016. While others were content to see doom and gloom in the level of margin debt on the NYSE, Hickey dismissed this as a minor concern.

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

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

3/5/16

The causation-correlation fallacy is a favorite of ours on A Dash. Robert Novy-Marx distinguished himself with an excellent paper titled “Predicting anomaly performance with politics, the weather, global warming, sunspots, and the stars.”

“This paper shows that several interesting variables appear to have power predicting the performance of some of the best known anomalies. Standard predictive regressions fail to reject the hypothesis that the party of the US President, the weather in Manhattan, global warming, El Niño, sunspots, or the conjunctions of the planets are significantly related to anomaly performance. These results are striking and surprising. In fact, some readers might be inclined to reject some of this paper’s conclusions solely on the grounds of plausibility.”

We often note how bloggers and media search back to find tedious explanations and tie a day together. For more reading, we recommend our old post “The Costly Craving for Explanations.”

3/20/16

“Davidson,” by way of Todd Sullivan, was recognized for writing on the confusion of nominal and real data on Retain and Food Service Sales. His key takeaway:

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

3/26/16

Jacob Wolinsky found it suspicious that Harry Dent was predicting the next big crash – and happened to have just the product to help investors cope. This “Rounded Top” chart had started to make its way across the panicky world of financial media:

The whole of Wolinsky’s article is still worth a read (especially given its twist ending).

4/3/16

The economic impact of lower oil prices in early 2016 was surprising to many observers. We recognized Professor Tim Duy for his research on the economic impact of lower oil prices.

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

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

4/10/16

If we spent a little time looking for the newest conspiracy theory about the Federal Reserve, we could probably give out the Silver Bullet every week. Ethan Harris of Bank of America Merril Lynch (via Business Insider) got this week’s award for shutting down a new “theory” about central banks and the dollar.

“There is a much simpler explanation for all of this. Central banks have turned more dovish because they are being hurt by common shocks: slower global growth and a risk-off trade in global capital markets,” he argued.

“Hence it is in the individual interest of the ECB to stimulate credit and bank lending, the BOJ to push interest rates into negative territory and the Fed to move more cautiously in hiking rates,” he continued.

Some may also point out that there’s a gap between Yellen’s recent messages and some of the recent speeches from FOMC members.

But Harris has thoughts on this, too:

  1. Yellen has consistently leaned more dovish than others.
  2. Most of those more hawkish speeches were from nonvoting members.

4/17/16

The mythology surrounding the Fed bled over into the next week as well. We gave Steven Saville a Silver Bullet award for targeting ZeroHedge with this very thorough rebuttal:

A post at ZeroHedge (ZH) on 8th April discusses an 11th April Fed meeting as if it were an important and unusual event. According to the ZH post:

With everyone’s focus sharply attuned on anything to do with the Fed’s rate hike policy, many will probably wonder why yesterday the Fed announced that this coming Monday, April 11, the Fed will hold a closed meeting “under expedited procedures” during which the Board of Governors will review and determine advance and discount rates charged by the Fed banks.

As a reminder, the last time the Fed held such a meeting was on November 21, less than a month before it launched its first rate hike in years.

As explained at the TSI Blog last November in response to a similar ZH post, these “expedited, closed” Fed meetings happen with monotonous regularity. For example, there were 5 in March, 4 in February and 5 in January. Furthermore, ZH’s statement that 21 November was the last time the Fed held such a meeting to “review and determine advance and discount rates charged by the Fed banks” is an outright falsehood. The fact is that a meeting for this purpose happens at least once per month. For example, there were 2 such meetings in March and 1 in February.

4/23/16

During the economic recovery following the Great Recession, critics often argued that net job creation emphasized part-time and low-paying jobs. Jeffry Bartash of MarketWatch thought to look at the data, and concluded the US economy is still creating well-paid jobs. The key takeaway is in the following chart:

5/8/16

Breaking down mean averages can produce some strange results, and you can never be sure how financial bloggers might spin that data. We gave a Silver Bullet award to Jeff Reeves for breaking down this baffling valuation of Tesla.

$620,000 for every car it delivered last year, or $63,000 for every car it hopes to produce in 2020.

By comparison, General Motors Co’s (GM.N) $48 billion market value is equivalent to about $4,800 for every vehicle it sold last year.

