Weighing the Week Ahead: Will an Earnings Surge Revive the Stock Rally?

Are you ready for some real news? How about corporate earnings? While there is some economic data on tap, the Q1 earnings season starts in earnest this week. With questions about economic strength, the dollar and the Fed in mind, pundits will be looking for fresh data. They will be asking:

Can resurgent corporate earnings revive the stock rally?

Last Week

Last week the news was heavy but generally neutral. Strong economic data caused celebration. The Fed minutes and concerns about tax reform were the biggest negatives.

Theme Recap

In my last WTWA I predicted special attention to the Trump-Xi meeting. That was a good call, with plenty of discussion all week. The talks did not yield much news, but there might be a lesson from that as well.

The Story in One Chart

I always start my personal review by looking at a weekly chart. While there was not much of an overall change this week, Wednesday was the exception. Stocks moved sharply higher after the ADP number and sold off sharply in the afternoon, perhaps because of reaction to the Fed minutes, perhaps because of tax reform prospects.

 

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 neutral.

The Good

  • Construction spending rose 0.8%. Steven Hansen (GEI) is not convinced.
  • Rail traffic in March increased 7.3% (AAR).
  • ISM manufacturing maintained recent strength at 57.2. Scott Grannis offers this chart.

  • ADP private employment registered a change of 263K, handily beating expectations.

  • Weekly jobless claims dropped to 234K

 

The Bad

  • Tax reform prospects seemed to get worse at least that was the market take on Speaker Ryan’s press conference.
  • The Fed may be reducing its balance sheet. (Reuters). Fed expert Tim Duy thinks that balance sheet reduction will be gradual.
  • Auto sales were surprisingly weak. Calculated Risk concludes:

    This isn’t a huge concern – most likely vehicle sales will move sideways at near record levels. But the economic boost from increasing auto sales is probably over.

  • ISM services dropped to 55.2. This is still a strong level, of course, but any dip from a peak is drawing attention.
  • Non-farm payrolls registered a net increase of 98K, well below expectations. Doug Short has a nice chart pack, including this rolling average interpretation of non-farm payrolls.

 

The Ugly

Rising global threats including Syrian gas attacks, North Korean challenges, and more terrorist attacks.

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, but nominations are always welcome. There are many bogus claims and charts out there!

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, including releases on Friday when financial markets are closed.

The “A” List

  • Michigan Sentiment (T). Continued high readings and debate over “soft” data.
  • Retail sales (F). Will negative consumer news be confirmed?
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • JOLTS (T). February data. This is about labor market structure, not job growth!
  • PPI (Th). Still tame, with more of the same expected.
  • CPI (F). See PPI. The core increase is starting to approach the Fed’s target level.
  • Business inventories (F). Not much expected from this February data.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

The schedule is light on FedSpeak and many markets around the world are closed on Friday.

Next Week’s Theme

In a normal week for economic data the start of the Q1 earnings season will command attention. Geopolitics will grab some headlines, but market participants are eager to see if the recent stock market strength is supported by corporate earnings. The key question?

Will resurgent earnings revive the rally in stocks?

Each earnings season sees a revival of a familiar theme: Companies guide expectations lower. The final report is a “beat” compared to this lowered bar.

More objectively, observers can compare earnings to the prior year. The weak energy sector has been a drag on these comparisons, leading to an “earnings recession.” This name was attached to two consecutive quarters of decline. This quarter seems more promising. Earnings expert Brian Gilmartin does a sector-by-sector analysis, concluding that this quarter might see S&P 500 growth of 12-14%.

John Butters of FactSet notes that current expectations are an increase of 8.9%, but that “double-digit” growth is more likely. He looks at the history of “beat rates.”

 

What does this all 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 featured sources and the best other quant news from the week.

Risk Analysis

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

The Indicator Snapshot

 

 

The Featured Sources:

 

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

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

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

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

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% — the highest level since October, 2014.

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

 

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix, Holmes, and Friends

We continue with a strongly bullish market forecast. 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 five technical experts, and some rebuttal from a fundamental analyst (usually me, but sometimes a guest expert). We try to have fun, but there are always fresh ideas. Last week the group discussed how to find trading ideas in a quiet market. We were delighted to have expert commentary from Chuck Carnevale, founder of F.A.S.T. Graphs and a frequent source for WTWA. Check out the five stock ideas from our regular group, and especially Chuck’s reactions.

Top Trading Advice

 

Brett Steenbarger continues his stream of great posts. My favorite this week is his explanation of the real reason traders lose money. That should certainly attract universal interest! Here is a key takeaway:

There is only one source of making money in markets, and that is identifying recurring patterns in market behavior and exploiting those in a manner that provides solid reward relative to risk.  We marshal and attenuate various personality traits to identify and exploit those patterns.  Success comes, not from indulging our personalities, but from knowing which traits to draw upon and which to work around.  That is called wisdom.

Peter Coy has great advice for system traders: Beware of excessive back fitting of your data. If this seems too nerdy, you are probably making serious errors in developing your trading system.

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 Gary Belsky’s, Why We Think We’re Better Investors Than We Are. Here is a sample, comparing an unhappy lawyer with a disappointed investor:

Both people are highly likely to obsess over their sunk cost — law school tuition and time served for the lawyer, the original investment amount for the stock picker — in a nonconscious desire to justify their earlier decisions. Both are also very likely to fall prey to “loss aversion,” a key tenet of Prospect Theory, which tells us that humans typically respond to the loss of resources — be it time, effort, emotion, material goods or their proxy, i.e., money — more strongly than they react to a similar gain.

What differentiates the typical lawyer and average investor, however, is their justification for engaging in their activity. Lawyers are trained to do what they do, while the majority of investors are not. Ask a random player in a law firm’s basketball league whether he or she could compete with LeBron James, and the most common response will be laughter. Yet many of those lawyers would willingly compete with the billionaire investor Warren E. Buffett.

 

Stock Ideas

 

Barron’s has some undervalued energy stocks for consideration.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. Felix, who is most aligned with long-term traders, likes Sprint (S). You will enjoy the careful response of our guest expert, Chuck Carnevale, to that idea! The entire post has a good discussion.

Blue Harbinger has ten attractive ideas with 10% yields. It is a thorough analysis, and read the cautions carefully.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is Jane Hwangbo’s 6 Things You Don’t Know About Money. The six points are interesting, as is this conclusion:

The point of money is to magnify you.

If you care about something, you get the opportunity to make more impact. If you love someone, you can give them more of what they need. You can share more. You can contribute more. You can invest in your future more.

You get more options.

In his regular column, Seeking Alpha Editor Gil Weinreich takes up an intriguing question – whether boomer retirements will cause a market crash. There is also a good discussion as well as links to other sources.

Value versus Growth

It is always interesting to see whether market sentiment is favoring value or growth. Blue Harbinger provides this interesting table.

Watch out for…

 

Kinder Morgan (KMI) and other pipelines. The operations are amazingly extensive.

The “toll road” analogy is also seductive for the pipeline companies. But that is only part of the story. Simply Safe Dividends has an excellent and thorough examination of the underlying finances, cost of capital, safety of the dividend, and the effect of changing energy prices.

 

Final Thoughts

 

There are several developing themes that require more elaboration than I can provide in WTWA. In such cases I often state my conclusions in advance – with more to come. Here are a few such ideas.

  • There are some lessons from the Trump-Xi meeting. Nothing bad happened. That may not seem newsworthy, but it is useful intelligence.
  • President Trump had his first test as Commander-in-Chief. He consulted experts and took their advice. Whether or not you agree with the decision, the process is better than we might have expected a few weeks ago.
  • The hard data, soft data meme is the latest way to find a source of market worry. The definition of the categories is not objective, nor is the analysis of the sources carefully done. This is definitely an agenda item.
  • The employment report is a single important example. The headline payroll report change was only about 100K. Despite repeated warnings that sampling error alone is +/- over 100K jobs, discussing smaller changes is great sport. The ADP report is a good independent source. Jobless claims are excellent. Wages are rising. The unemployment rate is declining. There is no reason to look for excuses (like the weather) for a weak number. But pundits must earn their pay!

