Weighing the Week Ahead: Time to Rebuild the Wall of Worry?

As some market worries have been put to rest, there is a growing appetite for new ones. Pundits who say that things look OK are not very exciting. Last week we saw a shift in attention. Despite healthy earnings and good economic data, I expect pundits to be asking:

What should investors be worried about?

Personal Note

No WTWA next weekend. If something major happens, I’ll post some thoughts. Would readers find it helpful to have an update of the indicators even when I am away?

Last Week

Last week the economic news was good, but mostly ignored.

Theme Recap

In my last WTWA I predicted a week focused on geopolitical risks. Despite some attention to earnings, economic data, and the latest Trump Administration pronouncements, that proved to be a reasonable guess.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market performance for the week. There was little change for the week. The Thursday rebound was attributed to comments suggesting quicker movement on a tax reform package. If we measure the gain from the prior week’s close it is about 0.80%.


Whatever the news, the net market effect was (once again) very small.

The News

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

Once again, the economic news last week was good. The market got a little boost.

The Good

  • Trucking data is improving despite the mixed headline data. Steven Hansen (GEI) explains.
  • Mortgage delinquencies declined to an 11-year low. (Calculated Risk).
  • Industrial production rose 0.5%. Eddy Elfenbein notes the weakness in factories and the strength in utilities.
    Tim Duy also takes a closer look, noting the weakness in autos and the strength in utilities. He also cites the American interest in larger cars.


  • Q1 Earnings.
    FactSet notes that reports are beating the historical metrics. Brian Gilmartin calls attention to the lag in energy stocks. Here is the key quote from John Butters:

    To date, 6% of the companies in the S&P 500 have reported actual results for Q1 2017. In terms of earnings, more companies (76%) are reporting actual EPS above estimates compared to the 5-year average. In aggregate, companies are reporting earnings that are 6.7% above the estimates, which is also above the 5-year average. In terms of sales, more companies (59%) are reporting actual sales above estimates compared to the 5-year average. In aggregate, companies are reporting sales that are 0.2% above estimates, which is also above the 5-year average.

And fewer companies are citing President Trump as a factor. It is a small sample so far, but interesting to watch.

  • Philly Fed remained strong with a reading of 22. This is especially good for a diffusion index, which measures month-over month changes. We cannot expect the pace of increases to be maintained. Few understand this and fewer mention it.
  • Initial jobless claims rose to 244K, which some may see as bad. Most follow this noisy series via the four-week moving average, which moved lower.
  • Existing home sales were up 4.4%. Calculated Risk notes that warmer weather was a factor. Bill also expects increasing inventory, which will help future sales.
  • Chinese economic growth was 6.9%, beating expectations. (FT)

 

The Bad

  • Hotel occupancy rates declined by 4.6%. Calculated Risk reports and notes the possible effect of a shift in Easter from March in 2016 to April in 2017.
  • Housing starts declined from February, but increased 9.2% over last year’s easy comparison. Overall, starts are up 8.1% YTD. Calculated Risk is sticking with a forecast of a 3% to 7% gain for the year. Check out the post for a solid discussion of this difficult series.

The Ugly

Following up on an item from last year, cell phone use by drivers is nearly universal. Sensor data show that the phones are used in 88% of trips.

Blowing up a soccer team’s bus to make money on the team’s stock options is also ugly.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week, but nominations are always welcome. There are many bogus claims and charts out there!

This week I was especially disappointed with coverage – even by mainstream media – of the IMF report on world financial risk. From most of the stories you would never know that risk had decreased. One major source even reposted a typical ZH piece – no links, poor writing, extensive quotes without citations, etc. Sadly, many more people read this than the original report or any unbiased accounts.

The Week Ahead

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

The Calendar

We have a normal week for economic data.

The “A” List

  • Consumer confidence (T). Expect some decline from record levels.
  • Michigan sentiment (F). A good read on employment and economic well-being.
  • New home sales (T). Continuing strength needed in this important sector.
  • Q1 GDP (F). This first estimate will be revised (perhaps heavily) but will still grab attention.
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • Pending home sales (Th). Not as important for economic expansion is new sales, but still a good market read.
  • Durable goods (Th). March data, but still important.
  • Employment cost index (F). A sign of labor market tightening?
  • Chicago PMI (F). Most important of the regional indexes, especially when the national report is in following week.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

The schedule is light on FedSpeak, but there will be plenty of earnings news.

Next Week’s Theme

In a normal week, the Q1 earnings season would continue as our theme. While dramatic moves in some stocks grab attention, the overall market interest emphasizes what to worry about. Since some of the recent problems do not seem as threatening, it is time for a fresh supply. Expect many to be asking:

What should investors be worried about?

There are four leading candidates:

  1. A government shutdown. Action is needed by the end of the week. Ever-changing rumors suggest that the vote will be linked to an ObamaCare repeal or some other topic. Expect this to get plenty of attention all week, since these issues are never resolved until the deadline.
  2. The French election. It’s a revolution no matter which front-runner wins, says a French political scientist and adviser to a former Prime Minister. (Interesting post). It could lead to rioting. (The Telegraph).
  3. The Trump agenda is in jeopardy. The President and his team have a business approach, but often do not recognize legal and political limitations. Some were disturbed by the recent account of the Trump/Merkel meeting, where the President did not understand the laws related to trade agreements – despite an explanation repeated ten times. (The British version).
  4. Market valuation. This multi-year topic got a fresh boost this week. The concept of an expensive market is now conventional wisdom. It implies that long-term investors are stupid, dumb money, and facing excessive risk. Just as they have been for years. Investors are worried about a crash, according to Goldman.

These are very important questions. Understanding a “wall of worry” is a fundamental concept for investors. Many think that a list of worries is bad. That is wrong. Well-documented concerns are reflected in current pricing. I tried to explain this concept in 2009:

Many observers express surprise that the market can rally in spite of “the fundamentals.”

This is the wrong question.  The best time to invest is when things look terrible and prices reflect the poor current conditions.  I wrote an article on this topic in mid-April of 2009 that I thought was one of my best.  A commenter, probably reflecting many others, offered a skeptical “Good luck with that.”  It is difficult, unpopular, and profitable to have a bullish market viewpoint when the general news flow is so negative…

…How can stocks rally with so much to worry about?  To answer this question you need to consider what these lists would have been like a month ago.  Some of the worries have been crossed off!  Others have been reduced.

The crash of the Euro, the sovereign debt crisis, and the “cockroach theory” have not come to pass.

Corporate earnings have remained strong — both current and prospective — despite skepticism.

None of the extreme “technical” forecasts — Hindenburg Omen, head-and-shoulders top, Death Cross, or Dow Theory signals came to pass.  Some are now reversing.

If you watch the lists of worries as they change over time, you can see that some important concerns drop off.  This climbing of the “wall of worry” best explains both the current market action, and also the week ahead.

This concept, along with our market indicators, helped in achieving my 2010 prediction of Dow 20K. The actual forecast was important. The underlying reasoning and method even more so.

As usual, I’ll have more about the new worries in my Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

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

The Indicator Snapshot

 


 

The Featured Sources:

 

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

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

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

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

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

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

Focus Economics did an interesting post on why productivity growth is so low. I was one of the 23 “experts” who commented. The answers are a bit uneven, but interesting. Take a look.

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix, Holmes, and Friends

We continue with a strongly bullish market forecast. All our models are now fully invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our five technical experts, and some rebuttal from a fundamental analyst (usually me, but sometimes a guest expert). We try to have fun, but there are always fresh ideas. Last week the group contrasted long and short-term themes.

Top Trading Advice

 

Brett Steenbarger is required reading for traders. My favorite this week is his discussion of Cyclically Adaptive Trading. You must read the entire post to understand this approach, but we should expect more on this theme. Does this sound familiar?

When traders refer to the difficult trading environment, they often make reference to “choppy” or “noisy” markets.  Usually their next sentences lament the “algos” and their impact upon markets.  I find these to be expressions of frustration, not constructive formulations of trading challenges.  Invariably, those lamenting choppy markets dominated by algos that “manipulate” markets engage in their venting–and then go back to trading as they’ve always traded…and continue to lose money.  

Gatis Roze has ideas about to deal with losses – and how not to!

Adam H. Grimes has an interesting post on the difference between developing skills and our perceptions of success. While it fits the normal trading themes, this has much broader interest.

 

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Chuck Carnevale’s excellent analysis of Penske Automotive Group (PAG). Chuck always has great stock ideas, but he often includes a lesson about how to find the best opportunities. This is a great example – well worth studying by DIY investors. His research uses information from the company, like this chart:

This is crucial if you want to understand the profit drivers, but it is only a start. Among many other points, he also includes one of the most important summary charts from his excellent resource. (I never invest in a stock without checking it out at F.A.S.T. Graphs, and that helped us to find PAG more than a year ago).

Stock Ideas

 

Corbin Perception’s Industrial Sentiment Survey is loaded with great information from big-time buy-side investors and analysts. Here is a sample – something I found interesting.


 

Barron’s has some interesting ideas this week. Big banks, Sarepta (SRPT), and O’Reilly (ORLY) all get strong mentions. There is also a nice feature on Bespoke Investment after ten years. It includes some of their picks and pans – interesting lists!

Brad Thomas suggests some “battle-tested” REITs.

Peter F. Way uses an interesting approach – hedging by market-makers doing big-volume trades. These actions reflect their expectations about risk and reward. He reports the results on the Dow stocks.


The entire article will help your interpretation, but Goldman Sachs (GS), Microsoft (MSFT), and United Health Care (UNH) are the most attractive.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. This week Felix emphasizes energy while Holmes likes Discover Financial Services (DFS).

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is the analysis of annuities. Here is how a variable annuity works (without the regular sales pitch). Here is how to create one yourself.

I have emphasized the regular personal finance feature at Abnormal Returns, but the offerings have become much more diverse. I follow them all, often finding items of personal interest as well as ideas for WTWA. If you have not recently checked out the site, it is time for another look. You can also get special benefits by becoming a member.

Seeking Alpha Editor Gil Weinreich’s series for investment advisors is useful for individual investors as well. The well-chosen topics span important questions and provide helpful links. I loved this week’s post on the value of time. Here is a key quote:

Sadly, many people who reach “retirement” (I confess, I do not like that word) experience depression because they don’t know what to do with themselves. My two cents: Whatever your ideal vision of retirement may be, start enjoying it now to ensure that you will enjoy it even more then.

