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.

Stock Exchange: BBD, TAN, FSLR, APD, and AAP All Deserve Consideration

Technical stock analysts are a rich source of new stock ideas. Those charts always suggesting something. Our trading models each specialize in a different time frame and level of risk. Each week Felix and Oscar host a poker game. We listen in on current trading ideas in the few minutes beforehand. They like to call this their “Stock Exchange.” I am the only human present, and the only one using fundamental analysis.

Their methods are excellent, as you will learn if you follow us for a few weeks. The entire group had a winning call on energy three weeks ago, without any from the fundamentals.

Do the markets predict future events? Or should you use fundamentals to predict the markets?

That is the ongoing debate at the Stock Exchange.

This Week’s Ideas

Our technical experts have varying ideas this week. As usual, I am skeptical, but let us give each of them a chance.

Felix

I look for long-term themes, and I have a great one this week. I see a great chart for Banco Bradesco (BBD). The YTD is strong and steady. Brazil is as tumultuous as ever, except this time they might be improving their banking system.

[Jeff] How do you know about bank reform? Have you been fraternizing with those foreign models again?

[Felix] Would you believe it is just a conclusion from the chart?

[Jeff] Also, the CEO is under indictment for tax fraud.

[Felix] The chart tells you that the company and the market have moved past that issue. Take a look.

 

[Felix] I also had more questions for this week’s post! I thank my fans, and I am happy to answer.

Richjoy403 of SeekingAlpha asks:

 

I’ve wrestled myself to a draw regarding my 4.5 year position in RDS.B (i.e., I can make about equally strong bull and bear arguments). I’m asking how your models and yourself view it?

 

As usual, I answered through Jeff Miller, who could not resist adding his own comment.

 

RDS.B in the top half of our 700 stock universe. I think there are better energy plays right now. I’ll write something more on that when I have finished some research.

 

Another question from Seeking Alpha’s dls680:

 

Jeff – Love your work! Since you asked for questions about specific stocks or sectors I’d like to throw a question out to you (and Felix, since you describe him as an investor who thinks long term) about Wells Fargo.

WFC is technically breaking down while at the same time the bank sector looks like it might be entering an uptrend. I know you’ve liked the Bank sector right along, so what would you say to a long term holder about continuing to hold WFC for the long term?

 

Jeff Miller and I responded:

 

Felix does not like WFC at all. We own it as part of our enhanced yield program, which means dividends and writing calls against the position. For long-term investing I prefer regional banks like STI.

Thanks for the kind words and for joining in our discussion.

 

[Felix] Please keep your questions coming. I could use the overtime pay.

Oscar

It’s been a tough month for Odell Beckham Jr. In a stark contrast to last year’s superstar performance, he’s slumped his way through the first 4 weeks of the NFL season without a single touchdown. However, sharp eyed analysts see Sunday night’s matchup against the Green Bay Packers as a chance to get back on track.

What we’re really talking about here, of course, is mean reversion. When you have a promising player who is underperforming, you don’t expect them to flame out entirely. You’re looking for the big comeback game!

[Jeff] Do you have some stock advice here?

[Oscar] Of course! I was just explaining how you should look at stocks. Take a look at the Guggenheim Solar ETF (TAN). It’s been a rough year to be sure, but I can’t possibly imagine this sector limping along at $20 indefinitely.

First Solar (FSLR) is one of the key holdings in TAN as well as in our custom sector basket. It is a great example. We’re starting to see rebounds here after a possibly overdone correction in early August. I’m expecting to see significant gains over the next 4 week period.

[Jeff] Your pick this week is also attracting some fundamental analysts, including this one on Seeking Alpha, who calls FSLR a “unique value and growth play.”

[Oscar] What does he think about the Cubs?

[Jeff] You are incorrigible! Let’s see what Holmes has for us this week.

Holmes

Oscar is looking for a rebound in his pick, but I am the rebounding specialist. Air Products and Chemicals (APD) came of its recent high of 145.72, and went straight down 7 straight sessions before bottoming and starting a nice little zig zag run up and to the right. That is a stock with rebound potential! I would look for this stock to get back to its highs with a downside stop at 133.75.

[Jeff] it is a bit over-valued, but it does have a 2.5% yield. To get the rebound you expect you will need yield seekers who are not that sensitive to valuation.

[Holmes] There are plenty of those folks around!

Athena

I have a great choice this week, Advance Auto Parts (AAP). This one’s been in the doghouse following an 18% drop last November, but I’m predicting an upside here.

[Jeff] Even after the drop, the stock is still overvalued by 30% or so according to Chuck Carnevale’s first-rate methods.

[Athena] I am sure that Mr. Carnevale is very nice, but my wisdom has been accurate for many centuries.

[Jeff] It might be a bit out of date. I have been looking for some guests to help keep this group in line. Perhaps we can persuade him to visit.

[Athena] That would be fine. I am always willing to share my wisdom.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You are allowed to choose me, although my feelings will not be hurt very much if you prefer one of the models).

Cast of Characters

Felix is fussy, precise, and very cautious. He looks for what is working, but it also must have upside potential. He is an investor who thinks long term. Felix will not usually announce new picks, but he will answer questions, saying what he thinks about specific stocks. He will also comment on favorite themes and sectors.

Oscar is naturally optimistic and a bit excitable. He definitely likes to go with winners, and focuses on a one-month time frame. He trades either sector ETFs, or a basket of stocks (equally weighted) that reflect a sector. Oscar will mention a favorite sector each week, and will also answer questions about sectors.

Holmes is a trader, but a cautious one. Holmes emphasizes asset protection through profit taking, stops, and trailing stops. He is careful in selecting new positions, and generally looks at an intermediate time frame. While he does not know the definition of “mean reversion” he loves rebounds! There is no set holding period, but two or three months is not unusual. Holmes will tell us one stock recommended that week. For those who sign up for his email list (no charge, privacy respected, holmes at newarc dot com) he will report exits with a one-day delay.

Athena trades more frequently than the others, but still limits risk. Her inspiration helps to find good ideas. Her excellent quant skills find attractive risk/reward opportunities. Her wisdom leads her to exit trades that are not working. Athena will provide a new idea each week.

Jeff usually has some comments about stock or market fundamentals. Unlike the other witty participants, he sounds like an old prof.

An Important Note to Readers – from Jeff

All of the characters (except me!) are models, carefully engineered and tested by one of the leading developers of the last thirty years. I humanize them to make it easier to understand the characteristics in their design. I always remind readers that my posts are informational, not investment advice, and that is especially true here. While we are trading based upon all four models, we are always watching and can act quickly when necessary. The models are not suitable for all investors. If you like the approach, reach out to us (info at newarc dot com) and we will provide more information.

The conversation is light-hearted, but the stock analysis is serious. We own positions in each of the stocks mentioned.

Finding great stock picks need not be boring. Please enjoy the banter and join in.

Weighing the Week Ahead: Will Election News Change the Course of Markets?

The calendar has a lot of data, but the FOMC meeting is over. The market waits for the next big event. We will soon have another jobs report, but Monday’s presidential debate overshadows the other news. The news cycles this week will be all about the election, and the financial press will be no different. Should investors use this news to change course?

Last WeekThere was plenty of economic news, and it was another mixed picture. The FOMC decision dominated.

Theme RecapIn my last WTWA, I predicted a focus on bonds, especially at the long end. That proved to be one of my worst theme forecasts. While interest rates figured prominently in the discussions, the Fed commentary quashed the selloff in the long bond. The ten-year note rates finished a bit lower than last week.

The Story in One ChartI always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a good, three-day rally. Doug attributes this to central bank policy – no rate increase from the Fed and the B of J.

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 NewsEach 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

  • FOMC held rates constant with a hint of increases to come. Whether or not you agree with the decision, the market seemed to celebrate. This is despite the reduction by the Fed in estimates for the long-term growth rate. The market continues to applaud stimulus over results.

(click to enlarge)

  • Building permits increased by 3.7%. This is a good leading indicator for housing.
  • Global steel production is again positive.

(click to enlarge)

The Bad

(click to enlarge)

The Ugly

More violence. Talks have broken down in Syria, leaving the two million residents of Aleppo without water (The Guardian). Continuing incidents, tensions, and protests involving U.S. police and assorted bombings. It is not as if leaders were not trying. The U.S. and Russia have joined to back talks in Syria.

Chicago’s homicide rate is much higher.

(click to enlarge)

The TSA, much maligned last summer, collects hundreds of weapons each week, before they get into the aircraft cabin. Here is a typical haul of firearms. Read the entire post to see the other creative weapons.

(click to enlarge)

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 always 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 economic data, setting up for some important reports at the start of October. While personally I watch everything on the calendar, you do not need to! I highlight only the most important items in WTWA. Focus is essential.

The “A” List

  • Personal income and spending (NYSE:F). Can the recent strength continue?
  • New home sales (NYSE:M). A decrease is expected, but how much?
  • Michigan sentiment . An important concurrent indicator for employment and spending. Is there an election effect?
  • Consumer confidence . See Michigan sentiment. This is almost as good and usually correlated.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Pending home sales (Th). Not as important for the economy as new homes, but still a good read on the market.
  • Chicago PMI . The most important of the regional indexes, especially when released on the Friday before the ISM index.
  • Durable goods orders (NYSE:W). Highly volatile August data with a big monthly decline expected. Any chance of an upside surprise?
  • Core PCE prices . The Fed’s favorite inflation indicator, so it is worth watching.
  • GDP third estimate (Th). Few are interested in the final revision (before later benchmarking) of Q2 GDP, but this is what goes into the books.
  • Crude inventories . Often has a significant impact on oil markets, a focal point for traders of everything.

The first Presidential debate will be a news highlight with markets paying attention. FedSpeak is back in full swing. Chair Yellen testifies on Wednesday before a House committee on bank supervision.

Next Week’s Theme

Most investors would prefer to tune this out, but we can no longer avoid it. The polls have tightened. We are on the eve of the first of three Presidential debates. It is expected to attract more viewers than the Super Bowl. Debates are always important, but this time is really special. The debate will provide a focus for the news cycle, including the financial media. I expect that everyone will be asking: Should the election news cause investors to change course?

Please note that this is not a post with political advocacy. Everyone should vote as they choose, and for whatever reason. That said, it is important for investors to understand what is anticipated by markets, and the likely result if things change. I have worked to find articles that reflect a mainstream viewpoint. As always, I welcome alternative suggestions.

We have three key questions. Out of hundreds of posts on these topics, here are a few that are good. Think of it as a starting point.

  1. Who will win? Nate Silver, whose methods have done well, gives Clinton a chance of about 60%. Larry J. Sabato now has Trump leading in the Electoral College.
  2. What actions might result?
    1. Paul Ryan should know. He sees changes in tax policy, regulation, entitlements, and anti-poverty programs.
    2. Economist Mark Thoma warns about problems in taxes, spending and economic growth.
    3. Niall McCarthy (via GEI and Statista) has something of a mainstream viewpoint, citing Moody’s. Whether you agree with these conclusions or not, it probably reflects the current street expectations. Also see Nanette Jacobson of the Hartford Funds.
  3. Will Congress agree? Important, but little good work.

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. This week Dwaine does a detailed indicator review, concluding:

These are just a few indicators in a battery of twenty-one that we examine, and whilst there are no alarm bells yet, the aggregate composite of all 21 indicators shows the US economy the most vulnerable to exogenous shock since this expansion started:

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 – 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. 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. Do you have a regular performance review? What does it include? Dr. Brett explains how to improve your trading from this process. He also has a great post on why creativity is important for traders. My guess is that most traders have not even thought about this question. Here’s why you should:

I recall speaking with a successful trader who told me that he was excited about the opportunity in the marketplace. I responded by saying that he was the first person I’d spoken with to tell me that. Everyone else was lamenting the lack of opportunity in markets. He said, “That’s right. I’ve always made my money going against the consensus!” That was shortly before the events of Brexit. That trader was able to capitalize on opportunity because he not only saw the world differently, but experienced it differently.

Adam H. Grimes also takes up the need for creativity and how to accomplish it. He draws upon his experience as a musician, and includes some other great examples for his proposed five steps.

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 analysis of risk by Michael Kitces. His informative blog is aimed at financial advisors and most of us read it religiously. A look at what your advisor is (or should be) thinking about is information you might not normally see. If you manage your own investments, it will give you some helpful ideas. Michael explains the difference between risk tolerance, risk capacity, and risk perceptions. Many people do not understand how much risk is needed to achieve their performance goals. Good planning is essential. He also notes:

The key point is that if perceptions are (or become) misaligned with reality, investors may engage in “surprising” behavior that seems inconsistent with their risk tolerance. For instance, an individual who is highly risk tolerant, but has the (mis-)perception that a calamitous economic event will cause the market to crash to zero, might still want to sell everything and go to cash. Even though he/she is tolerant of risk, no one wants to own an investment going to zero! In addition, the research suggests that some people may have better risk composure than others; in other words, some investors can keep their composure and maintain a consistent perception of the potential risks around them, while others have risk perceptions that are more likely to move wildly.