Each earnings season I offer a challenge. I am still waiting for an answer. Those who do not trust earnings say that the estimates are too optimistic. They also say that (at the time of the report) they are too low. If both are true, there must be some point in time when the estimates are pretty accurate. John Butters provides this interesting table, looking only at the last-quarter effect.

 

If earnings growth continues this pattern it can do the following:

  1. Increase confidence in earnings estimates;
  2. Increase confidence in an improving economy;
  3. Provide the basis higher forward earnings;
  4. Support the idea of a higher PE multiple.

Eventually, whatever the other worries, it is all about earnings.

Weighing the Week Ahead: What Can We Learn from the Trump-Xi Meeting?

We have a big economic calendar and potential Fed news. Those stories will take a back burner this week. My safest prediction is that we are about to see a new rash of China experts both in print media and on CNBC! These freshly-minted pundits will be asking:

What will the Trump-Xi meeting mean for the economy, and for stocks?

Last Week

Last week the news was mostly positive, but light. Markets continued the attention to the Trump Administration’s next policy steps – especially the chances for tax reform.

Theme Recap

In my last WTWA I predicted a discussion about the aftermath of the ACA repeal decision. That was a good call, as assorted pundits explained what the next policy moves might be. The more adventurous speculated about whether the Freedom caucus would block changes in the debt ceiling or tax reform. Some of that discussion will continue in the early part of next week.

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 overall weekly gain of 0.80% and the quarter one increase of 5.5%. The biggest takeaway might be the general rebound from last week’s market reaction to the failure of the ACA repeal.

 

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, including the size and frequency of drawdowns.

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 slightly positive.

The Good

  • Hotel occupancy is strong. Calculated Risk reports interesting hard data from private sources. These are items you might not see elsewhere.

  • Household finances are on “solid ground” as explained by Scott Grannis. Debt levels as a percentage of disposable income are at 30-year lows. He provides an interesting chart of household leverage.

  • Serious delinquencies have declined to 1.19% (Fannie Mae via Calculated Risk). This is the lowest level in nine years.
  • Corporate profits remain strong, increasing 9.3% year-over-year in Q416. New Deal Democrat has a good account of the trends, why National Income and Profit Accounts (NIPA) come so late, and how he estimates this series in advance. Scott Grannis has a similar report which also shows the relationship between NIPA profits and stocks. It is dramatically different from the popular valuation charts.

  • Michigan consumer sentiment remained strong, increasing to 96.9. Jill Mislinski has the update. It includes an interesting excerpt from the Survey of Consumers chief economist, Richard Curtin. He notes that expectations and partisanship are influencing the outlook. This bears watching. Jill also has this fine chart.

  • Q4 GDP revisions edged a little higher than expected to 2.1%
  • Pending home sales increased 5.5%. CNBC’s Diana Olick has an interesting report, noting that sales would be much higher if there were more inventory. She has an interesting interview from Denver, where construction is 50% behind the pace needed. Builders blame the lack of labor, especially illegal immigrants frightened by recent policy changes. The builder interviewed stated that the jobs were not desirable for most U.S. workers.

    This report, if accurate and typical, has implications for homebuilders, Fed policy (labor market tightness), and immigration policy. You need to watch the video to see the key points.

 

The Bad

  • Personal consumption spending missed expectations. The increase was only 0.1% despite an income increase meeting expectations of 0.4% growth. Steven Hansen (GEI) has a thorough analysis with excellent tables and charts.
  • Jobless claims moved slightly lower, to 258K, but the four-week moving average moved higher. I am scoring this as “bad” because the series has moved a bit higher from the best levels. Scott Grannis helps us to keep this in perspective with this interesting chart of claims compared to the labor force.

The Ugly

U.S. Bridges. (No, not the recent North American Bridge Championship, where Bill Gates had a nice win. While that particular event was limited to players with fewer than 10,000 masterpoints, it still included many experts. It was a nice victory, and his best career result). Turning back to actual structures, the American Society of Civil Engineers (ASCE) notes that 40% of bridges are more than fifty years old. Over the next twenty-five years the U.S. is short of needed spending by about $3 trillion.

 

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, but nominations are always welcome. There are many bogus claims and charts out there! I wrote about headline spinning last week, and the misleading recession forecasts that resulted. We should all encourage astute analysts to help on this front!

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 big week for economic data, featuring the most important reports.

The “A” List

  • Employment report (F). Expectations are in the 180K range, down from last month’s 235K
  • ISM index (M). Continuing strength expected.
  • Auto sales (M). The concept of “peak auto” has some recent buzz, drawing attention to this private data.
  • ISM services (W). Wider scope than manufacturing, but a shorter history. Strength expected.
  • FOMC minutes (W). Will be scrutinized for hints about the pace of future rate hikes.
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • ADP employment change (W). A good independent read on job growth.
  • Construction spending (M). February data, but an important sector.
  • Factory orders (T). More February data of significance. Continuing strength expected.
  • Trade balance (T). Usually not a market mover, but will get extra attention this week.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

While the schedule is not as heavy as last week, FedSpeak will be featured on several days.

The Thursday meeting between President Trump and China’s President Xi Jinping could be extremely important for economic policy and the markets.

Next Week’s Theme

This is a big week for economic data. We could usually expect daily analysis of the news, focusing on the Friday employment data. A secondary theme might be the emerging change in Fed policy, with speakers and the release of minutes on Wednesday.

Not this week! The visit of Xi Jinping and the meetings at Mar-a-Lago have significance extending beyond recent economic news. The commentary next week will raise the question:

What will the Trump-Xi meeting mean for the economy and stocks?

No one knows what will happen. The best we can do is collect relevant facts and decide what to watch for. Here is some key background.

  • Trump is advertising a “tough” meeting. Quartz suggests the reasons and key issues:

    He is sure to be coached by hardline China advisor Peter Navarro, who believes China is full of cheating thieves, intent on global domination. After Trump’s allegations that China had stolen jobs and a way of life from America’s middle class on the campaign trail, the stage seems set for a clash. Sensitive topics could include the trade imbalance, China’s over-production of steel, North Korea’s increasing militarization, and Beijing’s insistence that it control the South China Sea, in defiance of international law. American CEOs are worried that the wrong move could destabilize the relationship and harm the US economy.

  • Xi is the most powerful and popular Chinese leader in decades. He is dismantling the “collective leadership” approach. The Economist explains and questions whether this will lead to needed reforms. After describing his takeover of key committees and battle against corruption, the article focuses on his mission:

    All of this helps Mr Xi in his twofold mission. His first aim is to keep the economy growing fast enough to stave off unrest, while weaning it off an over-dependence on investment in property and infrastructure that threatens to mire it in debt. Mr Xi made a promising start last November, when he declared that market forces would play a decisive role (not even Deng had the courage to say that). There have since been encouraging moves, such as giving private companies bigger stakes in sectors that were once the exclusive preserve of state-owned enterprises, and selling shares in firms owned by local governments to private investors. Mr Xi has also started to overhaul the household-registration system, a legacy of the Mao era that makes it difficult for migrants from the countryside to settle permanently in cities. He has relaxed the one-child-per-couple policy, a Deng-era legacy that has led to widespread abuses.

  • Chinese strategy is to reach Trump through his family. The FT describes the background.

    China seems to have grasped that the best way to influence Mr Trump is via his family. Chinese diplomats have gone out of their way to court Mr Kushner and Ivanka Trump, who were their guests of honour at the Chinese new year celebration in February. China has also looked favourably on Mr Trump’s business. Since his inauguration it has approved dozens of pending trademark applications by The Trump Organization. The volume of applications to market Ivanka Trump’s brand in China has also soared. This week, Kushner Companies — the family property group from which Jared has stepped back — ended talks to sell a prime piece of Manhattan real estate on very favourable terms to Anbang, a Chinese company, after members of Congress alleged a conflict of interest.

  • Possible outcomes. The FT continues with the range of what we might expect.

    At one extreme, Mr Trump could threaten to carry out his campaign vow to impose a 45 per cent tariff on Chinese imports — a step that would provoke a global trade war and fall foul of the World Trade Organisation. That would produce a similar outcome to Mr Trump’s rancorous meeting with Angela Merkel last month, in which he presented her with a massive invoice for Germany’s defence costs. At the other extreme, Mr Xi could package a few Chinese investments into easily tweetable jobs announcements. Last year China invested a record $45bn in the US — mostly in real estate, finance and entertainment.

