Weighing the Week Ahead: Santa Rally Trumped?

2017 begins with plenty of economic data crammed into a short week. While most expected at least a touch of Dow 20K last week, it did not happen. The conversation quickly shifted to why the rally stalled out. In the coming week, the punditry will be asking:

Should we expect a weak start to 2017?

Last Week

Last week there was some soft economic news, but this week showed strength. There was little apparent market effect.

Theme Recap

In my last WTWA, two weeks ago, I predicted a shift from the Dow 20K obsession to developing a new list of market worries. That was a good guess, although as late as Wednesday some TV experts were debating whether 20K would be achieved by the end of the week. That represented another 55 points or so. Sheesh!

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the trend for the week and the narrow range.

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. This additional choice captures the pre-election period, the Trump Rally, and last week’s selling.

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.

The Good

  • Rail traffic ended the year on a strong note. Steven Hansen at GEI reports the data, while also noting the year-over-year calendar effects. We will know a little more next week.
  • Mortgage rates declined in the last week of the year.Calculated Risk notes that this modest improvement comes in the context of the worst five weeks in history in the post-election period.
  • Earnings growth for Q4 is looking good. FactSet sees a second straight quarter of year-over-year increases, with strength in other metrics as well.
  • Commercial real estate is booming. (Scott Grannis)

  • Homebuilder sentiment reached an 11-year high. (MarketWatch).
  • Initial jobless claims dipped to 265K, maintaining the recent low level.
  • Consumer confidence reached 113.7. Doug Short’s chart (via Jill Mislinski) puts this strong reading in perspective – best since before 9/11.

 

 

The Bad

  • Pending home sales declined by 2.5%.
  • Chicago Purchasing Index declined to 54.6 and missed expectations of 56. (GEI).
  • China abandons the 6.5% growth target. Rupert Hargreaves (ValueWalk) analyzes a change which many already expected.

The Ugly

Russian malware found on a Vermont utility laptop. (Slate). The article notes that utilities in Western Ukraine were past targets and describes the possible consequences.

 

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 Robert Huebscher, founder and CEO of Advisor Perspectives, for his article, As Seen on TV: Financial Products You Should Avoid – Lear Capital.

His opening theme is excellent: Good financial products are bought, not sold.

He carefully avoids a discussion of the specific sales techniques, focusing on the facts of the offer. He writes:

But I caution anyone against buying precious metals from Lear Capital. It is not an SEC-registered investment advisor and its web site states that there is no fiduciary relationship between it and its customers.

And also…

For example, Lear will sell you a $10 circulated Liberty gold coin (1/2 ounce) for $753.00 (plus $24 shipping). I did a quick search on eBay and found a circulated Liberty coin selling for as low as $666 (with free shipping).

Buying silver is no different. Lear will sell you a pre-1921 circulated Morgan silver dollar for $30 (plus $10 shipping). On eBay, I quickly found one of these for $22.00 (plus $2.62 shipping).

Mr. Huebscher notes that other dealers are similar to Lear. I can confirm this, since I have checked out several such offers. I have seen many poor investments touted on TV and radio, but I cannot recall a single good one. It is just not that easy.
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 big week for data and only four days of trading. It may start slowly, but expect seatbelts to be fastened before Friday’s employment report.

The “A” List

  • Employment report (F). Still the most-watched number, with continuing strength expected.
  • ISM Index (T). The first data for 2017 is expected to show continuing modest expansion.
  • FOMC minutes (W). While we should not expect much from the report of a unanimous vote, pundits will find something.
  • Auto sales (W). Has “peak auto” arrived?
  • Initial claims (Th). The best concurrent indicator for employment trends. Not a part of this Friday’s report.

The “B” List

  • ISM services (Th). Continuing rebound expected in the large service sector.
  • ADP private employment (Th). Different methodology from the “official” report, but just as accurate.
  • Trade balance (F). Important for GDP. Growing interest with possible changes in trade policy.
  • Construction spending (T). November data for an important sector.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

There is not much FedSpeak on the calendar, but Congress is returning to work on Tuesday.

Next Week’s Theme

 

Last week attention started with more Dow 20K hype. This was true even though it is a rather meaningless round number in a flawed index. It shows the power of symbolism to attract attention. When the rally fizzled out, the story swiftly turned. Everyone questions rapid, short-term moves, so it is a natural for the punditry.

I expect this theme to carry over into 2017, despite an abundance of fresh news. Any sign of weakness will raise the questions:

Will 2017 have a weak start? Just like last year? And what will it mean?

Pundits were already hard at work last week:

  • Trump rally mistaken, overdone, and a setup for selling.
  • Regular “Santa” rally pulled forward, reversing normal seasonal effects.
  • Selling for gains postponed in the hope of lower tax rates. Those waiting to sell strength are ready to move.
  • Reflation trade was already starting; it would have happened anyway. The Trump story was merely a catalyst.

What should investors conclude from these sharply conflicting ideas? Your opinions are quite welcome! 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, but is still well out of recession warning territory.

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). Jill Mislinski updates the ECRI coverage, noting that their public leading index is at the highest point since 2010. Surprisingly, the ECRI public statements remain bearish on the U.S. economy, the global economy, and stocks. It is as if they never recovered from the bad recession call in 2011. They have been out of step ever since.

Readers occasionally ask about the Risk Premium. Antonio Fatas has a slightly different method that I report every week, but an excellent discussion of the considerations.

Many are concerned about higher stock volatility during the Trump Administration. Expert Bill Luby looks at the past fourteen Presidents, giving you a better idea about what to expect.

 

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 six 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?

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

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 in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. 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 plenty of investor ideas for the new year. Our discussion focused on how to find fresh trading ideas.

Top Trading Advice

 

Brett Steenbarger continues to provide almost daily insights for traders. Sometimes the ideas draw upon his expertise in psychology. Sometimes they emphasize his skills in training traders. Sometimes there are specific trading themes. If you are a trader who is not following his work, you are not doing as well as you should.

This week I especially liked the following (from his new indicator series):

Bridgewater is trying to replace hedge fund managers with artificial intelligence. Humans would retain ultimate authority. Since that is exactly what we are doing with our Stock Exchange group, I am glad that the models do not read. They would all want a raise or threaten to leave!

I look at many sources for good trading ideas, but I welcome suggestions from readers to broaden the list of candidates.

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 chart from @jackdamn (StockTwits) via Josh Brown. More words are not needed.

 

 

Stock Ideas

There are so many end-of-year ideas. I like to include some leads to research in WTWA, but I have a special challenge this week. You have many opportunities to read a range of sources and get lists of favorite stocks. I always review them and then do my own analysis. I hope you do as well.

I want to emphasize a few ideas that you might otherwise miss.

One method of playing for a long-term rebound is to take the “dogs of the Dow.” Here is the past record, but see the site for the current rankings.

Lee Jackson at 24/7 Wall Street has several good columns with collections of picks. Here is one on biotech stocks. Check out the others for dividend choices, Trump stocks, financials and others.

Chuck Carnevale is back with an update on Flowers Foods (FLO) including a deep dive into fundamentals and the settlement of the recent lawsuit.

Simply Safe Dividends takes a look at UPS – boring but safe. I might consider this and write near-term calls against it in our Enhanced Yield program.

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 Holmes likes Palo Alto Networks (PANW). Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Eddy Elfenbein announced his eagerly awaited buy list for 2017. Check out the post for the full list. You will definitely find some good ideas. Or you can also join in the whole list via Eddy’s new ETF (CWS). It is both convenient and inexpensive.

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. There are always several great choices worth reading. My personal favorite this week is Ben Carlson’s advice on how to overcome a late start to retirement savings – a very common problem. The article has some good, practical advice.

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. This week I especially liked the discussion of who might benefit from a financial advisor. You might also be interested in the discussion of whether you should be providing a questionnaire to your advisor, instead of the other way around.

Watch out for…

Giving up liquidity. David Merkel has another excellent warning for investors, explaining the hidden costs of tempting investments.

 

Final Thoughts

 

I do not know how the market will trade in the next week, and neither does anyone else. That will not stop everyone who can get quoted in a column or get on TV from offering an opinion. When you see these stories, you should keep in mind this first-rate post by Ben Carlson. With a combination of insight and humor, he hands out his Financial Market Awards for 2016. Keep these two charts in mind:

This frightened nearly everyone at the time, but here is what happened.

And this year the S&P was up 13.2%

My own conclusion is that the reflation trade (explanation here) was teed up and ready to go. I expect the late-year trends to continue, mostly because the reaction was small if you look at a long-term chart.

I will discuss the prospect for 2017 more in my annual preview, coming soon, but Mrs. OldProf informs me that I have done enough for tonight. She is requesting (more) champagne and my company.

Happy New Year to all my readers. I hope you have had a prosperous year, meeting your own specific goals. If not….

This is a good time to ask yourself about how have you done? If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! That is true for 99% of my readers, whom I am trying to help. Some readers might well benefit from our help. Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Weighing the Week Ahead: New Year, New Highs, and a New List of Worries

There is a normal dose of economic data this week, but we are entering a quiet, pre-holiday period. As the rally faltered a bit, the Dow 20K talk yielded to a discussion of what could go wrong. I expect this discussion to continue in the coming week, and perhaps the next one as well. The punditry will be asking:

What can derail the rally?

Last Week

In a reversal from the last month, most of the economic news was soft. There was little apparent market effect.

Theme Recap

In my last WTWA, I predicted a week-long fixation on the Dow 20K story. That was very accurate, with the closest call coming just as I arrived at Chicago’s NBC tower for a CNBC interview on my 2010 forecast. I think it represents a delay rather than a jinx. Some might attribute the selling to the Fed and Chair Yellen’s press conference, an “effect” that was reversed the next day. It must have been meJ I’ll stay at the office for the rest of the year!

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.

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.

Personal

I will have several year-end posts planned for the next two weeks, but will probably skip WTWA next weekend. I am planning a Weighing the Year Ahead installment, probably in two weeks.

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.

The Good

  • Framing lumber prices are higher, year-over-year. Calculated Risk sees this as an important leading indicator for housing, so we should, too.
  • Initial jobless claims edged lower, to 254K.
  • Hotels are close to an occupancy record. (Calculated Risk).
  • The Fed provided the expected increase in rates with almost no market reaction. (That is the good part). Tim Duy provides some insight. See also “Davidson” via Todd Sullivan.
  • The Philly Fed showed a big gain to 21.5 (7.6 prior) and trouncing expectations. I am not very interested in the Empire State survey, but it mirrored the Philly result. Business and consumer confidence have both strengthened since the election. Confidence is essential for spending, investment, and economic strength.
  • Inflation is still tame, even as it creeps toward the Fed’s target.
  • Household balance sheets are much stronger. Scott Grannis regularly produces this chart. It is far more valuable than material from those focusing exclusively on debt, and ignoring assets.

  • Homebuilder confidence hits the highest level since 2005. (Calculated Risk).

 

The Bad

  • Industrial production declined by 0.4% from October to November.
  • The rail contraction continues. Steven Hansen continues his coverage with multiple takes and time frames. Check it out!
  • China/drone incident. The drone seizure coincided with Friday selling, a hint of market reaction to sensitive international issues. China will return the drone and claims that the story was “hyped up.”
  • High frequency indicators edge lower. NDD’s useful weekly compilation shows continuing strength in short leading indicators, neutral in the coincident group, and some weakness in the long term. He is downplaying the effects due to seasonality, but it bears watching.
  • Housing starts dropped by 18.7%. This was a very bad headline number. Various sources suggest that it emphasizes multi-family while single-family is strong. This is a shift that is quite acceptable, so we should follow it closely. Calculated Risk, our go-to source on all things housing, has a great analysis and this chart.

The Ugly

The Young. Colleges are profiting from helping credit card companies. The choices are frequently worse than the student could find otherwise.

The Old. Brett Arends opines that cost-of-living adjustments may soon end. Already the inflation rate for seniors, mostly because of medical costs, exceeds the standard CPI calculation.

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 opportunities abound and nominations are welcome!
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 data, loaded into the latter part of the week. Things will get very quiet after Friday’s opening.

The “A” List

  • Michigan sentiment (F). Confidence is important right now. Will the mid-month preliminary high hold up?
  • New home sales (F). Not much change expected in this important sector.
  • Leading indicators (Th). This widely followed measure is likely to be flat.
  • Personal income and spending (Th). This important read on the economy is expected to show solid growth.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (W). A small decline is expected. Less important than new construction, but still relevant.
  • PCE price index (Th). The Fed’s favorite inflation indicator – still very tame at a touch over 1%.
  • Q3 GDP third estimate (Th). Little change expected in what is now viewed as “old news.”
  • Durable goods orders (Th). This volatile series is expected to be much weaker than the October data.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Despite the end of the FOMC quiet period, we have little FedSpeak. Chair Yellen makes an early-week appearance, and that is all I see.

Next Week’s Theme

 

Last week attention focused on Dow 20K. This was true even though it is a rather meaningless round number in a flawed index. It shows the power of symbolism to attract attention. When the rally fizzled out, the story swiftly turned. Everyone questions rapid, short-term moves, so it is a natural for the punditry.

I expect it to carry over into a quiet week, with plenty of focus on 2017. The popular question will be about what could stop the rally. What should we worry about? It is time to rebuild the wall or worry.

What could go wrong?

Pundits were already hard at work last week:

You should ignore the lists or 2017 winners.

Trump’s policies might not get enacted, disappointing markets. S&P businesses are in line for $87.1 billion.

Trump’s policies might be enacted, hurting the economy and markets. (Think trade matters).

Trump might make a bad decision in a crisis. An ill-timed tweet?

Valuations are still excessive. Stocks are too pricey to buy.

The Fed and a strong dollar might hurt earnings.

Stocks might get too expensive for dividend reinvestment. (You can’t make this up).

Bonds are sending a warning.

Or maybe we should look at the bright side?

A nice reversal from the negativity of last January, the worst start to a year ever. (Josh Brown).