How true! In my research this week, I learned that the average daily use of mobile devices for Americans is…..Make your guess and see the answer at the end of the post. Also, Netflix reports that members have spent 500 million hours watching Adam Sandler movies.

Market Outlook

Schwab has an excellent discussion of reflation – a key market theme. The term is frequently used, but many do not understand it.

Reflation is the process of getting economic growth and price broadly back to pre-recession levels. While progress has been made, growth is still not accelerating. First quarter real gross domestic product (GDP) is forecasted to come in around a 1% annualized level according to Bloomberg. Add in disappointment with the political developments—the hoped for stimulus coming from Washington is at least delayed; the Federal Reserve is talking about reducing its balance sheet; and geopolitical tensions are rising—and you have a good mix for investors to pare back some risk. Stocks have trended modestly downward, while more cyclical areas of the stock market have struggled at the expense of more defensive areas. We’ve also seen yields reverse course after surging on hoped for fiscal stimulus and rising economic growth.

Their overall conclusions are constructive. They address many key concerns – examining and charting the data.

Watch out for…

 

Value traps. Simply Safe Dividends does a typically fine analysis of Cardinal Health (CAH). Even though it is a dividend aristocrat, there are warning signs.

Final Thoughts

 

What should we think about today’s key questions?

  1. Government shutdown. I expect this to be avoided. The ideal solution would be an element of bipartisan compromise. The danger? Too many “extras” tacked on.
  2. French election. I have no special insight into the outcome. (FiveThirtyEight says it is way too close to call). By the time you read this, we may have the result for this round. One safe prediction is that this story, whatever the initial outcome, will be with us for a couple of months as the runoff occurs, followed by legislative elections. There are plenty of stories with dire predictions. Historically, the press (especially the financial press) has dramatically over-estimated these effects. We shall see. (Some other opinions).
  3. Trump agenda. There has been a challenging learning curve in the first 100 days. For those who think the post-election rally was all about Trump, this is a problem. For those of us who expected this rebound, regardless of the election outcome, market-friendly policy changes remain as potential upside. Charlie Bilello has a nice, chart-packed analysis of the market’s “false narratives.” He has a great analysis of the “Trump stocks” and themes.
  4. Market valuations. The table pounding continues. I have written on this topic in detail, including analyses of all the “favorite” valuation indicators – none of which are currently used by the inventors. “Skin in the game” is usually an important test for market cynics. Why do they think that others (like Paul Tudor Jones) can interpret the Buffett indicator better than Mr. B? Check out his reasoning here in his Dow 100K comment.

I am going to attempt a simple and brief explanation of the current valuation issue. It involves a “thought experiment” like Einstein’s in developing the Theory of Relativity. (I love and recommend Walter Isaacson’s biography).

Suppose you are given the chance to purchase an asset for $100,000 with an annual payment of $10,800, a rate of 10.80%. Your personal rate of inflation is 13.5%.

Suppose instead that you are given the chance to purchase an asset for $100,000 with an annual payment of $2224, a rate of 2.24%. Your personal rate of inflation is 1.8%.

Which is the better buy? Which should cost more? When inflation is high, both assets look cheap. When it is low, both look dear. BTW, the examples use actual data from 1980 and 2017.

If you understand this example, you see why prospective inflation and interest rates are important for valuing both stocks and bonds. Sources that discusses stock valuation, using only historical data, are telling only part of the story. Ignore them.

Valuation for all assets is relative. If Einstein were with us, he would agree with Mr. Buffett.

[Answer to mobile device question: Five hours per day. That includes streaming Adam Sandler movies.]

 

 

 

 

Stock Exchange: Long-term (Energy) and Short-term (Finance and Software)

Every trader has a method linked to a time frame. Our group has some new ideas, but the members are sticking to their guns on some positions.

Long-term viewpoints emphasize an economic rebound, with materials and energy stocks leading.

Short-term methods show opportunities in financial stocks and software.

Review

Our last Stock Exchange discussed contrarian trading – why it is admired and how to do it intelligently. The group suggested three ideas. If you missed it, you will enjoy the topic and the ideas.

Market Tech Take

I hope to do something along the lines of a weekly review of important technical indicators. Our own key indicator, the Market Health Index (MHI), remains positive. Watch this space! Suggestions about your own favorite indicators are most welcome. If you have something good, we will run it on our special universe. You will get a result that you cannot see elsewhere.

Let’s turn to this week’s ideas.

This Week—Best Ideas Vary with the Time Frame

 

Holmes

This week I’m buying Discover Financial Services (DFS) a Credit Service company in the U.S. (65.30).

This one looks a little tricky. This stock languished in mid to high 50’s for a long time before establishing a new range in the mid 60’s to low 70’s. I’ve been watching this name pull back for a while and when I sense it is bottoming I jump in. I admit this pick make me nervous. I would be inclined to bail out if drops below 63.50, but I’m hoping it can revisit the recent highs of 73.


My biggest worry is whether that rally in that stock from 57 to 73 was real buying, establishing a new range to accumulate and not some low-volume short covering based on who knows what information that isn’t in the charts. My best protection is a tight leash on this puppy, and a willingness to bail on any new weakness.

J: Tight leash on the puppy? I thought you favored dog emancipation!

H: I do. It is just an expression that humans use.

J: You have some support on this idea. The fundamental valuation is solid, as the FastGraphs chart shows.


J: I especially like your ideas when there is good, fundamental support as well. But aren’t you worried about the upcoming earnings announcement?

H: That could well be a source of opportunity. The chart is sending a message.

J: To my eyes, it looks like a mixed message. Meanwhile, you are the source of our overall market status indicator. How do things look?

H: Still very positive—breadth, momentum, and risk. It is not quite as strong as a couple of months ago, but still OK.

Oscar

My newest holding is software. While I have my own basket, you can get the idea from considering the software SPDR (XSW).

If you’re following the market closely, which I do right after checking out the sports section, you don’t need me to tell you things have been a little flat lately. That doesn’t mean I’m gonna just give up and go to cash. I’d only do that if I thought a significant downturn were imminent. Let’s take a closer look at software:


You wouldn’t know it based on the moving averages, but the average price for this ETF has been trending down slightly over the past month. There have been a couple blips up above $58.50, but I’m comfortable with that. I still think there’s opportunity for significant growth here, very much like what we saw back in February. This is particularly true with individual holdings, like Microsoft (MSFT):


 

Slight decreases have brought the stock down from 2017 highs, creating a potential buying opportunity for savvy investors. If you shop around a bit, you might just find some other bargains in this sector.

J: MSFT earned the reputation as a “cash cow” that did not innovate. Gradually that changed, and the annual fees for software have helped to create an earnings base. That said, the valuation is not exciting.


 

J: As you can see, the stock is richly valued. You are picking up the recent momentum.

O: True. I hope it continues for a bit longer. Then I will be on to the next trade!

J: Are you following the Trump effect?

O: You are not going to fool me again! I know that the “Trump trade” is not about baseball! I am now checking out the front page after reading the scores, the racing form, and the stock page.

J: That is an improvement. What do you have to offer to our readers?

H: Here is my list of favored sectors – buy/hold/sell. Keep the questions coming!

 

 

 

 

RoadRunner

(Commentary translated from various pecks, rapid movements and beeps).

RR: I have no new ideas and few positions.

J: What? I just upgraded your diet. Do you want to go back to birdseed?

RR: You already discussed this with Vince (the Father of all our models).

J: I love your method. Find a stock in an uptrend which also has a clear trading range. Then buy when it is at the bottom of the range.

RR: I have a good method, but sometimes the market does not cooperate.

V: Yes. RR is usually fully invested, but the entry requirements are stringent. We never reach for new positions. That is why we keep risk low.

J: OK. Does that imply some overall market risk?

V: No. It just means a shortage of stocks that fit the three specific requirements.

J: That makes sense. And thanks for joining in, Vince. We’ll keep RR on the lizard diet.

RR: Thanks, Vince!

Felix

Once again, I do not have a new pick. My choices are long-term, and that perspective has not changed.

J: Again? Readers want new ideas.

F: Is there anything I can do to earn a few extra bucks?

J: What about reader questions?

 

F: I always appreciate reader questions. I check them all.

J: Are you responding to every request?

F: I am making a list of top choices from the “reader universe.”

J: What if a reader request is not on the list?

F: Then I do not see it as an attractive long-term choice. I respond to email with more specific questions.

J: And where would that be?

F: ETF at NewArc dot com. At least until you give me my own personal email address!

J: That is another expense. We’ll do it when you earn it. Any other ideas for us? You started out with a heavy weighting in basic materials and energy. Do you still like stocks in those sectors?

F: Yes. I made some great early gains.

J: And recently?

F: Those groups have pulled back with the resumption of economic skepticism.

J: You know about that?

F: Yes. I read more news – and more relevant news – than Oscar. My time frame, unlike the rest of the group, is not a quick trade. I am playing for the long run.

J: Thanks for explaining. By the way — Where is Athena?

F: Chuck Carnevale gave her last weekend off.

J: Chuck wouldn’t say that! And besides, that was a week ago.

F: That’s what she told me to say. She has nothing new this week.

 

Conclusion

Your time frame matters. The issues for the economy and market in the long run are quite different from a trading perspective of a few weeks. Day traders have a more extreme problem.

As we have frequently seen in this series, there is no “right” answer in trading. Your time frame and method determine what is right. Your results are measured in the long run, not by a single trade.

 

Stock Exchange Character Guide

Character

Universe

Style

Average Holding Period

Exit Method

Risk Control

Felix

NewArc Stocks

Momentum

66 weeks

Price target

Macro and stops

Oscar

“Empirical” Sectors

Momentum

Six weeks

Rotation

Stops

Athena

NewArc Stocks

Momentum

One month

Price target

Stops

Holmes

NewArc Stocks

Dip-buying Mean reversion

Six weeks

Price target

Macro and stops

RoadRunner

NewArc Stocks

Stocks at bottom of rising range

Four weeks

Time

Time

Jeff

Everything

Value

One month or long term

Risk signals

Recession risk, financial stress, Macro

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Questions

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

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables above, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

 

Weighing the Week Ahead: How Should Investors Cope with Geopolitical Risk?

Last week I suggested that the market might be ready for some real news—corporate earnings. That is still a key topic, but attention is focused on world events. Pundits will be asking:

How Should Investors Respond to Geopolitical Risks?

Last Week

Last week the economic news was good, but mostly ignored.