Another good treatment of risk comes from Seeking Alpha Senior Editor Gil Weinreich. He regularly raises good questions affecting both advisors and individual investors. His discussion of investment goals and risks highlights Eric Nelson, who cites the current fixed income risk to retirees:

Unfortunately, many people still invest as if bonds are priced to return 6% to 8% per year or more going forward. We continue to see significant inflows into bond funds and ETFs as well as balanced funds with a considerable allocation to longer-term bonds. These decisions are especially risky for retirees, whose greatest investment risk entails holding too much of their portfolio in assets that won’t produce an acceptable long-term return, such as low-returning bonds.

Stock Ideas

Chuck Carnevale continues his analysis of high-quality dividend stocks, searching for those that are fairly valued. His discussion of Flowers Foods, Inc. analyzes the stock and also provides an important lesson.

David Van Knapp analyzes which of the “dividend contenders” might be at risk.

Eddy Elfenbein has a great annual stock list and frequent updates about those stocks and the overall market. His clever commentary is appreciated by all, including those who follow him on Twitter. This week he launched an ETF (CWS after the name of his blog, Crossing Wall Street). The ETF will hold his recommended stocks, which you can buy without making twenty different trades. The news is explained in this interview with Abnormal Returns. I also enjoyed this Bloomberg interview, which also includes some of Eddy’s stock picks.

Peter F. Way’s approach measures the hedging used by big-money players. This week he calls attention to biotech stocks finding 70 that are attractive to institutional investors.

Infrastructure stocks are poised to gain no matter who wins the election. Barron’s interviews Jamie Cook, a top-ranked CSFB analyst. Knowledgeable investors can probably guess some of her key picks.

(click to enlarge)

Our newest trading model, Holmes, has been contributing an idea each week, something we bought for clients a few days ago. 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. Since each 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 may 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 CVS. 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 several great choices worth reading. My personal favorite is (once again) our winner of the “best of the week” honor (see above). I also liked the “secret to a good marriage” from Suzanne Woolley. Hint: This is a financial secret. How much is it OK to spend without talking with your partner? Answer for yourself before reading the article, which is both entertaining and quite important. (For guys, I advise not learning the cost of salons and something called a Mani Pedi. Mrs. Old Prof informs me that men also get Mani Pedi’s and I am hopelessly out of date. She does, however have ideas about the appropriate spending limits. The ratio is about 5:1).

Market Outlook

Josh Brown, who expertly helps individual investors by revealing behavior of some pros, highlights the importance of the “career risk trade.” Many managers are chasing the returns from the last twelve months.

Watch out for…

A bond bubble? Jim Cielinski looks at persistent buying despite valuations. He identifies four elements and produces this interesting graphic.

(click to enlarge)

Final Thoughts

I have an answer for each of the three questions. On a personal note, this is a sweet spot for me. Given my combination of skills – top college debater, coach of the Michigan team, political scientist, and student of presidential debates — this is a good topic for me. For most of these debates the expert commentators on TV were my colleagues as coaches and judges, from back in the day. Mrs. OldProf was originally amazed that they echoed my comments. Then she came to expect it!

  1. Who will win remains in doubt, but the first debate will be crucial. It could represent a change in what is important. Most presidential debates have emphasized short sound bites to convey a message, regardless of the question. That is what the coaches teach: Get your message in there! Incorrect statements of fact have been pounced upon as gaffes. There is a long history. There is also an equalizing effect. Both candidates are on the same platform. The visual and emotional impact may be as important as the substance. One observer even suggested that we should watch with the sound off. (That would facilitate watching Monday Night Football at the same time).
  2. Both candidates want to spend on infrastructure, which will be an economic stimulus. This will require compromise with Congress. Ostensibly a Republican would have an advantage, but there is dissension in the ranks. Initial decisions will include some executive orders, so there could be an immediate effect on health care and immigration.
  3. The dynamic with Congress will be crucial. A new president needs to forge some compromises on spending, tax reform, trade, foreign policy, health care, and defense. Without knowing the Congressional results this is nearly impossible to predict.

Not on the list of question — I expect a progression of reduced uncertainty.

  1. This week we’ll have more definition of the outcome.
  2. After the election we’ll know more about Congress.
  3. After a few months we’ll have more sense of the dynamics and the potential for compromise.

Political uncertainty has limited economic growth, earnings and stock prices. As the uncertainty is resolved, all will improve.

Weighing the Week Ahead: Should We Fear the Fed?

The calendar has little important data. Friday’s sharp selling was widely attributed to the fear of a Fed rate hike in September. Is it time? Should we fear the Fed?

Last Week

There was not much news, and it was another mixed picture.

Theme Recap

In my last WTWA, I predicted a continuing discussion of the Fed and the timing of the first rate increase, combined with concern over a September market correction. The first part was pretty accurate all week, but the market remained quiet. The modest trading range ended spectacularly on Friday., The “C” word is now on the lips of many.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. The overall range, once again, is very narrow. Doug’s take is that Friday was all about the Fed. He writes as follows:

Today’s action essentially confirms the metaphor of an equity market infant nursing on mother Fed’s breast. The selloff was triggered initially by hawkish remarks by the normally dovish Boston Fed President Eric Rosengren, a voting member of the FOMC. But more surprising was the announcement of an unannounced speech by even more dovish Lael Brainard at the open of the FOMC week, which runs counter to the general policy a silent Fed prior to the FOMC meeting end.

As you will see in today’s “Final Thought,” I have a very different interpretation, still consistent with the data.

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 and several other charts providing long-term perspective.

A Two-Question Quiz

  1. The recent Purchasing managers index for manufacturing recently registered 49.4. Last week’s “services” index came in at 51.4. Each data series has a long-term relationship with GDP. Which of these reports implies the higher rate of economic growth? Which one implies an impending recession? [See conclusion for the answer.]
  2. Suppose you are in an NFL “survivor” pool. You just need to pick a team that will not lose that week. No point spread. What are your odds of making it through two weeks? You may pick the biggest favorite each week.

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

  • Initial jobless claims fell to 259K, down from the prior week and continuing recent low levels.
  • The Beige Book was mildly positive, providing support for the modest growth scenario.
  • Framing lumber prices remain strong. (Calculated Risk).
  • Sentiment remains bullish. Dana Lyons looks at the ISE Call/Put ratio to refute the idea of a “frothy” market.

  • Durable goods orders had a solid rebound from earlier weakness, increasing 4.4%
  • The JOLTS report registered a new high in job openings and continued strength reflected in the quit rate. This shows the number of people voluntarily leaving their jobs. Josh Brown has a good discussion of this point. The labor market structure from the report is less encouraging. The ratio of unemployment to job vacancies confirms non-recessionary conditions, but also a mismatch between available jobs and workers. (Simple explanation here. Also a good chart via The Daily Shot).

The Bad

  • Employment benchmark revisions showed a decrease of 150K jobs over a one-year period ending last March (BLS). While this is a preliminary report, it is usually a good estimate of what we will see in the actual revisions this coming March. Essentially, this means that the job growth over the one-year period ending last March was over-estimated by 150K jobs, described as 0.1% of the labor force. It is a much larger percentage of the reported net job growth. I frequently cite this report as the most accurate count, but one that arrives too late to be of interest to those in the news and financial communities. If you missed my challenging quiz on the employment report, please take a look.
  • Rail traffic had another bad week. Steven Hansen (GEI) reports on the 5.7% decline for the month of August.
  • ISM non-manufacturing dropped to 51.4. As Bespoke notes, this was the biggest monthly decline since 2008.

Here is some color from the actual report:

WHAT RESPONDENTS ARE SAYING …

“Relatively stable August, with no sharp increase or decrease in sales or pricing. Labor availability and cost remains a very high focal point.” (Accommodation & Food Services)

“Overall, the oil and gas industry remain in [a] ‘wait and watch’ mode. The price of oil has impacted investment considerably.” (Construction)

“No significant changes to report. Still on track for expansion efforts to begin fourth quarter 2016.” (Finance & Insurance)

“Still recovering from the current downturn in the renewable energy market which is expected to pick up in the fourth quarter.” (Professional, Scientific & Technical Services)

“Stable with some increase in construction activity.” (Public Administration)

“The business environment has softened a bit over the last month. There are now opportunities to fill in the marketplace.” (Retail Trade)

“Midyear [is a] slow time for us, summer build is over, fall is historically light, holiday peak build September and October for peak time November and December.” (Transportation & Warehousing)

“Good, but slowing from previous months.” (Wholesale Trade)

 

The Ugly

North Korea is a multiple winner of my “ugly” award. The recent nuclear test is viewed as completely unacceptable by most of the world. Can leaders find an action that peacefully accomplishes widespread objectives? Will those having the most influence over N. Korea cooperate? These are important questions, beyond our normal concerns over investments.

Jonathan D. Pollack (Brookings) has a good explanation of why the recent test is different and more threatening than those in the past.

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 Wisconsin economist Menzie Chinn, who earned a belt full of bullets in a single article. The context is a post for a class in economics. Since so many current financial commentators take pride in not having taken Economics 101, it is a great illustration of why they are wrong! So many mistakes of this sort are made by financial pundits, including intentional misrepresentations. Prof. Chinn illustrates one of the most frequent errors – not using log scales in charts when they are appropriate. Note the deception it would generate in this example, which actually shows a constant rate of increase.

He also debunks the data conspiracy stories, using several links and good explanations. This post might be the single most profitable thing for investors to read this week.

 

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 another light week for economic data. While personally I watch everything on the calendar, you do not need to! I highlight only the most important items in WTWA. Focus is essential.

The “A” List

  • Retail sales (T). The biggest report of the week. The odds of a rate hike will increase if this is positive.
  • Michigan sentiment (F). Consumer confidence has been strong, helping to support the stock market.
  • Initial claims (Th). The best concurrent indicator for employment trends. Quiet strength is the long-term trend, so a spike would be worrisome.

The “B” List

  • Industrial production (Th). Volatile data with a big gain last month. Not much is expected, but this remains important.
  • CPI (F). Still not important, but this number will start to approach the Fed’s 2% inflation target as year-over-year gasoline prices stabilize.
  • PPI (Th). See CPI above.
  • Business inventories (Th). July data, but it is another piece in the Q2 GDP puzzle.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

FedSpeak will enter the pre-meeting blackout period after Monday. Fed Governor Lael Brainard has been dovish, so her Monday presentation will get plenty of attention.

Next Week’s Theme

Last week brought us more quiet for the first part of the abbreviated week. Friday was a very different story. The sharp decline, ending a two-month string of quiet days, commanded attention. What was going on?

The instant conclusion was fear of a September rate increase from the Fed. That sets the tone for next week. Everyone will be asking: Should we fear the Fed?

Normally I recommend spending very little time on yesterday’s news. As I wrote a few months ago, investors do not get paid for this knowledge – only pundits who get to sound smart after the fact!

This week is a bit different. Having a good sense about what happened Friday is important to our advance preparation. Here is an abbreviated sequence of events:

  • Stock futures were set up for a flat opening, just as we had seen all week.
  • Boston Fed President Eric Rosengren, repeating a speech made in August, stated that gradually removing accommodation was the best way to extend the duration of the recovery. The Boston Globe states that this pushed the Dow 400 points lower.
  • Stock futures moved lower by about ½ of one percent when the speech was reported.
  • Since markets are not expecting a September rate increase, and only a 60% chance of one before the end of the year, the original move attracted a lot of discussion.
  • When the Dow declined a little more, CNBC started running the headline that Fed fears were slamming stocks.
  • Several commentators cited the possible end of the Fed support for asset prices. Art Cashin fed the fire, noting in mid-afternoon that if stocks were down 300 on just the hint, an actual increase might take them down 1000.

You will see plenty of commentary on these themes. Feel free to add your own thoughts in the comments, including anything I have missed.

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 risk first, reward second. 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.

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.

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.

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. This week he further explains the possible turning point in earnings. Most people will not understand this until it is too late to profit.

 

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 – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year 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 or suggestions for new topics.)

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.

Top Trading Advice

Brett Steenbarger is posting many great ideas. Traders should make a daily visit. I sense another book coming! My favorite this week is How to Extract Greater Profits from Our Trading.