What does this all 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 featured sources and the best other quant news from the week.

Risk Analysis

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

The Indicator Snapshot

 

 

The Featured Sources:

 

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

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

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

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

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% — the highest level since October, 2014.

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

Scott Grannis writes this week about the equity risk premium, which I currently score as “high.” This means that I find stocks to be much more attractive the bonds. Here is Scott’s chart of this relationship. The above-average value is IMHO the best gauge of market sentiment – still negative on stocks versus bonds.

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix, Holmes, and Friends

We continue with a strongly bullish market forecast. 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 five technical experts, and some rebuttal from a fundamental analyst (usually me, but sometimes a guest expert). We try to have fun, but there are always fresh ideas. Last week the focus was on “Voodoo Chart Reading” inspired by Michael Kahn (see below).

Top Trading Advice

 

Like everyone else, I like reading about Jesse Livermore. He enjoys a reputation as a great trader despite multiple bankruptcies and a life ending in suicide. That certainly is one measure of success!

Joe Fahmy has a nice post highlighting Livermore trading rules from almost 80 years ago. Most still make plenty of sense. It would be a nice project for someone to analyze how these might be different under modern conditions. Out of the many rules I endorse, I especially like this one:

21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.

Brett Steenbarger remains at the top of trader “must-reads.” My favorite post this week is about trading resilience. Many traders do not recognize how negative factors can affect their work. You need the ability to bounce back.

Chartered Market Technician Michael Kahn uses the “Voodoo” word in discussing charts. He has a great post on what you can and cannot expect to learn from your chart study. I especially like his dismissal of the “death cross.”

First of all, the death cross occurs when the trend has already changed. That is the only way the math works, by the way, because the pattern is defined as the 50-day moving average crossing below the 200-day moving average. That cannot happen when prices are rising.

Anyway, in practice we often see the market bounce right as the cross happens. Why? Because typically it has been falling for a while already. Again, is has to be falling otherwise the short-term average cannot drop under the long-term average.

OK, Einsteins, I know we can make the math work with price spikes and outliers but roll with me here.

So, the market may be a bit oversold and it bounces. But overall the cross appeared because most likely something is wrong. Short of real voodoo telling us what’s what that is all we can hope from charts. They do not tell us what will happen. They are meant to give us clues as to what to do.

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 Michael Kitces great article, The Evolution Of The Four Pillars For Retirement Income Portfolios.He presents an excellent history of retirement needs and alternatives. He also analyzes the consequences of each of the current choices. I especially like this element of the conclusion, an issue that we frequently discuss with clients:

In fact, arguably when thinking about a retirement portfolio, it’s better to think in terms of “retirement cash flows” than retirement income, as what constitutes “income” for investment purposes (interest and dividends, but not principal) is different than what constitutes “income” for tax purposes (as interest and dividends might be tax-free coming from a Roth, while principal may be fully taxable if withdrawn from a pre-tax retirement account).

Nice work, with many great points. Please read the entire post.

Stock Ideas

 

David Fish has updated the list of dividend champions, challengers, and contenders. This is always a good source of ideas. This week he features McGrath RentCorp (MGRC) and includes some analysis from Chuck Carnevale.

Chuck is back with a deep dive on United Parcel Service (UPS). The quantitative metrics are solid, so he takes on the key concern – the challenges in business to consumer deliveries. This is a typically first-rate analysis.

Brian Gilmartin’s earnings-driven analysis still favors energy stocks. Like everyone else, we will be paying even more attention to Brian next week as earnings season begins.

Barron’s agrees with the energy theme, and also features Under Armour (UA) and Lowes (LOW).

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. Felix, who is most aligned with long-term traders, likes Wynn Resorts (WYNN). The most recent post provides descriptions of each model. You will probably identify with one of the characters, and your questions are welcomed.

Lee Jackson has five “safe stocks” if you think the “Trump magic” has worn off.

Yield Plays

Blue Harbinger has some dividend ideas in health care.

Wade D. Pfau does a nice job in describing bond ladders. I especially like the rolling ladder, which we offer as a complement to higher-yielding programs. Anyone interested in safe yield, with the potential to grow with the market, should read this post.

Emerging Europe?

Frank Holmes opines that the time has come.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is this week’s best investment advice (see above). Other great posts included the question of whether you would prefer $1 million or $5000 per month for your retirement, and the pragmatic warning about making financial decisions on your smartphone.

 

In his regular column, Seeking Alpha Editor Gil Weinreich takes up yet another important topic – diversification and what is added by ETFs. He cites contributor Roger Nussbaum, who provides a balanced discussion of diversification, stock picking, concentrated portfolios, and recent strong opinions. A timely point for discussion.

 

Watch out for…

 

Costly but natural mistakes. Josh Brown cites data showing that investors significantly underperform market averages. Mostly this comes from psychological reactions, but some is also stock selection. The key chart is below. If you are lagging on your investment performance, please request (main at newarc dot com) my free report on the 12 Pitfalls for Individual Investors. It is a quick and easy test to see if you can profitably “fly solo.” Here is Josh’s chart:

Subprime auto. Steve Eisman warns. Barron’s also features a negative take on CarMax (KMX) for the same reason.

Good companies that are bad investments. Aswath Damodaran explains how to tell this difference. Here is the summary, which I strongly endorse!

Final Thoughts

 

A major change in leadership has everyone thirsting for information about possible policy changes. Stated positions from a candidate are not dependable. Those ideas might change once in office, or might prove infeasible. In the case of foreign policy, the range of possible results is especially wide. The President has a lot of flexibility, and many of the relationships have a personal quality.

This highlights the importance of this week’s Trump-Xi meeting. Like a top poker player, you should be looking for “tells” about true intentions, future policies, and the economic implications.

As is often the case, it is foolish to predict the specific outcome of these meetings. Readers sometimes expect a definitive answer to the week’s question in my “final thought.” That is not the mission of WTWA. I try to do two things:

  1. Explain what will be the focus in the coming week;
  2. Provide help with interpreting events.

It is important to recognize what you do not know, what is unknowable, and what is pure speculation. Pretending that you know a specific answer can be costly.

Given that setting, how can we prepare for this event? Most observers will be focused on specific policy implications. That is a mistake. I am interested in the following:

  • Overall tone and friendliness. I do not expect any golf! This will be an early test of how foreign leaders, aggressively criticized by Trump during the election campaign, respond to him as President.
  • Symbolic quality of the announced results. A tough line by the President? Some clear concessions by Xi?
  • Common ground. Will there be an emphasis on issues like North Korea?
  • Technical missteps. The China team consists of specialist on the specific issues – those who work only on these matters and have done so for years. The US team has dismissed the experts for a more general approach. Will this matter? Will it lead to blunders?

The most important consequence will be the implications for trade policy. One major viewpoint is that President Trump has engaged in tough talk to facilitate bargaining. The other is that he will instigate a trade war. Which is closer to the truth?

This week will provide the first hints. Stay tuned!

Weighing the Week Ahead: What Does the Health Care Decision Mean for Stocks?

The economic calendar is light, but it really would not matter. The defeat (via retreat) of the effort to replace Obamacare will dominate financial market stories this week. The pundits will be asking:

What does the health care decision mean for stocks?

Last Week

Last week the news was mostly positive, but irrelevant. Markets were focused on the Obamacare repeal decision.

Theme Recap

In my last WTWA (three weeks ago since my vacation included two weekends) I predicted a discussion about the expected change in Fed policy and the effect on stocks. That now seems like ancient history, but it was a pretty good theme for that week.

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 overall loss of 1.24%, largest since last October. You can also clearly see the Friday fluctuations around the health care breaking news.

Given the time since our last post, let’s catch up with this longer-term chart.

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, including the size and frequency of drawdowns.

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 slightly negative.