Theme Recap

In my last WTWA I predicted that attention would shift to corporate earnings reports. Little did I know that a passenger dragged from a United Airlines flight would dominate the news cycle for the week. Just as that was losing interest, the Trump military actions grabbed the spotlight. So much for my expectation (and hope) of returning to news focused on financial markets.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the small daily moves and the 1.13% loss for the week.


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

The News

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

There was not much economic news last week, but it was pretty good.

The Good

  • Port Traffic showed strength in March. Steven Hansen (GEI) helps us sort through a very noisy data series.
  • Foreclosures are down, now below pre-recession levels. (MarketWatch).
  • Mortgage delinquencies are at a 10-year low. (24/7).
  • Small business optimism registered a strong 104.8.
  • Inflation tame. PPI and CPI both declined. Some see this as negative news since it is not hitting the Fed’s target. That makes little sense. If the Fed can continue stimulative policy without increasing inflation, so much the better.
  • Weekly jobless claims remained low at 234K. This half of the picture remains solid. We also need new hires.
  • Michigan sentiment remained strong at 98. The best chart of this indicator is the Doug Short design, now updated by Jill Mislinski. It shows the indicator, recession periods, and GDP. You can easily see the current level versus past records. If only everyone was so clear!


 

The Bad

  • Retail spending declined 0.2%. (Calculated Risk reports). Steven Hansen has a different take, with multiple historical charts and comparisons. Retail sales are an important sector, so this is worth watching closely.

The Ugly

Fraudulent LIBOR trading went far beyond those on the front line. This story should have gotten more attention because so many swaps and variable interest rates (perhaps your own mortgage?) were linked to this rate. Perhaps that is not a good idea.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week, but nominations are always welcome. There are many bogus claims and charts out there!

I am disappointed that so many of my blogging colleagues agree with this concept – on a theoretical basis – but do not join me in highlighting these posts. While I do not compete for my own award, I had a post this week that illustrates what I am looking for. There are plenty of “mystery charts” that are unclear, poorly sourced, or cannot be replicated. Sadly, these optical illusions fool many readers.

The Week Ahead

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

The Calendar

We have a normal week for economic data.

The “A” List

  • Housing starts and building permits (M). An advance look at an important sector.
  • Leading indicators (Th). Last month won’t be matched but overall strength expected.
  • Existing home sales (F). Less important for immediate economic effects, but a good market read.
  • Beige book (W). Anecdotal data, but the punditry hungers for any Fed-related news.
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • Industrial production (T). March data, but an important sector.
  • Philly Fed (Th). Earliest read on April is expected to be strong, but can’t match last month.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

The schedule is back to normal on FedSpeak, with something every day. Earnings season ramps up. World events may well grab attention. Friday is options expiration, which can have the effect of exacerbating big moves.

I would say “fasten your seat belts,” but enough of that already!

Next Week’s Theme

In a normal week, the Q1 earnings season would be the theme. The geopolitical stories are more dramatic, better both for TV clips and online posts. That is certainly an important story, but at WTWA we focus on financial markets. At least some of the punditry will be doing the same. The key question?

How Should Investors Respond to Geopolitical Risks?

There is not a lot of complexity in this week’s theme.

The facts:

Fear is back in the market.

Credit Suisse updates their fear gauge.


CNN shows an even more dramatic result.


  1. The fear team advises exiting the market, if you have not already done so based upon prior advice.
  2. The passive investing team thinks you should “stay the course.” Scott Grannis has a good chart pack and remains “cautiously optimistic.”
  3. Some see a buying opportunity. (Davidson, via Todd Sullivan).

Earnings expert Brian Gilmartin notes that whatever is bothering the market, it is not earnings!

FactSet’s John Butters agrees.

Those conclusions are important. The data helps us to isolate the market concern: geopolitics, not earnings.

Can investors do better than these three alternatives? As usual, I’ll have a few ideas of my own in today’s “Final Thought”.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

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

The Indicator Snapshot

 


 

The Featured Sources:

 

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

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

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

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

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

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

The Quarterly JP Morgan Guide to the Markets is available. This is a key resource for data-driven investors. Among the many great charts, investors should compare their take on valuation with those most popular in the blogosphere. Unlike those, there is some recognition taken of inflation and interest rates, especially the bond indicator.


Another key chart looks at what happens when interest rates move higher.


Why? Ultra-low rates are typically associated with deflation fears and massive skepticism about earnings. As the economy improves, both rates and earning move higher. So do stocks.

Bill McBride
updates his recession analysis. While his excellent record is not as long as our sources, he has the right idea. It is worth reading his current take (no problem in the foreseeable future) and the comparison to his past calls.

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix, Holmes, and Friends

We continue with a strongly bullish market forecast. All our models are now fully invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our five technical experts, and some rebuttal from a fundamental analyst (usually me, but sometimes a guest expert). We try to have fun, but there are always fresh ideas. Last week the group discussed three contrarian ideas.

Top Trading Advice

 

Brett Steenbarger is required reading for traders. My favorite this week is, How Tough Has Trading Been?
Brett collects data from various sources, demonstrating the recent rough patch for many strategies. Then he follows with key advice on how to negotiate these times:

It’s not enough to learn how to trade; it’s critical to trade uniquely.  It’s not enough to trade with rules and discipline; one must also find opportunity creatively.  The firms achieving the results depicted above are trading trends in liquid markets in a disciplined fashion.  A great approach to success would be to research strategies that made money during months when those other participants were performing worst.  There is no guarantee that future returns will mirror backtested ones, but digging for gold in well-mined fields is a poor risk/reward proposition.

This is an important lesson. This post is a close winner over the discussion of overtrading.

Mark Hulbert
provides an update on the “oldest market timing system.” Hulbert notes concern among most market timers, and then contrasts with Dow Theory. “All three of the Dow Theorists who I monitor on a regular basis believe the major trend remains up”. Read the entire article to see what might change their minds.

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 article from Charles Schwab’s Liz Ann Sonders. Sometimes the most important investment advice relates to your perspective – the reasons you have in mind for recent market behavior. In particular, if you buy the incessant media chorus of the “Trump Rally,” you will be worried every time a Trump program is stalled. Sonders cleverly shows why you need a deeper look. I cannot quote it without spoiling the story, so please read this excellent piece.

Stock Ideas

 

Barron’s looks at drug stocks that could thrive in an era of lower prices. Also underwear! Especially Hanes Brands (HBI) which is cheaper than competitors.

Deutsche Bank (via 24/7) recommends aerospace and defense stocks.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. Road Runner finds rising channels and picks stocks trading at the bottom – Targa Resources (TRGP) this week. Warning to investors: Road Runner does not hold positions for more than a month.

Simply Safe Dividends looks closely at Verizon (VZ).

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is Ben Carlson’s discussion of how much you need for retirement. The answer is different for everyone, of course, and Ben helps you figure it out. Here is a key tool:


 

 

Watch out for…

 

The original “Trump Stocks.” This is what happens when analysts on deadline jump the gun without complete information.


 

 

Final Thoughts

 

World events provide one of the biggest challenges for investors. A sense that something bad might happen triggers a very human response. Caution seems warranted.

Before offering some criteria, here are a couple of examples that will be unfamiliar to most current readers.

  • In the 1980’s the cold war raged. Polls asked a variety of questions. One was whether people thought they would die in a nuclear exchange. About 80% said yes. Later in the poll, people were asked whether they expected a nuclear exchange in their lifetime. About 70% said yes. Putting these two results together showed that most people did not expect to die of old age, an accident or something else. More than half of the US population seemed to expect death from nuclear war. Had that question been asked directly, the answer would probably have been different, but you get the idea.
  • Art Cashin, the clever, witty, and wise NYSE veteran has a story about his days as a trainee. You may infer his age, since the incident occurred during the 1962 Cuban Missile Crisis. This was the closest the world has come to a nuclear war. Art’s instructor asked the trainee class how they should respond to the threat of war. Their answers ranged from sell to going short. Wrong! The instructor explained that if we got through this, the market would rally. If not, it wouldn’t matter!!

Naturally, it is not that easy. We need to be realistic about threats and risk. In doing so we must – as always – separate our citizen role from our investor role.

There are several aspects to this question.

  • The risk must have a link to financial markets. Ben Carlson has a good history of important events. The results are mixed, which illustrates the key point.
  • It is not enough to sell. You must know when to get back in the market. This can be very difficult to do, especially when there is a surprise positive reaction.
  • Which risks require action? How much before the possible event? There are always threatening geopolitical situations. There is an active market in fear. My personal conclusion is that risks are much, much lower than they were thirty years ago.
  • If you act, what should you do? Sell everything? Go short? Few examine the effect of a modest hedge. It requires careful analysis and may not achieve what you want.

Investing Conclusion

It is important to recognize risk. It is the top priority for my accounts. I am committed to avoiding the next big downturn, which we all know will happen eventually.

You can do that by a perpetual bearish attitude, but most people need some investment returns. It is better to have tools that evaluate market risk. That is a regular mission in WTWA.

Going beyond the numbers you see here, I apply my experience. In 2012, for example, there was risk from the “fiscal cliff” issues. While I expected it to work out at the eleventh hour – and I was right – I reduced position sizes to reflect increased risk. This sacrificed some return, but it was aligned with my mission and our clients’ needs.

Selling your positions because there is a threat is not a good solution. Being a “buy and hold” investor would be better, but not best. Recognizing which geopolitical risks have market relevance is a key skill.

Stock Exchange: Three Contrarian Ideas

Every trader wants to be a contrarian. You get to be the “smart money.” You buy low and sell high. Buy the dips and sell the rips. Contrarians may not always be right, but they certainly get attention.

Brett Steenbarger, everyone’s favorite expert on trading, did a study of this in 2006. He compared two hypothetical traders. One bought the market after a down day; the other bought after an up day. Remarkably, since the market usually goes up, the former trader did better. A lot better. It would be interesting to see an update on this study.

Dr. Brett, whose website is a treasure trove of ideas for trading ideas, discusses how this applies to emotions and trading:

It occurred to me after writing the post that, when I’ve developed quant models of market behavior than anticipated a move, I’ve often heard kudos from others about my “good call.”  When I’m a psychologist and listening to my clients, helping them make changes in their lives by accessing strengths they didn’t realize they had, no one compliments me on good calls.

Our Stock Exchange gang does what Brett recommends–not prediction, but getting in tune with the market opportunities and avoiding emotion.

The fact that two members of the group do not have fresh ideas this week sends a message – one that I will discuss further in today’s conclusion.