If we don’t see the market gain a second wind after our having made an initial entry, the conditional probabilities of getting the move in the other direction continue to increase.  We are getting further confirmation that buyers can push the market no higher or sellers can push prices no lower.  It is when we see that our initial position is not getting torched and subsequent market behavior is in line with our thesis that we can add a second unit of risk to the trade.  We extract more from our trading by being largest when we’re “rightest” and smallest when we’re wrong.

Dr. Brett is also helping with the psychological aspects of your trading – Three Trading Techniques for Building Positive Trading Patterns.

Paul Tudor Jones: Decide on your stop point before you enter a trade. Finance Trends discusses this and some other advice from the great trader. Holmes is barking approvingly.

Another piece of advance preparation is asking yourself whether the prospective trade really has enough edge. Don’t forget to keep the volatility of expected results in mind! Adam H. Grimes takes up this question and provides links to some prior related work.

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 WSJ warning about “structured CD’s.” (subscription required, but you can find it if you Google the title). Many unwitting investors are biting on a pitch that you can double your money in six years with no risk. Some of those needing early access to funds actually lose money on the CD. Performance data are not available for this product, unregulated by the SEC. The WSJ managed to get some results, and they are abysmal.

Stock Ideas

Chuck Carnevale has some good lessons about how to select dividend stocks. For the buy-and-hold income investor he seeks continuity of the dividend as well as limited volatility in the underlying stock. His analysis is rich with stock ideas — some to consider and some to avoid. I hope DIY stock-pickers are reading Chuck’s stories closely. It is important to learn technique and analysis, not just follow someone else’s stock picks.

Abba – no not ABBA – likes T. Rowe Price (TROW). His analysis is based upon a dividend valuation model. I also like the stock, but we write calls against the position to enhance yield.

Market Folly monitors the moves of big investors with good attention to the most recent moves. Warren Buffett now has nearly 80 million shares of Phillips 66 (PSX).

Ready for some biotech stocks? Bret Jensen serves up regular ideas in his forum. His most recent update includes a key stock in the news, Valeant (VRX), which we own as a trade for technical reasons.

Our newest trading model, Holmes, has been contributing an idea each week, a stock we bought for clients a few days ago. I will mention it here, but you can see it a little sooner if you read my new weekly column. I’ll have a “conversation” each week with all three of our models. Since each 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 may be a starting point for your own research. Holmes may exit a position at any time, and I am not going to do a special post on each occasion. If you want more information about Holmes and exits, just sign up via holmes at newarc dot com and you will get email updates. This week’s Holmes added several stocks, including Cardinal Health Care (CAH).

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. This was a really great post. There are several great choices worth reading, including my pick for best advice of the week. My personal favorite is the timely and entertaining advice from Tim Maurer, How Fantasy Ruins Football (and Investing). He discusses several popular financial fantasies. He writes:

Fantasy: Gold is a good hedge against inflation. (Or a good hedge against currency risk, or a good investment. Just take your pick.)

Truth: Of the many traits often attributed to gold as an investment, the only one that really holds up is that the precious metal historically has risen in price when stocks are in deep decline. People tend to buy gold when they are scared (and sell it when they aren’t). But good luck shaving off some of your bullion for bread when The Hunger Games start (or when any dystopian tween books series becomes a reality).

Felix disagrees. That is what makes a market!

I also really liked Ben Carlson’s list of things he learned in his 30’s, especially numbers 9 and 10 (negotiating and saving).

Gil Weinreich of Seeking Alpha takes a helpful look at the “retirement crisis.” There is plenty of good advice. Gil’s series is aimed at investment advisors, but has also attracted many DIY investors, including some who are quite skeptical. It is a good dialogue which figures to help both groups. I am trying both to share and to learn.

Market Outlook

The trade for the next 35 years? Short bonds and long equities! Rupert Hargreaves of ValueWalk reports on Deutsche Bank’s advice and rationale.

Most investors are ill-positioned for this scenario. HORAN Capital Advisors reports on the continuing dramatic shift between stock and bond fund flows.

Final Thoughts

 

There really wasn’t any fresh news on Friday, but there must always be an explanation. Consumers demand it! It is a requirement for news reporters. I am reminded of an old book from my student days –a description of how reporters covered a Presidential campaign. The news world was very different in those days. Without instant communications the various news services had quite different deadlines. The wire services had to be the fastest and Walter Mears of the AP was regarded as the best at determining the lead from a complex story. Everyone also wanted to know how the NYT was going to play any news. The Rolling Stone version of the story (from 1972) is an enjoyable read and captures the flavor. Why is it relevant now?

News executives expect solid work, usually judged by reports of other leaders in the field. If you are going to deviate from the accepted lead, you need some special analysis. This is great for investors if they are able to look a little beyond the obvious and tune out the noise. Remember the following:

  • Simple dominates – even if it is simplistic.
  • Any recent event is a candidate to be the cause.
  • Support for popular themes and theories is encouraged. Oil prices were down over 2%, for example. For many this signals economic weakness. Ignore the recent increase in prices.
  • Don’t worry if the timing seems a bit wrong. You can explain that. The market was “digesting” the information. Or it was a “delayed reaction.”
  • And finally – make it into a big story!

A Reality Check

Not everyone bought into this theme. A number of investment managers questioned the logic. It is hard to sound intelligent when the market is plummeting, unless you have an instant explanation. I do not question Art Cashin’s trader take. There was a lot of money available to traders who perceived the potential for a big directional move. The algorithms joined in, technical levels were violated, and many were waiting for a break from the recent trading range. Those who profit from making sure that people are “scared witless” (TM OldProf) piled on.

Investors have time to analyze and to think more carefully about the causal model. The trading community believes that the economy is weak and fears that the Fed will tighten rates at a bad time. Both elements are necessary. Not only does the Fed see a stronger economy; it is committed to start with modest moves. The early stages of a cycle where very low rates are increased is bullish for stocks and bearish for bonds.

The overwhelming majority of investors made no trades on Friday. Many did not even know what happened until it was over. The vast majority of others are not going to take any action next week. This is good. Investors who try to compete with traders are playing a game they cannot win.

Quiz Answers

  1. The manufacturing index of 49.4, if annualized, corresponds to an annual increase in real GDP of 2%. The ISM non-manufacturing index of 51.4 similarly corresponds to real growth of 1%.

    One way to think about this is that the economy is still growing even when the secular decline in manufacturing is continuing.

  2. About 50-50. Even a two-touchdown favorite in the NFL is only about 75% to win. .75 squared is your chance of winning both games. Why should you care? People naturally take apparently obvious events and turn them into sure things. They become way too confident.

Weighing the Week Ahead: Should We Expect September Mourning?

The abbreviated week’s calendar has little important data. The economic news last week leaves open the timing of the next interest rate increase. As vacationing market participants yawn their way back to their desks and trading floors, what will be the focus? A look at the calendar and the end of summer will have them asking: Should we expect September mourning?

I borrowed the title from Alan Steel’s excellent post on this subject. More from him in the conclusion.

Last Week

There was a lot of important economic news. The picture was mixed, but mostly promising. The Fed can move in September or delay until December.

Theme Recap

In my last WTWA, I predicted another weeklong focus on the Fed. I expected every economic data point to get special attention, parsed through the perceived eyes of the Fed. This was the story all week – even on the quiet Friday afternoon. I asked whether the Fed would get a signal to hike rates. At the end of the week, most were answering “no.” I have had a good streak going on guessing the theme, but the week ahead is really a challenge.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. The overall range, once again, is very narrow. Doug’s take is that the market liked the slightly weaker than expected report, observing as follows:

The “bad news is good news” syndrome once again reaffirms the market’s primary dependence on Fed pampering via low rates. The index hit its 0.65% intraday high about 30 minutes into the session. Profit taking sent the index to its 0.13% intraday low in the early afternoon. But the buying returned, and the 500 ended the session with a 0.42% gain.

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 and several other charts providing long-term perspective.

Please Watch…

…for some upcoming events that might be interesting to WTWA readers.

  1. It is Labor Day weekend. Like you, I am enjoying some family time. Because the employment report is so important to markets, I will publish a little quiz to test your Jobs IQ. It will not be easy. You may keep your results secret or else boast about your knowledge!
  2. I am joining an outstanding group of fellow advisors in a webinar this week. It will be on Wednesday, September 7th at noon EDT. (Sign up here). We meet regularly for our own benefit. This time our leader, Rob Martorana, felt that other might learn from the interchange. The subject is how to interpret financial news. The material is great, and I am looking forward to participating. Please join us if you can. If you miss it, check out the original article. If investors find this to be useful, we will do more.

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

  • Initial jobless claims remained very low at 263K and beat expectations. (Bespoke)

  • Hotel occupancy remains at near record levels. (Calculated Risk).
  • Withholding tax collections remain strong. (Barry Ritholtz).

    As the total dollar amount of Federal withholding taxes continues to increase, we should expect to see retail sales and sentiment continue their improvements. This has resonance for GDP as well as the Presidential Election.

  • Factory orders rebounded nicely. Up 1.9%, the biggest gain in nine months. Steven Hansen offers a sharp dissent to the headline figure.
  • Earnings revisions have improved. There is a regular pattern of decline in over-optimistic estimates. Few are experts in studying the pace of these changes and how it is likely to impact the market. That is why we read the work of earnings expert Brian Gilmartin, whose most recent post which explains about this difficult question.
  • Personal income rose 0.4% in addition to positive revisions. Consumer spending also increased 0.3%.
  • Consumer confidence reached an eleven-month high. See Doug Short’s analysis for background, comparisons, and the best charts on the subject.
  • Bullish sentiment remains low, a near-term positive for stocks. Bespoke provides this chart.

 

The Bad

  • Auto sales fell to an annualized rate of 17 million. This was not far from expectations for most companies, but a decline nonetheless.
  • Rail traffic continues to decline. Steven Hansen (GEI) does his typical comprehensive analysis.
  • ISM index moved into contraction, registering 49.4 compared to 52.6 last month. Steven Hansen (GEI) has a comprehensive analysis including comparisons to the Markit PMI measure. It helps to consider the “internals” of the index calculation.

  • Employment gains disappointed. I am listing this as “bad” even though most see the overall story as pretty neutral. (WSJ). I am listing the specifics, but all are within their normal sampling error bands. The bond market reaction was also neutral. Calculated Risk said a “decent” report, which captured mainstream sentiment.
    • The net increase in payroll jobs was 151K. While this still represents reasonable growth, it was significantly below the last two months and also below expectations of 180K
    • Private hours worked declined and hourly earnings increased less than expected.
    • Unemployment remained at 4.9% and labor force participation was stable.

  • ADP reported private sector employment gains of 177K – reasonable but also a bit below expectations.

The Ugly

EpiPens. Rex Nutting gets to the heart of it: Saving lives isn’t Mylan’s business; maximizing profits is. The story has widespread implications. We all want to save lives. To do this there must be an incentive for drug development. When does this cross into exploitation? Should U.S. prices subsidize foreign drugs? It is an important issue on many fronts.

 

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 Ben Carlson, who takes on the apparently compelling statistical link between the Fed and stock performance. Since 2008 more than half of the increase in the market comes on days of FOMC meetings. He notes that this argument was featured in the WSJ, but it shows up in various places.

What happens if you change the starting date of the analysis?

Ben points out that the relationship is mostly a result of 2008.

 

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. While personally I watch everything on the calendar, you do not need to! I highlight only the most important items in WTWA. Focus is essential.

The “A” List

  • ISM services (T). Continuing strength in the service sector?
  • Fed Beige book (W). Anecdotal evidence adds color to the data for the next FOMC meeting.
  • JOLTS report (W). The Fed uses this to analyze labor market structure. It is less useful for employment growth.
  • Initial claims (Th). The best concurrent indicator for employment trends, but less attention during “employment week.”

The “B” List

  • Wholesale inventories (F). July data but relevant for revision of Q2 GDP.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

There will be some FedSpeak. There may also be news from the G20 conference. See Treasury Secretary Lew’s presentation at Brookings for a preview.

Next Week’s Theme

Last week brought us more quiet trading with no clear message from the data. As people slowly return from vacation, it is a natural time to review events. We will see plenty of stories about how September is the worst month for stocks. Everyone will be asking: Will September bring a market correction?

Michael Brush, writing at MarketWatch, has a typical example, Get ready for a 5%-10% stock-market drop. Expect more such predictions and advice to do something or other to avoid this kind of decline. This week’s Barron’s cover was similar.

Most expect the record streak of low volatility to end. Here are the top worries:

  1. The calendar. This chart from Michael Batnick (who does not present this as a trade) makes the point.

  1. The Fed. Some are worried that rates will rise. Others are worried that the Fed will keep rates too low.
  2. Energy prices. Some worry about a sharp rebound. Others are concerned about another crash.
  3. China.
  4. Europe. The current focus is Italy. The last hot spots (Greece and Great Britain) are OK for now.
  5. The US election. You can worry about either candidate or just the uncertainty.
  6. Congress is back in session (see conclusion*). Note the shaded area of the VIX chart, marking the recent seven-week recess, perfectly coinciding with the record lows in volatility.