The Good

  • Durable goods rose 1.7%.
  • Earnings growth remains solid. Energy has weighed down earnings over the last few years. The general assumption is that earnings estimates are too optimistic. FactSet reports that the expected y-o-y growth in Q1 is 9.1%. You probably do not see that data very often, unless you are wisely following Brian Gilmartin, who has been on top of this story for many months.
  • Rail traffic growth continues although the pace is a bit slower. Steven Hansen has the full story, including charts and analysis.
  • New home sales increased 6.1%. Calculated Risk, the go-to source on housing matters, calls this a solid report. Despite the 12.8% y-o-y increase, Bill notes the downward revisions to prior months. The key upcoming issue is whether builders will provide affordable housing.

 

The Bad

  • Jobless claims increased to 258,000.
  • Existing home sales dropped 3.0%. This was also a small miss of expectations. New Deal Democrat embraces the overall housing strength, calling this the “least important” housing indicator. Calculated Risk has an important summary about existing sales:

    To repeat: Two of the key reasons inventory is low: 1) A large number of single family home and condos were converted to rental units. In 2015, housing economist Tom Lawler estimated there were 17.5 million renter occupied single family homes in the U.S., up from 10.7 million in 2000. Many of these houses were purchased by investors, and rents have increased substantially, and the investors are not selling (even though prices have increased too). Most of these rental conversions were at the lower end, and that is limiting the supply for first time buyers. 2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80, in another 10 to 20 years for the boomers). Instead we are seeing a surge in home improvement spending, and this is also limiting supply.

The Ugly

Hate groups in the U.S. are flourishing. GEI Editor John Lounsbury regularly includes articles that you might miss otherwise, including this important story.

 

 

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 Charlie Bilello, whom we also featured on Stock Exchange. This is double recognition that is unlikely to be repeated!

Why is this so important? Because so many are being “scared witless” (TM OldProf euphemism).

Most pundits, media, “smart money”, experts on valuation have been completely wrong for many years. If you have wisely stuck with the fundamentals, you are called part of a “sucker’s rally.”

For some years, the top “fear indicator” has been VIX. No matter that few understand how it is calculated. The VIX has remained low, despite the insistence of many that risk is high. Instead of accepting the results of an indicator embraced for many years, the true believers take the only course possible: Find a new indicator!

Many of them have seized upon SKEW, which shows that the risk of a crash has never been higher. Bilello’s analysis pushes deeper, asking the excellent question of how predictive SKEW has been in the past.

The conclusion is that widely-perceived fear, whether in regular options or tail risk, does not predict a severe decline.

What does? A business cycle peak (AKA a recession). That is the reason for our careful monitoring of that topic.

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 rather light week for economic data.

The “A” List

  • Consumer confidence (T). This is the Conference Board version. Will the amazing strength continue?
  • Michigan sentiment (F). The Michigan version, which includes a continuing panel in the sample, is important.
  • Personal income and spending (F). Until and unless more business spending kicks in, consumers are crucial.
  • Initial jobless claims (Th). The series seems to be flattening at record low levels.

The “B” List

  • PCE prices (F). The favored Fed measure is approaching the 2% target.
  • Chicago PMI (F). Best of the regional indicators gets special attention as a hint about the ISM report.
  • Wholesale inventories (T). Advance Feb data. Desired or undesired? That is always the question.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

The Fed Speakers Bureaus have been busy. Expect a daily dose of FedSpeak.

Next Week’s Theme

There is little in the way of scheduled fresh news. The health care vote came at the end of the day on Friday. It will be open season for the punditry. Speculating about the President, the legislative agenda, the Speaker, and the market provides plenty of grist. The commentary next week will raise the question:

What does the failure of the Obamacare repeal mean for stocks?

Once again, there is a hidden question which will be the focus for most – the impact on the Trump agenda. While health care is important, the market strength is more related to tax issues and infrastructure spending. Here are the key viewpoints:

  1. The defeat weakens the President and signals lower chances for the economic agenda.
  2. Getting this issue out of the way permits more rapid attention to corporate tax reform.

These issues are most important to those who believe that the post-election rally is all about Trump. More observers are joining me in crediting the stock strength to resolving the election uncertainty and overall economic improvement. Scott Grannis has a helpful chart.

Even the usually sour Barron’s lead column says that an improved global economy accounts for about half of the U.S. stock rally.

Those who focus on the economic fundamentals (nice piece by a semi-anonymous blogger with whom I have corresponded) and corporate earnings emphasize a base of continued modest growth. Improvements in tax policy are an upside kicker. Eddy Elfenbein has his usual incisive and clear explanation of the history of the “Trump trade.”

The single best analysis I saw was from Dan Clifton of Strategas Research Partners. This video is packed with information, so watch it twice and take notes!

What does this all 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 featured sources and the best other quant news from the week.

Risk Analysis

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

The Indicator Snapshot

 

 

The Featured Sources:

 

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

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

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

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

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% — the highest level since October, 2014.

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

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix, Holmes, and Friends

We continue with a strongly bullish market forecast. 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 five technical experts, and some rebuttal from a fundamental analyst (usually me, but sometimes some guest experts). We try to have fun, but there are always fresh ideas. Last week the focus was on dealing with news-driven risk.

Top Trading Advice

 

Be careful in your backtesting! Sean McLaughlin understands the issues and provides practical advice.

Brett Steenbarger identifies seven training resources for developing traders, including helpful links.

Are you too confident about your skill at technical analysis? Price Action Lab shows how cognitive bias can lead you astray, including some great examples.

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 Chris Kacher’s popular and insightful chart, spread widely by Sue Chang. The various soft times in market history are considered. My own conclusion is that you had better have a good reason to fight the trend.

Stock Ideas

 

Deep value in a solar stock? Andrew Bary of Barron’s features SolarEdge Technologies (SEDG), citing a possible 40% upside. He quotes my friend Bob Marcin, who is very fussy about deep value, noting that the company “makes a category-killer product for a secular growth industry.”

Chuck Carnevale considers the implications of rising interest rates for stocks. His wide-ranging analysis, which you should read carefully, looks at historical macro effects as well as analyzing individual stocks like Johnson and Johnson (JNJ), McDonalds (MCD), and other important names.

Josh Brown explains why homebuilders are strong in the face of rising interest rates.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. Our momentum newest member, Road Runner, trades upward-sloping channels, seeking attractive entry points. This week’s idea is Netflix (NFLX). You will probably identify with one of the characters, and your questions are welcomed.

Yield Plays

Blue Harbinger does a deep dive into dividend aristocrats. He begins with the membership of the SPDR Dividend Index (SDY) and then moves to his likes and dislikes. It is an excellent and thorough piece. In a somewhat more speculative vein, Mark has a provocative analysis of CVR Energy (CVI), including Carl Icahn’s involvement and possible link to his role as a Trump advisor.

Simply Safe Dividends provides an absolutely first-rate analysis of the potential for utility stocks. There is a good analysis of the likely impact of higher interest rates, and how to pick companies that will hold up the best. Especially interesting is the argument for keeping some utilities in your portfolio no matter what you expect on interest rates.

Some REITs might be fine, even when rates are rising. Here are ideas from Salvatore Bruno.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is the practical tax-time advice on what records you can safely discard. More abstract but very powerful is this discussion of the trade-off between financial assets and human capital.

In his regular column, Seeking Alpha Editor Gil Weinreich raises an important question: Can even the rich afford to retire? He cites several great sources as well as some possible solutions. My advisor colleagues should join me in making this a regular read, but it is usually helpful for DIY investors as well.

If you have been stock on the sidelines, evaluating possible worries, you might want to read my (free) short paper on the top investor pitfalls. It is a good test of whether you can successfully fly solo. Send a request to main at newarc dot com.

 

Watch out for…

 

Companies with “suspicious earnings.” Rupert Hargreaves explains the warning signs and provides some starting ideas.

Final Thoughts

 

Astute and intelligent investors closely follow the news. That will be a special challenge in the week ahead. Most of what you read about the health care decision will be worse than unhelpful. It will steer you astray.

Most sources will discuss what the health care defeat means for Trump or for the Republicans. That type of story is easy to write and invites readers to join in the speculation. The financial outlets might do a little better with some ideas about the impact on tax reform.