Review

Our last Stock Exchange considered how to find trades in a low-volatility market. That topic worked like magic! Volatility picked up dramatically in the ensuing week. Maybe it was the power of guest expert Chuck Carnevale. Special thanks to him for his astute comments and good nature in joining in our conversation. If you missed it, please check back.

Market Tech Take

I hope to do something along the lines of a weekly review of important technical indicators. Our own key indicator, the Market Health Index (MHI), remains positive. Watch this space! Suggestions about your own favorite indicators are most welcome. If you have something good, we will run it on our special universe. You will get a result that you cannot see elsewhere.

Let’s turn to this week’s ideas.

This Week—Finding Contrarian Ideas

RoadRunner

(Commentary translated from various pecks, rapid movements and beeps).

Targa Resources (TRGP) was on a real tear between the start of November and the end of January. Beyond this three-month streak, the price has mostly leveled off. I take that as an opportunity.

Based on the shape of these moving averages and the trends over this past year, this could be a promising holding. My general approach is to hold positions for about 20 business days. We’ve got a relatively slim shot at a pop here, but I’m still willing to make this one of my short-term holdings.


J: As you can easily see from the F.A.S.T. Graph chart, this is a very poor buy for investors – at least on an earnings basis. The current price might not be justified for years.

RR: The market sees something else, as the recent price action shows.

J: Your method is to look for rising channels, buying at the bottom?

RR: Yes.

J: The price seems to have violated the bottom of the channel.

RR: Not quite. It is at a key point. It would help if you started drawing the channels.

J: I am the boss!

RR: Then assign someone with fingers. I have done my part. Time for my lizards – and thanks for the diet upgrade!

Holmes

This week I’m buying Brixmor Property Group (BRX) an owner operator of grocery-anchored community shopping centers in the U.S.

Here’s a stock that has been bouncing between 23.5 and 25 until Feb 27th when it tumbled down to 20.80. It has bounced a little since then trading in a tight range 22 and 20.90. I’m looking for rebound to 23.50 level with a tight stop at the 20.75. Hopefully that February move down has resulted in a wash out of sellers and now the stock is in stronger hands.

J: This is a typical chart pattern for you. Sometimes you wait for more of a rebound.

H: It has worked well in thousands of test cases over many years. You just need care in spotting it.

J: Shopping centers have not been doing well. Amazon (AMZN) is beating them on price and service. People would rather order from home.

H: Is that also true of grocery-centered properties?

J: I don’t know. Amazon is doing some groceries as well.

H: That sounds like a long-term effect. I will be out of this stock before that happens.

Oscar

I might have said this before, but here’s a holding that looks like a home run. The 50-day moving average on the Consumer Cyclicals ETF (XLY) is heading way past the outfield and into the cheap seats.


 

As you likely know, my M.O. is to find a momentum pick for a short term holding. There are enough attractive stocks within this area of the market that I’m not concerned about an imminent dip. I’ll keep an eye on this one for 4-6 weeks, and try to let it go for a small gain.

 

J: Good luck with that. All of the current news warns about retail and consumers. The word is out: The “Trump Trade” is off.

O: Trump? Who is he? Who is trading for him? Are you talking about the guy who was scouted by the Phillies? He is too old to be a player.

J: You need to read more than the sports section and Baseball Reference. This Trump is the current President.

O: Oh. Yes. That one. I thought that consumer sentiment was strong.

J: It is, but that is the key question for these cyclical stocks. What about the reader questions?

O: Like Felix, I am emphasizing the top choices from readers.

J: So they are not necessarily your own favorites?

O: No, but there is plenty of overlap.

J: How did you do in March Madness?

H: Not well. I don’t take the chalk – no edge. Time for baseball and fantasy golf.

Felix

I don’t have a new pick this week, so I’d like to look back to one of my recent choices. Continental Resources (CLR) was at a nice price point when I recommended it in early March. Over the course of the month, it continued to decline past February’s trading range.


This is part of the reason why I like to hold positions a bit longer than my friends. Some might be tempted to stop out this position at the $43 mark. I’ve kept this in my portfolio, and it’s currently a small gainer. My goals are to hold out until the stock starts trading near its levels from the beginning of the year, above $50.

J: To be clear, you have a system of limiting losses – something like a stop?

H: Yes, but it has a wider range than the traders.

J: What about questions from your fans.

F: I always appreciate reader questions. The extra work helps my pay.

J: Are you responding to every request?

F: I am making a list of top choices from the “reader universe.”

J: What if a reader request is not on the list?

F: Then I do not see it as an attractive long-term choice. I respond to email with more specific questions.

J: And where would that be?

F: ETF at NewArc dot com. At least until you give me my own personal email address!

 

 

 

 

 

 

 

 

 

 

 

 

 

J: Where is Athena?

F: Chuck Carnevale told her that if you could take a long weekend, she could also.

J: Chuck wouldn’t say that!

F: That’s what she told me to say. She has nothing new this week.

 

Conclusion

Sometimes you learn from what is not happening. Just as Sherlock Holmes (no relation to our own Holmes, despite his attire) noted when the dog did not bark in the night, the absence of expected action had meaning. The flat market, followed by the recent pullback, is not an environment for momentum driven strategies. The result is a lack of action from our momentum strategies. This fact encouraged me to adopt our theme for the week – Contrarian Trading.

As we have frequently seen in this series, there is a time for each method. The market is offering some rebound trades, while momentum is out of favor. Respect what the market is giving you.

 

Stock Exchange Character Guide

Character

Universe

Style

Average Holding Period

Exit Method

Risk Control

Felix

NewArc Stocks

Momentum

66 weeks

Price target

Macro and stops

Oscar

“Empirical” Sectors

Momentum

Six weeks

Rotation

Stops

Athena

NewArc Stocks

Momentum

One month

Price target

Stops

Holmes

NewArc Stocks

Dip-buying Mean reversion

Six weeks

Price target

Macro and stops

RoadRunner

NewArc Stocks

Stocks at bottom of rising range

Four weeks

Time

Time

Jeff

Everything

Value

One month or long term

Risk signals

Recession risk, financial stress, Macro

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Questions

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

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables above, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

Stock Exchange: The Role of Valuation in Trading

 

Investors who use valuation do it in an absolute sense — the way we do in our Great Stocks program — but what about traders. When the market sets a price that is much different, it reflects broad-based opinion that the typical valuation method is not accurate. Our models sometimes pick that up. Our trading model picks are based upon technical factors, but these often reflect valuation versus the past or versus other stocks/sectors.

Our guest expert this week is Robert Marcin, the founder and general partner of Defiance Asset Management. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund  (currently Morgan Stanley Institutional Value). We invite our readers to follow him on Scutify.

This
Week—Oscar Eats Out

This week’s picks are especially interesting from a value perspective. Our technical models often sense a change in valuation – which they find attractive. Robert has a different take.

 

Oscar

Oscar: This week, I like the restaurants sector. We’ll use Bloomin’ Brands (BLMN) as an example:

Price has been highly variable, though its current price matches up almost exactly with its 200 day moving average. That’s part of the reason why I would move to make this part of a restaurants sector holding for the next month. I predict modest gains, likely near the $20 level.

Robert: Bloomin Brands is an inexpensive stock but with little fundamental catalyst to drive shares higher unless it’s simply broad restaurant exposure one is looking for.

Oscar: I am shooting for the broad exposure, but I like the price here too.

Robert: The stock is cheap at 12.5x’s earnings and 7x’s ev/ebitda, but with little growth in revenues or earnings forecasted, there’s not a lot of conceptual appeal here for a sustained move higher.

Oscar: How about my $20 target? What are my risks here?

Robert: The stock is still down a bunch and can bounce back toward the old highs of mid $20s, but a holding company for Outback, Carabbas, Bonefish and Flemings doesn’t sizzle like the latter’s steaks. Risk here includes high debt and restaurant industry overcapacity which seems to have hit entire category with price discounting.

Oscar: Ouch. The stock may not sizzle, but that was quite a burn.

 

Felix

Felix:

I’m comfortable with my current holdings, so I’d like to look back at my first pick of the year. On 1/5/17, I got into Shopify (SHOP) around the $50 range. Since then, the returns have far exceeded expectations. Let’s take a look:

We’re currently sitting around $64.84 after only two short months. The 50 day moving average, of course, has spiked accordingly. While I generally try to hold positions for months (if not years), I might reevaluate here in light of recent gains.

Robert: This is the pure play growth company in the group with its business model of cloud based multi channel commerce platform services still expanding rapidly. Some 400,000 small and mid sized businesses/startups who want access to ecommerce and retail get their services for modest monthly fees and sell sell sell to the world on most major internet platforms.

Felix: Sounds like a glowing review! Jeff is usually a bit tougher on us.

Robert: Well, now that you mention it…Revenue growth has been 100% per annum but is now slowing down to 50% as the company hit $400ish mm in sales last year and are projected to hit $600 mm this. The stock is expensive at 10x’s sales with the company at break even levels as it spends/invests to grow.

Felix: Expensive? I’ve been sensing a lot of growth in this sector. Don’t you think this one has a little room to run?

Robert: As a pure play, beat and raise growth company, the stock clearly has the hearts and minds of growth and momentum investors. IF one is bullish on stocks, there’s no reason this standout should stop here if their growth continues at such a torrid pace. Primary risk here is very high valuation.

 

Holmes

Holmes: After searching more than 700 stocks for the last 5 trading days…I have not found a single stock that fits in my risk/reward schema. So, this week I’m sitting on the sidelines hoping some of my previous picks will carry the load.

I don’t attach any meaning to not finding a name this week. But I do think this might be hint for me to head out for a long overdue vacation.

J:  I thought you just came back from vacation.

H:  And I thought you were off this week.

Athena

Athena: My momentum play this week is Citigroup (C). Here’s the chart:

As usual, I’m buying after a recent pop, with hopes of another spike over the next couple weeks. February was a good month, and the 200 day moving average suggests a continued rate of steady growth.

Robert: Citi is my favorite of the bunch. Its’ a cheap stock 10x’s eps and .9x’s book value) with improving fundamentals and a chart that seems ready to break out. The bank has a wonderful, global franchise as well as strong domestic businesses also, yet has been under earning vs peers so there’s profit margin expansion potential here.

Athena: Well alright! Anything I’m not seeing here?

Robert: This company should benefit from Trump Administration regulatory reforms and Fed’s rate hiking process as well. Also, legal expense seems to have peaked and should decline adding more to bottom line. It’s at the high end of a range, but I would expect it to break above $60 convincingly and run from here.