Reeves’ full article, still available on MarketWatch, is still very smart and very readable.

5/21/16

The “flattening” yield curve had become the newest scare issue by late May. Barron’s Gene Epstein and Bonddad’s New Deal Democrat both took this to task, with satisfying results. In particular, the latter’s article had a solid mix of compelling charts with snappy writing:

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

5/29/16

We gave this week’s award to the former President of the Minneapolis Fed, Narayana Kocherlakota. As conspiracy theories persisted, he explained the nature of Fed meetings and their timing:

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

6/12/16

New Deal Democrat earned a second Silver Bullet award for his work debunking a notoriously deceptive chart:

“The problem with this graph is that includes two slightly to significantly lagging indicators.  Your employer doesn’t start paying withholding taxes until after you are hired.  State tax receipts aren’t paid until a month or a quarter after the spending or other taxable event has occurred.  Worse, since both have seasonality, both have to be measured on a YoY basis, which means the turn in the data will come after the actual turn in the economy.”

Conclusion – Part One

As always, you can feel free to contact us with recommendations for future Silver Bullet prize winners at any time. Whenever someone takes interest in defending a thankless but essential cause, we hope you’ll find them here. Expect to see Part Two of our Silver Bullet review later on in the week. Happy New Year!

Applying The Lessons From 2015

[This post originally appeared on Seeking Alpha last week.  I enjoy a wide following there, and I appreciate the opportunity to participate in their annual series.  As I note at the beginning of the interview, this is a very valuable resource.  I share the interview with readers of “A Dash” with the permission of Seeking Alpha.]

George Moriarty (GBM) — Thank you for once again taking the time to share your plans for the year ahead with us.

Jeff Miller (JM) — Thanks for inviting me to participate. The Seeking Alpha annual previews are extremely important for thoughtful investors. You always have interesting and diverse ideas from an impressive group of contributors. I enjoy reading the work of others, but it also helps me to focus my own ideas. I normally write about Weighing the Week Ahead, but this is Weighing the Year Ahead.

GBM — The start of this year has been pretty rough for investors. Does that affect your outlook?

JM — I don’t place any special emphasis on the first few days of the year. Most of the factors I am watching are event-driven, not the result of the calendar. The early trading this year has helped to create many attractive opportunities – mostly through excessive economic pessimism.

This year started with a decline in the Chinese stock market. I doubt that anyone could put together a cogent argument about why this was important for U.S. stocks, but the narrative caught on. For more information, check out my post here.

When we next got a rash of doomsayers and many slinging the “R” word, I wrote a post on that topic as well.

Despite this I am frequently asked about someone’s newly created recession model. The simple fact is that the debunking stories are not nearly as popular. No one cares about the plane landing safely.

GBM — What has so many investors/citizens feeling the economy is on thinner ice then? Why is this economy viewed so negatively by so many?

JM — This is something of a trick question! If we look at citizens, they have been reasonably positive. I track both the Conference Board survey and the Michigan Sentiment Index (which I prefer). People are reasonably upbeat about their personal situations, but critical of the overall leadership. Many in financial news interpret these surveys through the prism of the market, not realizing that the average person is not responding based upon a stock portfolio.

Another subject to consider: CEOs consistently predict their own business to continue growing at a healthy rate, though they tend to be negative about the state of the global economy.

Investors are negative for a variety of well-documented reasons:

  • News and headlines that drive viewers and page views. I think that Seeking Alpha and our colleagues there are something of an antidote to this, but the very popular sites are bearish. As I am responding here, I see a new headline from one of the top media sources, Woeful earnings threaten to intensify stock-market bloodbath. The author speculates about four quarter of declines, when there have only been two so far. He completely misreads the chart from his source. Then his editor gives it that headline.
  • It is in the political interest of some to make things seem terrible. Since I recommend avoiding partisanship in investing, let’s call this the “out” party. Both parties do the same. We can expect a drumbeat of bad news.
  • It is in the financial interest of many to make things seem terrible. Most people do not carefully track the background and interests of featured media “experts.”
  • People are encouraged to think that they can trade and time the market. Brokerage commercials foster the idea. Looking at stock quotes too often is hazardous to your wallet. I like the approach of our colleague, David Van Knapp.