Feel free to add your own thoughts in the comments, including anything I have missed.

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 risk first, reward second. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The Featured Sources:

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he expresses more confidence about growth in earnings.

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.

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.

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.

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, as he always does after an employment report, Georg updated his unemployment-based recession indicator. No recession is indicated.

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. For most readers, they 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 – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year 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 or suggestions for new topics.)

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, including several aggressive sectors. The more cautious Holmes also remains fully invested.

Top Trading Advice

Brett Steenbarger describes the three main causes of big drawdowns. See if you remember any of them from your own experience. Here is how to think about the diagnosis.

If you’re in drawdown mode, it’s important to ask if the problem is with your betting versus folding or if the problem is sitting at the wrong table or playing the wrong game altogether.

Dr. Brett has another lesson, showing how to milk information from data to find the best trades. Take a look at this chart and then read his analysis.

We have all had losing trades. The Trading Goddess discusses the best way to exit, including the thorny question of stops.

But as soon as you’ve entered the position, the price falls apart and forces you out of the trade when your protective stop is triggered.

Then, as soon as you’re out of the trade, the stock swiftly reverses back up.

After running 5% to 10% higher over the next few days, you’re left in the dust with no position and tear in your beer!

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 final column at The Motley Fool. He has been the best advice choice many times. His work is consistently helpful to investors. He promises that he will keep writing in his new gig, and I hope that is true. This week’s article reviews some of his key lessons. They are all worth careful study, buy I especially like this one:

Progress happens too slowly to notice; setbacks happen too quickly to ignore. The market quickly lost 38% in 2008, and it was huge deal. Books were written about it, and Congressional hearings were held. We’ll be talking about it for decades. The market then slowly tripled from 2009 to 2015, and barely anyone flinched. You had to sit down and show people the numbers to get them to believe you. This is common: Recessions take place over months; recoveries take place over years. It can take decades for companies to become valuable, but bankruptcies happen overnight. Pain hurts more than the same level of gain feels good, but the duration differences between progress and setbacks helps explain why there are so many pessimists amid a backdrop of things getting better over time.

And also this one….

There has never been a better time to be an investor. Ever, in history. More people have access to first-class services than ever before. It’s so important, and we don’t spend enough time realizing how good it is.

Stock Ideas

Chuck Carnevale continues his strong recent series with a look at the “Big Five” Canadian banks. He emphasizes the importance of finding a good entry price! This is a thorough analysis, and you should read it carefully before investing.

Morningstar updates the top buys and sells from their “ultimate stock pickers.” This group was a “net seller” but still holds some favorites. Check out the full article for other ideas.

Holmes will begin contributing an idea each week, a stock we bought for clients a few days ago. I will mention it here and Holmes will also post it each Friday at Scutify.com. While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas may be a starting point for your own research. Holmes may exit a position at any time, and I am not going to do a special post on each occasion. If you want more information about Holmes and exits, just sign up via holmes at newarc dot com and you will get email updates. This week’s Holmes made no portfolio changes. Danaher (DHR), which we bought last week, is still interesting and about the same price as our entry.

Energy

With a new trading range for oil prices there is renewed interest in energy stocks. Dan Dicker (Oil&Energy Insider – subscription required) recommends waiting until oil is closer to $40/bbl. He includes an interesting chart showing how some of the Bakken shale drilling sites developed. He writes as follows:

Oil wells cost money to drill and inevitably run dry. They need to be constantly replaced with fresh drilling to maintain output. Those drilling and maintenance costs sometimes overwhelm the returns of the oil being sold, as is the case this year and the previous two, and sometimes the returns greatly outpace the costs, as was the case before the bust in 2014.  We know that most of the independent U.S. oil companies operating in shale have bypassed this current cash burn problem in the short term by raising efficiencies – which lowers costs – and by slashing capex, which sacrifices the ability of potential future replacement.

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 several great choices worth reading, but my favorite is this advice from Jonathan Clements. He explains that people are living longer and must take that into account in setting an investment horizon. He notes as follows:

…your time horizon may extend beyond your own life expectancy. Suppose you are age 80 and you have money you plan to bequeath to your 20-year-old granddaughter, who will then use the inheritance to pay for her own retirement. The investment time horizon for this money might be 50 years, over which the stock market will likely clock dazzling gains.

[Jeff] I agree with this analysis, but I always start by securing enough of a portfolio to assure against life-changing market results. One good place to start is with another source from Tadas, Tim Maurer. He warns against taking too much risk.

Market Outlook

Eddy Elfenbein, continuing to impress on his CNBC segments, explains 5 Signs that Stocks have Room to Run. We turn off the mute and TIVO back when Eddy is on, our highest indication of respect!

Strategy

Michael Batnick (MarketWatch) has a helpful article about what investors could learn from horse bettors. There is a list of ten great ideas, especially for value investors. I especially liked this one:

There is always the temptation to abandon your strategy when it’s out of favor.

“If you begin espousing this approach, you are sure to suffer abuse from your fellow horseplayers. When one of them asks you who you like in a race and you say, ‘I think the 4 is a bigger price than he should be,’ the likely response is, ‘So what? Who do you like?’ Your cronies are apt to tell you that you should be betting on horses, not on prices, and after an inevitable stretch of watching some of their underlays win, you will begin to doubt yourself.”

 

I wrote on a similar theme last week. You might enjoy Why Smart Investors Struggle to Beat the Market.

Ben Carlson explains the importance of rebalancing. If you do not regularly review and execute this strategy, you are missing out on a natural way of selling high and buying low. You are also taking too much risk!

Final Thoughts

Volatility will eventually increase, but there is no reason to expect it right away. Most of the reasons have been recycled all year. Let me comment on the new ones.

  • The calendar. One pundit stated that the reason for weak Septembers was that people were worried about October! Alan Steel covers this topic in a witty fashion. He deals with “the hordes of deviant scribblers…who have made single variable correlations into a media business.” His brief post has plenty of good advice, and you definitely won’t stop reading after the first line about the prune juice and Viagra diet. Take some time to read his other helpful and entertaining posts.
  • Rate increases. James Hamilton has a nice analysis of the concurrent moves of other economic indicators during rate increase periods.

    These 4 episodes have several things in common. First the inflation rate rose during each of these episodes and was on average above the Fed’s 2% target, a key reason the Fed moved as it did. Second, the unemployment rate declined during each of these episodes and ended below the Congressional Budget Office estimate of the natural rate of unemployment, again consistent with an economy that was starting to overheat. Third, the nominal interest rate on a 10-year Treasury security rose during each of these episodes, consistent with an expanding economy and rising aggregate demand.

  • Congress back in session. While the information is accurate, this point is a joke. Mrs. OldProf said that I should footnote and include this line so that everyone would know to laugh. I told her that readers of WTWA know a silly bivariate chart when they see one!

Fundamental factors are more important than the small seasonal effects. The latter often include a couple of large moves that skew the result. The chance of a correction is no higher than it was last month, or the month before.

Weighing the Week Ahead: Have Stock and Oil Prices Decoupled?

This week’s calendar features another relatively light week for data, a lot of politics, slow summer trading, and options expiration. Something has to fill all of that air time! Expect more Olympic coverage, political commentary, and light features. There will be the usual Fed chatter. To the extent that there is real market discussion, I am looking for a new topic: Have Oil Prices Lost Their Impact on Stocks?

Last Week

The important economic news was mixed as was the market reaction.

Theme Recap

In my last WTWA (two weeks ago), I predicted discussion about whether the earnings recession might end in Q3. I suggested we would need to fasten our seatbelts for a showdown on the economy and earnings, probably in quarter three. That might prove out, but we certainly did not need seatbelts last week! We had quiet summer trading with light news and plenty of people on vacation. CNBC interspersed Olympic coverage and even found time to have multiple segments featuring a sandwich on Friday.

Politics, global events, and competition intersected.

Mosquito

 

There was some support for my earnings thesis from our two key sources:

FactSet noted the distribution of earnings results by sector and the continuing overall beat rate.

Brian Gilmartin analyzed the forward curve for earnings, including some important implications.

The Story in One Chart Short

I always start my personal review of the week by looking at this great chart from Doug Short. The overall range is very narrow, with little overall change. 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 and several other 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

  • Gasoline prices are expected to move lower, perhaps as low as $1.92 by year’s end. (EIA forecast via Calculated Risk).
  • Initial jobless claims remain low and even declined by 1000. (See Doug Short for charts and analysis).
  • Mortgage rates are back at the lows, 3.375 for “flawless scenarios.” (Calculated Risk).
  • The JOLTs report showed improved labor market conditions. Most sources are not covering this accurately. It is not an alternative method for estimating net job growth. It does show the trend in job openings, the structure of the labor market, and the voluntary quit rate. Nearly 3 million people each month are voluntarily leaving their jobs, double the number in 2009.
  • Producer prices fell more than expected, 0.4%. Some are citing this as bad news. The bad news will come when stimulus overshoots.
  • Michigan sentiment remained strong, slightly beating expectations. Doug Short does the best analysis and has the most informative chart:

DShort Michigan Sentiment

The Bad

  • Railroad growth remains slow. Zacks explains that this has translated into lower earnings, partly because of the energy sector.
  • Productivity fell 0.5%. Gains in productivity are essential for economic growth.
  • Retail sales disappointed, with no growth month-over-month. It was also a significant miss of the 0.4% expected gain. Doug Short analyzes this disappointing report. As always, he provides helpful historical perspective, including the chart below. It seems to show a return to the pre-recession pace of growth, but without every closing the gap to the prior trend line.

The Ugly

Public retirement commitments. Robert Pozen, in a Brookings op-ed, highlights these costs, and the main reasons:

The unfunded liabilities for retiree healthcare for the 30 largest US cities exceeds $100bn, according to the Pew Charitable Trusts, a Philadelphia-based non-profit organisation. The unfunded liabilities for the 50 US states exceeds $500bn, according to Standard & Poor’s, the rating agency.

Retiree healthcare plans are uniquely American. They exist because the US has never offered universal healthcare before Medicare, the national social insurance programme, at age 65.

Many employees of cities and states retire between 50 and 55, so local governments usually provide them with highly subsidised healthcare between retirement and Medicare, and sometimes beyond.

For a more general analysis of the threat from retirement costs, see Mohamed A. El-Erian’s article on the “titanic risks.”

Noteworthy

There is a lot of current discussion about the “typical” American community. FiveThirtyEight provides some interesting data on both cities and states. You will find the results interesting. Much to my surprise, I am living in the state with demographics closest to the country overall.

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 Fox, writing at BloombergView. He takes on a popular myth that just won’t die – the manipulation of government statistics. Like Fox, I have some personal experience in working with the career civil servants who analyze data. The notion that they do whatever a (temporary) political leader instructs is very costly to investors who believe it. The article takes up various accusations and stories, with plenty of good discussion. Here is one key argument:

First, because I know a little bit about the people who put together our nation’s economic statistics. The Bureau of Labor Statistics, Bureau of Economic Analysis and Census Bureau are run on a day-to-day basis by career employees, not political appointees. Even the appointees are often career staffers who get promoted, and many have served under multiple administrations. When top statistics-agency officials do leave government, it’s often for jobs in academia. Credibility with peers is generally of far more value (economic and otherwise) to these people than anything a politician could do for them.

I would add that any shenanigans would be the basis for articles and books by those leaving the agencies.

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 another moderate week for economic data and the end of earnings season is near. While personally I watch everything, I highlight only the most important items in WTWA. It is important to focus.

The “A” List

  • Building permits and housing starts (T). Permits are a good leading indicator.
  • FOMC minutes (W). No one really expects any fresh news, but the punditry will find something.
  • Leading indicators (Th). Still highly regarded by many, despite the various redefinitions. Continuing strength expected.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Industrial production (T). Improvement expected in this lagging series, important to GDP.
  • CPI (T). Inflation data remains a secondary indicator. It will take a few hot months to bring it to the fore.
  • Philly Fed (Th). A rebound expected. This result has earned growing respect.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

There is plenty of FedSpeak for those who have been missing that. Options expiration on Friday may delay the exodus to the beach for some.

Next Week’s Theme

Quiet calendars and slow trading offer time for collective introspection. There will be plenty of political discussion, tempting investors to draw unwarranted conclusions about their money. I have noted a new theme in the discussions of the Pundit in Chief and the Senior Stock Trader: Some head-shaking over the daily divergences between oil and stock prices. I might be a little early with this expectation, but it is worth thinking about. Expect the pundits to be wondering:

Has the Correlation between Oil and Stock Prices Broken Down?