Athena: What kind of risks might I have here?

Robert: Risks include a low dividend yield vs peers and negative impact from trade wars/restrictions as its most internationally exposed.

Athena: I can deal with that – for two weeks.

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

Questions

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

Conclusion

Finding value stocks is difficult work. By definition, you’re looking at positions that are currently unloved. It can take time before the market catches up with the potential you see in the stock. The key question is whether you can afford to ride it out until the market agrees with your assessment.

It often seems that short-term traders are ignoring a stock’s fundamentals.  This week’s examples illustrate that value is sometimes reflected in the charts.

Weighing the Week Ahead: Possible Stimulus and How to Pay

It is a short week without much new data. Even FedSpeak is on holiday. The big story will continue to be the Trump transition. I expect the punditry to be asking a dual question:

How much economic stimulus and how to pay?

Last Week

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

Theme Recap

In my last WTWA, I predicted that it would be “all Trump, all of the time”. And so it was. Speculation about the effect of Trump policies is rampant, usually wrong, and revised daily. This is profitable for media sources and the punditry, so we can expect it to continue.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally as well as the late-week weakness (despite options expiration).

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

The News

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

This week’s news was quite good. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Jobless claims decreased to 235K, the lowest since 1973 despite a larger labor force. (Eddy Elfenbein) Amazingly, some are looking for any modest uptick in this series to be some sign of disaster.
  • Heavy truck sales slump over? (Calculated Risk)
  • OPEC might be on track for a deal on production limits. The market is skeptical, so this would be a real plus for oil prices. Daniel Dicker at OilPrice.com explains the rationale. MarketWatch also notes the possibilities. (See also OPEC news below under “bad”)
  • Earnings continued to show the strength we have been reporting for several weeks. The earnings recession is over.
  • Small business optimism is higher. Since uncertainty and weak confidence has been cited as a drag on business investment, it will be interesting if this indicator starts to show more strength.

  • Housing starts beat expectations with a shift from multi-family to single-family. Calculated Risk has been right on target with this trend, as well as the overall growth rate.
  • Retail sales were strong up 0.8% on top of upward revisions for the prior month. The reports handily beat expectations. See Doug Short’s Big Four update in the Quant Corner.

 

The Bad

  • Industrial production continues to lag with a flat report instead of the small expected increase.
  • Pre-OPEC actions. The market still seems to appreciate higher oil prices. Iran and Iraq continue to increase production in front of the meeting. (But see OPEC above).

The Ugly

Fake News – and the reaction. The bogus news sites had more traffic than legitimate ones during the election campaign. This led Google and Facebook to change policies, prohibiting sites that traffic in lies to make money.

Do we need social media sites as editors, deciding what is fake and what is not? Izabella Kaminska explains the consequences:

The rot at the core of media has little to do with the propagation of fake news on the fringes. Alternative news sites and underground press with questionable journalistic practices have been a phenomenon since forever. In free societies, the public sphere tolerates single-issue publishers, special interest groups or anti-establishment newsletters, because we know that for every outlet which propagates nonsense there’s another that might be ahead of the curve on a topic of great cultural, commercial or political significance.

Accepting the fringes — which includes fake news — is what liberty and a free press is about. It’s our greatest strength, especially when positioned within the constructs of a fair and reasonable slander, libel and defamation framework. Suppressing marginal views is not the answer.

Tyler Cowen observes that this is little different from misleading forwarded emails.

There is no easy answer, but we must start by asking whether it is really a problem. We expect consumers of information to discriminate.

The investment world has seen an avalanche of lies and deceptive information from the most popular sites. The lesson from losing money does not seem to have much effect. This is a bad omen for issues where there are less direct financial consequences.

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations are welcome.
The Week Ahead

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

The Calendar

We have a normal week for economic data, with most of the reports concentrated on two days before the holiday.

The “A” List

  • New home sales (W). Important sector for improved economic growth.
  • Michigan sentiment (W). Strength continuing after the election?
  • FOMC minutes (W). Probably no surprise. Confirmation of a tilt to a hike in December?
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (T). Not as important as new homes, but still a good read on the market.
  • Durable goods (W). Volatile series. Any signs of strength in a sluggish sector?
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Earnings season is ending. The limited Fedspeak is early in the week.

Next Week’s Theme

 

This should be a very quiet week. There is little data. Most of the A-Teamers will be taking some time off. (Not me. A competitor used to suggest “Talk to Chuck.” He must have been hard to get on the line, but you can still “Talk to Jeff.”) We can expect more Trump speculation from the B-Team. It can’t be worse than we have already seen.

Analyzing the Trump effects requires a good analytic framework and a non-political approach. I hope these concepts will be familiar to regular readers. I was delighted to read a great piece from Prof. Aswath Damodaran, covering both themes. He produces this excellent diagram:

That is a lot on the plate for the punditry. It is all requiring some digestion. (Sorry, I can’t help it. At least I took it out of the title!)

I expect the initial focus to be on taxing and spending.

How large will the stimulus be, and how will it be financed?

I am always delighted when a theme I am working on is delivered to me in Barron’s on Saturday morning. Their cover story is Taming Federal Debt: The Case for 100-Year Bonds. The argument is very good and this chart is especially helpful:

Barry Ritholtz joins in, suggesting what he calls “The Last Best Chance for Fixing Roads and Refinancing Debt.” He offers many points supporting the desirability and probability of a major debt refinancing.

There is a lot of complexity facing investors. Right now, the stimulus plan is probably the most important. As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The Featured Sources:

 

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

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

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

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed. His most recent research update suggests some “mixed signals” from labor markets.

Doug Short: The World Markets Weekend Update (and much more). It is time for another look at Doug’s Big Four, the most important indicators for recession dating. The NBER looks for a significant drop from a peak. All but one are still rising, with industrial production the laggard.

New Deal Democrat provides more reassurance. His long-leading indicators have now filtered into the shorter-term measures, especially the most recent housing results. Like our other sources, he now sees no recession for 9-12 months.

 

How to Use WTWA (especially important for new readers)

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

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

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested, but has done a lot of profit-taking and position switching. Now joined by Athena, the group has a regular Thursday night discussion which they call the “Stock Exchange.” This week’s question was about how to spot a good chart. You might be surprised at the answer. You can see that discussion as well as the most recent ideas for consideration – and you can ask questions!

Top Trading Advice

 

Brett Steenbarger is on the verge of retiring our award for best trading advice. Every trader should be reading him daily, as well as his books. Readers will not agree with every conclusion, but it will get them thinking about the right issues. It is a challenge to pick the best post each week, but I’ll try once again.

His analysis is right on target for this week’s issues. He notes the short-term effect of the election as well as the long-term concerns. As a trader, he is aware, but flexible. You could also check out posts on how to react to a big winning day and how to align with market cycles.

Adam H. Grimes has a nice post on losses – not the normal expected losses, but the big ones. He suggests five reasons, which are worth your consideration. The one that I see most often is #3, taking trades of the wrong size.

 

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 Bill McBride’s cold-water splash in the face for those who have been spending too much time on the wrong sites: The Cupboard is Full. It is a nice, objective summary of overall conditions. His summary hits the high spots, citing the relevant data and providing his customary charts. Here is his conclusion:

Sure, there are problems. Not everyone has participated in the current expansion. Wealth and income inequality are record extremes. There is too much student debt. And climate change is posing a real threat to the economy in the future. I could offer proposals to address those issues without negatively impacting the current expansion, and we will see if those issues are addressed in the coming years.

However, the bottom line is the cupboard is full. The expansion should continue for some time. What could possibly go wrong?

Here is an example of the several helpful charts, how population will drive housing expansion:

Meanwhile, plenty of financial, cyclical, technology, and homebuilding stocks are trading at recession pricing.

Backing up this conclusion is (yet another) great entry by “Davidson” via Todd Sullivan. He emphasizes the significance of single-family housing for the overall economy. Here is a key quote:

Housing Starts and financing go hand-in-hand. The T-Bill/10yr Treas spread used by banks in mtg lending decisions narrowed to 1.2% in July 2016 indicating a potential slowing in housing which this data reflects. This morning this spread has widened rapidly since the election to 1.8% and the trend looks higher. 10yr rates should continue to rise faster than T-Bills and this will confound many forecasters.

The election of Trump has not yet been factored into housing. I would buy TOL and LEN at current levels with their excellent CEOs. Single-Family Housing starts should be higher by June 2017 after Trump strips away some of the impediments to mtg lending.

 

Stock Ideas

 

Time for energy investments? Brian Gilmartin makes the case with his objective, earnings-driven analysis. He also cautions:

What we hear from the new Administration will matter.

There is a lot of angst over the sector now, with the choppiness of crude trading, what the new Administration does with solar credits, etc.

Give it more time.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, with four or five specific ideas that we are also buying. This week Holmes revisits a pick from about a month ago, DexCom (DXCM). On the last round Holmes stopped out for a small loss, avoiding a bigger decline. With a new bottom Holmes is trying again. Check out the post for my own reaction, and more information about the trading models.

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

Time for biotech? Bret Jensen makes the case for several stocks, including one of our favorites, Cara Therapeutics (CARA).

And an evaluation of the “bump from Trump” from VanEck.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the very practical discussion of what burglars are looking for in finding a house to rob.

Stickers do not help much, but big dogs do. Your hiding places are not helpful. They know all of them. This surprised me the most:

“NRA sticker on car bumper = Lots of guns to steal,” wrote one burglar.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors. That is especially true this week as he highlights key questions, among others, about what advisors do and their effect on performance. I especially his post with analysis and links you can use to see whether you would benefit from an advisor. Here is a key quote:

A true leader educates clients on what are the key principles that should define their financial decision-making: how does one invest, how one can increase his savings rate; spending restraint, etc. The best advisors do this. The worst follow the same trends as Johnny-come-lately investors. I still recall Wall Street Journal articles in the aftermath of the dot-bomb detailing how many brokers made it big promising the moon and stars to all-too-eager clients.

This is very true. In my first interview with clients I try to align expectations with reality, especially in keeping risk under control. One woman had $2 million to invest and needed to turn it into $6 million in three years. I suppose she found someone who told her that he would do that.

Here is another test. If you can deal with the challenges in my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them, you can fly solo. Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Market Outlook

Plenty of sources, mostly of the permabear variety, cited low interest rates as bad news for stocks. Now that rates are moving higher, that is also supposed to be a negative. Scott Grannis effectively explains this relationship –A bond bear market is bullish for stocks.