The rally is real. Brian Wesbury’s valuation model showed stocks as 30% under-valued on election day.

20% upside for next year? Brian Gilmartin sticks to the facts. This is an earnings-based conclusion.

 

What should investors conclude from these sharply conflicting ideas? 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

 

The increased yield on the ten-year note 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 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). Jill Mislinski updates the ECRI coverage, noting that their public leading index is at the highest point since 2010. Surprisingly, the ECRI public statements remain bearish on the U.S. economy, the global economy, and stocks. It is as if they never recovered from the bad recession call in 2011. They have been out of step ever since.

James Picerno highlights an important, oft-ignored relationship. Many worry about higher interest rates. He notes the relationship between higher rates and stronger economic growth.

 

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 six 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?

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

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 in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group meets weekly for a discussion they call the “Stock Exchange.” This week we had a great topic – whether the focus on Dow20K had an effect on technical analysis. The prior two segments were on limiting risk and maximizing returns. (We report exits from announced Holmes positions if you ask to be on that list. Write to holmes at newarc dot com).

Top Trading Advice

 

Brett Steenbarger continues to provide almost daily insights for traders. Sometimes the ideas draw upon his expertise in psychology. Sometimes they emphasize his skills in training traders. Sometimes there are specific trading themes. They all deserve reading. This week I especially liked the following:

Adam H. Grimes has an excellent piece on finding ideas. You must be experienced, but also avoid confirmation bias. Dr. Brett gives a HT and follows up.

Brendan Mullooly takes one of my favorite approaches – drawing a lesson from outside trading, especially from sports. This approach helps rid us of confirmation bias, providing a fresh look. Check out the full post for data on the impact from overtrading. And the sports analogy? Teams that keep switching quarterbacks!

[This chart was approved by Mrs. OldProf, a native of Green Bay and a knowledgeable football fan.]

 

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 advice from legendary investor Peter Lynch. Instead of finding something from the last week, I wanted to find the best choice for current conditions. Ben Carlson did the Peter Lynch report about two years ago, starting with this very relevant quotation:

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.

And also….

Now no one seems to know when they are gonna happen. At least if they know about ’em, they’re not telling anybody about ’em. I don’t remember anybody predicting the market right more than once, and they predict a lot. So they’re gonna happen. If you’re in the market, you have to know there’s going to be declines. And they’re going to cap and every couple of years you’re going to get a 10 percent correction. That’s a euphemism for losing a lot of money rapidly. That’s what a “correction” is called. And a bear market is 20-25-30 percent decline.

They’re gonna happen. When they’re gonna start, no one knows. If you’re not ready for that, you shouldn’t be in the stock market. I mean the stomach is the key organ here. It’s not the brain. Do you have the stomach for these kinds of declines? And what’s your timing like? Is your horizon one year? Is your horizon ten years or 20 years?

What the market’s going to do in one or two years, you don’t know. Time is on your side in the stock market.

 

Stock Ideas

Lee Jackson has an interesting screen that produced 5 Dividend Stocks that You Can Still Buy With Market at Record Highs. “We screened the Merrill Lynch research data base for stocks that are rated Buy, pay a dividend and haven’t gone parabolic this year. We found five that make good sense for investors”.

Wind energy stocks have been left behind in the “Trump rally.” Buying opportunity or victim of policy changes?

But keep in mind that solar is now cheaper than wind energy. Tom Randall (Bloomberg Technology) has a helpful analysis of how much and why.

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 Holmes likes Amgen (AMGN). Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Some Merrill Lynch top picks for 2017 (via 24/7 Wall Street).

Ben Levisohn (Barron’s) sees 23% upside for FedEx.

Interested in REITs? Try health care.

Get ready for Eddy Elfenbein’s new buy list. This annual event is a great source of ideas for investors who like to think in a time frame of at least a year. You can also join in the whole list via Eddy’s new ETF (CWS). It is both convenient and inexpensive.

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, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the important article by Jonathan Clements on your personal risk-free rate. It is not the T-Bill or T-Note from financial analysis, but your own most costly loan. This may seem obvious, but many people fail to consider it in their financial calculations.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors, so the series is worth following regularly. This week I especially liked the discussion of financial literacy. Even active investors are unable to answer basic questions. WTWA readers would get them all right, so it may seem very surprising.

Watch out for…

Bonds cratering while stocks rally. Eddy Elfenbein presents a telling chart.

Final Thoughts

 

My biggest reason for the 2010 Dow20K post was to alert investors to the idea of “upside risk.” There is always – always – a list of plausible worries. These dominate the news and the financial discussions. The other side is difficult. It is boring to say repeatedly that things are normal and promising. Talking about some new development seems smart – attracting viewers, page views, more gigs to make you famous, and even investors who seek confirmation.

The natural process leads to a focus on problems. These are easy to see, while solutions are not. Therefore, most investors do not understand the ill-named concept of the wall of worry.

The new list of worries, all well-known and reflected in current market prices, is a replacement for those listed on my current “investor fears” page, which replaced those from the 2010 era. It seems smart to study world events and use that knowledge to guide your investment decisions. But it is not!

You cannot make these calls as well as the market does. You are almost certain to over-react.

The investor mistakes I highlighted in 2010 are still with us:

  1. Excessive attention to headline events;
  2. Reliance on poor forecasts of the economy, especially recessions; (James Picerno has a great list of typical forecasts)
  3. Too much reliance on backward-looking earnings, reflective of unusual events and times.
  4. Ignoring the long-term economic forces putting idle assets to work. (Mark Hulbert on 24K)
  5. Emphasizing politics instead of investing. In 2008 many investors hated the prospects and principles of the Obama administration. They sat out the start, and never found an entry point.

It is more profitable to accept a measure of uncertainty, rely upon the best recession and earnings indicators, and remain agnostic about politics.

 

This is a good time to ask yourself about how have you done? If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! That is true for 99% of my readers, whom I am trying to help. Some readers might well benefit from our help. Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Weighing the Week Ahead: Dow 20K?

The post-election market run has been accompanied by improving economic data and increasing confidence. The result has the punditry asking a question that seemed crazy in January:

Will the Dow hit 20K?

Before reading this week’s installment, “Sherman, set the WABAC machine to” mid-year, 2010. The Dow was at 10K and many famous pundits were predicting a fall to 5000. In order to appreciate the psychology of the time, please read my post and especially the comments at Seeking Alpha. You will see some very colorful criticisms of my work! You will enjoy a few good laughs. I’ll comment more on this below, but it is a great place to start.

Last Week

Once again, last week’s calendar of economic news was nearly all good, supporting the market gains.

Theme Recap

In my last WTWA (two weeks ago), I predicted a period of stronger economic news and the possibility of a more positive market reaction. This is what has happened, but most commentators still are not emphasizing the main theme. It is not all about the Fed.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.

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.

The Good

  • Rail traffic finally scores a slight positive. Steven Hansen provides the current data, as well as the more negative long-term perspective.
  • Senate passes stopgap funding. This is not getting a lot of attention, but it is a big shift from the past eight years, especially 2011, when the last correction came for this very reason. (The Hill).
  • OPEC reached a production limit agreement. Whether this will attract cooperation from non-OPEC countries is open to question. We might also ask whether a floor under energy prices is a positive. That said, the oil price/stock correlation has been a factor since the energy collapse. Months ago, I suggested that we were entering a sweet spot for oil pricing. The OPEC participants see a cap of about $60/barrel, which makes sense.
  • Jobless claims down ticked, and remain near all-time lows. See Calculated Risk for the story and charts.
  • Productivity rose over 3%.
  • Michigan sentiment spiked to 98 on the preliminary estimate. LPL shows why this is important.

  • Borrowers continue to move out of negative equity on their homes. 384K in Q3 (Calculated Risk).
  • ISM non-manufacturing strengthened to 57.2. Doug Short has the story and this chart:

 

The Bad

  • Gas prices rose over five cents. (GEI).

  • Interest rate components of long leading indicators are weakening. (New Deal Democrat). This is mostly a positive story, but the long-term interest effects are worth watching. NDD’s report of high frequency indicators is a regular read for me, and should be for other frequent traders.

 

The Ugly

Secret outside influence on U.S. elections. Foreign countries frequently have an interest in the most important elections. There is nothing new or unusual about that. Voters can weigh the opinions and arguments in the same way they use other information. Actions that are secret are another matter, especially when following the “dirty tricks” approach.

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 opportunities abound and nominations are welcome!
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 big week for data.

The “A” List

  • FOMC rate decision (W). An increase is widely expected. The statement and Yellen’s press conference may yield hints about next year.
  • Housing starts and building permits (F). Softening pace expected in this important sector.
  • Retail sales (W). November data following a very strong October.
  • Industrial production (W). Any improvement in this economic weak spot?
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • PPI (W). Interest in inflation measures is increasing, but prices are not.
  • CPI (Th). See PPI above. Eventually these will be important.
  • Philly Fed (Th). The first look at December data is expected to be positive.
  • Business inventories (W). Significant for Q4 GDP, but little change is expected.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

With the FOMC meeting at mid-week, FedSpeak is on mute. Expect plenty more news on possible Trump policies.

Next Week’s Theme

 

The strong data continues, as does the market rise. We still do not see a reflection in forward earnings, but the earnings recession has ended. The Fed is about to raise rates, and no one cares. It is not all about the Fed, and more are learning that. As the market hits new highs, including a big round number on the DOW, the focus this week will be on DOW 20K.

In my 2010 articles I tried to emphasize the right focus for investors. Too many were paralyzed by fear from the frequent disaster predictions. Their upside risk was huge. This section was crucial:

Asking the Right Questions

The bias is inherent in the situation. The problems are known. If you write for a major publication, you are rewarded for analyzing the negativity. If you go on TV, you are expected to parrot the analysis of problems. This makes you seem smart.

By contrast, the solutions are vague and unknown. If you even talk about them, all the “hot shots” are skeptical.

That should be your clue to pay attention. Repeating the known news does not make you money. Try asking these questions:

What if unemployment falls to 8%?

What if the annual budget deficit is reduced?

What if housing prices and sales show a clear bottom?

What if mortgage rates remain low?

What if politicians negotiate a compromise on tax increases?

What if Europe stabilizes?

What if China and other emerging countries resume a solid growth path?

What if earnings for US companies continue to surge, leaving the 10-year trailing earnings in the dust?

What if the US rationalizes immigration?

If you have not thought about these possibilities, you have a fixation on negativity. My Dow 20K concept is designed to set you free — to get you thinking about the long sweep of history and the potential for success. If even a few of these things happen, what would be the market reaction?

This list of worries seems so old….

Two years later the New York Times ran a story with the analysis from a big firm. The reasoning was like mine, but missing the first 30% of the move.

Josh Brown takes note of the Barron’s cover. Since magazine covers are often viewed as contrary indicators, he adroitly includes a few others that might have been viewed as signals of a top. Great insight, and great fun.

Scott Grannis shows the wall of worry climb (but I still like my own version better!)

Eddy Elfenbein highlights the sharp contrast between now and January as well as the impact of the banking sector.

Remember how the start of 2016 was one of the worst market starts in Wall Street history? Howard Silverblatt noted this stat: At the market’s February, low, the S&P 500 was down 10.5% YTD, yet the Financials were down 17.7%. Since then, the S&P 500 has rallied 21.5%, while the Financials are up 45.6%. It’s as if the entire market were the dog being wagged by the banking sector’s tail.

None of this really answers the DOW 20K question, but the information is great. 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

 

The increased yield on the ten-year note 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 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.

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

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.

There is a Correlation Nosedive says Nick Colas (via Josh Brown). This signals an opportunity for those who can identify the best stocks and sectors. The phrase “stock-picker’s market” is oft-repeated. Now it makes some sense.

Dr. Brett analyzes the divergences and the implications.

Brian Gilmartin reports on the recent Chicago CFA luncheon where “Dan Clifton of Strategas Partners gave a great presentation on the coming fiscal stimulus and what it might look like and what it might mean for the US economy in 2017”. This means plenty of money for share buybacks and earnings increases. Brian (who has been very good on both earnings and the market) reaches this conclusion:

In year-end meetings with clients, I’m telling clients from both sides of the aisle that the SP 500 could be up 20% next year. Prior to the election and since last Spring ’16, the SP 500 was already looking at its best year of expected earnings growth in 5 years. The proposed President-elect and Congressional fiscal policy could be another level of earnings growth above what was already built into the numbers, before November 8th.

Personally, the $1 trillion repatriation estimate that Dan Clifton threw out seemed on the lighter side to me. Apple alone has $250 billion sitting on its own balance sheet, which is 1/4 of the expected total.

This is something we all should be monitoring.

 

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 six 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?

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

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 in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group meets weekly for a discussion they call the “Stock Exchange.” This week we talked about maximizing gains. Last week the topic was minimizing risk. (We report exits from announced Holmes positions if you ask to be on that list. Write to holmes at newarc dot com).

Special thanks to our guest expert, Blue Harbinger, who provided first-rate fundamental analysis, providing counterpoint for our technical models.

Top Trading Advice

 

Brett Steenbarger continues to provide almost daily insights for traders. Sometimes the ideas draw upon his expertise in psychology. Sometimes they emphasize his skills in training traders. Sometimes there are specific trading themes. They all deserve reading. This week I especially liked the following, each reflecting one of the main themes:

 

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 post on The Art and Science of Investing. I am delighted that he is keeping his promise to keep writing, leading the effort at a new, multi-contributor blog. This entry, as is the case with much of the best investing work, does not emphasize immediately “actionable” advice, designed to attract plenty of page view. The concept is great, and the post is worth a careful read. Here is the thesis:

This drives people crazy, because the more important a field is, the more scientific and predictable we want it to be. People take scientists seriously because they can count of them. Art is taken less seriously because it comes and goes.

But most fields outside academia are both science and art.

Including investing.

An example?

There is scientific data showing the best way to invest is to buy the cheapest set of companies you can find. There’s equally persuasive data showing the best way to invest is to buy the fastest-growing set of companies, which tend to be expensive. Some investors obsess over brand and intangibles. Others say ignore those and only look at fundamentals. Neither is right or wrong. You just have to appreciate that each strategy lives in its own context, and that market trends come and go. It’s an art.