If your retirement funding plan is based on selling assets, it puts you in the position of being a “forced” seller to obtain the cash you need. Selling into a falling market can be scary. As the value of your assets drops, you need to sell more units to get the same amount of cash. If you are early in retirement, this is doubly harmful, because it has a disproportionate impact on the amount of remaining assets that you own.

Everyone needs a specific and personal plan.

GBM — Now before we dive too far into 2016, can you reflect briefly on what you learned in 2015?

JM — This is a particularly appropriate question. Normally a market veteran would not learn much of significance in a single year. 2015 was different, and the lessons are new ones.

I call it the Dominance of Trading. There is always plenty of short-term action, but it is now bleeding into the thoughts of long-term investors. Here is how it works.

  1. High frequency trading firms seek and constantly update market relationships. There is no need and no desire to be analytical. Who cares if the relationship is causal or a spurious correlation? The firms trade instantly and aggressively on things like language in a Fed statement or a currency ratio.
  2. Human traders notice and act upon the same relationships. They cannot beat the algorithms on speed, but they still see the pattern.
  3. The punditry “explains” the stock market move. This usually means finding some logic – however distorted – to make the trading effect seem rational.
  4. Well-intentioned individual investors, those seeking to make sense out of the noise, are misled by the pundits.
  5. Long-term relationships between factors are ignored in favor of explaining each day’s move – a required part of the financial coverage of every media source. It does not matter that the daily change is usually in the percentage range of normal randomness.

This cycle of investor misunderstanding is new. As is always the case when Mr. Market gets something wrong, there is an opportunity for the thoughtful investor. To collect you need to fight your way through the daily emphasis on “explaining” the most recent market move – usually linking it to some prediction or macro theory.

GBM — Moving ahead, you and I both love politics. Given the dynamics of the early primary season, talk me through how you’re positioning for this election, which feels very different than previous years.

JM — You are absolutely right. As I recall, you are a political scientist from Fordham, a great school. And it is a very different primary season. Here are the key elements of difference:

  • No incumbent running, no “designated” successor, yet little competition in one party.
  • Extensive competition in the other party, with candidates eliminated even before the first vote is cast in any primary or caucus.
  • The serious candidacy of a woman.
  • The “Trump effect” and the emphasis on “outsiders”

It is a very interesting situation, especially for people like us. We remember that the front runners at this stage often met with surprises. Larry J. Sabato, Director of the UVA Center for Politics is my go-to source on elections. He recently produced an interesting and humorous summary of the erroneous conventional thinking in Presidential elections going back to 1960.

GBM — You thrive on taking the long view, but in managing a primary season, how do you suggest individual investors position themselves as the candidates get sorted out in each party?

JM — Most observers see investing through the prism of their own experience, without any questions about the relevance. I am going to do the opposite. My experience is that each Wall Street firm has someone with relatively modest political science credentials. They must write articles and make suggestions just as a matter of interest. They make small news into big stories. I have three admonitions for investors following the election:

  1. Do not over-estimate election effects. The President’s powers are more limited than most people think. As an example, take a look at the recent Obama executive orders and the instant opposition.
  2. Do not confuse your own opinions about the best candidate with the likely market effect. When it comes to investing, you should strive to be politically agnostic.
  3. There are some “macro” effects for extreme candidates from both parties. Moderate choices and the potential for compromise are the “market-friendly” outcomes.

With that in mind, here is what I am watching. In each case I am looking for a theme that gets some dominance in the public debate:

  • Health care/Obamacare. It will not be repealed, but funding cuts may affect insurance company profits. Drug pricing may be perceived as a big issue.
  • Energy. Coal companies, pipelines, use of the Strategic Petroleum Reserve, and tax benefits for oil companies are all relevant. This is probably the most complicated for drawing policy conclusions. For example, how is alternative energy affected?
  • Defense. Candidates differ greatly on defense policy. Some approaches imply significant buildups to deal with regional issues. Others involve cuts.
  • Free trade. Economists do not agree about many things, but they are nearly unanimous in supporting free trade initiatives.
  • Immigration. This is another theme where economists (pro-immigration) and many voters may disagree. An anti-immigration policy could have some negative economic consequences.

GBM — Back to investment topics, last year you emphasized that the business cycle has no expiration date. So where are we in the cycle now?

JM — This is the crucial question for the year ahead! Many observers note the modest economic growth and expect the U.S. economy to stall out. This would be virtually unprecedented. Cycles end with a peak in activity, higher inflation, and much higher interest rates – not the modest moves contemplated by the Fed.