I’ve been arguing for years that higher interest rates won’t be a problem, since they would be symptomatic of stronger growth. Higher rates won’t lead to an exploding deficit, because the stronger growth that pushes interest rates higher will also work to reduce the deficit by boosting tax revenues. Interest rates have been low because the market has had a very pessimistic view of the future growth potential of the U.S. economy.

I agree!

Watch out for…

“Cheap” put protection. The oft-cited advice to buy puts when markets are calm is misguided.

Mixing up your politics and your evaluation of the business cycle. (The Capital Spectator).

Coal stocks. The President-elect may not be able to deliver on this front as along as natural gas prices are so low. (MIT Technology Review)

Final Thoughts

 

The stimulus/infrastructure theme is getting a lot of attention. PBS had a pretty objective analysis of the needs, labor shortages, and implementation problems.

My conclusion is that something major on infrastructure needs will be approved. Here are three key reasons:

  1. Congress loves to spend money and point to the effects in specific districts.
  2. It is easy to imagine a bipartisan coalition. This week showed support from the GOP side via Barron’s and the Dem side via Barry Ritholtz. The philosophies are in alignment.
  3. It is the right thing to do. There are important needs. The exact term of new bonds is up for debate, but locking in low rates seems pretty obvious.

Time Frames encourage a wide range of conclusions. Many are predicting that Trump policies will all end badly – eventually.

Moody’s Mark Zandi has downgraded economic forecasts.

The firm’s “outlook for the U.S. and global economies has been shaken up by the shocking election of Donald Trump as president of the United States,” writes Zandi in the firm’s latest monthly economic outlook. “Based on our analysis to date, the economy under President Trump will likely perform a bit better in the near term but ultimately it will be diminished.”

Zandi is projecting that GDP growth under four years of President Trump will be less than 2% per year, below the 2.2% he had been forecasting before the election. “That is not a big difference in any given year, but it is meaningful over a four-year period,” writes Zandi.

Ed Yardeni, in a thoughtful analysis, asks, “Is Trumponomics Inflationary?” His analysis does not have an easy conclusion, but deserves some thought about each point.

David Rosenberg sees increasing inequality, paving the road to ruin. He sees skewed tax effects and a shortage of skilled tradespeople for proposed programs.

My own perspective for investors is about one year ahead. None of the key issues permit longer forecasts. The immediate stimulus effects will be positive. Investors should do a regular reassessment of progress.

Digestion. There is plenty to do. Here are the key issue areas in my planning for the Trump administration. Each requires study of political dynamics as well as overall impact. Most of the punditry is still reaching far beyond what they know, writing on deadline, driving too fast for the reach of their headlights.

I am starting with the most general and important themes. I welcome suggestions about interesting topics or themes I have omitted. In each case I am evaluating probabilities, impacts, and stocks affected.

  • Stimulus
    • Infrastructure
    • Tax cuts
    • Financing
  • Sectors
    • Health stocks – biotechs, pharma, insurance, hospitals — all different
    • Energy
    • Construction
  • Trade policy
    • Exporters
    • Importers – corporate and consumers
  • Immigration
  • Law and Order
  • Defense

And finally, Happy Thanksgiving to readers of WTWA. I hope that my work has given you a little more to be thankful and happy about.

Things I Don’t Care About — And Neither Should You!!

One of the biggest challenges for investors is filtering out bad, useless, or even costly “information.”  I have a method for screening out the noise and using my time more effectively.  Part of it is keeping the TV on mute and using TIVO to check out anything that is really significant.  You can also just skip articles that obviously do not meet the test.

Here is a good starting list of what to ignore.  Feel free to suggest additions.

  • The Hindenburg Omen – or any other method using BO (i.e. backtested overfitting) and failing the smell test.
  • Commentary from people who are famous for being famous – their websites confuse media appearances with credentials.
  • Tobin’s Q – a great idea fifty years ago, but not relevant for modern companies.
  • Bond guys opinions about stocks – don’t ask your barber if you need a haircut (Warren Buffett)
  • Stock guys opinions about bonds – see above.
  • PMI data lacking multiple business cycles – you have to start somewhere, but we do not need to believe it.
  • Recession predictions from some “expert” who cooked up a model last week – too few cases, too many variables.

You can save many hours and also avoid some bad decisions by rejecting this useless and harmful noise.

Test Your Employment Report IQ

It is Labor Day – a good time to think about jobs. Employment is the most important element in economic growth and also for future Fed decisions. Each month the employment situation report is the subject of intense discussion. It helps to understand the data.

This will be most effective if you attempt to answer each question before checking the answer. The quiz is a little wonky; if it were not, everyone would know it. If you are right on even half of these questions, you will be doing better than most of the “experts.” No peeking!

For answers where a number is called for, take credit if you are within 25% of the actual answer.

Questions

  1. If initial jobless claims are nearly 300K per week, and payroll employment gains are less than that per month, how can employment be getting better?
  2. How many new jobs are created each month?
  3. Is the “birth/death” model the most important method used by the BLS to account for new jobs?
  4. How accurate is the estimate of new job creation?
  5. What is the sampling error (i.e. “margin of error” defined as +/- 90%) for the monthly payroll employment report?
  6. How many times is the original payroll report revised?
  7. Do these revisions eliminate the sampling error?
  8. Is it more accurate to look at “internals” like job growth in a sector, than to go by the overall change in jobs?
  9. What is the aggregate annual impact of seasonal adjustments?
  10. Do Fed members and political leaders know the results in advance?
  11. What year was the high point in labor participation?
  12. What was the level?
  13. How many people who actually want jobs, whether or not they are looking, are currently unemployed?
  14. What is the duration of unemployment?
  15. Does the BLS have discretion in determining or announcing the monthly results?

Answers

1. Initial jobless claims are a report of job losses. The payroll employment report is a net number – gains minus losses for the month. This distinction is frequently missed, even by leading economists whom you see on TV.

2. Over 2.6 million jobs were created per month in the most recent report, Q4 2015. About 2.3 million jobs per month were lost. The net gain for the quarter was about one million, much smaller than the gross increase of 7.8 million. http://www.bls.gov/news.release/cewbd.nr0.htm

 

3. No. The BLS does not receive responses from those who have gone out of business, but it treats non-respondents like the rest of the sample. They make an assumption that enough new businesses are formed to offset those that dropped out. This is the “imputation step” which is four times as important as the birth/death adjustment.

4. The estimates of both overall employment and new job creation have been very good, but this still means deviations of 50K to 125K jobs each month. The chart below shows that most of the monthly variation comes from continuing businesses and is captured in the sample. Business births and deaths are largely offsetting.

5. The sampling error for the net change in jobs is about +/- 100K.

6. There are three revisions. The first two occur on the two months after the initial report. These reflect additional survey responses, not any sort of correction. More than a year later, the results are benchmarked to actual counts from state employment agencies. The Quarterly Census on Employment and Wages covers 98% of private employment, so this is a good count.

7. The first two revisions do not eliminate sampling error. The benchmark revisions are actual counts, not a sample, but the QCEW reports are not very current.

8. A lot of discussion is focused on the “internals” of the report. People never mention that each of these subgroups is part of the sample, and also subject to sampling error. Depending on the size of the group, it can be much larger (proportionally) than for the overall net job change.

9. This is a trick question and the easiest of the quiz. Despite the spinning you hear each month about seasonal adjustments, they are cited only when it proves the pundit’s point. The aggregate annual effect of adjustments is zero.

10. The President, Vice-President, the Council of Economic Advisors, and the Fed Chair get the report the afternoon before it is announced. It is a tightly-controlled process, with results not even known until a day or so before Jobs Day. https://www.washingtonpost.com/national/jobs-day-an-economic-and-political-obsession/2012/03/09/gIQADZPW1R_story.html

11. The peak in labor force participation was in early 2000.

12. The level was about 67%. Looking only at those aged 25-54, the level was 84%.

13. The number of unemployed who want jobs and instead work part time or have become discouraged is 7.8 million, about the same as the number counted in the reported unemployment count, or over 15 million total. The oft cited much higher numbers of people “not working” include (among others) people who have retired, are still in school, or have chosen to work raising a family.

14. About 2 million people, or 26% of the total, have been unemployed for 27 weeks or more.

15. The employment reports are the result of a detailed process that is changed infrequently and only after great public debate. Partisan politicians are not involved in compiling the data. The language chosen is the subject of internal debate, but only covering a modest range of choices. It sounds like it is written by a committee with a limited vocabulary – and it is!

Conclusion

I hope you enjoyed the quiz. Whether or not you did well, you should now be a more discerning and skeptical consumer of jobs report punditry.

Sources

In addition to specific sources named above, much of the material here comes directly from the Technical Notes of the various surveys, including the following:

http://www.bls.gov/web/empsit/cestn.htm

http://www.bls.gov/bls/empsitquickguide.htm

Weighing the Week Ahead: Will the Fed Get the Signal for a September Rate Hike?

This week’s calendar is loaded with important data. Now that the Jackson Hole Fed Conference is over, can we expect a policy change soon? Every data report this week will get special scrutiny. Will the Fed get the signal to hike rates?

Last Week

The important economic news was pretty good, but interest focused on Chair Yellen.

Theme Recap

In my last WTWA, I predicted a weeklong focus on the Fed conclave at Jackson Hole and the implications of Chair Yellen’s speech. This was the story from CNBC’s opening on Monday through the Fast Money group on Thursday after the close. There was an interlude for the “squatty potty” story, but even CNBC cannot talk about the Fed all of the time. Jane Wells is a good sport about such assignments and seems to enjoy “suiting up” for the occasion. I congratulate her on her new status as “special correspondent.”

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 stocks remaining near record highs. It shows the effect from the Yellen speech, the Fischer comments, and the final verdict. It was all pretty muted. 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

 

The Bad

  • Q2 GDP rose only 1.1% according to the revised calculations.
  • Existing home sales declined 3.2%. Calculated Risk has the story.

The Ugly

Budget projections. Left unchanged, the U.S. federal budget will increase in relation to total economic output for the first time since 2009. Econintersect.com does a great job of highlighting key reports from a wide variety of sources. This analysis from the non-partisan Congressional Budget Office includes a revealing chart of what is in prospect.

 

Perhaps one of the Presidential candidates will reach agreement with Congress to address this.

On a personal note, I used to teach a public finance course with a unit on budgeting. One of my favorite lectures included the progression of projections. What started out as “balanced” on a five-year projection always turned into a deficit when “year zero” was reached. I taught those classes a long time ago, but nothing has changed.