I love this concept! There are many ways to profit from trading and investing. Arguments about approach may either distract or enlighten.

 

Stock Ideas

 

Brad Thomas suggests two REITs for the new Commander-in-Chief. Besides the recommendations, Brad analyzes some potential losers.

Still wondering about winners from the election? Marc Gerstein’s stock screening methods generate a great list of stocks and sectors.

Looking for safe yield? Who isn’t!! Blue Harbinger provides a first-rate analysis of Saratoga Investment Corp. (SAR). There are plenty of traps in the Business Development Company (BDC) universe. Mark’s analysis shows how carefully you must consider the data in finding sound choices. He carefully considers the implications from higher rates.

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, with four or five specific ideas that we are also buying. This week Holmes likes Molson Coors (TAP). Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

But Tom Armistead warns that there is too much enthusiasm about Deere.

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, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the Bloomberg analysis of when it is right to wait before claiming Social Security benefits. While it is an individual choice and calculation, delay is good for many. (See also “Watch out for” below.)

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors. Gil is on a well-deserved vacation, but his last post is very helpful. He takes a nice look at the current risks and rewards from the market rotation away from bonds.

Watch out for…

Structured products. Larry Swedroe (ETF.com) provides a careful analysis of what the investor is really getting. Most have inflated notions about the returns and are not properly informed about risks. In many cases, a simple fixed-income security would be better. This is a complicated story, but it is worth reading carefully if you, like so many, are considering these investments.

 

Final Thoughts

 

Will we reach DOW 20K? And stay there? I expect us to touch that level soon. When the market gets close to such numbers there is a magnetic attraction. Sellers see it as inevitable, so they back away. It becomes a self-fulfilling prophecy. Whether the level holds will be a trickier question. It will, but perhaps not right away. No one really knows.

My purpose in the DOW 20K project, including buying the domain name, was to help individual investors to focus on the right problem: Missing the upside because of the paralysis of fear. Consider the following:

  • For many years, anyone forecasting more than an 8% gain in the market was tagged as super-bullish.
  • Since 2010 there have been incessant warnings of another market crash, a decline of 50% or more.
  • A market doubling in 6 ½ years represents 11% compounded growth.

It was not a prediction of rush to 20,000, but an emphasis on taking the right perspective. There are always market worries. The big negative predictions always get the attention. It is always difficult to stay the course.

Is DOW20K the end? Definitely not. The fundamentals are all better than in 2010, and the worries are different. I’ll write soon about the methods behind the original call and the current implications. For now, I’ll just say that the upside/downside risk is still attractive.

Investors need not just “buy and hold.” Recessions are the biggest risk, so I watch that closely. The right allocation among asset classes deserves a regular review.

This is a good time to ask yourself about how have you done? If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Weighing the Week Ahead: Are Stocks Ready for Stronger Economic News?

It is (ahem) a very big week for new data. The A-teams are back from their mini-vacations, ready to take a fresh look at the new world. While some will continue to work the Trump Administration/stock theme, it remains mostly guesswork. There is a new theme, which markets and pundits will get around to, perhaps as soon as this week. With a tone change on the economy and deficits, I expect the punditry to be asking:

Can the market embrace some good news?

Last Week

Once again, last week’s light calendar of economic news was nearly all good, but not the focus of discussion.

Theme Recap

In my last WTWA, I predicted special attention to the Trump stimulus plan and how it might be financed. Must of the week’s discussion was about possible cabinet appointments and the policy implications, but spending and taxation got plenty of attention. It was a s good a guess as any.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.

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.

Personal Note

I am taking a few days off, so there will be no WTWA next week. I hope that the Stock Exchange group does not play hooky.

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. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Rail traffic is improving reports Steven Hansen at GEI. The story is even better if you remove coal and grain.
  • Technical indicators are strong. Our own technical models remain strongly bullish. Noted technician John Murphy (via Charles Kirk) has this comment:

    “There is little doubt that the market’s trend is still higher. The fact that it’s being led higher by economically-sensitive stock groups like energy, materials, industrials, small caps, and transports is a sign of strength. The fact that tech stocks are starting to strengthen is also a positive sign.”

  • Chemical activity shows continuing strength. Calculated Risk monitors this indicator, which seems to lead industrial production.
  • Durable goods rebounded nicely to an increase of 4.8%.
  • Existing home sales were strong at 5.6M SAAR, beating expectations. Calculated Risk cautiously notes that the results do not reflect the recent higher mortgage rates.
  • Michigan sentiment beat expectations moving to 93.8. Doug Short has a comprehensive review.

The Bad

  • New home sales fell on an annualized basis. The decline included both multi and single-family residences. Calculated Risk offers perspective. Please compare the measured response here and above on existing home sales.
  • Mortgage rates moved above 4%. (MarketWatch).
  • Trucking is still declining, but the rate seems lower. Steven Hansen at GEI reviews the mixed picture.

 

The Ugly Beautiful

At some point, I need to do an update on last week’s “Fake News” ugly award. There is a good cyberspace discussion, but that can wait.

As I occasionally do, I want to focus on the positive for a change. Bill McBride of Calculated Risk had an encouraging Thanksgiving post, Five Economic Reasons to be Thankful. Read the whole post, but here is one that might surprise you – household debt levels.

 

 

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 Jon Krinsky of MKM Partners, with a big assist from Josh Brown. There is a consensus that countries are racing to debase currencies in “beggar thy neighbor” policies. The stronger dollar certainly reduces earnings for some companies, especially if they do not do any currency hedging. The flip-side gets no attention. Josh writes, There is zero evidence of a long-term correlation between stocks and the dollar. Take a look.


The Week Ahead

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

The Calendar

We have the data avalanche that we often see when the first two days of the new month are at the end of the week. This quirk of the calendar makes this the biggest week of the year for data.

The “A” List

  • Employment report (F). Expectations are a little lower for the data markets see as most important.
  • Consumer confidence (T). A good concurrent read on spending and employment.
  • ISM index (Th). Still modest growth in this widely-followed measure?
  • Auto sales (Th). Important sector, private data, and not a survey. What more could you want?
  • ADP private employment (W). Deserves more respect as an alternative to the “official” data.
  • Personal income and spending (W). Important economic growth indicator. Will strength continue?
  • Beige book (W). Provides descriptive color for FOMC participants, and occasionally some policy insight.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Construction spending (Th). Rebound expected in this important sector.
  • GDP second estimate (T). Somewhat “old news” but still the base for the ultimate measure of economic growth.
  • Chicago PMI (W). Most important of the regional surveys, with some predictive power for ISM.
  • Pending home sales (W). Less direct impact than new construction, but a good read on the housing market.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

For those who missed it during the holiday-shortened week, Fedspeak is back! We could also get big news out of the oil production talks between OPEC and non-OPEC members.

Next Week’s Theme

 

This will be a big week for news, and it might also be for stocks and bonds. For a long time, the market reaction has been entirely Fed-focused. If the economy looked better, the Fed would start raising rates. If it looked worse, the Fed was expected to help. Whatever the reason, the tone has now changed. Economic data have been better, and there is more optimism. There is growing acceptance of higher interest rates. The market seems untroubled (so far) by the rate move and the strength in the dollar.

While few remarked on the tone change last week, I expect it to get more attention in the week ahead, especially if economic data remains strong. It will leave us wondering – Can the market finally celebrate good news?

This is a multi-part theme prediction. We do not know that the data strength will continue. We do not know what the FedSpeak comments will be. And finally, we do not know how markets will react. We have a clue about how the political world will react (via Charles Kirk).

“I’m getting a real kick out of how so many Republicans have gone from bear to bull on US economy overnight and how many Democrats have done the opposite.”- Patrick Chovanec

This change will be reflected in comments from the punditry this week.

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

 

The increased yield on the ten-year note 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 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.

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

Georg Vrba: The Business Cycle Indicator, (latest edition below) 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.

Urban Camel at The Fat Pitch analyzes recession forecasts based upon the Presidential Cycle, a popular current theme. This is a great article. (A Silver Bullet candidate at least). Here is a key quote:

More to the point, there are better ways to forecast the next recession than counting months on a calendar or focusing on changes in the presidency. How?

By monitoring changes in the macro data. A persistent slow down in retail sales, housing consumption, employment growth and other macro indicators will likely be a better method for indicating when a recession is becoming more likely. This is the stuff that matters most; the calendar and presidential terms are demonstrably inadequate on their own. Our regular commentary on the macro environment can be found here.

This is very good advice to the recession worrywarts.

If (like me) you are a quant who is always hungry for more data, you will love FocusEconomics. You get a compendium of information from around the world, with cogent analysis. To take one example, here is their update on the Trump effects:

There are so many interesting topics that it is difficult to describe in one example.

 

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 six 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?

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

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 in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group did not meet on Thanksgiving Day, but you can expect reports to resume in this Thursday’s “Stock Exchange.” Out of the many Holmes picks this week, I can report one that seemed to capture a theme, Fomento Economico Mexicano SAB, (FMX). This Mexican holding company, trading via the ADR, includes several retail holdings. (Think Coke and Heineken). Holmes likes to play rebounds on a technical basis, so this is an interesting play on Trump policy from a source who knows nothing about the election or the news. (We report exits from announced Holmes positions if you ask to be on that list. Write to holmes at newarc dot com).

Top Trading Advice

 

Brett Steenbarger keeps on bringing it, day after day. His posts are a must-read for traders, but often have broader scope. If you are trying to perform well at anything, Dr. Brett can help you. My favorite piece this week was about a movie featuring young drummers. It is often helpful to go outside of your own world, take an objective perspective, and then look for the lessons.

Adam H. Grimes has a good explanation of how to calculate volatility in Excel. I find that most people consistently over-estimate volatility, perhaps goaded by the CNBC reports of “triple digit moves” and a 50-point bounce since the lows. These are both basically meaningless unless you are trading a very large short-term position.

Bill Luby discusses common misperceptions about the VIX. This is a great example of those who need to use Adam Grimes’ spreadsheet!

You can always tell when the crowd gets long the VIX and ends up on the wrong side of the trade.  “The VIX is broken!” becomes an oft-repeated refrain, as does “The markets are rigged!” and the usual list of exhortations from those who are in denial.  The current line of thinking is that the world must be much more dangerous, risky and uncertain as a result of a Trump victory, yet the VIX is actually down 31.4% since the election – ipso facto the VIX is broken.

The VIX is a market measure, not something readily rigged. If you disagree, you are simply on the wrong side of the market.

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 Batnick’s post, This is Not Bearish. The question is the new all-time highs in stocks. I know from experience that the average investor sees this as some sort of warning. Instead of interpreting prices in context, they see a chart or a range and expect mean reversion.

Michael looks at data since 1928. How many new market highs do you suppose have been made since then? How many this year? The answers are 1134 and 11. I suspect that few would come close in their guesses. 18% of all months have closed at all-time highs. Here is what happens after a new high:

The time after a new high is nothing special – and nothing to worry about.

This post was frequently cited, but I enjoyed the color provided by Brian Gilmartin. His story about how a Chicago TV producer uses psychological tests to find the most stressful stories is priceless!

Stock Ideas

 

Brian Gilmartin has a mixed take on health care (seems right to me). Policy is changing. Defensive stocks are in question. More aggressive picks might do well. Check out his objective, earnings-based take for some ideas.

Tiernan Ray (Barron’s) has a helpful article on deal stocks. While value investors always look for cheap stocks, these are also often good takeover targets. It is helpful to keep an eye on the candidates.

Mexico a screaming buy? MarketWatch analyzes the trade rhetoric and prospects. (And note Holmes above).

Freeport McMoran? (FCX). Stone Fox Capital analyzes the relationship between copper prices and the stock price. Not much of a boost is needed, and the copper market has been strong.

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, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is Jonathan Clements’ piece on the two financial numbers you need to know. Hint: You might have a clue about this, but are probably measuring incorrectly.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors. I especially liked this post on dividends. Why do so many insist on regular cash payments?

Gil nails it with his answer – the security of regular payments.

If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo. Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Market Outlook

Eddy Elfenbein provides several interesting facts about the economy, helping us all to keep perspective. You will enjoy the mixture of surprises and items you might guess. Did you know that nearly half of mutual fund managers do not own their own fund?

Eddy’s ETF (CWS), based upon his successful annual list, is getting a lot of deserved attention. It is off to a good start.

Bill Kort reviews the most recent predictions of the end of the world.

Value Investing

The rebound of the value approach continues. Dana Lyons provides the most recent evidence.

Watch out for…

The bond market. The Brooklyn Investor compares bonds and stocks over a long period. The analysis reveals the shortcoming in measures like the Shiller P/E, which consider neither interest rates nor inflation. There are many helpful charts, but here are some examples.

I am always baffled at comments like, “The market has averaged a P/E ratio of 14x for the last 100 years so the stock market is 40% overvalued at 20x…”.

How can you compare 14x P/E to the current level without discussing interest rates?  And if you think stocks should trade at 14x P/E today, then you should also think that interest rates should be much higher than they are now. For example, the 10-year bond rate averaged 4.6% since 1871 and 5.8% since 1950. But these periods include a time when interest rates were not set by the market.

And also this:

 

1955-2014:

            Interest rate range           average P/E

                   4 – 6%                             23.3x
6 – 8%                             19.6x

I looked at the data from 1955-2014 (adding one more year to update this isn’t going to change much) to see what the average P/E ratios were when interest rates were in certain ranges.

From the above, we see that the market traded at an average P/E of 23.3x when interest rates were between 4% and 6%.  The 10-year now is at 2.3%. So we have a long, long way to go for interest rates to threaten the stock market, at least in terms of the bond-yield/earnings-yield model.

Final Thoughts

 

If you want to analyze a change, you need to know when it starts. Here is part of an example from my causal modeling classes.

When does change start?