Eddy Elfenbein noted the breakdown. I am always encouraged when he reports observations consistent with my own. Here is his chart:

sc08102016d

This week’s problem has two parts:

  1. What will happen to oil prices?
  2. Will stocks follow?

For now, let’s stick to the first question, where there are plenty of opinions:

  • Oil supply and demand is now in rough balance. (“Davidson” and some other experts).
  • Oil is going lower – back below $30. There is still a glut and higher prices reflect a short squeeze.
  • Oil is going much higher. The oil glut is smaller than expected leading to a target of $80. Current trading reflects only momentum, not fundamentals.

….and many similar opinions on all sides.

As always, I’ll have a few ideas to add 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. Risk first, rewards second. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

The Featured Sources:

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he expresses more confidence about growth in earnings.

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.

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.

It is time for another update of Doug Short’s Big Four. The start of another recession would be marked by a peak and significant decline in these indicators. Most investors should take a frequent look at this chart instead of the headlines in the financial press!

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 a number of interesting approaches to asset allocation. This week Dwaine has his own interpretation of the “Big Four” indicators – a recent narrow miss. Despite this, he concludes:

To conclude, looking at the individual co-incident monthly data used by the NBER shows a far more pessimistic view currently than when looking at a syndrome of conditions. But the co-incident data in this particular indicator and the recession probabilities we are registering are not as bullish as the employment data would have you think. In fact, taking our proprietary implementation of the Big-4 index, and comparing it to the last 8 expansions, shows just how meek this recovery has been:

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. For most readers, they 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 – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year 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 or suggestions for new topics.)

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 are continuing with a bullish market forecast. Felix is fully invested, including several aggressive sectors. The more cautious Holmes is now also fully invested.

Top Trading Advice

Traders are worried about the next two months, notes Steven M. Sears (Barron’s). Trading desk chatter about Chair Yellen’s upcoming Jackson Hole speech, a possible rate hike, and mean-reverting behavior in volatility. This has them buying call options on the VIX, popularly known as the fear index. Should you join this trade? I am not making a recommendation, but merely raising an idea for consideration. I do not share the concern about the impact of a rate hike. I also note that several of those quoted are selling derivatives.

Dr. Brett asks, Can Successful Trading Be Taught? He answers “yes” and explains how.

In another great post he explains how to “train your brain.”

We should all seek information from people with the right expertise and the right experience. What could be better than a clinical psychologist, a teacher, a coach of traders, and decades of personal trading experience? Every trader I know would benefit from Brett’s books as well as his blog.

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 some ideas that “keep on giving.” This contradicts the page view theory of posting: Look for “actionable investment advice.”

How to Read Financial News: Tips from Portfolio Managers is worth reading and re-reading. Robert J. Martorana is an insightful author and organizer. He was the editor (I called it ‘ringmaster”) when I wrote for TheStreet.com’s Real Money site. He has organized regular conference calls among advisors, bloggers, and investment managers who all have great ideas and strong credentials. Recently he took some of the calls and turned them into a first-rate educational piece about reading financial news. I am delighted to be included. I hope others find the ideas as useful as I do. If it is popular, perhaps Rob will do more of these.

Another good post on this theme is from Morgan Housel, who describes things that he is “pretty sure about.” It is a great list. My favorites are the following:

Recessions and bear markets are very easy to predict, except for the timing, cause, magnitude, duration, location, and policy response.

Look at today’s five largest companies in the world. Fifteen years ago, one of them didn’t exist, one was a tiny start-up, one was a belittled relic of the dot-com bust, another was fighting to stay relevant after flirting with bankruptcy a few years before. I suspect the next 15 years will be even more extreme.

If you tell people what they want to hear, you can be wrong indefinitely without penalty. This explains the careers of many pundits.

Stock Ideas

Oil exploration stocks? Peter Way has an interesting approach to analyzing the upside/downside risk of this sector.

501110-14709376100679758

It is not too late to buy dividend stocks. Philip Van Doorn explains how to sort through the risks.

David Van Knapp has a “periodic table” of dividend champions. You need to read the entire post to appreciate this. Here is part of it:

223670_14707064705187_rId14

Holmes will begin contributing an idea each week, a stock we bought for clients a few days ago. I will mention it here and Holmes will also post it each Friday at Scutify.com. While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas may be a starting point for your own research. Holmes may exit a position at any time, and I am not going to do a special post on each occasion. If you want this information, just sign up via holmes at newarc dot com and you will get email updates about exits. This week’s Holmes pick is Eastman Chemical (EMN).

Market Overview and Outlook

The consensus market forecast is now Dow 20,000 (sort of). Victor Reklaitis explains at MarketWatch.

Should you hedge against a crash? Marc Faber is (once again) predicting a 50% market crash. Some are outbidding him by calling for 80%! Barry Ritholtz takes up this topic providing a list of his past predictions and this chart:

Should you hedge against Zika? Josh Brown, expressing realistic concern about the virus, emphasizes the need to separate such events from your investment decisions.

Michael Harris suggests, “The frequency of articles in the financial media and blogosphere with calls for a stock market collapse is often a good indicator of a bullish market”. Read the full post for discussion and a chart of events this year.

Should you sell the market high? HORAN Capital Advisors does a complete analysis.

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 several great choices worth reading, but my favorite is the NYT article from Ron Lieber, explaining how to maintain your 401(k) – ignore it! You can do better if you follow the risk indicators on WTWA, but most people who closely follow their statements buy and sell at exactly the wrong times.

Election Effects

Expect many more articles on the impact of the election and what stocks you should own. I am sticking with my year-long viewpoint: This is all overdone. The new president, whoever is elected, will face a struggle in passing an innovative agenda. No such analysis can be complete without considering the likely makeup of Congress – and that is just for starters. Barron’s has a cover story featuring a likely Clinton election and analyzing the policies. The NYT analyzes the difference in tax policies.

Value Stocks

If you missed my special post on this topic, addressing the “value trap” question, please take a look.

Watch out for….

Surprises in ETF trading costs. Chris Dieterich (Barron’s) notes that the explosive growth in choices has led to many niche funds without liquidity. He cites some examples where the bid-ask spread imposes a higher cost than the management fee!

Utility stocks. James Picerno wonders whether the “wobbly rally” signals a bubble.

Fancy ideas now aimed at the “little guy.” Some of the big guys are cutting allocations.

Final Thoughts

The correlation between oil prices and stocks never made any sense. Some traders prefer commodity prices as an economic indicator. They are skeptical of the official data. The fact that oil prices represented a supply story rather than weak demand did not stop many from hitting the recession panic button. HFT algo’s picked up something that was working, and a lot of hot money started following this trade. If you were a trader, you had to take notice. On some days CNBC would view oil traders who said they were watching stocks, as well as stock traders who were watching oil. When a trade is working, you should not go too deeply into the reasons.

Investors got the chance to buy some great stocks at lower prices.

Fundamentally, lower gas prices are good. Past price surges were frequently described as a consumer tax with no corresponding benefit. Whether people spent or saved the extra cash, it had a positive effect. Since all transportation costs were lower, everyone was helped, not just drivers, although the effects are difficult to calculate.

When the market responded negatively to lower prices many started reaching for explanations. Attention turned to those living and working in oil production areas, as well as banks making loans to them. This was true enough and easier to see than the larger, but diverse effect on consumers.

A New Chapter?

With the rebound in oil prices, will the punditry cite this as a reason for higher stock prices? I am not counting on that, but two months ago I highlighted the idea that oil prices might have hit a “sweet spot.” Energy company earnings will be better. The potential for higher production places a brake on price spikes. It provides a healthy environment for the economy and the stock market.

The oil/stock relationship may be fading, but count on the trading world to find something new!

Explaining small daily moves in the market averages is like analyzing why a snowflake fell on you rather than the person walking next to you. The many words and hours spent doing this are worse than worthless. The process creates a false sense of logic and order which may well cause mistakes in future decisions.

Weighing the Week Ahead: Earnings Recession Ending Next Quarter?

This week’s calendar includes a little data, a lot of politics, slow summer trading, and the last of the earnings reports. I expect financial media to focus on an earnings season post-mortem by asking: Has the Earnings Recession Reached a Turning Point?

Last Week

The important economic news was excellent, and the market reaction was positive.

Theme Recap

In my last WTWA (two weeks ago), I predicted a focus on what the U.S. elections might mean for stocks. With major conventions in both parties and saturation coverage of anything said, that was a pretty easy forecast. My own final thoughts included the idea that there were not yet any clear implications. Since the major averages are about where they were in my prior post, the market seems to agree.

The business of figuring out what a President will do is pretty tricky. Morgan Housel uses historical data to rank past presidents on various criteria – stock market, profit growth, GDP, and inflation. Even knowing your history, the results will surprise you. The “best” presidents on these measure often started at a time when things were pretty bad.

The politics digested, the market turned to the biggest data of the last two weeks, the monthly employment report. The news relieved some continuing concern about the economy.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. While the range is pretty narrow, you can clearly see the early weakness and Friday’s rally to a new all-time high. 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 and several other 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

  • Initial jobless claims remain low. There was a slight miss of expectations this week, but Calculated Risk provides the overall perspective.

  • Chemical activity hits a new high. Scott Grannis continues to follow solid indicators that most others miss. This one has a good record and “points to stronger growth than is widely perceived to be the case.”

  • Vehicle sales beat expectations, but some complained that higher incentives were required.
  • Employment increased solidly and more significantly than expected with a net gain of 255K payroll jobs and even more strength in the individual survey. While some are, as usual, seeking nits to pick, these data were an encouraging signal about economic strength. Expect the dialog to shift back to Fed policy. Bloomberg has good coverage.

The Bad

  • Rail traffic declined again. Steven Hansen covers the story including non-seasonally adjusted data in several time frames.
  • ISM services Index dropped slightly to 55.5, a little below estimates.
  • GDP growth was only 1.2% in Q2, significantly lower than expectations. Prof. James Hamilton has an objective analysis of what is going on. Hint: Inventories are crucial, and difficult to gauge. See also Bloomberg on the inventory story.
  • ISM Index dipped slightly but remained in expansion territory. Calculated Risk has the analysis and this chart:

The Ugly

Printed firearms on airplanes? The TSA caught this example, but there is a technology war going on. If you read the TSA Blog, you will see how many loaded weapons discovered at checkpoints.

 

 

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 always welcome. There is plenty of misinformation to refute!

 

The Week Ahead

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

The Calendar

We have a moderate week for economic data, as earnings season winds down. While I watch everything, I highlight only the most important items in WTWA. It is important to focus.

The “A” List

  • Michigan sentiment (F). Good read on jobs and spending.
  • Retail sales (F). Consumer spending remains as a key factor for economic growth.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Wholesale inventories (T). Volatile June data, but an important part of gauging GDP.
  • Business inventories (F). More June data with implications for GDP adjustments.
  • JOLTS report (W). Important to understand labor market structure – not job growth.
  • PPI (F). This will become important after a few hot months – but not yet.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

The big story will still be corporate earnings. We have a little FedSpeak. Expect questions to focus on whether a policy change is more likely after the employment report. Don’t expect much new information before Yellen’s Jackson Hole speech. More politics, of course, but without a clear implication for markets.

Next Week’s Theme

Markets seem to have digested the Brexit story, and surprisingly shrugged off the terrorist violence. The economic data have quieted recession worries, and even turned positive. In the slow summer trading I expect more attention to analyzing earnings. Everyone will be asking:

Has the Earnings Recession Reached a Turning Point?

  • The bearish side will emphasize multiple points;
    • The streak of losses continues
    • Profit margins remain high, and (theoretically) vulnerable
    • Earnings results reflect stock buybacks and other financial engineering
    • And other points about how earnings are calculated.

In many ways, this debate will hinge upon forward expectations for the economy, business investment, and future profits.

As always, I’ll have a few ideas to add 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. Risk first, rewards second. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The Featured Sources:

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he expresses more confidence about growth in earnings.

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%. This does not completely reflect Brexit effects, so we may get a further revision.

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

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.

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.

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. For most readers, they 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 – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year 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 or suggestions for new topics.)

 

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 have moved to a bullish market forecast. Felix is fully invested, including some more aggressive sectors. The more cautious Holmes is still about 80% invested. The recent strength has moved Holmes into the bullish camp, and we expect an increase in the number of candidates.

Top Trading Advice

Are you worried about “missing” a trade? Do you switch your system a lot? Do you make “boredom trades?” If your answer to any of these is “yes” you should read this post from Adam H. Grimes.