 

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 always welcome! For ideas, go to your favorite conspiracy site and look for people doing data mining and/or poets writing about economics.

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 huge 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

  • Employment situation (F). Another strong report? Will this tip Fed policy into a rate increase?
  • ISM index (Th). Great concurrent read on the overall economy with some leading aspects.
  • Personal income and spending (M). You have to earn it before you can spend it! July data, but both are important.
  • Consumer confidence (T). The Conference Board version helps to assess both job creation and spending plans.
  • Auto sales (Th). One of the best non-government reads on the economy.
  • Core PCE prices (M). This – not CPI – is the measure the Fed uses to evaluate the 2% inflation target.
  • Initial claims (Th). The best concurrent indicator for employment trends, but less attention during “employment week.”

The “B” List

  • ADP employment change (W). A good independent indicator of private employment growth. Deserves more respect.
  • Pending home sales (W). Everything about the housing market is important, but pending sales are a bit less significant than other measures.
  • Chicago PMI (W). The most important of the regional measures.
  • Construction spending (Th). Volatile July data is important for the long-term trend.
  • Trade balance (F). July data, widely misunderstood, but important for Q2 GDP.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

The big news is the employment situation reports, especially coming right before Labor Day.

Next Week’s Theme

This week brought us another week of quiet trading, but the Fed conference may have teed up a policy shift. While the speeches were short on the specifics craved by traders and the punditry, the basic message was a bit more hawkish. The Fed expects an improving economy and tighter labor markets. This week’s data – and especially the employment report – will get special attention. Everyone will be asking: Will the Fed get the signal for a rate hike?

After Jackson Hole, there are three basic positions:

  1. Negative rates. While discussed, both Yellen and Fischer made it clear that this was not a serious option – at least not right now.
  2. Steady as she goes. Look for more economic strength before raising rates. Then move cautiously and slowly.
  3. Adopt a higher inflation target. Some believe that the long end of the curve will increase only when inflation expectations move higher. This means that the Fed must commit to stimulative policy even if inflation moves above the current 2% target. (Mark Thoma has an excellent description).

Regardless of the chosen position, there was general agreement that monetary policy was being asked to do too much. The neutral sounding calls for help with fiscal policy really means a call for Keynesian stimulus.

Opinion was clearly divided in the Jackson Hole showdown as well as the ensuing discussion. 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. 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.

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.

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. Here is Doug’s latest update (including the recent retail sales data) of the Big Four indicators followed by the non-partisan, non-governmental NBER in dating recessions.

 

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

What are the distinguishing characteristics of top traders? Brett Steenbarger identifies five. How many describe you? My favorite is this one:

*  Successful traders know when to not trade – They wait for opportunities; they pull back their risk taking when they’re not perceiving opportunity.  It’s not that successful traders are always successful.  It’s that their success springs from knowing how to not lose when they’re not seeing the ball well.

 

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Bill Kort’s Apocalypse Now. He notes the media penchant for finding disaster lurking behind every corner. This may well be the single most costly mistake for investors. He does a nice job of linking it to this week’s issue:

Sure, there are apocalyptic events in the stock market, but the media makes them sound almost routine even though they are few and far between. Market attention via the media has been wrapped around another Fed fund rate increase as a catalyst for such an event. It is very doubtful that a quarter-point increase in the rate would be a disaster. In fact, worry over a Fed rate increase at this point is “much ado about nothing”.

Stock Ideas

Chuck Carnevale continues his helpful sector-by-sector review of dividend growth stocks. His articles are always a great source of ideas. I review them all, and you should, too.

Barron’s identifies the “ten best dividend stocks” noting valuation as well as yield. I like the list, because most of the names are those we often hold in our enhanced yield program. (We write near-term calls to get even greater yield from strong stocks). These are all interesting choices.

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 Level 3 Communications (LVLT).

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 Morningstar’s Christine Benz, Retirement-Planning Assumptions: Yes, You Can Be Too Conservative: The risks of oversaving and underspending are real, too.

However, I think there’s a risk–albeit an under discussed one–that well-meaning retirees and retirement-savers can take caution too far. For example, I’ve run into 75-year-old retirees who, in the interest of playing it safe, are spending just 2% of their portfolios annually; at that pace, they’re very likely to leave a very large kitty behind. That may be what they want, but it may not be. In a similar vein, I’ve met 40-year-old accumulators who tell me that they’re certain Social Security won’t be there for them, or that they’re assuming their portfolios will return just 2% in their 25-year runway to retirement.

I see this so frequently. Many retirees are in a solid position to enjoy life, and they should do so!

Bond Funds and Bond Ladders

If interest rates rise, there is plenty of risk in both bond funds and stocks (utilities and classic dividend stocks) that are bond proxies. A bond ladder provides more control. Larry Swedroe, director of research for The BAM Alliance, explains the many advantages. I especially like the discussion of avoiding the impact of hot fund flows.

There’s another little-discussed benefit of owning individual securities. With a mutual fund (or ETF), after a period of falling interest rates, “hot money” chasing recent performance will typically buy into the fund. The fund, therefore, must buy more bonds in a low-rate environment, thus lowering the average rate for all investors. Then, if rates begin to rise, the hot money will often leave, forcing the fund (and long-term investors in it) to suffer trading costs and capital losses that can’t be “waited out.”

On the other hand, an investor who holds individual bonds and is satisfied with the yield to maturity when the bond was purchased, is not subject to the same problem (that is, other investors cannot force him to sell at depressed prices).

I strongly agree with this approach. For clients who are preserving wealth, we recommend bond ladders as a foundation.

 

Watch out for….

Target date funds. John Authers (FT) explains that if you do not adjust allocations for relative valuations, you can get seriously off course. If you have a financial advisor, this is a basic task. If not, you should verify that the TDF is doing what you want.

Over-reliance on the Shiller CAPE ratio. Acclaimed valuation guru Aswath Damodaran explains why this approach is potentially dangerous, often leading investors astray.

Refinery stocks. Names that may seem cheap on a long-term basis may be under pressure from other factors. Paulo Santos explains the current risks. Few understand this market. We did well when oil prices crashed since many ETFs just lump refiners in with the general oil sector. Quite wrong.

Volatility derivatives. Trading volume has exploded in these products. Traders who are “scared witless” [TM OldProf Euphemism] read a blog post explaining that this is a great way to hedge. Hardly any realize how much the odds are stacked against them. Mark Melin’s article at ValueWalk does a great job of explaining these issues. The chart below summarizes the key point – contango in the futures contracts. If you do not understand the significance of this, you need to do a lot more study before trading these products!

 

Final Thoughts

The biggest story, now joined by major media sources, is the failure of the Fed efforts at more transparency. Everyone seems to agree that more information has not improved clarity about policy. I have sometimes joined those questioning the communication methods, but always emphasizing a key point:

Transparency ≠ Clarity

If the Fed is data dependent, and the data paint a mixed picture, the immediate policy implications cannot be clear.

Each day I see commentary suggesting that economic data are very weak, but the Fed should be raising rates. Some even suggest that higher rates are needed so the Fed can lower them to fight the next recession. They disagree with the Fed mission to avoid or delay the next recession.

The likely outcome from this is the analysis from Merrill Lynch’s Chief Strategist, Michael Hartnett. His conclusions got a lot of attention this week, including Sara Sjolin (MarketWatch) with the chart below, and also the FT. The latter discusses the Keynesian Put, a concept you will soon be hearing more about.

The bear steepening occurs when a stronger economy raises rates on the long end of the curve. It is bearish for bonds and bond proxies, but very bullish for economically sensitive stocks and banks. We saw some hints of this shift on Friday. Strong economic data, especially tighter labor markets, may (finally) move interest rates higher.

Weighing the Week Ahead: How Should Investors React to the Oil Price Rally?

This week’s economic calendar is pretty light. Market participants will be looking to an early getaway for the long weekend. While there will be plenty of entertaining FedSpeak, I expect a different topic to be at the fore. Pundits will be asking:

Should investors react to the oil price rally?

Last Week

The news was pretty good, but the stock market was not.

Theme Recap

In my last WTWA, I predicted that the punditry would be asking whether it was “springtime for housing”. That was the recurring topic as housing news was reported on several different days and garnered plenty of discussion. Competition came from the Fed Minutes, some dramatic earnings reports, and the election race.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He 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 economic and market news, on balance, was pretty good.

The Good

  • Housing starts increased to a 1.172 annual rate, beating expectations. Calculated Risk has a complete analysis. I am especially interested in single-family building permits, a good leading indicator. Bob Dieli’s monthly economic report always updates this chart:

Dieli Building Permits

 

  • Existing home sales were up 5.45 million (SAAR), the top of the Calculated Risk range for a solid report. Bill writes:

    Note that January and February are usually the slowest months of the year and March and April are the beginning of the “selling season”.  This is a solid start to the year.

    EHSNSAApr2016

  • Jobless claims down ticked to 278K, in line with estimates and below the 300K level that some have been citing. (The four-week moving average was up slightly).
  • Industrial production rose by 0.7%. Eddy Elfenbein has a good report, noting that this interrupts the downtrend since November, 2014. He also points out the effect on the Atlanta Fed’s GDP forecast for Q2, now up to 2.8%
  • Sentiment remains very negative. Urban Carmel summarizes asset allocations and economic skepticism. Ben Eisen of the WSJ cites four stats, including the fund flows in the chart below. Schwab’s Liz Ann Sonders agrees. She notes only negative questions from both investors and advisors, “all almost bordering on Armageddon.”

w1056

The Bad

  • The Philly Fed indexremained negative and essentially unchanged, -1.8 on the diffusion index. Employment improved dramatically, but remained marginally negative. The outlook fell a bit but remained strongly positive. There was little market reaction.
  • Fed minutes showed more chance for a June rate increase. Our go-to Fed expert, Tim Duy, sees a June hike as a bit less than 50-50 but July as quite possible. The Fed remains more confident about the economy than most market participants.
  • LA port traffic declined. Calculated Risk uses a rolling twelve-month average to control for seasonality. The decline was 0.7% for inbound traffic and 0.8% for outbound. Steven Hansen opines that this raises recession concerns.
  • Rail traffic “moves deeper into contraction”. Steven Hansen looks at a variety of rolling averages, including some analysis that adjusts for the declining coal shipments.