  • When the new Captain orders a change in course?
  • When the crew knows the new Captain will order a change?
  • When the crew knows the new Captain, but not whether he will order a change?
  • When the crew knows there will be new Captain who might order a change?
  • When the crew knows there might be a new Captain?

I am sure you get the idea. The methods that track the market under various Presidents have many problems, but the starting and ending points are especially important. There are no new Trump policies. We are all still guessing about what they might be.

And yet – there has been a definite change in tone. Economic strength has a lot to do with confidence – the willingness to invest and to spend. A divided government had many dysfunctional consequences, especially repeated issues about the debt limit and spending on crucial programs. We can expect less of that. There will also be a very different reaction to economic data; the political rhetoric that blinded investors will be reduced.

The generalized Fed theory will have less traction. Those who have been wrong about the market for years have used the Fed as a fig leaf. With interest rates rising and the economy improving, that story must change.

The emphasis on commodity prices as an economic indicator, most prominently by the ECRI, is also proving wrong, as is the impact of a stronger dollar.

This is not an endorsement of specific Trump policies. It is the reality of moving out of the election environment – at least for a year or so! This week’s data avalanche could be the first real test of this new attitude.

Weighing the Week Ahead: Time for a Portfolio “Transition?”

There is some important data on the schedule for this week, along with earnings and the expected doses of FedSpeak. None of that will attract much attention. Instead expect “all Trump, all the time”. The slant in financial media will be the implications for investors. As we get news of the leadership transition, I expect the punditry to be asking:

Do investment portfolios need a transition?

Last Week

Last week’s economic news was all good, but less important than the election.

Theme Recap

In my last WTWA, I predicted a focus on the election and the chances for greater economic and financial clarity. The election expectation was obvious, and there was indeed a focus on the implications for investors. That said, I embraced the consensus expectations which proved to be dramatically incorrect. I did correctly note that the crystal ball would remain cloudy, but that proved to be quite an understatement.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the post-election rally as well as the Friday fizzling.

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. Here is one additional example.

The big story of the trading week does not show up in the stock market data. As the Trump victory became apparent, overnight trading in stock futures showed a massive decline. This chart shows the selling and the morning rebound.

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. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Election uncertainty ended. This was a known, market-friendly event, although the amount of the reaction was a surprise.
  • Framing lumber demand drives higher prices. Those who prefer market data to other source should take note of the data from Calculated Risk.
  • Earnings reports continue strength on all measures. Earnings growth, results versus expectations, sales versus expectations, and outlook are all solid (FactSet). It is not getting much attention, but the “earnings recession” is over. Brian Gilmartin provided the first alert on this dramatic shift, and now points to a possible expansion in multiples. Ed Yardeni shows the impact via changed expectations.

  • Michigan sentiment showed strength with a reading of 91.6, solidly beating the prior month and expectations. The survey was before the election.
  • JOLTS remained positive. This may be the most misunderstood indicator. Pundits use it to analyze job growth, because that is what they want to know about. Many other measures do that job better. JOLTS is about the structure of the labor market. How tight things are and whether employees freely leave jobs for others. If you do not understand the Beveridge Curve, you do not understand JOLTS.

  • Initial jobless claims declined to 254K, marking 88 consecutive weeks below 300K. This is the best record since 1970. Calculated Risk has the story and a helpful chart.

The Bad

  • OPEC output jumped. This calls into question the planned production cuts. Whether you agree with me that stock prices should not be linked to oil prices, that continues to be the reality. Thus – this news is market unfriendly. (MarketWatch)

 

The Ugly

Financial abuse of the elderly. Reshma Kapadia of Barron’s has a great feature article on this topic, describing the various scams and consequences. Here are a few of the top ones:

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.
Noteworthy

Could you pass the U.S. Citizenship Test? You might enjoy the quiz from BuzzFeed. Example: Who was not one of the writers of the Federalist papers? John Jay, James Madison, Alexander Hamilton, or Thomas Jefferson? Mrs. OldProf tells me that this one is too easy if you scored a ticket to Hamilton and paid attention.

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 an important week for economic data, with a special focus on housing.

The “A” List

  • Housing starts and building permits (Th). Different directions in recent reports.
  • Retail sales (T). Continuing strength expected.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Philly Fed (Th). Continuing small gains expected in an early read on November.
  • Industrial production (W). Small growth expected despite recent weakness.
  • PPI (W). Still not a major market factor, but moving higher.
  • CPI (Th). Not the Fed’s “official” inflation indicator, but it is moving beyond the target.
  • Business inventories (T). September data, but relevant for final Q3 GDP.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

There are still some earnings reports, including housing stocks. Once again we also have almost daily Fedspeak. We’ll get to watch some dancing around the political questions.

Next Week’s Theme

 

In a different year, this would be a week for special attention to housing. The economic data feature some important forward-looking indicators and earnings reports include important housing-related stocks. Instead, the surprised investment community is scrambling to identify the implications of a Trump presidency and a GOP Congress. Regular media will have daily reports of transition plans, cabinet appointments, and shifting policy stances. Financial media will focus on what it means for investors. Expect this question to be a common theme:

Does your portfolio need a complete remake?

Here are the important issues:

  • Has the best asset allocation shifted? More stocks, less bonds?
  • Is the overall market more dangerous? Time for more cash?
  • What are the likely economic consequences, in both the short and long terms? The WSJ has a nice general summary, loaded with charts, about the economy Mr. Trump will inherit.
  • Which stock sectors are likely to benefit, and by how much?
  • Are there specific stock favorites?

Traders rushed to act, frequently on hastily and ill-formed ideas. The overnight futures trading is a spectacular example, but most of the other conclusions are also quite speculative. Consider how wrong many of the big names in investments have been. Citi, Goldman and Bridgewater Associates all expected declines of 3 – 10% on a Trump victory. Even after the market was rallying, many of the pros were expecting the story to end at any moment. As Time notes, the three errors included the event itself, the impact, and the aftermath.

I advised caution in a message to my readers “the morning after.” (Clients got more detail). Check out the post for my list of four key points.

As one person noted in the comments, using patience left you behind on some day-trading possibilities. True enough, if you guessed well. Would stocks down 6% continue to decline or stocks up 6% keep ascending.

I’ll have a few ideas of my own about what comes next 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

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come.

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.

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

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.

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.

 

How to Use WTWA (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 six 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?

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

Thanks also to readers for the interest and early comments for my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. Readers of WTWA can get a copy by sending an email to info at newarc dot com. We will not share your address with anyone.

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 holds several aggressive sectors. The more cautious Holmes also remains fully invested. Now joined by Athena, the group has a regular Thursday night discussion which they call the “Stock Exchange.” This week’s question was the effectiveness of technical analysis in the aftermath of a disruptive event. You can see that discussion as well as the most recent ideas for consideration – and you can ask questions!

Top Trading Advice

 

Brett Steenbarger warns against overtrading simply because things are boring. Not so much this week, but that might make it the best time to consider a great lesson.

He also presents an update on his market trading models, an interesting comparison to our approaches.

Bill Luby shows that the volatility crush was among the top 25 in history. If you have been trading VIX as a long, plenty of agility was necessary to limit your losses. If it was a hedge, you needed significant positions in the right sectors to make a profit. Check out VIX and More for the full story.

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 the cool-headed and accurate analysis from Liz Ann Sonders: Don’t Fear a Recession or Market Overvaluation. This coverage of Schwab’s IMPACT 2016, the largest conference in the investor business. Robert Huebscher continually brings the best analysis to advisors through special posts. I always read them along with many other advisors, but they are not a secret. You too can see what the advisor community is following. Here is a key quote on valuation:

“Valuation metrics can support any view of the market,” she said. The metrics that are dependent on an inflation or interest-rate component show that the market is cheap, she said. But metrics such as the forward P/E ratio show a median valuation. Sonders said that valuations tend to be highest when inflation is 2-3%, just above its current range. “But inflation going higher is a risk for P/E ratios,” she explained.

A slavish devotion to valuation indicators that ignore low interest rates has been an expensive mistake for investors. Here is a chart of the ETF modeled on Prof Shiller’s famous CAPE ratio. Despite the professor’s repeated statements that he is personally invested and recommends a significant stock allocation, his work is most frequently cited as indicating potential for a market crash. That is not his personal interpretation. The Barclay’s ETF uses CAPE to find the most attractive sectors, and it remains fully invested.

Suppose that each of the CAPE devotees who went to cash because of alarming valuations had allocated just 25% of the portfolio to the CAPE fund. (Not that this has been the very best choice, but it illustrates the Shiller contrast very well.)

 

Stock Ideas

 

Companies that may participate in “rebuilding the aging infrastructure.” Here are eleven stocks (24/7 Wall St) that could benefit from the $2.75 trillion that The American Society of Civil Engineers sees as necessary. Some of the ideas might surprise you.

Barron’s has a summary of other stock ideas, for those interested in immediate pursuit of the Trump theme.

 

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, with four or five specific ideas that we are also buying. This week Holmes likes Tractor Supply (TSCO). Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Marc Gerstein plays the “semi-contrarian” with his EBAY idea.

Chuck Carnevale has a very important post combining an analysis of the risk from increased market volatility, with the analysis of specific stocks. Investors should be reading Chuck’s work carefully every week.

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, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the advice on how to handle market volatility from Christine Benz (Morningstar). She easily clears the first hurdle – the temptation to give blanket advice. Each investor is different. She offers time frame as one important consideration. If investors want to copy what I do with clients, this article provides a good basic outline.

As you gauge whether to make any changes in light of the volatility, the really important concept to keep on your radar is risk capacity–what sort of losses can you endure without having to rework a goal?

If you still have a reasonably long time until retirement–say, 10 years or more—you have a fairly high risk capacity. That means that regardless of how you feel about near-term losses, you’re likely to recover from them during your time horizon. In fact, stocks have generated positive returns in more than 90% of rolling 10-year periods. For that reason, such investors ought to have aggressively positioned portfolios with at least 50% in stocks; given today’s low bond and cash yields, a more conservatively positioned portfolio will barely preserve purchasing power, let alone grow.

Seeking Alpha Editor Gil Weinreich was one of the few to highlight the possibility of a Trump victory, and do so with confidence. He reasoned from the Brexit precedent and a sense of the popular uprising. In a helpful and constructive fashion, he disagreed with my highlighted sources in last week’s WTWA. While his work is popular among investment advisors writing on Seeking Alpha, the topics are frequently important for active individual investors.

Out of the several helpful posts last week, my favorite was the individual investor advice (and appreciated the mention) to follow your plan rather than the election. This is especially persuasive from someone who called the election result. The money line from Gil?

But as we all know, investing is best accomplished unemotionally.

Other ideas?

For the most conservative investors, who normally stick to Treasuries, it may be time to switch to TIPS. Barron’s explains that inflation fears have now given the edge to the inflation-protected securities.

Emergency fund idea bad advice? Sally Krawcheck explains why paying off credit cards is more important. Do the math!

Blue Harbinger provides an update on Business Development Companies (BDCs). The article ranks many of the opportunities, and provides criteria for evaluation. This is a good start for anyone considering investments in this space.

Watch out for…

Dividend stocks? Many observers opined that this week’s decline in the bond substitutes was only the start. (I agree). The dividend investment gurus have a different take. While they are looking for buying opportunities, here are the early returns.

Final Thoughts

 

Last week I embraced the conclusions from the polling community, which was dramatically incorrect. They are preparing post-mortems. They will try to figure out the sources of error and improve their methods, because that is what professionals do. Of the sources I cited last week, Nate Silver was the best. Even his methods gave Mr. Trump only about a 30% chance. That is not high enough to predict the outcome, but it should get one’s attention. I will be doing my own review of what went wrong with the pollsters, and whether we gave them too much credit.

I was more accurate concerning what investors should be doing about the election. I have expected a market rally after the election, if only because a big element of uncertainty would be removed. I also have warned that plenty of uncertainty will remain!

If you allowed your political preferences to influence your investing, you probably have had poor results. If you have been sticking to the fundamentals – a solid portfolio of cheap stocks – you are doing well.

What’s Next?

As I write this we have already seen a change in the Trump transition leadership and acceptance of some elements of ObamaCare. Each policy needs fresh scrutiny, using the following elements:

  • The possible difference between candidate Trump and President Trump
    • Which proposals were serious
    • The effect of actual responsibility
    • The influence of the team
  • The limitations of power (See this great take on what Truman said about Eisenhower)
  • The potential for compromises

I will look at these questions on a policy-by-policy basis, discovering the changes in value in the related stocks. Many journalists and pundits are on this job, of course, but the instant conclusions are unreliable. Even the best journalists and financial analysts have little experience in analyzing the workings of the policymaking process.

For most investors, a portfolio review is in order, and a remake might be. As the leadership transitions, so should your asset allocation and stock selection. It is a job that should be done carefully, and done right. You have a lot at stake.

Weighing the Week Ahead: Time for Some Clarity?

We have a light week for data, but plenty of other big news. Earnings season continues. There will be plenty of FedSpeak, and most importantly the results of the U.S. elections. I everyone to be asking:

Will the election results provide clarity for financial markets?

Personal Note

 

I enjoyed my Wisconsin weekend away with Mrs. OldProf, who is completely sick of election stories. Especially after seeing a few ads in a battleground state! She will probably will not read this week’s edition, focusing instead on her Packer-laden fantasy football entry and tomorrow’s game.

I know that some readers will not like my conclusions this week. Please read them as investment advice, not voting advice.

Thanks also to readers for the interest and early comments for my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. Readers of WTWA can get a copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Last Week

Last week’s economic news was all good, despite the modest negative reaction in stocks. The election story is the culprit.

Theme Recap

In my last WTWA (two weeks ago), I predicted a focus on the trading range, and whether it would soon be broken. Breaking election news attracted most of the attention with earnings playing a secondary role. Since then, we have experienced a 40-year flood, so to speak. The nine consecutive days of market declines are the most for 36 years. And still counting. Whether the range has been broken remains open to question, but I was wrong about the key theme.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Some sources said the market was in the “grip of the worst decline since the financial crisis.” Doug notes that the nine days of decline amounted only to 3.09%. By comparison, the nine-day streak from 36 years ago represented 9.37%. Even single-day declines can be more than this, including the -3.59% on June 24th of this year. Doug’s analysis helps to put the recent trading in perspective.