The implications for investors demand more sophisticated analysis. This was a test of two things:

  1. The intransigence of the Freedom Caucus
  2. The GOP leadership and the President’s ability to craft a compromise.

If a “layup change” like Obamacare repeal cannot be done within the Republican party, the entire agenda will require some compromise with Democrats.

This affects both the probability of success and the nature of the resulting policies. This conclusion is much more important for investors than the specifics of the health care legislation. It is also more sophisticated than knee-jerk commentary on the change in the “Trump agenda.”

 

A Conclusion for Investors

I know from my travels and discussions that there is a high degree of market concern right now. Part of it is uncertainty about Trump policies (from investors of both parties), and a general sense that the rally is extended and markets are “high.”

This type of concern is exactly why we must invest based upon data, not emotion.

None of our indicators currently warn about the end of this business cycle. Business cycles do not have an expiration date. They do not die of old age. (Yardeni). These are emotional ideas that feel right, but lack empirical support.

There is plenty of “upside risk.” Earnings growth is improving, even in the environment of modest growth. The recent market strength could go on for years without any policy changes. If some of the Trump agenda (probably with Democratic support) becomes law, it could mean a spike in both economic growth and profits. We already see improved business and consumer confidence.

Weighing the Week Ahead: Will a More Aggressive Fed Derail the Stock Rally?

The economic calendar is light until the Friday employment report. Most of the punditry are still digesting the more aggressive talk in the recent speeches from Fed participants. With many observers expecting a correction and looking for a catalyst, pundits will be asking:

Will a more aggressive Fed derail the rally in stocks?

Personal Notes

I have a vacation coming in a couple of weeks. I will not write WTWA next weekend, and possibly not the weekend after that. I will still be following the markets and email. I will join in if it seems needed. The Stock Exchange group is supposed to keep working.

Last Week

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

Theme Recap

In my last WTWA I predicted a discussion about whether stock prices had lost touch with reality. That was a good guess. There was plenty of talk about market valuation. Those bearish also questioned the lack of specifics in the Presidential Address to Congress – which had a greater immediate effect that the annual Buffett letter.

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 yet another record close based on the week’s gain of 0.67%. We can also see the gap opening after the Presidential Address to Congress.

The rally story is even clearer in this chart, when begins before the election.

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, including the size and frequency of drawdowns.

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

  • Durable goods orders increased 1.8% after last month’s decline. Most of the increase was from the volatile transportation sector, but it was still a welcome boost.
  • Earnings news was positive. Brian Gilmartin emphasizes the favorable trend in estimate revisions.FactSet reports that the earnings and revenue beat rates are slightly lower, but outlook is stronger. Here is an interesting chart of surprises by sector.

  • Investor sentiment turned more bearish. The AAII reports that sentiment is within historic ranges, but off recent highs. This is unusual given past behavior in a rising market. I score it as “good” since most regard it as a contrary indicator.
  • Mortgage delinquency rate falls below 1%, the lowest since June, 2008. (Calculated Risk).
  • ISM Non-Manufacturing rose to 57.6 (from 56.5). The employment index also moved higher. February was stronger than January.
  • ISM manufacturing increased to 57.7 beating expectations and showing a solid increase over last month’s 56.1. The Chicago regional survey was also very strong.
  • Rail traffic in February was 4.2% higher than a year ago. Steven Hansen takes the look at the data we have come to expect, including various moving averages and trends. Read the whole post, but this chart captures some key points, especially the improvement over the last two years.

  • Consumer confidence spiked to 114.8, a post-recession high. Briefing.com covers this series.

  • Initial jobless claims rose slightly on the week, but dropped to the lowest level since 1973 on the widely-followed four-week moving average. (Calculated Risk).
  • President Trump’s speech was very well-received. Most preview articles mistakenly emphasized the need for specifics. Commentators right after the speech did the same. My own preview did not provide advice on what to go out and trade right after the speech. Instead, I drew upon experience and the current policy environment to highlight the key element – the potential for compromise. This chart shows the dramatic shift in this Trump presentation, more like SOTU speeches than nearly anything else he has done. (The Upshot)

 

The Bad

  • Construction spending fell 1%.
  • Money supply is drifting to the neutral range – possibly even tilting negative. (New Deal Democrat). Despite complaints about Fed policy, this is a possible economic drag.
  • Pending home sales fell 2.8% and December was revised lower.
  • Debt Limit will be reached in mid-March. Even the extraordinary efforts will be exhausted in September or October. Will this play out any better with a GOP President and Congress? Douglas A. McIntyre has a good story on this issue.

The Ugly

My concern about hacking and threats to the Internet’s weak spots continues. Rick Paulas’s article is not about events from last week, but is just as relevant. Perhaps even more so with the Barron’s cover story on robots.

The article explains that even rather unsophisticated attacks can work on the 6.4 billion Internet of Things devices in use. Little is being done to protect on this front.

 

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. Potential award winners can find daily inspiration at several websites!
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 moderate week for economic data, featuring the employment report on Friday.

The “A” List

  • Employment situation (F). Despite +/- 100K sampling error and multiple revisions, this is seen as most important data
  • ADP private employment (W). Good independent alternative to the BLS numbers
  • Initial jobless claims (Th). Not the same time period as the Friday report.

The “B” List

  • Trade balance (T). Attracting more interest in the Trump era
  • Wholesale inventories (W). Desired or undesired? That is always the question.
  • Factory orders (M). January data. Modest gain expected.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

FedSpeak will be light and earnings season is ending. Employment will be the big story.

Next Week’s Theme

 

The punditry, especially those who explain the stronger stock market as enthusiasm for Trump policies, is even more amazed than a week ago. To them it seemed that the lack of specifics in Tuesday’s Trump speech should have provided a dose of reality.

Many will now turn to the most common explanation for strong stocks, the ever-popular Fed theory. With several speeches emphasizing that the March FOMC meeting is “in play” for an increase, interest rate markets are adjusting to the probability of three rate hikes in 2017.

Much of the commentary next week will raise the question:

Will a more aggressive Fed spark a stock market correction?

Some might add “finally”!

The question actually has two parts:

  1. Will the Fed increase rates at a pace greater than expectations?
  2. Will this lead to a correction?

Friday’s employment report will have special significance for those with these fears. It will be the final and most important piece of evidence for the FOMC decision.

Both questions have a bullish and bearish side.

  1. An increased pace of Fed rate hikes was the consensus at week’s end. (Bloomberg). Leading Fed observer Prof. Tim Duy’s careful look at the important Dudley speech (before Yellen) was not so decisive.
  2. Bears invoke the hoary adage, “three steps and a stumble.” (David Rosenberg). As you review the evidence, you might consider the starting point for interest rates, as well as the yield curve. More constructively, Neal Frankle analyzes the frequency (often) and severity (moderate) of corrections.

 

What does this all 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.

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

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

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% — the highest level since October, 2014.

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

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, but some noted guests experts are coming). We try to have fun, but there are always fresh ideas. Last week the focus was on trading an overbought market. The week before we considered sector rotation strategies, with a recent example from Oscar.

Top Trading Advice

 

Morgan Housel draws upon Ed Thorp’s work to discuss the advantages and dangers of trading with a small edge.

I agree. Every busted card-counter starts with the statement: “The deck got really good”.

Brett Steenbarger has so many strong entries that picking a favorite is a challenge. Here is one I especially liked from last week – reading the market’s psychology. Hint: Do not impose your own preconceptions on what is really happening.

In case you were unable to attend Brett’s master class in NY, SMB’s Bella has a summary of key takeaways. I especially like #6. The successful trader finds more than one way to win. Check out the five “inspirations” as well.

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 once again be Warren Buffett’s annual letter to his investors. It is full of wit and humor – and plenty of great insights. Last week I recommended his annual letter to investors. For those who (mistakenly) did not take the time to read it, you can now check out the “Cliff Notes.”

  • Methodology and screening expert Marc Gerstein applies Buffett principles. Check out his interesting list emphasizing book value.
  • Twenty-eight highlights from Exploring Markets. I especially like this one: When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.
  • Ed Yardeni explains why the oft-cited “Buffett Rule” gets complicated when interest rates are so low. It is why Mr. B regards stocks as cheap.
  • Gil Weinreich has a list of great quotes with his own comments added.