The Ugly

State and local pension funds. Chicago provides an example. A decision of the Illinois Supreme Court struck down an “overhaul” of the system, adding $11.5 billion to the deficit, now $18.6 billion. The fund covers 70,000 workers and in the absence of any changes, will run out of money in ten years. (Crain’s Chicago Business)

Noteworthy

Try this financial literacy quiz designed by economists from Wharton and George Washington. (via Shawn Langlois) I am confident that WTWA readers will do well. Keep in mind that less than 1/3 of the population could get all three questions right!

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. Think of The Lone Ranger. This week’s award goes jointly to Gene Epstein of Barron’s and New Deal Democrat of the Bonddad Blog and xe.com. Both take on the frequent current scary articles about the “flattening” yield curve, citing the yield difference between the ten-year and two year notes. That spread is currently 0.94 percentage points. Those on a mission often cherry-pick the part of the curve to analyze, and cry alarm whenever it gets a little smaller.

Epstein points out that until the curve actually inverts (a spread of less than zero) there is not a reliable recession indicator.

2016_05_23_cmyk_NL_

NDD has a great article with plenty of charts. He calls out the “doomers” with this commentary and chart:

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

image_686

I wish that more publications would recognize the Silver Bullet winners and writers like them. It is difficult to call out weak and biased posts. There is little reward for good and courageous analysis.

The Week Ahead

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

The Calendar

We have a modest week for economic data. I highlight the most important items, helping us all to focus.

The “A” List

  • New home sales (T). Continuing strength in housing?
  • Durable goods (Th). Important April data. Continuing recent strength?
  • Initial claims (Th). The best concurrent indicator for employment trends.
  • Michigan sentiment (F). Best for job growth and prospective spending. Strength continuing?

The “B” List

  • Pending home sales (Th). Unlikely to match last month. Not as important as new sales, but a read on the market.
  • GDP second estimate for Q1 (F). This will get attention, but it is old news by now with Q2 more than half over.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

There is plenty of FedSpeak, including a Friday appearance by Chair Yellen. Things will be slowing down by Friday as some slip away early for a long weekend marking the unofficial start of summer.

Next Week’s Theme

 

It is a pretty light economic calendar. In addition to the daily dose of analysis by pseudo-experts on the Fed, I expect to see some serious discussion about energy prices. Will the oil rally continue? What does that imply for investors and traders?

Voting a tentative “No” is Dana Lyons, who cites technical resistance and concludes as follows:

Will the oil rally stop here? We have no idea – but we wouldn’t be surprised to see the rally get clogged up, at least temporarily.

tumblr_inline_o750onwm8P1sq14jh_500

Oil & Energy Insider is also cautious but more bullish, mostly citing fundamentals. Their free edition includes this analysis:

Oil prices bounced around this week, flirting with $50 per barrel but stopping short of that key threshold. The major supply outages in Nigeria (now at 900,000 barrels per day) and Canada (more than 1 million barrels per day) continue to put upward pressure on oil prices as they are erasing the supply overhang. Still, much of that will be temporary. The EIA poured a bit of cold water on the rally this week, reporting a surprise uptick in oil stocks. At the same time, U.S. production continues to slowly erode. The markets are more confident than at any point in recent weeks that prices won’t crash back into the $30s, but more movement to the upside is not a given.

Their premium edition (which requires a subscription) is headlined Fundamentals Starting to Underpin Oil Price Rally. They cover a wide range of considerations, but include key questions: When might we expect Nigerian supply to rebound? Most investors would find their analysis quite helpful:

–    The Niger Delta Avengers have attacked pipelines and platforms in Nigeria, knocking 800,000 barrels per day offline.
–    Between 2006 and 2009 Nigeria suffered a similar level of attacks and outages, and a sweeping amnesty policy helped bring an end to the violence. The new President Muhammadu Buhari has taken a tougher line, ending patronage that existed in security contracts for many militia members, a move that has contributed to the resurgence in pipeline attacks.
–    Nigeria’s cash reserves are running low as its economy slows. Reserves have plunged from $49 billion in 2013 to $27 billion recently.
–    Eni (NYSE: E) suffered the latest attack this week. Fellow oil majors Royal Dutch Shell (NYSE: RDS.A) and Chevron (NYSE: CVX) have also seen their infrastructure taken out from explosions.
–    Nigeria’s oil production is at its lowest level since the 1980s. The attacks show no sign of letting up, and as of now the Nigerian government is unwilling to back down.

 

 

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 052016

The Featured Sources:

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

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. This week he observes that more people are using forward earnings, and many are thinking about 2017.

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). Monthly reports including both an economic overview the economy and employment.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting approaches to asset allocation. This week Dwaine opened to the public one of his subscriber-only research reports. He notes that one of his recession indicators has moved up to 60%. He goes on to explain that he uses a group of six different methods as his preferred approach. He writes as follows:

Another way to look at the RFE is to average the current recession probability showing on each of its six model components, which is currently showing a 14.6% probability of recession. This model appears to have served well in the past, with zero false positives above readings of 0.20.

2016-04-26_1743

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods.

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

Noteworthy this week:

Hedge funds are using artificial intelligence to analyze the Fed minutes. Guess who can do it faster – you or them?

Peter F. Way reports on the hedging techniques of “big money” traders, identifying candidates with the best risk/reward balance. Apple?

501110-14632831049172328

 

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 and no cookie-cutter approach. 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.
  • Felix and Holmes – top artificial intelligence techniques in action.
  • Why 2016 – The Year of the 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. (Suggestions and questions welcome!)

 

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 about 75% invested, and with less aggressive sectors. REITs and utilities have moved near the top of the list. The (usually) more cautious Holmes remains almost fully invested. Holmes uses a universe of nearly 1000 stocks, selected mostly by liquidity. Even when the overall market is neutral, there will often be some strong candidates.

Top Trading Advice

Dr. Brett Steenbarger has important advice about Seeing Beneath the Market Surface. He writes:

Markets move higher, markets move lower.  The question worth continually posing is, “Is the market getting stronger or weaker?”  This is a meaningful question because a market that moves higher can be getting weaker and a market that moves lower can be getting stronger.

Read the entire post as he explains how to apply this approach.

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, it would be this Forbes article by Brett Steenbarger (and not just because he has some kind words about WTWA, but thanks!) As a psychologist and trading coach he sees things missed by others and explains them very well. I share many of his themes, but often cannot communicate them as well. People need to be open to new ideas and unemotional in executing the plan.

Few can meet these tests.

Stock Ideas

Chuck Carnevale has a timely post on cyclical stocks. He shows how to use his tools to analyze valuation in this difficult sector. When can these stocks be right for dividend-oriented, conservative investors? Emerson Electric (EMR) is his illustration. If you agree with our experts that a recession is not imminent, cyclical stocks are a good place to shop.

How about Kroger? Hale Stewart makes this a good example of how to search for a good stock – find an interesting sector, a cheap stock, and a catalyst.

Retailers that might profit from the “Amazon effect.” (Philip Van Doorn) Hint: they need to change their business model.

Marc Gerstein has some interesting contrarian retail plays. Marc always uses some science in his method. Here he identifies desired characteristics, develops a screen, and looks for a catalyst. It is another article that goes beyond simply delivering stock ideas (although it does that). Stock screening meets Peter Lynch.

How about solar? If energy prices improve, solar stocks do as well. Travis Hoium has an interesting argument favoring First Solar (FSLR) over some alternatives.

Outlook

Why is it so attractive to be negative on your investments? One good answer lies in Morgan Housel’s explanation of volatility and how it can take investors off course. It is so easy to think about an account in terms of how far we are from the past high. In fact, that is the condition over 87% of the time. Each year includes a lot of big moves that seem small when you later look at the long-term stock chart. He uses 1998 as a year of major gains, but only if you were able to ride out the major swings. I like this chart showing time spend below the prior high:

sp6_large

 

 

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 this special edition. There are always several great choices worth reading, but my favorite this week is from Carl Richards at Investment News. He suggests that a good financial advisor helps clients by turning off the news spigot. (If you do not use a financial advisor, I recommend that you turn it off anyway! You might make an exception for WTWA).

There’s a valuable role for us to play as real financial advisers, that of the human curator. Do our clients really need to spend hours sorting through their feeds and trying to decode the headlines or could we be doing that for them? What should they be paying attention to?

For instance, one friend shared with me that when he turned off the financial news spigot, he calculated that he saved two to three hours every night. Do the math and it ends up being a savings of 40 or so days each year.

Value Stocks

Time to buy again? They are cheaper than the broad market and that seemed to be the story last week.

Watch out for….

Boeing (BA). Barron’s warns that demand for fuel-efficient aircraft has declined.

Bonds and fund redemptions. If the ten-year note increases one percentage point, to something like 2.8%, you will immediately lose 9% on your investment. It would take a few years to make that up, even if rates moved no higher.

Investment big-shots using a platform to talk their book. Are they really there to help you? This is an interesting summary of recommendations at the recent SALT conference, which was breathlessly covered in the media. Most of the topics would require a lot of research, but the Sherwin-Williams (SHW) recommendation (You can’t buy paint online) caught my attention. It took about five seconds to discover the error of this assertion.

13F filings. Here is one example that highlights stocks from David Einhorn. This, and nearly everything written about 13F reports is misleading. This WSJ article headlining George Soros is especially misleading. I explained this carefully (for the second time) but no one cares. We can think of it as our secret!

Final Thoughts

Knowing economics helps to understand energy pricing, but the payoff for that knowledge has been delayed. In my most popular article ever on Seeking Alpha, I noted a few basic facts about energy including the relatively small gap between supply and demand. We are now observing the closing of that gap. It could (and will) continue in one of three ways:

  1. Reductions in supply through economic forces. U.S. producers responded, but most others have not – so far at least.
  2. Increases in demand through a growing economy. This is happening with record miles driven in the U.S. and many new consumers worldwide.
  3. External shocks, through weather, disasters, or war.

The same economic effects may well push against a price increase. The reduction in rig counts, for example, seems to have paused for the first time in eight weeks. Bespoke has one of their great charts using data from the primary source on drilling activity, the Baker-Hughes weekly report.

052016-Baker-Hughes

 

Even if $50/barrel represents an intermediate high for oil prices there are important favorable consequences:

  1. The savings to the consumer, compared to recent years, remains large;
  2. The fears about failing companies and job losses, exaggerated and localized, will be less of a story.;
  3. The concern about banks failing due to oil company bankruptcies will be reduced.

Current oil prices may represent a sweet spot both for the energy sector and the overall stock market.