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!

The Good

  • Personal income and spending were up 0.3% and 0.5% respectively. These results were better than the prior month, and in line with expectations.
  • ISM manufacturing index registered 51.9 beating the prior month and most expectations. This is roughly consistent with recent GDP readings.
  • GDP for Q3 increased 2.9%, the highest rate in two years. James Hamilton notes that this is still slightly below the long-term trend, but good enough to reduce the recession odds of his model to 12.3%.

Some skeptics have claimed that the good report is “full of beans” in the words of Dr. Ed Yardeni. While the one-time effect of soybean imports was important, he cites several other factors that suggest future strength.

  • Earnings strength continues. Despite the importance of this story, it has not gotten much attention. The earnings recession is over, as I concluded from our first-rate sources a few weeks ago. FactSet has some key points in their update:
    • 71% of S&P 500 companies have reported earnings above the mean estimate and 54% of S&P 500 companies have reported sales above the mean estimate.
    • For Q3 2016, the blended earnings growth rate for the S&P 500 is 2.7%. If the index reports growth in earnings for the quarter, it will mark the first time the index has seen year-over-year growth in earnings since Q1 2015 (0.5%).
  • Corporate narrative agrees. Avondale Asset Management tracks hundreds of earnings calls. Their helpful summary includes quotations from the calls, organized into topics. Here is the encouraging list of topic headings for the U.S. macro section. There is supporting evidence for each of the points below.

 

The environment has stayed slow and steady

The economy is fully healed even if it’s not setting new records

Conditions are still pretty difficult for industrial companies, but turning up

Still, there’s a pervasive sense of uncertainty

CEOs are waiting to see what happens in the election

Companies are setting strategic plans that assume weakness

The consumer has been slowing

But energy and currency are moving from a headwind to a tailwind

Inventories are much leaner than they have been

And pricing pressures are building

 

  • Employment
    • Non-farm payrolls increased by 161,000 and the prior month was revised upward by 35,000.
    • ADP private employment growth was 147K, 23,000 less than expected, but the prior month was revised up by 48,000.
    • Unemployment decreased slightly to 4.9%.
    • Hourly earnings increased 2.8% on a year-over-year basis –
    • One slight negative was initial jobless claims edging higher by 7000, but still historically low at 265K.

 

The Bad

  • ISM non manufacturing registered at 54.8, down from 57.1 in September and missing expectations. Calculated Risk has the story, highlighting a comment in the report about the effect of uncertainty from the Presidential election.

The Ugly

The last days of a very personal and negative election campaign. Scott Grannis called for a “mulligan.” (For non-golfers, a complete do-over). I would probably just slice another drive into the rough! If you want to change outcomes, you must be willing to reform the process and go to work on your swing. In such a long election season, campaign managers finally resort to techniques that are proven to influence the undecided and the faithful. You and I might be turned off, but we are not the target market.

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 winner is Bill McBride of Calculated Risk. Debunking recession calls is not popular. It is not the way to get page views. Please read Bill’s entire post to see the full story about the endless parade of recession calls. Here are some of the key points:

Note: I’ve made one recession call since starting this blog.  One of my predictions for 2007 was a recession would start as a result of the housing bust (made it by one month – the recession started in December 2007).  That prediction was out of the consensus for 2007 and, at the time, ECRI was saying a “recession is no longer a serious concern”.  Ouch.

For the last 6+ years [now 7+ years], there have been an endless parade of incorrect recession calls. The most reported was probably the multiple recession calls from ECRI in 2011 and 2012.

In May of [2015], ECRI finally acknowledged their incorrect call, and here is their admission : The Greater Moderation

In line with the old adage, “never say never,” [ECRI’s] September 2011 U.S. recession forecast did turn out to be a false alarm.

I disagreed with that call in 2011; I wasn’t even on recession watch!

And here is another call [last December] via CNBC: US economy recession odds ’65 percent’: Investor

Raoul Pal, the publisher of The Global Macro Investor, reiterated his bearishness … “The economic situation is deteriorating fast.” … [The ISM report] “is showing that the U.S. economy is almost at stall speed now,” Pal said. “It gives us a 65 percent chance of a recession in the U.S..

The manufacturing sector has been weak, and contracted in the US in November due to a combination of weakness in the oil sector, the strong dollar and some global weakness.  But this doesn’t mean the US will enter a recession.

The last time the index contracted was in 2012 (no recession), and has shown contraction a number of times outside of a recession.

Bill cites this chart:

Bob Dieli also made both of those calls in real time, as he has been doing for a few decades. His work goes mostly to private clients. It helps all of us to monitor objective sources like this. They benefit only from being right.

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 light week for economic data, but some important earnings reports for retail stocks. I watch everything on the calendar, so you do not need to! Check out WTWA to focus on what is important – and ignore the noise.

The “A” List

  • JOLTs report (M). Few understand, but the main use is labor market structure.
  • Michigan Sentiment (F). Has been weaker than the Conference Board version. An important indicator.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Wholesale inventories (W). Volatile and challenging to interpret. Rebound expected.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

More important than the economic data will be continuing earnings news. We also have almost daily Fedspeak and plenty of international events and speeches. And most important of all – the election.

Next Week’s Theme

 

With increasing uncertainty about the election outcome and resulting policies, markets pushed the trading range lower over the last two weeks. Eddy Elfenbein describes this as an extended period of small lower moves. Each of the daily declines has been less than 0.7%. During the same period, the economy has been showing signs of acceleration. Eddy provides a helpful chart:

Earnings have also been solid in the face of the longest market losing streak in 36 years.

I expect discussion of the election and the implications of the results to be the key market question:

Will we finally get some clarity?

The possible election results are not binary. There is a wide range of possible outcomes, listed below from bearish to bullish. Please note that I am not opining about who I want to win or how you should vote. I am reporting how the market will probably react under differing circumstances, with some references for you to start your own research.

  • No clear result. We might think it’s over when it’s over, but that might not be the case. (Robert Schroeder, MarketWatch)
    • Some states might require recounts, either automatic by state law or after a challenge.
    • A third-party candidate might win the electoral votes of one state in a close split between the major parties. That is the explicit objective of candidate Evan McMullin.
    • Trump and /or supporters might challenge the outcome, possibly with some legal basis. Most people will remember the Bush/Gore controversy and the infamous “hanging chads.”
    • The Supreme Court decided that dispute, splitting along partisan lines. Right now, that would be a 4-4 vote, placing emphasis on how states and lower courts decided.
  • A Trump victory. Estimates are that the market would decline by 5-7%, mostly because of increased uncertainty. Many market participants believe that Trump economic and regulatory policies would be market-friendly. (CNBC)
  • A Democratic sweep with a majority in both houses of Congress. The perception, possibly not accurate, is that this would allow a much more aggressive legislative agenda. This is probably not accurate because of the filibuster potential in the Senate. Cloture currently requires 60 (out of 100) votes. This serves to block nearly everything that does not have solid overall support. Making it more complicated is the idea of the “nuclear option” where the cloture requirement would be reduced. (Barbara Kollmeyer, MarketWatch)
  • Divided control — a Clinton Presidential victory with Republicans maintaining control of one or both houses of Congress. Markets have generally liked a deadlocked government. (Allianz)

Which of these will happen? Join in the comments with your thoughts about the election implications. As always, I’ll have a few ideas of my own in the conclusion.

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.

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 Big Four Update, the World Markets Weekend Update (and much more).

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.

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.

 

How to Use WTWA (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 six 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?

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This week the gang came up with some contrarian, pre-election ideas. You can see the best technical analysis – and you can ask questions!

Top Trading Advice

 

Brett Steenbarger cites that noted trading guru, Bruce Lee, to illustrate our need to be flexible in trading.

In another post he emphasizes the need to ask the right questions. As he often does, this is a good technique for other life missions, not just trading. He uses an excellent specific example of VIX trading.

Options expert Bill Luby sheds some light on VIX trading, a widely misunderstood topic. He explains the difference between “median reversion” and using five-year moving averages. I doubt that most have event considered this significance.

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 Ben Carlson’s post, Don’t Be Afraid of All-Time Highs in the Stock Market. This is a concern that you see often, because many people equate a high level of the index with “expensive.” It is also true that declines begin from a peak. Forgotten in this is that most peaks lead to new peaks! Here is a key table:

And a key quotation:

Here’s also another way to think about this — since nearly 7% of all days since 1950 have been an all-time high that means that more than 93% of the time the stock market is in a drawdown state from a previous peak. So 9 times out of 10 you are going to be beating yourself up for not selling at the previous high. This is what makes the markets so interesting and excruciating all at the same time. Most of the time you’re in a state of regret.

Stock Ideas

 

Many people are mystified by the PEG ratio. Chuck Carnevale does a deep dive on the derivation and provides examples to show when and how it should be applied. If you invest in growth stocks, this is a must-read article with many ideas.

Brian Gilmartin draws upon the changes in earnings estimates to highlight attractive sectors for Q416. This is extremely helpful work, and worth a close read. Hint: Technology and Financials.

Is health care a sector to avoid or to embrace? Eddy Elfenbein comments on the decline in the group since July, 2015.

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, with four or five specific ideas that we are also buying. This week Holmes likes Biomarin (NKE). Check out the post, Stock Exchange: Contrarian Pre-Election Trade Ideas in Chips, Biotech, Trucking, and Energy, for my own reaction, and more information about the Holmes method.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

How about housing? Barry Ritholtz has a great post highlighting the big best on housing by one of those who called the decline and has now switched sides, fund manager Donald Mullen. The entire post is worth reading, but here is the key argument:

Given how wary some people are of homeownership, why should we be thinking about demand strengthening? Here are a few possibilities:

  • Millennials seem to be moving out of their parents’ basements, and forming households;
  • Mortgage rates are starting to rise, and the potential for further rate increases could lead potential buyers to getting off the fence;
  • Low equity constrains inventory; that drives up rental demand as well as prices;
  • The economy continues to recover and even expand;
  • Unemployment has been about 5 percent for about a year, and wage increases are finally beginning.

All of these add up to an increase in the number of households, including renters — many of whom go on to become buyers.

This is also what we see from the Calculated Risk reporting on home prices, consistently higher but with room to run.

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, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the story about how even math teachers cannot understand 403-b annuities. Tara Siegel Bernard explains in the NYT. I have a lot of experience with people who come to me, seeking to escape something that sounded great at the time. The products are fine for some people, but because of high commissions are sold to many more. Anyone considering an annuity needs some advice ahead of time.

Another good piece is the Barron’s Next article on excessive concentration in stock of your own company. I have seen millionaires lose everything that way.

Seeking Alpha Editor Gil Weinreich’s market is the community of financial advisors, but it also attracts spirited comments from investors. I especially enjoyed this post featuring retired RIA Jim Sloan. The topic is one I rarely cover in WTWA – spending. I focus on clients’ investment plans; these must match their spending needs. Sometimes it is better to find a few economies than to take excessive risk.

Morgan Housel pulls together some themes that are among my favorites. It is a good explanation of why even the smartest individual investors go wrong. Hint: You are good enough to explain why it is not working and toward complex solutions.

Watch out for…

Facebook? Marc Gerstein provides an interesting and balanced analysis, driven by his quantitative methods.

Final Thoughts

 

The election outcomes that the market sees as most distressing are extremely unlikely. The best sources I follow suggest a Clinton victory, a toss-up in the Senate, and the GOP retaining the House. These are not partisan pollsters, but those who benefit only from accurate interpretation of data. Here are the key sources and a starting link. The message changes with new information, as we would expect. Barring any fresh news, the outcome has a high probability.

Larry J. Sabato of the University of Virginia Center for Politics.

Nate Silver, a numbers guru with respect from the Political Science community.

Sam Wang and the Princeton Election Consortium. Their method of median-based probability estimation is interesting and plausible.

The resulting gridlock will be perceived as positive. That will be true only if our leaders learn to compromise. There are decisions ahead that require action.

The first market reaction will be positive, if only because the worst cases were avoided and the uncertainty ended. Hedge fund managers who have lagged the market and are hoping to catch up via big short positions will need to cover. Based upon trader commentary and performance reports, this is a large group.

The second reaction will be sector and stock specific, and it will take time. Most of the financial punditry does not realize the limitations on Presidential power. I expect changes in drug pricing policies, for example, but not a sweep against an entire sector. The targets will be the most egregious excesses.

I understand that many people will disagree with these conclusions, despite my care in identifying sources. They will have theories about bad polls, hidden voters, and the like. I recommend reading this post. It is fine to keep cheering for your candidates until the last vote is tallied, but you do not have to lose money as well.

Weighing the Week Ahead: When Will the Trading Range Be Broken?

We have normal week for economic data, including the first estimate for Q3 GDP. There are also important earnings reports. Election stories have become even more intense. Meanwhile, the market has been pretty quiet. I expect financial media to be asking:

When will the trading range be broken?

Personal Notes

I will be traveling next week and probably will not write WTWA.

I have completed my new paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. Readers of WTWA can get a copy by sending an email to info at newarc dot com. We will not share your email address with anyone.

Last Week

Last week’s news was pretty good, despite the modest reaction in stocks.

Theme Recap

In my last WTWA, I predicted more attention to the “stealth market rotation.” This idea got a little attention on Monday from the Pundit-in-Chief, but that was all. The rotation was less pronounced and the competing stories were good ones.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a slightly positive week, but the real story is the continuation of a very narrow trading range.

Doug has a special knack for pulling together all of 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 really good. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The Good

  • Building permits rose and beat expectations. But housing starts declined (see below). New Deal Democrat analyzes this contrast and the effect on his leading indicators.
  • Philly Fed also beat expectations.
  • Existing home sales rose 3.2%. Calculated Risk is the go-to source on housing, and Bill continues his analysis of the effects of the small inventory. This concept is essential to understanding housing trends.