Stock Ideas

 

Chuck Carnevale does his typical comprehensive analysis of j2 Global (JCOM). It includes business model analysis, the important stats, education on how to analyze, and much more. Even if this particular stock does not trip your trigger, you will learn from the article.

Our Stock Exchange always has some fresh ideas. There is usually something from four different approaches. Our momentum trading model, Athena, highlighted Principal Financial Group (PFG). You will probably identify with one of the characters, and your questions are welcomed.

Bottom Fishing

There are some high dividend stocks – often a sign of danger. Are these dividends safe?

Frontier Communications (FTR) yields 14%. Stone Fox Capitalanalyzes the risk.

Target (TGT) declined 12% after announcing poor earnings and a weak outlook. Simply Safe Dividends believes that the yield of 4%+ is probably safe, but a significant increase next year is unlikely.

How about Snap?

A fashionable IPO always attracts attention. In the absence of actual earnings data, everyone is free to spin a story. Initial trading was very positive. Does that mean that investors should consider buying it at market prices? (Those who get an allocation at the offering price have already made a bundle – depending upon when they sell).

Valuation guru Prof Aswath Damodaran provides the careful look we would expect from a top expert. While his final range is wide (and includes current prices) the overall conclusion is not promising. If you are attracted to the stock because you like the concept or company, you should look at this post.

MarketWatch reports that most analysts have stock targets below the $17 IPO price.

 

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is the discussion of ten things you must know about personal finance. It is important to get fundamental decisions right before launching your investment program.

In a similar personal finance emphasis, Seeking Alpha Editor Gil Weinreich cites the top four savings ideas from BlackRock’s clients.

If you have been struggling with your own decisions, you might want to read my (free) short paper on the top investor pitfalls. It is a good test of whether you can successfully fly solo. Send a request to main at newarc dot com.

 

Watch out for…

 

Scam season. One person gets you in the back yard to discuss landscaping, while the other is inside your home, stealing. The IRS does not take payments through credit cards or gift cards. If it seems in the slightest bit suspicious, check it out. The elderly are frequently targeted.

Final Thoughts

 

Your investment conclusions are strongly influenced by your preconceptions and current position. Last week I had an especially good summary of the two main themes. If it matters, Warren Buffett went on TV the day after I wrote this, expressing a similar opinion about stock valuations.

  • Stock values are attractive
    • Emphasis on earnings expectations and forecasts
    • Belief in relative valuations – comparing stock expected performance, with bonds, real estate, gold, etc.
    • Confidence that a recession is not imminent.
  • Stocks are over-valued
    • Emphasis on trailing earnings
    • Analysis based partially on 19th century data
    • Belief that valuation is absolute. A sector’s value is independent of the alternatives
    • Focus on headline risk – uncertainty, world events, etc.

Your choice of world view controls how you interpret fresh news, and your key investment decisions. If you are getting it wrong, you need an epiphany!

The market is rising despite the lack of specifics in the Trump plan and the realization that there will be delays in his proposals – even if he can sell them to Congress. The reason is straightforward:

The economy has been getting better in the post-election period. Dr. Ed Yardeni, declares that The Recession Is Over. He is thinking globally, noting that worldwide improvement cannot be linked to the U.S. election.

Charles Lieberman reviews the entire array of factors, including what to worry about.

Briefing.com’s excellent Big Picture column (worth a paid subscription) explores the possible causal relationships. Here is a key chart.

The Fed rate increases will be consistent with a stronger economy, an environment that implies solid growth in earnings. Scott Grannis explains why higher rates are not a threat in the current market:

It’s very likely we’re still in the early stages of more of the same. Interest rates are going to be rising, probably by more than the market currently expects, because the outlook for the economy is improving and inflation is at the high end of the Fed’s target range, yet interest rates are still relatively low because of the market’s willingness to pay up for safety—and that won’t persist for much longer. Stocks are going to be buoyed by improving earnings and the prospect of stronger economic growth. Interest rates will be moving higher because of stronger growth—higher rates are not yet a threat to growth. The Fed is still a long way from raising rates by enough to threaten growth. If the FOMC hikes rates in two weeks it won’t be a tightening, it will be a sensible reaction to stronger growth and improved confidence.

Worries?

Sure. If the Fed gets behind on inflation and accelerates rate increases, even though the economy is sluggish, it will be an early sign of an impending recession. I am watching this closely, and so should you.

Meanwhile, do not be scared witless (TM OldProf euphemism).

Weighing the Week Ahead: Have Stock Prices Lost Touch with Reality?

It is a big week for economic data and the first address to Congress from the new President. Most of the punditry is engaged in a collective head-shake about overbought conditions. Even if the data flow remains strong, pundits will be asking:

Have stock prices lost touch with reality?

 

Personal Notes

I always try to publish for Sunday morning, which is convenient for most readers. Occasionally circumstances delay me. Sorry about this weekend.

On a second front, a reader thought he spotted me at a political rally. Readers know that I emphasize political agnosticism in investing. Like most of you, I have opinions, but try to keep them separated from our decisions. With that in mind, I have an alibi for this occasion!

Last Week

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

Theme Recap

In my last WTWA I predicted a discussion about Trump policies and the business cycle. This was partially correct, but the prevailing theme – by a widespread margin – emphasized the likely delays in key economic policies. That will be a transition point for the week ahead.

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 yet another record close based on the week’s gain of 0.7%.

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

 

The Bad

  • Hotel occupancy softened over the last few weeks (Calculated Risk).
  • New home sales missed expectations. The prior three months were all revised lower. While sales were up 5.5% year-over-year, the comparison months were among the weakest. Calculated Risk notes that these were the first months after mortgage rates moved higher and provides analysis and this key chart.

  • European tourism interest in America is down 12% after the travel ban. (Forbes).

The Ugly

Russia may have interfered with the Brexit vote say UK officials. Jake Kanter and Adam Bienkov have the story at Business Insider.

 

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 EconompicData, for an important and careful analysis of the effect of rising interest rates on bond investors.

The problem is that the debate over the Fed and interest rates became political. To maintain consistency, many argue that higher rates will be good for bond investors. Here is Jake’s summary of the problem:

I’ve read too many posts / articles that outline why a rise in rates is good for long-term bond investors (as that would allow reinvestment at higher rates). While this can be true depending on the duration of bonds owned and/or for nominal returns over an extended period of time, it is certainly not true over shorter periods of time and absolutely not true for an investor in most real return scenarios… even over very long periods of time.

There are a range of possible assumptions and consideration of each. Here is a key illustrative chart:

To summarize a great post – which bond investors should read carefully – higher rates will be great for future bond investors, but painful for those with current holdings.

 
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 very big week for economic data, with all of the big reports except the employment situation.

The “A” List

  • ISM index (W). Important for both concurrent and leading qualities. Strength continuing?
  • Auto sales (W). More gains from a key sector or “peak auto?”
  • Consumer confidence (T). Will the great strength continue?
  • Personal income and spending (W). January data, but a very important business cycle series.
  • Fed beige book (W). With the Fed resuming a role as a key worry, there will be extra attention.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • ISM services index (F). Continuing strength? More important than manufacturing, but harder to interpret.
  • GDP Q4 (T). The second estimate includes more data, but little change is expected.
  • Durable goods (M). January data in a volatile series, but progress is needed.
  • Pending home sales (M). Not as important as new construction, but a good read on the market.
  • Chicago PMI (T). Best of the regional surveys is a little preview of the national ISM report the next day.
  • Construction spending (W). Big rebound expected in the important but volatile series.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

President Trump’s first Address to Congress on Tuesday night will command attention in many ways. Most importantly for our purposes will be hints about legislative priorities and the Congressional reaction. Insider tip: Watch for things that get applause from both sides of the aisle.

Next Week’s Theme

 

The punditry, locked into a mindset about valuations, Trump policies, Fed significance, and daily preoccupation with what could go wrong is engaged in a collective head shake. Isn’t it obvious that many of the Trump policies will be delayed? Won’t this derail the “Trump Rally?”

The commentary increasingly expresses amazement, wondering:

Have Stock Prices Disconnected from Reality?