None of the best recession indicators signal high risk. The business cycle is just about where it was last year. Eventually there will be a “big bang” and probably a late Fed over-reaction, but that could be years away.

Bob Dieli, who probably has the longest and best record on recession forecasting, updates the business cycle position monthly. His “where we are in the cycle” chart has not moved in the last year.

Ed Hyman reaches a similar conclusion.

My best guess is that we will be discussing this same subject next year.

GBM — Where are the upside risks today?

JM — Let’s start with why stocks didn’t do better in 2015? Earnings growth stalled, mostly because of energy. Markets have traded in line with forward earnings expectations. This partly reflects the economy and partly the lagging sectors. Leading economist Brad DeLong describes six different shocks which have occurred during the recovery period. Most people impose some simple summary on the economic narrative, but this article provides much better insight.

It includes plenty of good charts like the one below:
6a00e551f08003883401b7c7fe0e6a970b

If we can avoid some of the episodic drags of the last few years, the economy will do better. A common mistake is to believe that a free-market economy requires constant stimulation. In fact, we have unused labor and capital available right now. Skeptics love to argue about the monthly payroll report and the “birth-death” adjustment. I monitor the actual count from state employment services – the tax collectors. This information trails by eight months, but it is certainly not overstated. Who wants to pay excess taxes? It demonstrates that new business formation has been quite healthy.

This gives us an opportunity in stocks that will benefit from better growth and higher interest rates. People may also be surprised to see P/E multiples move higher (!) along with interest rates. Multiples on forward earnings currently reflect a lot of skepticism on whether the “E” will be there. If the ten-year note got to 3.5% it would reflect a healthier economy, as long as inflation remains under control. JP Morgan’s excellent Guide to the Markets is a dream come true for those who love charts and data.

GBM — What other themes are you monitoring as we proceed into 2016?

JM — My basic approach is to look at the themes that reflect the “trader confusion.” Value investors trailed the market last year despite using excellent, time-tested methods. The top twenty stocks in the S&P 500 went up over 60%, but now sport a P/E in the 90’s. (EV to EBITDA is a more respectable 17.5). Stocks with earnings but a P/E below 14 were down 13.7%. This sort of discrepancy evens out over time. While no one knows the time frame for sure, I am positioning to benefit if 2016 is the “Year of the Value Stock.” We have a special report on this topic and the opportunities presented, available to readers on request.

Here are some themes where there was over-reaction last year. These are all factors that historically have been supportive for U.S. stocks.

  • Dollar strength. Lack of support for the dollar was part of the impetus for the 1987 crash. In general, a strong dollar has been neutral-to-positive for stocks.
  • Oil prices. High oil prices were behind the market struggles in the early 70s. In general, low oil prices have been good for the U.S. economy and for stocks.
  • Interest rates. In the long run, low interest rates are a positive factor for stocks.

Investors have been confused by short-term effects on all of these fronts. Those who understand the long run relationships have a great opportunity. Note the charts below (the vertical axes for both bond yields and crude prices have been inverted to facilitate comparison).


I expect the overall market to grow in line with earnings expectations and the economy. Astute investors can do much better by emphasizing last year’s laggards – materials, energy, some tech, and financials.

GBM — Any final thoughts?

JM — We both know that forecasts should have time frames, and that is challenging right now. I expect most of my themes to play out over the next year, but we might need to wait until Q2 earnings.

And finally, most people appreciate some good examples as well as data. Here are three recent ones from CNBC (when I accidentally left the “mute” button off).

  1. One of the anchors mentioned to an interview subject that the “stock guys” seemed to see a recession coming, when none of the economists did. No kidding!
  2. One of the anchors asked a Presidential advisor what the White House might do about the low oil prices. He was amazed and explained that the benefit of lower prices was $750 per person. She asked about some jobs in Houston and an airline stock.
  3. CNBC interviewed a stock trader who attributed the big declines to a fall in oil. Then they interviewed an oil trader who said that their market was following stocks!

Investors who can get a grip on economic fundamentals have plenty of choices. I follow quite a few value investors and they all have a list of stocks they really like. One recently said that he was like a “kid in a candy shop.”

Thanks for reading! As always, please feel to share your thoughts in the comments section below.