Is your trading affected by high-frequency models? Do you need to change your methods? Josh Brown has some answers and what you should be thinking about.

Brett Steenbarger distinguishes between successful discretionary traders and successful quantitative traders. Which are you?

Successful discretionary traders I’ve known and worked with have been distinguished by their level of market understanding.  Successful quantitative traders I’ve encountered have excelled at analysis and prediction.  Sometimes the successful discretionary trader makes use of predictive models as inputs to decisions; the successful quantitative trader will ground models in sound market understanding.  At the end of the day, however, quants trade their predictions and discretionary participants trade their understanding.  One trades universal patterns; another trades insights specific to what is observed here and now in a particular market.

 

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility! Mixing insurance and investments is a terrific way to kill two birds with one stone.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Tony Isola’s discussion of widely believed lies. He includes a great list. I like so many entries that it is tough to pick a favorite. I’ll go with “Mixing insurance and investments is a terrific way to kill two birds with one stone”. What is yours?

Stock Ideas

The Zika virus is prominent in the news. While we all sympathize with the victims, we can also invest in companies working on a cure. Angus Nicholson of IG has some interesting suggestions for biotechs set to win big.

Chuck Carnevale turns his focus to dividend growth stocks in healthcare. This is an attractive sector, and he provides nine timely ideas in Part 1 of 3. This entry was excellent and we look forward to the future installments.

Holmes will begin contributing an idea each week, a stock we bought for clients a few days ago. I will mention it here and Holmes will also post it each Friday in a Scuttle at Scutify.com. While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas may be a starting point for your own research. Holmes may exit a position at any time, and I am not going to do a special post on each occasion. If you want this information, just sign up via holmes at newarc dot com and you will get email updates about exits. This week’s Holmes pick is Enbridge (ENB).

 

Market Overview and Outlook

Josh Brown explains (Rules-based tactical vs wizardry and witchcraft) why you should not attempt to imitate big-firm pronouncements by following their calls.

Eddy Elfenbein also weighs in on market timing, reporting the dramatic difference in a Fidelity study.

Avondale’s weekly Company Notes Digest is especially useful during earnings season. You do not have time to listen to all of the conference calls and you certainly cannot count on the media coverage. This is a good way to find important themes. (terrorism more important than Brexit). Also why Aetna is leaving the health insurance exchanges. And much more.

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 several great choices worth reading, but my favorite is Jason Zweig’s important warning about the risks of too much stock in your 401-K account. He writes:

Since June, four dozen companies whose stock fell by at least half in 2015 have filed disclosure forms to the Securities and Exchange Commission on their 401(k) and other savings plans. By my estimate, workers at these companies lost $1 billion in 2015 by over-investing in the stock of their own employer.

This is very important. I frequently see such risks in the accounts of potential clients. It is one of the first things we fix.

Value Stocks

Since value stocks have lagged, many strong voices have suggested that the market message is that the economic cycle is over. I covered this subject last week. If you missed it, please take a look. I provide discussion of several stocks recently dissed in the media.

Watch out for….

For those at or nearing retirement, here are eleven common Medicare mistakes.

Final Thoughts

Over the past several weeks we have gotten quite a bit of new evidence to guide our investing. I see four major themes:

  1. Most investors seem to be looking beyond concerns about uncertainty and matters without quantifiable market impacts – Brexit, the election, terrorism.
  2. The economic data looks better than it did in the second quarter.
  3. Earnings expectations seem to have made a trough.
  4. Some sectors are much more promising than others both because of potential earnings growth and current valuation.

The biggest concerns relate to improving earnings, the need for more business confidence, and a resulting increase in corporate investment.

We are entering a period where we can expect a showdown on the economy and earnings – probably in Q3, despite the upcoming election. Fasten your seatbelts!

Weighing the Week Ahead: What Does the Election Mean for Stocks?

This week’s calendar includes a big serving of data, an FOMC meeting, the Democratic convention, and plenty of earnings news. The financial media will be asking: What does the election mean for stocks?

Last Week

The economic news was excellent, and the market reaction was positive. It was a light week for data, but the important news was positive—especially housing.

Theme Recap

In my last WTWA, I predicted that we should expect some challenge to the post-Brexit rally. People would be focused (even more than we usually see) on what could go wrong. It was a big week for earnings and politics as well. The market’s answer to the question reflected some optimism about the second half 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. You can clearly see the successive highs and the final breakout on Friday. 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 and several other charts providing long-term perspective.

Personal Note

I am on vacation this week, and I probably will not write next weekend. I am still keeping an eye on things, so I will put up a short piece if there is really important news.

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

  • Initial jobless claims are at a 43-year low. (Jeffry Bartash, MarketWatch).

  • Housing
    • Existing home sales are strong and would be even stronger with more inventory. Calculated Risk explains the reduction in distressed and foreclosure sales. June sales were the best in ten years.

  • Housing starts and building permits. Growth is solid and prices are higher, but this is not another housing bubble. Patrick Clark (BloombergMarkets) does a good job of explaining the difference in the current growth phase. He writes as follows:

    But residential real estate isn’t in a speculative bubble, industry observers contend. Instead, a low inventory of available homes is driving prices higher—prices, however, will eventually recede as buyers throw up their hands, or as more new homes come on line. The structural issues that led to the housing collapse last decade aren’t present.

    The largest price appreciation is coming in places where population is growing, but zoning laws have restricted the pace of new construction.

The Bad

 

The Ugly

Another week, a new terrorist event. I continue to hope for a week where the ugly award once again goes to a financial problem.

 

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 always welcome. There is plenty of misinformation to refute!

To help in spotting ideas, here is a handy guide from The Guardian’s Science observer, David Spiegelhalter, Our Nine-Point Guide to Spotting a Dodgy Statistic. (Thanks to reader AR for this suggestion). Most of the examples are British, but with universal application. I especially like the “indicator switching,” a favorite ploy of market pundits.

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 pretty big week for economic data, featuring the FOMC decision. While I watch everything, I highlight only the most important items in WTWA. It is important to focus.

The “A” List

  • FOMC rate decision (W). A rate increase is not expected; the statement will get close attention.
  • Consumer confidence (T). Conference board version is an indicator for jobs and spending.
  • Michigan sentiment (F). Unlike conference board, has a panel component.
  • GDP (F). First read on Q2 – big rebound expected.
  • New home sales (T). Important economic sector. Can the growth continue?
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Pending home sales (W). Less important for the economy than new construction, but a good read on the overall market.
  • Chicago PMI (F). An early read on next week’s ISM number.
  • Durable goods (W). Volatile June data, but the trend is important.
  • Employment cost index (F). Q2 data. Wage growth confirmed?
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

The big story will still be corporate earnings. The Democratic Convention will grab plenty of news. FedSpeak is on hold for the FOMC meeting, but there are some Friday appearances.

Next Week’s Theme

Markets seem to have digested the Brexit story, and surprisingly shrugged off the terrorist violence. The economic data have quieted recession worries, and even turned positive. We have competing potential themes this week.

The economic news and earnings reports are important. So far the earnings news has been solid. Brian Gilmartin was early and accurate in calling for an earnings trough. His latest post highlights the importance of Apple earnings and previews the other upcoming big reports. FactSet notes that both bottom and top-line results so far are exceeding the average “beat rate” from the last several years. Alliance Bernstein observes that headwinds to earnings growth has abated. Avondale has plenty of color about earnings calls, with a surprisingly positive take on the economy, Brexit, and earnings outlook.

A competing issue will be the FOMC meeting. While no policy change is expected, circumstances have improved enough to put one or two rate hikes back on the table this year. Tim Duy has a chart-packed analysis of what the Fed is seeing. The look at labor market tightness is especially important.

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Instead of these key issues, everyone will be asking:

What will the election mean for stocks?

I rather hope that I am wrong, and that the important economic and earnings news will take center stage.

 

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. Risk first, rewards second. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The Featured Sources:

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he expresses more confidence about growth in earnings.

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%. This does not completely reflect Brexit effects, so we may get a further revision.

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

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.

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. His latest update describes the elements of the indicator we cite every week.

 

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. For most readers, they 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 – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year 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 or suggestions for new topics.)

 

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 our neutral market forecast. Felix is once again fully invested, including some more aggressive sectors. That continues to work well during the rally. The more cautious Holmes is now about 80% invested, taking some profits last week. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now. It is not a resounding endorsement of the overall market, but a vote for opportunistic trading. I am curious about what it will take for Holmes to turn “mildly bullish.”

Top Trading Advice

Are stocks coiled for an upside move? Dana Lyons, using the mid-cap 400 to illustrate, writes as follows:

Specifically, the 7-day range in the index spans less than 1 percent for just the 8th time ever. And, at precisely 1.00%, the 8-day range is the narrowest in more than 20 years. In fact, all of the historically tighter ranges occurred in the low-volatility early to mid-1990′s period.

He sees a good setup for an upside breakout – tradable if it fits your time frame.

Brett Steenbarger explores the creative aspects of trading, revisiting a recent post that proved to be his most popular ever. Traders will benefit from both.

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 insightful market outlook provided by “Davidson” via Todd Sullivan.

…(E)conomic fundamentals are reliable in forecasting economic activity 12mos-18mos ahead. Fundamentals provide guidance to markets well before and often in contradiction to consensus market psychology. Fundamentals provide a long-term rate of return (Natural Rate) that can be used to compare returns from markets and individual securities. Having fundamentals which can do this for us make them a good tool to separate the investments which carry value from those which reflect more hope than substance. Many forecasters have called for a ‘Market Top’ every year since 2010 ($SPY). In counter-point, fundamentals have continuously forecasted higher equity prices since late 2008. Over the long-term, history shows that fundamentals have always driven market psychology which in turn drives market prices. A market top is not near. A top is not even close. Markets are a ‘Human System’. We should worry most when most are not worried.

Good advice.

Stock Ideas

I always like articles that illustrate good analysis while discussing a potential stock. Valuation expert Aswath Damodaran discusses “story stocks” using Tesla as an example. (He also mentions Amazon). Here is a chart of the basic thesis:

Can distressed energy company bonds be a better choice than the stock? Some traders are buying bonds and selling short the stock. Investors who own the stock might find it preferable to replaced it with bonds. (The FT).

Barron’s warns about pharmacy benefit managers (on the cover) and utilities. IBM and Cisco get friendlier treatment.

Market Overview and Outlook

Providing a contrast to the oft-cited, infamous 1929 chart, Shawn Langlois (MarketWatch), reviews evidence about whether the current bull market might be just getting going.

 

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 several great choices worth reading, but my favorite is Michael Batnick’s advice on how long-term investors should focus. Read the whole piece, but the essence is this Carl Richards sketch.

Value Stocks

It is important to remember the length of stock market cycles. Even the best approaches can be out of favor for several years. HORAN Capital Advisors notes the encouraging rebound in value stocks, emphasizing the remaining upside potential.

 

Watch out for….

Target date funds. Check out five reasons to think twice. The “set it and forget it” approach might not work for you. (MarketWatch).

Long-term fixed income. Marc Gerstein says, “Owning long-term bonds are like using your jaw to punch Mr. Market in the fist.” Here is his “hate list.”

 

 

Final Thoughts

I have not written much about the election, because there is no clear implication for stocks – at least not yet. Many supposed impacts (drug prices?) are over-estimates of effects. Since we are concerned with investments, we look at political issues only through the prism of those effects.

More important is a mistaken viewpoint that stocks reaching a new high means that investor sentiment is euphoric. Not so.

BofA opines this week that it is time to buy stocks. Rupert Hargreaves (BI) reports:

Hartnett’s simple bullish message is based on the pessimistic attitude of investors in the market following Brexit and amid the general global economic malaise. Indeed, according to Bank of America’s research, investors ended June with the highest cash allocation on record at 5.7% on average and reported the lowest equity allocations in four years. Moreover, it looks as if investors are capitulating into bonds with annualised year-to-date return from global government bonds in 2016 at 25%, the highest return in 30 years. These three bearish indicators combined with the fact that inflows into precious metal funds hit a record during the first week of July, all point to the fact that investors are very bearish on the outlook for global equities. Bank of America, Merrill Lynch’s Bull & Bear Indicator, fell to an “extreme bear” reading of 1.6 on June 28.

There is plenty of room for stocks to advance, depending upon three factors:

  1. The economy – reasonable growth and no recession;
  2. Corporate earnings – getting out of the energy funk and inducing some business investment; and finally
  3. Attracting (even more) investors from alternative allocations.

At the mid-point of 2016, the key for investors is to understand the remaining market potential, and avoid obsession with scary headlines.

Economic cycles very rarely “stall out.” Recessions begin at a business cycle peak, something that is still at least a year away.