On one side, those who date the rally from the day of the election infer cause and effect. Anything that damages the prospects for tax and regulatory relief also damages the bullish story.

Another group notes that the market, after an extended period of strength is “overbought.”

An increasing number of observers is questioning whether Trump policies are actually the basis for the increase in stock prices.

If these policies are crucial, Tuesday night’s Presidential Address to Congress is definitely the key moment of the week – regardless of economic data.

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.

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.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% — the highest level since October, 2014.

The legal Marijuana business will create nearly 300,000 jobs by 2020.

 

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 on sector rotation strategies, with a recent example from Oscar.

Top Trading Advice

 

Brett Steenbarger explains how knowledge is part of trading. He makes a powerful analogy between traders that can see both the macro and micro pictures and a quarterback who sees the entire field. His work always helps traders discover both what they should know, and how to learn it. While this was my favorite for the week, the daily posts should all be on the trader’s must-read list.

The early T-Wops (a negative Presidential tweet) had a negative impact on stocks. Traders learned this, of course, and the high-frequency algorithms did automated tracking. As often happens, once everyone catches on, things change. The WSJ shows that a Negative Tweet may not crush a stock

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 Warren Buffett’s annual letter to his investors. It is full of wit and humor – and plenty of great insights. You can learn about tax policy, accounting issues, stock buybacks, and Mr. Buffett’s ten-year bet where he took the overall market versus hedge funds.

Stock Ideas

 

Mr. Buffett’s dividend stocks versus the “dogs of the dow.” Jon C. Ogg crunches the numbers.

Big biotech? Battered down, but with good earnings and cash flow. Some of the companies also have a pipeline. Check out some large cap choices.

 

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is the post from Dan Danford. He explains the difference between excellent but general advice from experts and advice specific to your circumstances. Keep this in mind when reading the Warren Buffett letter. Here is a key quote:

Those experts don’t know a thing about you or your situation. They don’t know your age, health, marital status or personality quirks. They don’t know where you live or how much your house cost. They don’t know how much you spend on groceries or hobbies, or that you were forced into early retirement by an ungrateful employer. They know none of this. Nada.

 

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 zesty topic of the week started with an explanation from a noted writer and advisor, David Merkel, on why investors need good advice. I strongly agree with David, but I realize that some investors enjoy doing the work to maintain a successful program. (Is that you? My (free) short paper on the top investor pitfalls is a good test of whether you can successfully fly solo. Send a request to main at newarc dot com).

 

Watch out for…

 

Rising interest rates. In a riff on this week’s Silver Bullet analysis, Davidson (via Todd Sullivan) explains some key fundamentals about rates, the yield curve and the Fed. It is another myth-busting analysis.

 

Final Thoughts

 

How the punditry interprets the current market depends on how one defines base valuations and expectancy.

  • Stock values are attractive
    • Emphasis on earnings expectations and forecasts
    • Belief in relative valuations – comparing stock expected performance, with bonds, real estate, gold, etc.
    • Confidence that a recession is not imminent.
  • Stocks are over-valued
    • Emphasis on trailing earnings
    • Analysis based partially on 19th century data
    • Belief that valuation is absolute. A sector’s value is independent of the alternatives
    • Focus on headline risk – uncertainty, world events, etc.

The result?

Most people choose the over-valued path. It is the conventional wisdom in the media. Even the bullish pundits choke out a statement that stocks are “reasonably valued.” This world view requires some explanation of why the stock rally continues. The explanation has changed over time —

  • Stocks are overvalued and a crash is likely.
  • A crash might not happen, but returns over the next five, ten, twelve years will be lower.
  • Valuation is not a good method of market timing, and who knows when the “half-cycle” will end?
  • Stock strength is due to extraordinary Fed policy, providing liquidity that banks or the plunge protection team use to buy stocks. It will end with the end of QE, which probably will never happen.
  • The end of QE merely shifted focus to Europe, where the ECB has taken over the money printing.
  • The current rally is based upon Trump promises, which will never come to pass and might not even work.

Investment Conclusion

I hope most will notice that the forward valuation approach and the recession data I report weekly is a simple explanation. The current market is what we would expect. The Republican victory had increased small business confidence, but is not the main driver of stock prices.

The prevailing explanation was wrong-footed at the start and has remained so. Like bad science, it has not explained anything, so it must be continually re-invented.

It is really not complicated. There will be a time to become cautious. Meanwhile, mid to late- stage cyclical stocks, financials, homebuilders, and technology remain attractive.

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.

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.

Weighing the Week Ahead: Is Market Optimism Justified?

We have a rather light week for economic data. The biggest reports came last week. Earnings season continues. Everyone is keeping a close eye on President Trump, wondering what might happen next. Meanwhile, stocks are at all-time highs and interest rates have stabilized. This combination creates more questions than answers, which will lead the punditry to wonder:

Is the market optimism justified?

Last Week

Last week the economic news was strong, but (once again) with little reaction from stocks.

Theme Recap

In my last WTWA two weeks ago I predicted a focus on volatility, wondering whether policy uncertainty would have a reaction in stocks. That was a good call, although overshadowed by the policy moves themselves. There were several articles on volatility, mostly noting the lack of reaction in the VIX.

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 that the week’s gain was all from early action on Friday. Some attributed this to the employment report, but the timing is more consistent with a reaction to Trump actions on Dodd-Frank.

Let us also update another chart from this useful weekly article — a graphic picture of drawdowns. You can readily see both the frequency and magnitude.

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.

Some Super Bowl Fun with Two Hidden Lessons

Most readers will be watching the Super Bowl today. Did you know how important this is for market performance in 2017? The old AFC/NFC forecast is passé. We now must “dig deeper” into the data. By email I received an analysis that looked at Manning’s, Broncos, and other factors. I’ll focus on this year’s table.

And here is the recommended interpretation:

Looking at the averages, one might think that having New England or Bill Belichick in the big game is no big deal. A look at the year by year results shows that this could be a huge deal since the averages mask big swings in both directions.

For New England, just being in the big game could be a bearish sign as the market has dropped 6% on average in years where the Patriots have played in the Super Bowl since the turn of the century. During the Tom Brady dynasty years, the Patriots have won four of six times so far while the market is tied 3-3. Two of the years the Patriots have made the big game, 2002 and 2008 have coincided with major bear markets, an ominous sign.

Markets have also been volatile in years where Bill Belichick has coached in the big game both with New England and the New York Giants. Following his coaching appearances, the market has finished up 30% once, down 30% once, up 20% once and down 20% once.

Conclusion: What Super Bowl matchups could mean for the market in 2017

Based on the volatile reaction by markets to seeing New England and Bill Belichick in the Super Bowl, combined with the short-term positive, long- term negative reaction to last year’s win by Peyton Manning and the Denver Broncos, it looks like we could be in for a highly volatile for the markets this year. The bull market of recent years could be due for a setback. While signs are mixed over what direction the market may finish the year, there is a strong possibility of a 20% plus move this year.

Jane Wells asked some questions (What milestone did the Dow recently pass? Who is Janet Yellen?) to the high-income Super Bowl Participants. You will enjoy their answers.

Oscar likes the Falcons, but Vince insists that football picks are not part of his programming! Mrs. OldProf likes the Falcons as well, but that is just because they beat her Packers. I’ll stick with the Michigan man.

Use the comments to suggest the “hidden” lessons. WTWA readers should not need me for this oneJ

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

  • Consumer spending rose 0.5% in December, beating November’s increase of 0.2% and expectations of 0.4%.
  • Pending home sales rose 1.6%, beating expectations for a 0.6% gain.
  • Consumer confidence remained high at 111.8, although slightly slower than the December reading.
  • Initial jobless claims remained low, at 246K. (Calculated Risk).
  • Factory orders increased 1.3% beating expectations and much better than the 2.3% loss from November.
  • ISM manufacturing registered 56, beating expectations and reaching a level not seen for more than two years. (Scott Grannis). This chart shows why it is important.

