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

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

Will Trump policies extend the business cycle?

 

Last Week

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

Theme Recap

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

The Story in One Chart

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

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

The News

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

This week’s news was mostly positive.

The Good

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

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

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

 

The Bad

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

The Ugly

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

 

The Silver Bullet

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

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

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

The Week Ahead

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

The Calendar

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

The “A” List

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

The “B” List

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

     

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

Next Week’s Theme

 

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

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

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

Will Trump Policies Extend the Business Cycle?

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

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

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

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

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

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

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

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

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

 

The Featured Sources:

 

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

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

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

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

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

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

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

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

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

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

Top Trading Advice

 

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

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

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

Insight for Investors

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

Best of the Week

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

 

Stock Ideas

 

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

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

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

 

Seeking yield?

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

 

 

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. The piece about the importance of a will is great. I liked the one helping you teach kids about money. (I tried to do this with poker chips, and you can guess the ending). My favorite was gender control over family finances. Do you think it matters who is earning more? (Hint: Mrs. OldProf regards it as completely irrelevant).

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

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

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

Watch out for…

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

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

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

 

And more on value investing

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

Final Thoughts

 

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

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

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

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

Investing Conclusion

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

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

Weighing the Week Ahead: Trump V. Yellen Round One

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

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

Trump v. Yellen, round one.

Last Week

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

Theme Recap

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

The Story in One Chart

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

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

The News

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

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

The Good

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

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

 

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

The Bad

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

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

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

The Ugly

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

 

The Silver Bullet

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


The Week Ahead

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

The Calendar

We have a normal week for economic data.

The “A” List

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

The “B” List

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

     

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

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

Next Week’s Theme

 

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

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

Trump v. Yellen, Round One

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

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

Here is what Yellen might do.

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

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

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

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

 

The Featured Sources:

 

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

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

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

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

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

Georg Vrba: The Business Cycle Indicator and much more.Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. The most recent update is for the Business Cycle Indicator.

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

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

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

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

Top Trading Advice

 

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

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

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

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

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be this post from Seeking Alpha Editor Gil Weinreich, Are Bonds Bad? How about Funds? He cites Evan Power’s analysis of the current retirement risks, responding to a Kiplinger article that retirement was now 10 times riskier.

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

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

Stock Ideas

 

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

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

 

Seeking yield?

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

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

Portfolio Management

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

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. This week may be the finest entry in a long series. I strongly recommend a look at the great links cited. Look at all the posts on the fiduciary rule. The average investor needs to understand who is selling and who is acting in his interest. For retirees or near-retirees, the Michael Kitces post is very valuable. Most people do not think about the priority of various retirement needs, but they should!

 

Thinking about Social Security?

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

 

Watch out for…

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

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

And more on value investing

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

 

Final Thoughts

 

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

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

What about the Fed?

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

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

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

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

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

Weighing the Week Ahead: Is Market Optimism Justified?

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

Is the market optimism justified?

Last Week

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

Theme Recap

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

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes that the week’s gain was all from early action on Friday. Some attributed this to the employment report, but the timing is more consistent with a reaction to Trump actions on Dodd-Frank.

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

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

Some Super Bowl Fun with Two Hidden Lessons

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

And here is the recommended interpretation:

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

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

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

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

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

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

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

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

The News

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

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

The Good

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

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

     

The Bad

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

 

The Ugly

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

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

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

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

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. Jacob Wolinsky has a terrific review of Harry Dent predictions. Here is one of the most dramatic, from just a year ago.

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

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

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


The Week Ahead

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

The Calendar

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

The “A” List

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

The “B” List

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

     

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

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

Next Week’s Theme

 

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

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

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

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

Is market optimism justified?

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

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

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

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

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

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

The Featured Sources:

 

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

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

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

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

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

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

Georg Vrba: The Business Cycle Indicator and much more.Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal.

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

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. All our models are now fully invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). We try to have fun, but there are always fresh ideas. Last week Holmes made a timely call on Macy’s (M). Many of the stocks cited are worth your consideration.

Top Trading Advice

 

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

Ralph Vince has a warning about Trump Effects:

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

Nearly everyone I speak to is looking for three things:

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

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

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

 

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Davidson (via Todd Sullivan), who pulls together economic data and conclusions in his explanation of why stronger Employment Reports Indicate Higher Equity Markets.He includes several important indicators, emphasizing the need to look at several. This illustrates the right way to do financial research. He writes:

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

 

Stock Ideas

 

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

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, including four or five specific ideas that we are buying. This week the dip-buying Holmes (who has been very hot) liked Macy’s (M). That worked well for those who did their own research and agreed.

Seeking yield?

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

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. My personal favorites this week are two entries I see as related. Josh Brown points out the opportunity for young people to start saving and investing, enjoying compound interest. Tony Isola shows the flip side – the cost of an impulsive purchase paid off on a credit card. This is a great lesson!

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest has quickly become a must-read for financial professionals. Somewhat to my surprise, the topics are also especially relevant for active individual investors. They frequently join in the comments, adding to the value of the posts for both groups. Gil has several good topics, but I especially liked this discussion of the fiduciary rule. Most people do not understand what this means, and what is at stake. I strongly support Gil’s argument.

Watch out for…

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

BDC’s. BDC Buzz has the story.

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

Final Thoughts

 

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

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

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

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

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

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