  • Industrial production registered a (small) increase of 0.1%. Steven Hansen notes that the year-over-year figure is still in contraction.
  • Hotel occupancy still on pace to be the second best year in history. (Calculated Risk)
  • Earnings season shows continuing strength. FactSet reports that 78% of S&P 500 companies are beating earnings estimates and 65% beating on sales. Take a look at the entire analysis. Here are two interesting takeaways.

The Bad

  • Rail traffic continues to decline, even when coal and grain are excluded from the data. Steven Hansen does a thorough analysis of the trends.
  • Jobless claims edged 13K higher, moving away from recent lows.
  • Housing starts declined and missed estimates. The annual rate was 1.047 million. Calculated Risk discusses and notes that his prediction at the start of the year, growth of 4-8% still looks about right.

 

The Ugly

Increased hacking. Yesterday’s widespread outage attacked a domain name service, according to MarketWatch. Engadget says, Blame the Internet of Things and provides the map below. The hacking began with home devices which often have weak security protocols. With that entry, the distributed denial of service attack took down a list of major sites, including “Twitter, Spotify, Reddit, The New York Times, Pinterest, and PayPal.”

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 Ryan Detrick of LPL Research. I am showing the power of his work via the two key charts, but reading the entire post will help you to spot these things on your own.

 

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, along with many important earnings reports. I watch everything on the calendar, so you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • New home sales (T). Continuing strength needed.
  • Consumer confidence (T). The Conference Board version spiked last month. Few expect the gains to hold?
  • GDP for Q3 (F). Even though this is backward looking, it will get plenty of media attention in front of the election.
  • Michigan Sentiment (F). Has been weaker than the Conference Board version. An important indicator.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Pending home sales (Th). Not as important as new homes for immediate economic effect, but a good market indicator.
  • Durable goods (Th). Volatile September data, but important for the overall assessment of the economy.
  • Existing home sales (Th). Without the impact of new homes, but still a good read on the overall housing market.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

More important than the economic data will be continuing earnings news. We also have almost daily Fedspeak and plenty of international events and speeches. And of course…the candidates.

Next Week’s Theme

Despite the many events that normally increase volatility, the stock market has traded in a narrow range. There is an increasing sense that “something’s got to give.” The exact cause and timing remain unclear, but the obvious choice is Election Day.

I expect an active discussion about a looming market question:

When will the trading range be broken?

Here is a chart of the market over the last year:

If you look at mid-July through today, you can see that the trading range has been quite narrow.

Now let’s turn to the sequence of topics I have written about in the last two months. These remind us of what we were thinking and worrying about each week.

  • Possible rate increase after Jackson Hole 8/28
  • Chance of an Autumn Correction 9/3
  • Should we fear the Fed? 9/11
  • Is the bond correction at hand? 9/18
  • Election effects on the market 9/25
  • Time to get past the gloom? 10/2
  • Earnings recession over? 10/9
  • Market rotation at hand? 10/16

Despite this list of challenges, stocks have held up pretty well.

Many are expecting the trading range to be broken soon. But in which direction?

Election predictions range from a surprise, Brexit-style victory for Mr. Trump to a Democratic sweep. The markets seem to favor a Clinton victory, but a continuation of divided government, mostly because of reduced uncertainty.

At the beginning of the year I wrote that the investment effects of this election were smaller than most would expect. The President has much less power to change policy than most people think – especially in the face of a Senate filibuster. Either candidate would need to forge alliances with the other party to make major changes. OppenheimerFunds has some interesting comments about surprises from past elections, and advice for investors this time.

Data indicate that many are not following this advice. A BlackRock survey (via Financial Advisor IQ) found that 53% of investors have raised their allocation to cash because of the “persistent volatility.” The Presidential election gets credit as a major cause.

The perceived volatility is completely wrong – certainly for the last few months, and also for several years. If you missed my post on testing your Confirmation Bias Quotient, you might want to take a look. Something is causing many investors to perceive volatility that is not really there.

Bloomberg reports that investor cash levels have not been seen since 9/11.

Join in the comments with your ideas on when the trading range will be broken, and in which direction. As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also 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.

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 Big Four Update, 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 a number of interesting approaches to asset allocation.

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.

“Davidson” (via Todd Sullivan): An excellent, understandable description of the interest rate cycle and its close association with recessions. The description of the factors we can expect to see before a recession will come — someday. Here is a key quote and chart:

Recessions, for the most part, in my opinion, are predictable. The rate spread between T-Bills and the 10yr Treasury is 1.20% today or 120bps (basis points). Based on history, lending continues, a relatively high level of pessimism continues and so does economic expansion. The rate spread is only one of several economic measures we have available that indicates economic expansion is likely to continue for several years.

 

How to Use WTWA (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 six 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?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This is the place to get some ideas from the best technical analysis – and you can ask questions!

Top Trading Advice

 

Brett Steenbarger provides a checklist to help you determine if you are “operating in peak performance.” As he often does, Dr. Brett has raised a point that few people think about. This is one that could make a big difference – and not just for traders.

The Trading Goddess considers pot stocks for an election trade.

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) and the analysis of current market fears. It is a post packed with good ideas, one of which is in the quant corner as well.

The past 12mos has seen many a ‘high profile’ investor forecast that a recession is imminent. This is the consensus view. Some claim it is driven by economic weakness from one area or another. There are still claims that employment is weak when it is at record highs. Others claim that retail sales and personal income (wage growth) are nearly unchanged for more than a decade. Not so! They are much better. Then, there are those who claim that recoveries only last a certain number of years before they expire. Not so! Finally, there are some who claim no recovery has occurred and that the SP500 is only higher because interest rates are so low, i.e. high stock prices are only supported by the Federal Reserve keeping interest rates at historical lows. Definitely, not so! The range of commentary covers a broad spectrum, but remains pessimistic just the same.

Please take a few minutes to read this valuable post.

Income Ideas

 

Many investors are looking for income stocks. Rightly worried about the valuation and downside risk of utilities, they seek alternatives. Some have joined us in buying sound, conservative stocks and writing near-term calls against the position. This can generate an excellent yield and is safer than owning the stocks alone. It is a lot safer than a basket of utilities.

REITs present another alternative. The trick is to find those that have some ability to hold up in the face of interest rate hikes. Brad Thomas has been writing on this topic, presenting several good ideas. This week it is Apple Hospitality (APLE). I have been adding some REITs to the yield portion of our client portfolios. Like Brad, we include analysis from Chuck Carnevale’s F.A.S.T. graphs as part of our research.

David Fish has an interesting article on dividend increases anticipated before the end of the year. There is also a link to his updated list of dividend champions.

Stock Ideas

Lee Jackson writes about three “red-hot chip stocks.” These interesting ideas are based upon a research report from highly-regarded chip analyst Will Stein (SunTrust Robinson Humphrey).

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, with four or five specific ideas that we are also buying. This week Holmes likes Nike (NKE). Check out the post for my own reaction, and more information about the Holmes method.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Dillard’s, Inc. (DDS): Has The Pendulum Swung Too Far? Asks Mitchell Mauer. I especially like to recommend articles that are backed by good analysis. Here you can see both pros and cons. It follows a method that is quite useful in selecting stocks.

Is the selling in Gilead Sciences overdone? Stone Fox Capital notes the falling analyst recommendations despite strong earnings. Should the stock really be trading at a multiple of 6. The net payout (stock buybacks plus dividends) is now almost 18%.

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, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the “lucky versus good” analysis from Jonathan Clements. He writes:

The problem: We typically judge our financial choices by a single, crude yardstick—whether they make or lose us money. But that measure of success or failure can result in faulty feedback that validates bad behavior. Consider three examples……

Check out the whole post for the examples and an excellent lesson.

Millennial Investors

Barron’s introduces a new site aimed at “a new generation of investors.” There is a combination of advice and some stock ideas. I enjoyed the article about why Apple Pay is more secure than a credit card. They also introduce “The Next 50 Index” with stocks geared toward Millennials.

And from another source – this provides some inspiration about our changing habits.

Final Thoughts

There are several points to keep in mind:

  • The market has been resilient in the face of challenges. Look again at the chart. The worrying seasonal predictions have all been wrong – as January goes, sell in May, September as the worst month. We now approach the period of greatest seasonal strength.
  • The earnings recession seems to be at an end. Forward earnings are trending higher.
  • There is no sign of an economic recession – just more of the same slow growth.
  • Consumer confidence is still strong.
  • Energy prices are back in a range where the threat to producers has been reduced and the consumer prices remain modest.

What is needed to spark a change? The biggest item is increased investment by business. Surveys continue to show caution among these leaders, even when their own business is doing well. When there are specific events to worry about, it is easy (and seems wise) to defer decisions.

Acclaimed system developer, author, and hedge fund manager Ralph Vince summarized the situation with a bold call in a post at Daily Speculations:

Regardless of who wins this election, this market is going to rip to the upside — and I can be quite certain of that without even looking at the numbers, just the very tentative nature of nearly everyone around it. I’ve smelled this dish cooking before, and so have a lot of folks on this site.

How is that for a contrarian position?

Weighing the Week Ahead: Has the Market Rotation Begun?

We have normal week for economic data, and a big week for earnings reports. The last Presidential debate will grab headlines. We have been monitoring these factors for weeks, but something new is showing up in the data. Let’s call it a “stealth rotation” from bonds to stocks and from bond substitutes to less favored stocks. If the punditry carefully watches the data, they will be asking:

Has a market rotation begun?

 

Last Week

Last week’s news was pretty good, despite the negative reaction in stocks.

Theme Recap

In my last WTWA, I predicted special attention to the early earnings reports and questions about whether the earnings recession was ending. That was a reasonable guess, although most of the commentary seemed to focus on a couple of big earnings misses. There was also plenty of competition from some surprising China data, the ongoing Fed debate, and of course, the election news.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a negative week. You can see the opening gap on Thursday after the Chinese trade data, and also Friday’s failed rally.

Doug has a special knack for pulling together all of 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 really good. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The Good

  • JOLTS continues to show a solid labor market. Chair Yellen uses it as a signal for a tight labor market. The healthy “quit rate” shows that many people are comfortable in voluntarily leaving jobs. Some reports focused strictly on the number of job openings, which is a poor use of the data.

  • Initial jobless claims also show labor market strength.

  • Retail sales provided the week’s best economic news, rising 0.6%, the best increase in three months. (Bloomberg)
  • Corporate earnings nicely beat expectations. FactSet has some interesting early data – 76% of the reporting companies have beaten earnings expectations and 62% have beaten on sales.

 

The Bad

  • Import container counts are again lower. Steven Hansen (GEI) smooths out the effects of the Hanjin Shipping bankruptcy and finds a troubling trend. Does it portend weak holiday spending? The chart below is the year-over-year change in the three month moving average.

  • Chinese exports and imports both declined more than expected.
  • Q3 GDP estimates edge lower as more data is reported. Calculated Risk summarizes the move from various sources. Here is one example:

  • Michigan consumer sentiment slips to 87.9 in the October preliminary report. Jill Mislinski updates the story and the terrific Doug Short chart combining multiple elements of the story in a single look.

The Ugly

The political sideshow. There were polls to determine the “winner” of the debate. Not so long ago debates were seen as a way for the trailing candidate to show equality of stature – same stage, same rules, etc. Many challengers have used this effectively. It is also a way to demonstrate that a “Presidential” image. If an expert from years ago, without any context, read the transcript of this “town hall forum” debate s/he would not believe it. Campaigns are ever-more focused on the undecided or uncommitted voters, especially in the key states. Suppose for a moment that these voters may not have been the ones sitting at the front of the class. What do we expect the campaigns to do? The sound bite negative ads are one approach, but this is reaching a whole new level – and not a high one.

The most important thing you can do as an investor is to vote your conscience while still using sound, unemotional judgement concerning your personal finances.

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 welcome. I also note that Dr. Ed Yardeni joined us in applauding the Justin Lahart article on CAPE. Dr. Ed provides his own thoughts about market valuation and the advantages of forward earnings.

I am not a fan of valuation measures based on trailing earnings, especially if they trail over the past 10 years. I believe that the stock market is forward looking and discounts analysts’ consensus expectations for earnings over the year ahead. More specifically, I use S&P 500 12-month forward consensus expected operating earnings, which is a time-weighted average of analysts’ expectations for the current year and the coming 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 fairly big week for economic data, as well as earnings reports. I watch everything on the calendar, so you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • Housing starts and building permits (W). Important forward looking data on a crucial sector.
  • Industrial production (M). Volatile September data. Any sign of a rebound from last month’s loss?
  • Fed Beige Book (W). Prepared for the next FOMC meeting, this provides color from each Fed district, going beyond the data.
  • Leading indicators (Th). Widely followed, despite some controversy. Rebound expected from last month’s negative reading.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (Th). Without the impact of new homes, but still a good read on the overall housing market.
  • CPI (T). Inflation is still not very important, and it will not be until there are a few higher months.
  • Philly Fed (Th). Has earned some respect as one of the few regional indicators that can move markets. The first October data.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

More important than the economic data will be continuing earnings news.

Next Week’s Theme

The Presidential campaign and the final debate continue to dominate the news. The regular economic data this week include important leading indicators about housing. These will not get the attention deserved. Corporate earnings reports will also get some attention, but the emphasis seems to be on spectacular “misses.” Did you even realize that the earnings season is positive so far? Unless you look at the FactSet data, you would not know.

Through this haze there have been a few glimmers of a new trend. If you are alert, you will see more attention to the question:

Has a market rotation begun?

There is some evidence.

  • The ten-year note has moved noticeably higher while the yield curve has steepened.
  • Utilities are losing ground while banks are gaining. Brian Gilmartin astutely asks, whether banks are assuming that role.
  • Economic skepticism remains intense – but perhaps the result of the election. Chris Matthews (Fortune) notes that concern about the economy has grown even as data show improvement.