Weighing the Week Ahead: What Might Derail the Stock Market Rally?

This week’s calendar includes a light schedule for data with an emphasis on housing. Earnings season is in full swing with important reports every day. The early reception has been surprisingly good, creating plenty of mystified pundits. The financial media will be asking: What Can Derail the Rally in Stocks?

Last Week

The economic news was excellent, and the market reaction was strong. The continuing market rebound has caught many off base. This week’s review is mostly positive on economic data.

Theme Recap

In my last WTWA, I predicted that the post-Brexit rally now depended on earnings, especially management discussions of outlook. I noted that there were a record number of appearances by Fed participants as well as the release of the Beige Book, but felt that would be much less important. This proved to be a very accurate guess. In particular, the reception to some key earnings reports was quite strong. CNBC had a couple of short pieces on the FedSpeak, basically proving the expected lack of fresh news.

I hope readers have stayed with the rally during the post-Brexit move. It is important to know what to watch.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. You can clearly see the two big rally days and the quiet Friday. 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 and several other charts providing long-term perspective.

SPX-five-day

 

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

  • Rail traffic is shows continuing improvement. Steven Hansen helpfully covers the weekly data and various comparisons. Part of the improvement relates to comparisons to weaker 2015 data, so it is not all good news.
  • High frequency indicators have turned better – nearly all of them. New Deal Democrat’s weekly update is very helpful for those wanting a comprehensive survey.
  • The Labor Market Conditions Index (recently weak) has improved. “Fred” has the data.

Labor Market Conditions

  • Wholesale sales improved so I am scoring it as a positive. Steven Hansen goes beyond the seasonally adjusted data, noting that sales are still at “levels associated with recessions’ and there is “degradation in the 3 month averages.”
  • Industrial production rose 0.6%, beating expectations of a 0.2% gain. This is a nice rebound in an important sector.
  • Initial unemployment claims handily beat expectations at 254K. The extremely low level of new jobless claims continues.
  • Retail sales soundly beat expectations with a gain of 0.6% versus 0.2% expected. Ex-auto the results were even better. This was reassuring to those worried about the consumer. (Calculated Risk).

RetailJune2016

The Bad

  • JOLT’s showed a decline in job openings but the important voluntary quit rate was the same. Many observes mistakenly try to use this report to coax out stories about net job growth. That is not the point of this research. It is both slower and less accurate than the regular payroll report. It is much more important for labor market tightness and structure.
  • Congress is leaving on recess. Normally I list this under “good news” but this time there are quite a few issues that were not addressed. After the political conventions the return will be brief. Our legislators naturally need to get back to the campaign trail! Maybe it is time to consider a more efficient way of changing leadership. The Hill has the story about work left undone.
  • Michigan sentiment declined and missed expectations. The experts at Michigan noted concern about Brexit among the high-income respondents. (Steven Goldstein at MarketWatch). This will be interesting to watch. As usual, Doug Short has the best chart summarizing the series.

Michigan-consumer-sentiment-index

 

The Ugly

This week our hearts go out to the French. I am really hoping for a week without ugliness.

 

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 always welcome. There is plenty of misinformation to refute!

The Week Ahead

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

The Calendar

We have a rather light week for economic data, with an emphasis on housing news. While I watch everything, I highlight only the most important items in WTWA. It is important to focus.

The “A” List

  • Housing starts and building permits (T). An important sector, but a modest decline is expected in starts. I am more interested in permits.
  • Leading indicators (Th). A rebound expected in a series widely followed as a recession signal.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (Th). Less important for the economy than new construction, but a good read on the overall market.
  • Philly Fed (Th). Attracting more information as the earliest data with a label from the prior month.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

The big story will still be corporate earnings, as reporting season moves into full swing. The Republican Convention will grab plenty of news. FedSpeak will die down after last week’s thirteen appearances.

And of course, we can expect more updates on international crises.

Next Week’s Theme

Markets seem to have digested the Brexit story, and surprisingly shrugged off the terrorist violence. The economic data have quieted recession worries. The post-holiday FedSpeak was not threatening. Early earnings reports were OK, but not great.

So why is the stock market reaction so positive? The punditry is already hard at work on this question. I expect the discussion to continue. The market reaction is clearly at odds with what many call “the fundamentals.” If markets keep going higher, the questions will increase. If stocks pull back, we can expect a parade of pundits explaining why.

Either way, everyone will be asking:

What can derail the rally in stocks?

Feel free to join the discussion in the comments, but I see several worry themes:

  • Terrorism. The world is a nasty place and seems to be getting worse.
  • Economic concerns.
    • Deflation – signaled by falling commodity prices, especially cheap oil. Or alternatively–
    • Inflation – signaled by rising commodity prices, especially higher oil prices.
  • Politics.
    • Trump would be a disaster for the U.S. and world economies.
    • Clinton would be a disaster for the U.S. and world economies.
    • Uncertainty. Not knowing who will be elected is a disaster for the U.S. and world economies.
  • Central banks. They painted themselves into a curve, merely delaying the inevitable economic disaster. (I actually heard one of the Fast Money guys use one of mixed metaphors about the Fed. Maybe it was an accident, but he certainly didn’t cite the OldProf!)
  • Market valuation. Markets are too expensive. All of them. Investors cannot expect any reasonable return over the next twelve years (except gold, of course).
  • Technical indicators.
    • Stocks were declining – lacking leadership.
    • Stocks are now overbought and frothy.
    • Stocks are stuck in a trading range.
    • There was a Hindenburg omen – when was that?
  • Weak and mistaken leadership worldwide.
  • Delayed Brexit effects.
  • Global hot spots – South China Sea, Korea

 

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. Risk first, rewards second. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

indicator snapshot 071516

The Featured Sources:

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he expresses more confidence about growth in earnings.

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%. This does not completely reflect Brexit effects, so we may get a further revision.

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

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

Big-Four-Indicators-Since-2009-Trough

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.

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. His latest update describes the elements of the indicator we cite every week.

BCI-Fig-1-7-14-2016

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. For most readers, they 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 – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year 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 or suggestions for new topics.)

 

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 our neutral market forecast. Felix is once again fully invested, including some more aggressive sectors. That continues to work well during the rally. The more cautious Holmes is still fully invested, in a diverse group of 16 stocks from a universe of nearly 1000, selected mostly by liquidity. Sometimes we have had only 14 or 15 stocks. That is revealing. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now. It is not a resounding endorsement of the overall market, but a vote for opportunistic trading. I am curious about what it will take for Holmes to turn “mildly bullish.”

Top Trading Advice

Who is participating in the current market? How and at what levels? Know the background before trading! (Brett Steenbarger).

When you have met your “goal” for a session or a time period, do you stop trading? There is a great discussion at daily speculations. I have a strong opinion on this one, but I am interested in your comments.

Do you use Twitter in your trading? Finding other opinions? Breaking news? Here are some ideas.

Why a systematic daily approach is important to your trading. Holmes was barking appreciatively at the ideas from Pradeep Bonde, especially the unemotional focus on setups and execution. (Easy for him to say!)

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 Aaron Task’s 3 Reasons the Stock Market Is Rising Even As the World Feels Like It’s Falling Apart. Here is a key quotation:

The World Isn’t Ending: While there’s plenty to worry about—including global terrorism, uncertainty over what Brexit really means, anxiety over how U.S. election plays out, and much more—the global economy is expanding, albeit slowly, and the U.S. looks pretty good relative to other developed economies. (Insert “best looking horse in the glue factory” joke here.) And despite legitimate concerns about anti-globalization forces being on the rise here and abroad, the volume of global trade is expected to rise 2.6% this year after climbing 2.8% in 2015.

An old Wall Street saying also helps explain why stocks have fared well despite all the negative headlines: The market climbs a wall of worry.

You should be more worried about the stock market when “everyone” is bullish and the conventional wisdom says buying stocks (or real estate or any other asset) is a “no brainer.” That is certainly not the case today: UBS says wealthy investors are holding on to record levels of cash and 84% believe the election will have a significant impact on their financial health, Reuters reports.

The entire article acknowledges some current concerns, but brings the story back to data.

Stock Ideas

Chuck Carnevale remains cautious, even including top dividend candidates. Anyone seriously interested in finding great stocks should be following his series closely. It provides suggestions, but also the underlying reasoning and data.

Barron’s has a cover story on Royal Dutch Shell. The analysis covers dividends, cost-cutting, and oil prices. Even if you do not agree with the conclusion, this is an interesting approach.

Barron’s also cites Madison Square Garden as almost 60% undervalued on a sum-of-the parts analysis of trophy properties. Once again, this combines an interesting pick with a useful method of analysis.

2016_07_18_cmyk_NL_

Market Overview and Outlook

Traders see a conspiracy to keep the market higher. (Art Cashin). I believe that Art is accurately conveying a widespread sentiment.

The Fear and Greed Trader has a nice overall market summary, providing a refreshing balance to the normal daily news. It is a comprehensive summary and well worth reading in its entirety, but here is a key quotation:

The new highs are being dismissed for one reason or another. Maybe those that are saying that are on to something. I prefer that investors, do some research, draw a conclusion, and exhort all to run far away from the rhetoric that has been wrong now for months and years.

I don’t know where the S&P can trade to now with any certainty as momentum is hard to quantify. What I do know is that the entire market dynamic has now changed given this breakout.

Eddy Elfenbein is musing about Dow 20,000, which he thinks might happen this year.

I agree that this is a good time to buy or own stocks, even for those who have missed out so far. Please check out my own recent update on the market potential and how to find the best stocks and sectors.

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 several great choices worth reading, but my favorite is the simple and accurate message from Carl Richards:

When I first start working with clients, there’s a period of time I refer to as the financial pornography detox. It’s when you’ll get calls from clients wanting to know what they should do based on what some talking head said or some headline they read. Your job as a real financial advisor is to help them detox from this nonsense and understand they don’t need to do pay any attention to this so-called investment news.

Check the full post for the helpful illustration and the full podcast.

Brexit News

There is continuing interest about implications beyond the immediate effects. I follow these developments in three different ways.

  • Fundamental economics. Focus Economics has an excellent update on expectations for the UK as well as implications for other countries. (See also).

focuseconomics_uk_afterbrexit_infographic

 

  • Earnings data. We know the outlook is important. What sort of factors are coming up in the conference calls? FactSet offers this distribution:

FactSet earnings calls

  • Extra “color” from the earnings calls. Avondale does a great job with this. I found the JP Morgan comments on loan demand and spending to be especially interesting.

Value Stocks

Value strategies have lagged for the last few years. This year the trend seems to be shifting. (The Capital Spectator).

R1000.val_.gro_.2016-07-13

Watch out for….

Any story mentioning the “aging bull.” This popular theme has been taken up by some of the best sources – probably because it resonates with the instincts of the average reader. It is now competing with “self-taught in Austrian economics” as the most dangerous phrase in the investment lexicon. I will omit citing the multiple references last week, but do not be convinced. There is no relationship between the length of a bull market and the expected number of years remaining.

Even bond king Gundlach warns about the current risk in bonds, with the setup in the ten-year Treasury the “worst in his career.”

 

Final Thoughts

The simple reason for the market rally? Many stocks were priced as if we were already in a recession. As the economic data refuted this notion, prices partially normalized. There is plenty of remaining room, especially in economically sensitive sectors.

Of course there is plenty to worry about. Everyone should be aware of national and world problems, and try to act constructively. Compassion toward those suffering is in the nature of most people, regardless of their values or religious background.

When you think about investments, the problem is sharply different. It is expected and even desirable that the world is filled with problems. The challenge is to understand which problems are actually meaningful for your investments.

One way to keep your eye on the ball (since it is baseball season) is to evaluate the impact of any events on corporate earnings. Look at overall earnings, sectors, and stocks. Be specific. Do not use any lightweight arguments like “the first domino” or “if you see one cockroach.” Brian Gilmartin’s work is a great source for regular updates on earnings trends, combined with his insights. His latest post notes the reversal in both earnings and revenue, a turning point that he accurately predicted.

If your disciplined investigation cannot determine a link to profits, the news may still be very bad — but not for your investments. Embrace times when everyone else seems to have emotional worries.

Afterword – Worries Circa 2010

From one of my key posts in 2010. Please look at the reasons why so many were depressed about the market six years ago. You probably do not even remember some of them, but they were prominent at the time.