  • Auto sales remained at record levels. (Phil LeBeau, CNBC). There is also a shift to the more profitable vehicles.
  • Nonfarm payrolls showed a net gain of 227K. The headline solidly beat expectations, so I am scoring this as “good.” The details were a bit more mixed, with some slight negatives. This is my own summary after reading many sources.
    • Positive
      • Headline job gain.
      • Increase in labor force participation.
      • Benchmark revisions confirming that prior data was something of an under-estimate– also showing healthy growth of jobs from new businesses. (This parallels the Business Dynamics report, which I wrote about here).
    • Negative
      • Small negative revisions to prior months.
      • No gain in the “household survey” employment.
      • Slight uptick in unemployment.
      • Sluggish increase (O.1%) in wage gains.

     

The Bad

  • Personal income increased by 0.3% in December, slightly missing expectations for a gain of 0.4%, but much stronger than the prior month’s 0.1% gain.
  • Construction spending for December declined 0.2%, missing expectations for a slight gain and dramatically lower than the prior month’s 0.9% pop.
  • Earnings beats are slightly below recent averages. (Factset).

 

The Ugly

A possible Chinese stress test for Trump. Jennifer M. Harris, Senior Fellow at the Council on Foreign Relations has an Op-Ed piece, with the full article at CNN. Here is the key quote:

Major geopolitical crises have a way of greeting US presidents soon after taking office. Nazi Germany’s withdrawal from the League of Nations in 1933, the Soviet-led construction of the Berlin Wall in 1961, the Gulf of Tonkin incident in 1964 — all were among the most daunting tests of US foreign policy in the past century, and all came less than a year into the tenures of new US administrations.

This is no accident. Foreign governments often like to test a new White House early on.

Russia, Iran, and North Korea are other obvious candidates.

 

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. Jacob Wolinsky has a terrific review of Harry Dent predictions. Here is one of the most dramatic, from just a year ago.

Time to redraw that one. The power of graphs with red lines and arrows is amazing. Jacob’s article also includes the results of a Google search for Dent’s predictions. You must see it to believe it!

I especially appreciate that Jacob was inspired by his Silver Bullet award in 2013. I only wish that more would join me in highlighting people doing this kind of valuable work.

Meanwhile, Mr. Dent’s business model is working just fine. Check out the speaking fees.


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 the most important reports came last week.

The “A” List

  • Michigan Sentiment (F). Continued strength anticipated. Special interest in future expectations.
  • Trade balance (T). December data with impact on Q4 GDP adjustments. Will be watched more closely as Trump policy is clarified.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • JOLTS report (T). Misunderstood and misused. This is about labor market structure, not job growth.
  • Wholesale inventories (Th). December data can have some effect on GDP adjustment. Favorite spinning target.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Fed speakers are back on the trail. Questions will probe the new political environment and hints about future 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

 

There is plenty of good economic news. A nice chart-packed review from Steven Hansen (GEI). And also from Urban Camel. Here is just one example comparing full-time and part-time jobs. There are plenty of great charts in both posts.

The earnings recession is over and future growth looks good. (Brian Gilmartin).

And yet everyone is nervous. (Great piece from Josh Brown).

While President Trump will continue to grab the spotlight this week, I will continue my focus on the stock market fundamentals. In today’s Final Thought I will offer some suggestions about how to implement this approach. Meanwhile, expect the key question for this week to be:

Is market optimism justified?

The basic positions cover a wide range. Even if one or more of them seem incredible to you, be assured that someone passionately maintains that viewpoint.

  • You must be kidding! Market valuations are in nosebleed territory. Investors are like Wile E. Coyote.
  • It is only a matter of time before the new Administration does something to spark a crisis.
  • Technical indicators have moved to neutral. (Charles Kirk and Guy Ortmann of Scarsdale Equities. Both are excellent, but require a relationship).
  • Markets can expect solid earnings growth with upside of 10% or so. (Ed Yardeni, Barron’s).
  • Companies are getting more comfortable with Trump and more confident about the future. (Avondale digest of conference calls – a great resource).
  • Tax cuts, repatriation of corporate profits, and lower regulations will create an explosion in economic growth.

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

 

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 Dwaine’s take on leading indicators, asking about time above the current value.

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.

Scott Grannis: The market is not very optimistic. This shows the importance of our weekly coverage of the equity risk premium, showing the relative attractiveness of investors’ two major choices – stocks and bonds.

 

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 Holmes made a timely call on Macy’s (M). Many of the stocks cited are worth your consideration.

Top Trading Advice

 

As I suspected a few weeks ago, Dr. Brett Steenbarger is taking a sabbatical to work on his next book. Most traders have probably not matched me in reading all his posts. Many of them have enduring value, so you should take some time to review his archives. My favorite this week helps you to explore you best trading strengths and virtues.

Ralph Vince has a warning about Trump Effects:

While everyone is in a lathered-up blather about executive orders and screeching, we gotta keep our eyes on the ball. I for one can’t get sucked up into political noise when there’s money to be made.

Nearly everyone I speak to is looking for three things:

1. A pullback in equities.
2. Interest rates have bottomed and will now approach more historically normal levels.
3. Volatility is bound to increase in the coming months and perhaps years.

And the degree of which I am hearing this makes me quite certain none of these are in the cards.

A colorful YOLO story – possibly fake – about a trader going “all-in” on poor earnings from Apple (AAPL). His collection of puts and short call spreads would make $5 million if it worked, recovering the $2.5 million inheritance he lost in two years. With the strong report, he was completely blown out, as witnessed on a live stream. There are many lessons here whether it was true or not. Handling wealth. Position size, whatever your confidence. Suspicion about those making dramatic calls to sell their services.

 

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 Davidson (via Todd Sullivan), who pulls together economic data and conclusions in his explanation of why stronger Employment Reports Indicate Higher Equity Markets.He includes several important indicators, emphasizing the need to look at several. This illustrates the right way to do financial research. He writes:

One must continuously test indicators against each other to be intellectually honest.

 

Stock Ideas

 

Barron’s likes Chili’s (Brinker International – EAT) but not Chipotle (CMG).

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 Macy’s (M). That worked well for those who did their own research and agreed.

Seeking yield?

How about health care REITs? Blue Harbinger analyzes twenty candidates, two of which we own.

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 favorites this week are two entries I see as related. Josh Brown points out the opportunity for young people to start saving and investing, enjoying compound interest. Tony Isola shows the flip side – the cost of an impulsive purchase paid off on a credit card. This is a great lesson!

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 discussion of the fiduciary rule. Most people do not understand what this means, and what is at stake. I strongly support Gil’s argument.

Watch out for…

Binary options. Another product that seems simple but few understand or trade successfully. (FT).

BDC’s. BDC Buzz has the story.

VIX trading. Bill Luby provides data on the poor results of VIX ETPs. Many are tempted to buy the VIX as a hedge without even knowing how it is calculated or whether it is a leading indicator.

Final Thoughts

 

Like Josh Brown, I am hearing a lot of worry about what might happen in the Trump Administration. Over the last several months I have highlighted all of the following:

  • An expectation that the Market would rally no matter who won the election – just removing one element of uncertainty.
  • The earnings recession ended in Q316.
  • Forward earnings are the most effective way to forecast the market, and 8-10% higher is quite plausible.
  • P/E multiples are strong when people have confidence in earnings.
  • This could be conservative if repatriation, better growth, or reduced regulation come to pass.
  • The best sectors are financials, tech, home builders, and some biotech.
  • The biggest market worry is a battle over trade, especially with China.

To my surprise I opened Barron’s and found Dr. Ed Yardeni making exactly the same points. Anyone reading WTWA for the last few months could have done the interview. I generate my own ideas and reach my own conclusions, but I always like it when astute analysts look at the same evidence and agree.

In a similar vein, my Seeking Alpha colleague Bill Kort has a great analysis of the danger of mixing your opinions about news with your investments. I am delighted that some of my work and my highlighting of Morgan Housel encouraged him to pursue this valuable topic.

Policy uncertainty remains the most important investor worry. We can mitigate this in two ways:

  1. De-emphasize the social issues. Yes, they are important. Feel them passionately if you wish. As an investor, you must ask whether they affect your portfolio.
  2. Consider timing. We cannot know about and react to a military attack. We can monitor the progress of trade negotiations. The most important investor threats still leave us time to react. I am watching closely, and so should you.

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.

 

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.