    …a voter’s political beliefs and the overall political environment instead drives how they feel about their economic circumstances.

    There’s no better way to interpret the latest results from the latest Marketplace-Edison Research Poll, which showed that 30% percent of Americans are very fearful they will lose their job in the next six months, up 10% from last year.

And also….

A particularly telling figure in this year’s survey: While 37% of those surveyed said their personal economic situation has improved over the past year—versus 21.5% who said it got worse—just 30.3% said the overall economy improved. What’s more, 36.9% said it got worse.

If more people’s financial situation improved than deteriorated, why do more people think it’s the opposite for the economy in general?

As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also 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.

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 Big Four Update, 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 a number of interesting approaches to asset allocation.

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. This week Georg also updates his unemployment-based indicator, still not signaling a recession as you can see from the chart below.

GEI reports that the ECRI’s growth index remains solid, despite a marginal fall last week. Meanwhile, the ECRI continues its prediction of “stagflation lite” and Fed criticism.

This is a good time to review the St. Louis Financial Stress Index – vastly superior to anecdotes and headlines.

 

How to Use WTWA (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 six 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?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This is the place to get some ideas from the best technical analysis – and you can ask questions!

Top Trading Advice

Brett Steenbarger reminds us that we should always consider what we would be doing if not trading. Is it a good choice? He also highlights an interesting trading contest for women. It leads both to prizes and to job opportunities. While performance is measured, the criteria do not encouraging taking wild shots. You can still apply, but do so right away if interested since the contest has started.

Do you have an edge in your trading? Do you have a tested, trusted system? Adam H. Grimes describes this important first step for traders as well as what they should do next.

If you don’t meet Adam’s tests, you should definitely re-read Dr. Brett’s post!

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 Neal Frankle’s analysis of a client question about real estate versus stocks. In a generic sense, it is a common question faced by nearly everyone. Neal realizes that everyone’s situation differs. Using the couple’s investment goals and time frame, he compares three alternative choices. From this analysis one of the choices is easily eliminated. It is an excellent demonstration of sound contextual analysis. To appreciate the result, you should read the whole post. Here is an intriguing chart:

 

Stock Ideas

Chuck Carnevale’s most recent idea is CVS Health Corporation (CVS). His analysis shows that the stock has moved from overvalued territory to fair value – and with plenty of upside.

Our newest 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, with four or five specific ideas that we are also buying. This week Holmes likes Dexcom (DXCM). Check out the post for my own reaction. And his choice from last week, Air Products and Chemicals (APD), has now been endorsed by Athena. Check out the post to see the other picks, ask questions, and choose your favorite model.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Tom Armistead takes a deep dive into the numbers in his study of IBM. Read his post to see why artificial intelligence is a crucial factor.

Lee Jackson recommends four dividend stocks from the defense sector. And also five contrarian picks with good yield.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the Forbes report on a survey of young adults. It is a good read for young people and for investors wanting to understand current trends.

 

Gil Weinreich continues his excellent series for investment advisers, and of great interest to investors as well. He frequently features ideas about best practices for the advisor community. This week he introduced a new contributor, Neal Frankle. It is this week’s “best investment advice.” (And thanks to Gil for mentioning me along with others in his fine group).

Market Outlook

Mark Hulbert notes the seasonal strength typical of year’s end. Could there be a “monster rally?”

 

Final Thoughts

 

There is a continuing gap between perception and reality when it comes to economic progress and risks. This has translated into extremely defensive investment decisions, emphasizing anything that seems to provide yield. The incessant political accusations have made this worse.

The resulting environment encourages stories – even by unbiased journalists – seizing upon the dramatic. I am seeing the “R word” thrown around much more often, and by people without any special experience or track record.

The developing market rotation is still some weeks away from popular recognition, but there are signs it is getting closer. This Bloomberg interview with Tom Lee is well worth watching. Lee’s market read and forecasts have been excellent for years. He has remained bullish, and for the right reasons. I am encouraged when I see him commenting on the themes that I am also seeing.

One catalyst will be absolute losses in bond mutual funds. Investors are about to learn something important and possibly painful: Bonds and bond substitutes do not come with guarantees.

Weighing the Week Ahead: Is this the End of the “Earnings Recession?”

We face a modest week for economic data. While equity markets remain open, bonds will not trade on Monday (Columbus Day). Yom Kippur begins Tuesday at sundown and extends through the next day. The punditry, fueled by recent revelations as well as Sunday’s debate, will pounce on the election news. With the official start of earnings season on Tuesday and important reports by the end of the week, perhaps we can hope to see a serious market discussion before the week ends. I expect the punditry (eventually) to be asking,

Is the earnings recession over?

Last Week

Last week’s news was very good, although there was little reaction in stocks.

Theme Recap

In my last WTWA, I predicted a shift from the gloomy outlook might be improving as some of the current worries were reduced. That was a good guess for an overall theme. There were quite a few “looking ahead” pieces both on TV and in print. The other news – the election, Brexit, and flash crash news was featured on some days, but it is difficult to plan for that.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a flat week, and stayed within a range of about 1%. CNBC breathlessly noted the “triple digit moves” on several occasions. This is a great illustration of making something out of nothing.

Doug has a special knack for pulling together all of 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.

Personal Note

The market is at a crucial point. It is not a time for sitting on the fence. Next weekend Mrs. OldProf (hometown Green Bay) and I are headed to visit her family in Wisconsin, so maybe I should say not a time for being a “deer in the headlights.” I am planning to write next week, but I can’t be sure. Meanwhile, we have a family fight brewing for tomorrow night, with the Presidential debate at the same time as a football game.

Because of the importance, I put extra effort into this week’s WTWA edition, and I hope it is helpful. People are sometimes bashful about reaching out to us with questions. Please feel free to get in touch via main at newarc dot com.

The News

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

The Good

  • Auto sales beat expectations, up 4.7% to an annualized rate of 17.8M. Calculated Risk puts this into perspective.

  • High-frequency indicators remain strong. New Deal Democrat does an excellent weekly update, which I follow regularly. His latest report shows the strength in both long-leading and short-term indicators. The concurrent indicators are mixed. Reading this post helps to understand why many using less data are more confused about the market.
  • A shortage of truck drivers? A $5000 bonus is available. Another among the many small, unremarked indicators which I follow. (Tyler Cowen)
  • Home prices up 6.2% over last year according to the CoreLogic index. (GEI)
  • Employment reports were generally positive.

  • Jobless claims dropped to 249K.
  • Labor participation increased, while the unemployment rate also increased from 4.9% to 5%.
  • The work week moved higher.
  • Best of all, hourly earnings increased 0.2% over August and 2.6% year-over-year.
  • The median duration of unemployment is down to 10.3 weeks. (WSJ)

  • ISM Non-Manufacturing made a big jump to 57.1, almost 6 points higher than last month and four points higher than expectations.

The Bad

  • Construction spending fell 0.7%.
  • ADP Private Employment gained only 154K, down from 175K in the prior month and missing expectations. This was worse than the “official” private employment estimate.
  • Commercial real estate index stumbles. Calculated Risk tracks this and provides a good update.

 

The Ugly

My original plan was the poll showing that over 40% of potential voters could not name the Vice-Presidential candidates. With the Presidential campaign in a descending spiral and a violent hurricane, my original idea seems lame. There is plenty of ugly news. We can all hope for a better week ahead.

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 Justin Lahart of the Wall Street Journal for his article, Shiller’s Powerful Market Indicator Is Sending a False Signal About Stocks This Time. The article has an excellent discussion of alternative methodologies, including an alternative profit measure that matched the results quite well until 2008. The Shiller CAPE is widely cited as a justification for not owning stocks, but both Prof. Shiller and his co-developer Prof. Harvey do not use it that way themselves. Here is the key conclusion, drawing upon the work of Prof Damodaran the leading expert on corporate valuation:

For New York University finance professor Aswath Damodaran, this is the real sticking point. He set up a spreadsheet to see if there was a way that using the CAPE could boost returns. When the CAPE was high, it put more money into Treasurys and cash, and when it was low it put more into stocks.

He fiddled with it, allowing for different overvaluation and undervaluation thresholds, changing target allocations. And over the past 50-odd years, he couldn’t find a single way he could make CAPE beat a simple buy-and-hold strategy. In the end, he doesn’t think it represents an improvement over using conventional PEs to value stocks.

“This is one of the most oversold, overhyped metrics I’ve ever seen,” says Mr. Damodaran.

Mr. Shiller agrees that the CAPE can’t be used as a market-timing tool, per se. Rather, he thinks that investors should tilt their portfolios away from individual stocks that have high CAPEs. But he says he isn’t ready to modify his CAPE for judging the overall market.

Attacking the most popular excuse for missing the rally is not a popular position. If only more journalists would step up with this kind of investigation.

 

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 modest week for economic data, with some holiday effects included. While I watch everything on the calendar, you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • FOMC minutes (W). Unlikely to provide fresh news, but will still be watched closely.
  • Michigan sentiment (F). Good read on current employment and spending.
  • Retail sales (F). Rebound in store?
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • PPI (F). Not much is expected. This will not be important until we have a few “hot” months.
  • Business inventories (F). August data, but relevant for GDP calculations.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

Other news includes the Presidential debate on Sunday night and the start of earnings season. And of course, near-daily servings of FedSpeak.

Next Week’s Theme

The revelations surrounding the Presidential election campaign are going to dominate the news cycle. Sunday night’s debate will probably fan the flames. With bonds not trading on Monday, stocks will not have that cue. It is possible that these stories will persist, but there is a more important matter: Corporate earnings.

This earnings season could well be a turning point after a long “earnings recession” and a sluggish economy. Stocks have been resilient in the face of bad headlines and seasonal headwinds. Could stronger earnings be the spark for an upside breakout? I expect the pundits to be wondering:

Is this the end of the earnings recession?

There are three basic positions.

  1. Negative. Jim Bianco notes the declining estimates for the quarter and sees parallels to 1987. To be fair, he represents many taking this position. Here is his evidence of the plunging estimates.

  1. Eddy Elfenbein takes a neutral position, noting the trend toward lower earnings. He notes that the picture is much better if you exclude energy.
  2. Brian Gilmartin and FactSet see a possible inflection point. Brian has been the first on this story. Here is his latest analysis. While he is always a good read, it is especially important during earnings season. He provides a lot of analysis on specific stocks. FactSet explains that earnings estimate fall before the season begins, but the final returns beat estimates. Their expectation is that the final reports will break the streak of lower earnings.

The Bianco report seems strange. Surely he knows about the lowered bar and beating expectations. His squiggle chart starts in irrelevant territory and excludes the tail that is obvious in every other quarter. It is difficult for most people to see, exhibiting what I call a high coefficient of obfuscation (TM OldProf). Let us see what really happens. Like 1987? Really?

As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also 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.

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 Big Four Update, 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 a number of interesting approaches to asset allocation.

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. This week Georg also updates his unemployment-based indicator, still not signaling a recession as you can see from the chart below.

Citi does not see a recession either. (HT The Daily Shot)

How to Use WTWA (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 six 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?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This is the place to get some ideas from the best technical analysis – and you can ask questions!

Top Trading Advice

Brett Steenbarger (as I guessed a few weeks ago) is doing another book and will be taking a sabbatical for the month. He provides us two more great posts — an update on his trading model and an interesting measure of “pure sentiment.”

Adam H. Grimes also provokes thought with a post about losing. Few understand that it is part of winning.

 

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 JP Morgan’s wonderful quarterly chart book. Budget fifteen or twenty minutes to page through this carefully. My guess is that you will lose track of time as you enjoy the objective presentation of data. While it is difficult to find favorites, here are two that can have the biggest payoff for investors.

First, do not expect stocks to fall as rates move higher! As long as the starting yield is low, increased rates are associated with better earnings, a better economy, and higher stock prices.

And second, interest rates at the long end are not all about the Fed. Inflation is the key for the ten-year note. The Fed controls the short end. Look at the evidence.

Stock Ideas

When you read Chuck Carnevale’s articles, prepare for a stock idea combined with a great lesson. I am amazed at how well he does this, week after week. Following up on his analysis of Consolidated Edison (ED), he uses the same techniques on Johnson & Johnson (JNJ). Even if you are not one of the many investors who own these stocks, you will learn a great deal from Chuck’s process.

Our newest 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, with four or five specific ideas that we are also buying. This week Holmes likes Air Products and Chemicals (APD). Check out the post to see the other picks, ask questions, and choose your favorite model.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Tech assumes the sector leadership. Jim Picerno has the story.

Energy seems to have stabilized in the range I identified a couple of months ago. Some believe the OPEC deal has provided a floor. This is important as a place for picking up a few beaten-down names as well as the implications for the overall market. I am doing more research on this topic.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is Jonathan Clements’ (MarketWatch) warning about seven key mistakes. Read them all, but here is a sample:

1. Stocks are risky.

Reality: Sure, they’re risky. But the implication — that other investments are less risky — simply isn’t correct. Bonds and cash investments may not offer the rollercoaster ride that you get with stocks. But they leave you vulnerable to inflation, which is arguably an even bigger threat.

Gil Weinreich had another superb post in his series that explores the intersection between clients and advisors. He includes a description of the qualities that an advisor needs:

The ability to listen, question and analyze; professional knowledge and core beliefs; knowledge of what one doesn’t know, or what is unknowable; a positive attitude; peer relationships that would allow the advisor to test the value of his ideas or seek needed advisor; a propensity to share knowledge with others; discipline; sense of responsibility; and sensitivity to others’ pain.

This may seem simple and obvious, but it is very strong and helpful. Many investors ask the wrong questions and many advisors just try to maximize fees with high-profit products.

Morgan Housel has a similar message, explaining why good advice is important.

Watch out for…

Utility stocks. Bespoke shows how rapidly these can fall as interest rates rise.

Dana Lyons agrees. Check out his post to see why this sector is at a crucial point.

And FMD Capital on the “fear trade” falling apart.