Here is a list of worries that I have noted, in no particular order:

  • ETF liquidation doomsday scenario
  • Flash crash — and overall worries about market manipulation
  • Bush-era tax cut expiration
  • Collapse of the euro and/or European Union
  • The Hindenburg Omen
  • Increase in US budget deficits
  • Ominous head-and-shoulders pattern in market averages
  • Dow 5000
  • Dow 2000
  • Dow 1000
  • The collapse of the US consumer
  • The double-dip recession
  • Sell in May
  • Sell in October
  • Sell, Mortimer, Sell (OK, I sneaked that one in for those who know).
  • The BP spill
  • Fear of Obama
  • Obamacare
  • Weakness in the dollar
  • Strength in the dollar
  • Weakness in China’s economy
  • Strength in China, leading to higher rates
  • Korea
  • Iran
  • Initial claims spiking to over 500K
  • Initial claims falling, but results skewed by seasonality
  • Shadow housing inventory
  • Foreclosure robo signing
  • Overstated and exaggerated corporate earnings
  • Fed blunders — QE II
  • High frequency trading
  • Worldwide collapse and deflation
  • Worldwide hyperinflation

 

The single most important thing for the investor to understand — right now — is the value of worries.  If you are looking for good investment returns, you need a time when others are worried.

The concept of the “wall of worry” is difficult for the average investor.  They seem to think it is bad when there are many worries.  In fact, the lack of worry is a sign of a market top.  Let me simplify.

Here is the image of the market top:  “What?  Me Worry?”

6a00d83451ddb269e20148c6fca9d9970c-450wi

 

Weighing the Week Ahead: Will Earnings Expectations Sustain the Rally in Stocks?

This week’s calendar includes a pretty normal schedule, but not the most important economic reports. There will be an abundance of FedSpeak, with questions about last Friday’s employment data. Despite this, the real story will be the start of earnings season. Expectations are pretty low. Statements about the outlook are always important, but that is especially true right now. The financial media will be asking: Can the profit outlook sustain the rally in stocks?

Last Week

The economic news was pretty good, and the market reaction was even stronger. The continuing market rebound has caught many off base. This week’s review emphasizes Friday’s employment report, since that was the biggest news.

Theme Recap

In my last WTWA, I predicted that the post-Brexit rally might continue if the economic news was good. This could lead to discussion of a possible “summer rally.” After a poor start to the week, the economic data finally turned the trick. From my “final thought” from last week:

Rightly or wrongly, much will depend on the employment report. The economy is the key to future earnings. Recession odds are low, earnings are improving, the oil issue has stabilized, and the Fed is on hold.

In addition to summer rally discussions, there was continuing skepticism – sucker’s rally, bull trap, and similar terms were bandied about. Sometimes I am right about the theme, but incorrect in my expectations. Last week both were on target.

The Story in One Chart

I always start my personal review of the week by looking at the great chart from Doug Short that summarizes the week. Since that post has not yet been updated this week, here is the picture from CNN Money. It was a pretty quiet week until the big Friday rally.

cnn weekly

 

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

  • Rail traffic is showing improvement, but the story reflects some mismatch in holiday timing and weaker comparisons. (Steven Hansen).
  • Las Vegas real estate sales are improving, up 7.1% year-over-year. Calculated Risk notes:

    This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities.

  • Energy prices are lower, with gasoline down 50 cents from last year. The Oil and Energy Insider has plenty of good data. The charts show the forward curve of prices – not just the current spot. U.S. Production continues to decline.

d577d024-1c19-4bb4-b105-28f47c541823

  • Spenders coming back from the mortgage crisis? Victoria Stilwell at Bloomberg makes the case, noting that time has “healed the wounds” allowing more credit for those who had foreclosures.
  • Long-leading indicators have improved. New Deal Democrat has a mid-year summary of ten indicators with demonstrated lead times. This is well worth a look. One nugget among the many good ideas:

    The yield curve remains as positive even now, with the same slope as it had in the middle of the 1970s, 80s, and 90s expansions.  The 5-year spread is even wider than it was during most of the 1960s.

  • ISM services handily beat expectations (56.5 versus 53.3 expected and 52.9 last month). Scott Grannis analyzes the components and has a good chart comparing the U.S. to the Eurozone. He suggests that worries may be over-stated.

US vs Eurozone Serv

  • Employment news was good. We should follow multiple sources on employment, especially because of the volatility and revisions in the “official” data. This week the news was all good, but perhaps not as good as the initial market reaction would suggest.
    • The ADP reported a gain of 172K private jobs, beating expectations of 152K. This is an important independent source.
    • Initial jobless claims hit a new low at 254K, beating expectations by 14,000.
    • Non-farm payrolls recorded a stunning net gain of 287K, exactly the opposite of last month’s result of 11K after revisions. This was good news, but not as good as it seemed. It requires a deeper look.
      • Commentary varied widely. For details, check out the summaries at Bloomberg and The Wall Street Journal. The bearish pundits either denied the strength, said that the market was not prepared for a rate increase, or both. Bullish commentators saw Santa in July, a reassuring number that would not cause the Fed to react.
      • Many fine sources showed balance. This report was not as good as it seemed, nor was last month’s so bad.
      • The charts are always interesting. Here are some of the most important from The WSJ and Bob Dieli’s monthly employment report (subscription required). To summarize from the WSJ, the change in earnings growth is still disappointing; most net job creation is full-time, the number of those wanting but not getting full-time jobs has declined significantly. From Dr. Dieli, the overall path of growth is the main theme. The duration of unemployment is an important and often-neglected story. Both sources have many more helpful charts and plenty of analysis.

2016-07-09_19-16-59

 

2016-07-09_19-19-18

2016-07-09_19-17-53

dieli employment

dieli duration of unemployment

 

The Bad

  • China rollover risk. Tom Orlik at Bloomberg Intelligence analyzes the current situation and the need to roll over $24 trillion in debt.

    The amounts involved, the maturity mismatch between assets and liabilities, and the fragile state of final borrowers all increase the chances of a misstep — and the severity of an impact should one occur. That underlines the importance for the government to maintain buoyant nominal growth, ample liquidity and low interest rates.

  • Manufacturing orders declined by 1%. Steven Hansen (GEI) has the full story with multiple takes on this data series. He sees more of a mixed picture.
  • The worldwide yield curve is flattening. Ed Yardeni discusses this story, concluding that while not recessionary, it bears watching.

FIG1

The Ugly

Three days of violence. Like everyone else, I was sickened and saddened by events. Leaders of all stripes had comments. My own favorite professor, Neil Browne, always emphasized the need for Asking the Right Questions. Although he has allegedly retired, his mission continues. He posted a thoughtful and insightful perspective.

 

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 always welcome. There is plenty of misinformation to refute!

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 normal week for economic data. In my calendar I highlight only the most important items, helping us all to focus.

The “A” List

  • Retail Sales (F). Will this reflect improved sentiment and employment?
  • Industrial production (F). A volatile data series–closely watched given the recent manufacturing weakness.
  • Michigan Sentiment (F). Good read on employment and spending.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • China Q2 GDP (F). It is amazing how quickly this number is generated….
  • CPI (F). May start to get some attention if the expected increase occurs.
  • PPI (Th). See CPI.
  • Fed Beige Book (W). Descriptive reports from various Fed districts, prepared for next FOMC meeting.
  • Business inventories (F). May data, but relevant for GDP.
  • Wholesale inventories (T). Volatile May data – a factor in GDP calculation.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

The big story will be corporate earnings. Fed fans can enjoy appearances from at least six of the regional Presidents. Expect each to be asked if Friday’s employment data changes the likely timing and number of rate increases.

Next Week’s Theme

Markets seem to have digested the Brexit story. The economic data have quieted recession worries. We can expect plenty of post-holiday FedSpeak, but little real news from those sources. It is the start of the Q2 earnings season. There are questions about both the top and bottom lines, but expectations are pretty low. The real question is about the future.

Everyone will be asking:

Can the profit outlook sustain the rally in stocks?

Feel free to join the discussion in the comments, but I see three key questions:

  1. Will the outlook for earnings be stronger?
    1. Optimists note that the dollar has stabilized, as has the decline in energy. Earnings expert Brian Gilmartin has emphasized these themes, while still noting the sequential declines in revenues and earnings.
    2. Pessimists emphasize the “earnings recession” and the sluggish second-quarter economy.
  2. Will stocks respond if the earnings outlook is good?
    1. Optimists note ultra-low valuations in many economically sensitive sectors. These stocks have room to run skepticism wanes.
    2. Pessimists point to lagging sectors that seem to lack upside. And of course, the familiar themes about overall market valuation.
  3. Will fundamental improvement be supported by the technical analysis followers?
    1. Optimists see a potential breakout from the long-run trading range.
    2. Pessimists see an overbought market.

 

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. Risk first, rewards second. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

indicator snapshot 070816

 

The Featured Sources:

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he expresses more confidence about growth in earnings.

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.

This week the recession odds (in nine months) have nudged closer to 10%. This does not completely reflect Brexit effects, so we may get a further revision.

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

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.

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. His latest update describes the elements of the indicator we cite every week.

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.

As we review the weekly indicators it is important to maintain perspective. A 20% chance of a recession would be average. It is not a reason for fear, since it says that a recession is very unlikely. There will be a time to exercise more caution, but we are not yet close to that point. There are many very questionable recession stories right now.

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. For most readers, they 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 – the top artificial intelligence techniques in action.
  • Why 2016 could be the Year 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 or suggestions for new topics.)

 

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 our neutral market forecast. Felix remains almost fully invested, including some of the currently-popular fixed income sectors. That is working well. The more cautious Holmes is still fully invested, in a diverse group of 16 stocks from a universe of nearly 1000, selected mostly by liquidity. That group is also responding well. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now. It is not a resounding endorsement of the overall market, but a vote for opportunistic trading.

Top Trading Advice

Worried about the Bloodbath of 2016 and post-Brexit fallout? The Trading Goddess has your back with ten suggestions. My favorite is the pocket chain saw.

Wondering when to sell? Adam H. Grimes helps with the question of when to take profits.

Brett Steenbarger shows the preparation needed for trading. (Start at 3 AM? Hmm). He does describe the need to have a balance including some quality time away from 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 (HT Abnormal Returns), it would be Phil Huber’s Fun With Strikethroughs: Wall Street Maxim Edition. He takes on the common misperception that good investing can be accomplished through a few simple rules, and he does so adroitly with humor. You will enjoy the entire list, but here is my favorite:

As goes January, so goes the year nothing.

Stock Ideas

Chuck Carnevale is cautious, even including the dividend aristocrats. He carefully describes his valuation concerns while highlighting the best candidates.

Philip Van Doorn (MarketWatch) has more stocks that were hammered by Brexit yet still favored by analysts. Those shopping for laggards may wish to take a look.

Market Overview

Shawn Langlois’ excellent “Need to Know” column features a variety of interesting market perspectives. This week’s “the call” segment featured Joe Fahmy’s four reasons for the Dow to hit 20K this year. (Check out www.dow20k.com for a prediction on this subject made in 2010 – when the Dow was at 10K).

Laszlo Birinyi publishes an excellent monthly newsletter (subscription required). He covers many analytic methods, but he features a collection of past media stories on the market. It is a helpful way to keep perspective. Take this one for example:

[Jeff] This might sound like something from last month, but it was actually written in 2010.

[Jeff] Maintaining the right long-term perspective is one of the biggest challenges for investors. I cite this striking example not to highlight the error of a single analyst. It was mainstream — a prevailing opinion published in a leading source.

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. This week, during his well-deserved vacation, he invited suggestions for good posts that had not gotten much attention at the time of original publication. This produced a number of high-quality ideas that he featured throughout the week. I am not surprised. My sense of something that is really good does not always resonate with readers. Other bloggers share this experience.

I am featuring one of these posts as this week’s best. In addition, please check out Wednesday’s article on Portfolio Management, and have a look at my suggestion. Cullen Roche’s piece on fear and negativity also has a timeless quality.

Watch out for….

The so-called “safe” stocks. These stocks are so overbought that it was a prevalent theme in this week’s investment advice.

Ian Bezek warns about utility yield chasing.

Ellie Ismailidou and Anora Mahmudova (MarketWatch) have a similar warning.

Corporate bond yields are also threatened (Barron’s).

Barron’s questions the fundamentals of the utility business – slowing growing demand vs. supply.

Final Thoughts

 

Stocks will eventually respond to an improving economy. We might have to wait for third-quarter earnings reports, another three months. An improved outlook will speed up this process, since stocks have tracked forward earnings. Improving the outlook will improve those projections.

Jeremy Siegel explains how stabilizing energy stocks, low interest rates, and improved earnings could lead to a 15% increase in stocks.

Years ago we could expect conference calls to “talk up” both current news and future prospects. A skeptical attitude was a healthy approach! More recently, CEO’s seem more interested in keeping expectations low. The financial community will pounce on negative statements and extrapolate to similar companies. It should be a great story.

The rotation from yield stocks to cyclical names and financials is the best opportunity for long-term investors.

But even more patience might be required.