Final Thoughts

 

To many investors it may seem like nothing is happening. If you follow our indicators you will see significant changes. Stocks are both safer and more promising and there are signs of sector rotation. What do you think will happen when those invested in bond funds learn that the values do not always rise?

If the “earnings recession” ends, that will accelerate the current change in tone. We all know that seasonality improves as the year nears its end, but no one has a good explanation. Here is my hypothesis:

Market participants start thinking in terms of a multiple of the next year’s earnings!

I know it seems silly, but just watch those commenting or writing. You will see it. They will begin to describe stocks of interest in terms of multiples of 2017 earnings. They will not mention Dr. Shiller’s method of looking at historical earnings. They certainly will not discuss Tobin’s Q. (Imagine: Well, Joe, we analyzed the replacement value for Amazon and found it to be vastly overvalued. We could replace their buildings, their fleet, and their workforce for 15% of their market cap). Or Google, or Facebook, or IBM, or Accenture, or any non-manufacturing company. I have never seen Tobin’s Q cited in the context of valuing a specific stock.

My own method is a constant revision of estimates using a slightly modified CAPE approach to get my own expected multiple. Since I am always looking twelve months ahead, the calendar changes are not important. This is why tracking forward earnings is so important. In particular, we have an opportunity to look for stocks with improving outlooks matching the improving economy.

We are “front-running” the pack in a completely legal fashion.

Weighing the Week Ahead: Time to Look Past the Gloom?

We have a huge week for economic data. The Fed is now on hold until after the election. The election can still go either way. It is easy to find something to worry about. That said, the fourth quarter is usually good for stocks.

Should investors look past the gloom?

Last Week

There was plenty of economic news, and it was generally positive. The election had a lean to Clinton, which the market seems to like, but not a decisive verdict. There were two wild cards – the rumors about an OPEC deal and the concerns about Deutsche Bank. Both introduced day-to-day volatility, but not a lasting effect. The jury remains out on both.

Theme Recap

In my last WTWA, I predicted a focus on the first presidential debate, wondering if this would provide a clear path for investors. That was half right. The debate dominated discussions early in the week and post-mortems continued for a couple of days. There was no clear KO, so the election effects are still in doubt.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a flat week and a rocky path.

Doug has a special knack for pulling together all of 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. You can easily see the whipsaw on the OPEC and Deutsche Bank stories. In a break from recent trends the market traded inversely with oil early in the week before the “OPEC rally.” Some attributed this to the debate. The Deutsche Bank story sent markets lower on Thursday, with many seeing another “Lehman moment.” One day later, the pundits explained why the circumstances were not the same as in 2008. Who really gained from the scary stories on Thursday?

The News

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

The Good

  • Earnings are set to improve. Earnings guru Brian Gilmartin has been on this theme for weeks and adds to the evidence. Dr. Ed Yardeni joins in, suggesting that Q2 was the trough.

  • Congress avoided a government shutdown. The Hill explains how. Are prospects for compromise better?
  • Trucking increased sharply. Calculated Risk has the story.
  • Global activity is stronger. Scott Grannis suggests that stable oil prices might be the reason. Readers may remember that I mentioned the possibility of a “sweet spot” in oil several weeks ago.
  • New home sales were strong, beating expectations and up almost 21% year-over-year. Calculated Risk explains why this is important for the economy.
  • Chemical activity is stronger. I noticed that several sources are now following this data series. Calculated Risk shows the leading quality of the indicator, represented in this chart:

 

The Bad

  • Pending home sales declined 2.4%, missing expectations.
  • Restaurant performance decreased 1% from July. Several sources are citing a “restaurant recession.”
  • Deutsche Bank faces a large fine, possibly requiring more capital. Many worry about effects on other banks. Some hedge funds have reduced trading and maintaining collateral with DB.
  • Durable goods production showed no increase.

 

The Ugly

Potential hacking of US elections. While it is unlikely to change the outcome, it is important that results are perceived as legitimate. (Yes, I have heard of Mayor Daley). Even Nixon accepted the 1960 results. The CFR opines that Congress should warn Russia.

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 I want to highlight Evidence Soup, by Tracy Allison Altman. She definitely has the right idea in her work. This week’s theme of whether immigrants disrupt US employment is both important and timely. She highlights evidence that supposedly disproves this notion, but there is a lot of work in evaluating it. I sympathize with this challenge. What do you think?

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. While I watch everything on the calendar, you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • Employment report (F). Rightly or wrongly, even rather small changes create large reactions.
  • ISM Index (M). Rebound expected in a private indicator with some leading qualities.
  • ADP private employment (W). A strong measure of employment changes, deserving of more respect.
  • Auto sales (M). Private data on an important growth sector.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • ISM Services (W). Not as interesting as the manufacturing index, but only because the series is shorter.
  • Construction spending (M). Important sector, but August data.
  • Trade balance (W). Important part of the GDP calculation for Q3.
  • Factory orders (W). Volatile August data, but an important sector.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

Did you get enough FedSpeak after the FOMC meeting, the press conference, the speeches last week, and the Yellen Congressional testimony? No? If not, you will have several more opportunities to get even more transparency and clarity this week!

Next Week’s Theme

Despite warnings to sell in May, the worst month of August, and the dangers of September, stocks have posted another positive quarter. The fourth quarter is positive over 80% of the time. But wait! To some the list of worries seems more important than usual. The biggest include the following:

  • Election uncertainty
  • Recession chances/economic weakness
  • Length of the bull market
  • Misleading corporate earnings

These factors have most market participants in a gloomy mood. The market resilience this year will have the pundits wondering: Is it time to look past the gloom?

The ever-witty Alan Steel wonders if sentiment is detached from reality.

Yes, and it’s always been that way; the consensus of opinion and the investor herd move in exactly the wrong direction at exactly the wrong time.

That’s because investors rarely focus on anything beyond what they’re hearing and seeing today.

And in the words of our good friend Mike Williams of Genesis Asset Management in Chicago, “It’s not what’s now that matters, it’s what’s next.”

Bill Kort uses actual reader counts to demonstrate the effect of negative headlines – SELL ALL STOCKS!!!. He notes, “The articles I publish with overtly negative titles draw far more readers than those with neutral to modestly negative elements”.

As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also 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.

The recession odds (in nine months) have nudged closer to 10%.

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

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.

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

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

The ECRI has been dropped from our weekly update. It was not so much because of the bad call in 2011, but the stubborn adherence to this position despite plenty of evidence to the contrary. Those interested can still follow them via Doug Short and Jill Mislinski. The ECRI commentary remains relentlessly bearish despite the upturn in their own index.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation.

James Picerno takes up a frequent question about the slope of the yield curve: Is it still relevant given the heavy-handed central bank involvement in the markets. My own thoughts are in the comments.

How to Use WTWA

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 six 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?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This is the place to get some ideas from the best technical analysis – and you can ask questions!

Top Trading Advice

Brett Steenbarger continues to provide a great piece of trading advice every day. It is always difficult to pick a favorite. One of the big trading questions is how much risk to take. How do you decide? Brett writes:

There are risk-averse traders who never make significant money.  There are risk-seeking traders who blow up.  Then there are smart traders who take calculated risks.  They make selective bets.  Like the skilled poker player, they know when they have a good hand and they know how and when to bet that hand.

Related, from Adam H. Grimes – why forecasting volatility is important.

Also – how not to “outthink” yourself when you hit a bad stretch.

Repeat after Bella: ALWAYS have a good entry price!

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 explanation of the difference between a bubble and a cycle.

According to various media sources we now have at least 14 bubbles:

A new real estate bubble.

A bond bubble.

A tech bubble.

A VC bubble.

A startup bubble.

A stock bubble.

A shale oil bubble.

A healthcare bubble.

A dollar bubble.

A college tuition bubble.

A Canadian housing bubble.

A central bank bubble.

A social media bubble.

A China bubble.

One economist recently gave up and just said “Everything’s a bubble.”

At a conference I attended a few years ago, Yale economist Robert Shiller said something amazing: The word “bubble” wasn’t even in the economic lexicon 25 years ago. Not in textbooks, not in papers, not in schools. But now we have bubbles everywhere.

Read the full article for Morgan’s excellent analysis of how to distinguish real bubbles from hype.

Stock Ideas

 

When you read Chuck Carnevale’s articles – and you should – prepare for a stock idea combined with a great lesson. This week Chuck analyzes Consolidated Edison (ED), a popular choice among retirement investors. He explains why valuation is a key to understanding whether it is a sound investment. A few minutes spent with this post and a cup of coffee can save you megabucks!

Abba likes Delta (DAL). We do, too, but we have calls written against the position.

Peter F. Way’s interesting approach highlights current opportunities in chip stocks. As always, he has plenty of ideas, but you need to read the entire post for a full analysis and a list of interesting ideas.

Political commentary on drug prices have put a lid on biotech stocks. Michael Brush (MarketWatch) notes the decrease in such commentary and cites a number of “catalysts around the corner” for the sector. Buyouts ahead?

Our newest trading model, Holmes, has been contributing an idea each week, something we recently bought for clients. I will mention it here, but you can see it sooner (along with other interesting ideas) if you read my new weekly column, the Stock Exchange. I have a “conversation” with disciples of our four trading models. This week we took up the two most popular trader questions:

  1. Technical or fundamental analysis; and
  2. Ginger or Mary Ann

Since each model has a different personality and style, there are often disagreements – especially with me! While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position. This week Holmes added several stocks, including DuPont (DD). See the Stock Exchange for a more complete analysis and ideas from the other experts.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is Tony Isola’s list of “deplorable” investments. I see the ads for many of these and become ill. If there was only some way to help individual investors before they lose a lot of money on an overpriced, illiquid asset. Here is a list of products that provide big fees to those offering them, and significant restrictions on the buyers:

  • Equity-Indexed Annuities – How about an investment with limited upside but large potential for a substantial loss? Throw in a 10% sales charge and no dividend participation (50% of historic market returns) and we have the ingredients for a deplorable retirement scenario.
  • Funds with 12b-1 Fees – Fund size and investment returns are negatively correlated. Investors are paying a fee to brokers designed to increase assets and reduce returns. Kind of like paying a restaurant to give you food poisoning!
  • Proprietary Mutual Funds – This is cross selling at its most heinous. Never buy a mutual fund created by a broker’s employer- this is the ultimate perverse incentive.
  • Non-Traded REITs – A false promise of safety combined with 10% upfront commissions, this is a true sucker’s bet. Just because something is not traded doesn’t mean it cannot go down in value. By the way, their publicly traded cousins have vastly outperformed this group over time, because of greater transparency and lower fees.
  • Commodity Funds – High risk combined with low returns rarely ends well. These products specialize in something called “Contango.” Investor translation: Nearer dated futures’ prices are lower than the longer dated ones, or more commonly known as buy high and sell low, rinse and repeat.
  • Variable Annuities – These are often sold on the pretense of guaranteed income and tax-deferred growth. In reality, very few investors need this product fraught with complexity and egregious fees. These are often placed inappropriately in tax-sheltered accounts; investors do not need both a belt and suspenders.
  • Front-Loaded Mutual Funds – Investors pay a premium of 5.75%, and an additional 1% a year in fund fees to purchase an investment that is almost guaranteed to underperform an unmanaged index fund costing .05%, annually. There is NEVER a reason to pay this fee.
  • Over-Niched ETFs – Healthcare Shares Dermatology and Wound Care ETF and Pure Drone Economy Strategy funds are all that needs to be said. The prosecution rests its case.
  • Hedge Funds – 2% annual fees combined with 20% of yearly profit makes it pretty hard for investors to bring home any type of meaningful positive returns. While there is a small minority of hedge funds that are worth the steep price, they are either closed or have account minimums that rule out everyone except for the Bill Gates’ crowd.
  • Market Linked C.D.s – The ultimate vanilla investment has been hijacked by Wall Street. Unless you enjoy paying a 3% commission and having the possibility of losing principal due to early withdrawal, run away from anyone who approaches you with this nonsense. Purchasing a complicated structure that will underperform your Credit Union’s basic offering is a deplorable choice.

Great work.

Less dramatic but also important is a Morningstar article on how to consider Social Security as part of your retirement planning. For many investors, even those with significant planning and savings, this can play an important role. You need to get it right.

And last but certainly not least in a great week for personal finance readers, check out Gil Weinreich’s three-part series on the issues facing those who “can’t afford retirement”.

Market Outlook

Eddy Elfenbein looks at the tough streak for value investing, and also the recent improvement.

Watch out for…

Overconfident forecasts. Tony Isola explains the dangers in coin-flip market timing strategies and predictions based upon politics.

Pension Partners underscores this advice, highlighting the danger of blindly following a “guru.”

Final Thoughts

 

Concerning the debates, there are three different methods of scoring.

  1. Points on specific issues – the method for formal debates. You look at each issue and determine who got the better.
  2. Technique. This is how we coach. You look for opportunities to insert carefully prepared “blocks.” These have pre-tested language and evidence.
  3. Change of opinion. This is, of course, what ultimately matters.

As someone who has judged hundreds of debates and followed them closely in all presidential elections, I thought that Secretary Clinton did better on point one and decisively better on point two. Being a coach for Mr. Trump would be very frustrating! He really likes to wing it.

That said, there was no knockout blow or major blunder. Voters are not watching this like debate judges. Mr. Trump’s message obviously resonates with many. The polls show a slight move toward Clinton, but the issue is still open with two debates to go.

Recession odds are low. Every week we see wannabee analysts who have no track record. This includes those at big-name firms. Understanding the economic cycle is one of the biggest advantages for the astute investor.

Bull markets (and economic cycles) do not die of old age. This is another great misconception. The odds of four heads in a row is 1/16. What do you think it is after you have already flipped three?

Energy earnings have colored overall results. We need to look forward.

The current market worries are no worse than ever. For perspective, look back at how negative everyone was when people criticized me for suggesting Dow 20K.

A list of negative headlines does not represent fundamental analysis. TV know-it-alls “explaining” yesterday’s news provide no edge. The best investments come from recognizing and ignoring bogus advice.