Investing 101

Most of my work on "A Dash" is written for the individual investor who is trying to make sense out of conflicting information. I am delighted to get responses from other financial advisors and from sophisticated investors with alternative viewpoints. Meanwhile, I also get occasional messages from another group – people who are just getting started in the investment world.

In fact, some of my best clients were people who asked the question, "How do I get started?" and began with a small program. There is nothing like having an actual investment to focus your attention. In our office Feray Alin handles most of our routine investor contact (in addition to several dozen other things). We share a sensitivity to client needs. She recently wrote a nice summary of how to get started. I would like to share it via "A Dash." Perhaps some in our audience will add some suggestions.

Feray wrote:

This article is for those that have never looked at a 10-Q, do not have an IRA and have never executed a trade. This is an article for the beginner.

Step One: Look at your spending – not an online form budget (these rarely include everything). Look at all of your expenses for the last 12-24 months and figure the total for one month on average, then add a little extra for the months where you spent more and configure that into your monthly expenditures.

Step Two: Calculate your monthly base income. If you work extra hours some months and not others, do not include these (save these for the months where you spend more – i.e. major holidays, months where everyone seems to have a birthday, etc.) The extra pay needs to go straight into a savings account to be used in those months of high expenditure.

Step Three: The difference between Step One and Step Two is what to do with that extra money. It depends upon each individual and what exactly that dollar amount is – could be $10, could be $50. If you have $10 or $50 extra a month this should go straight into a savings account, saved over time to build up and open up your very own IRA account. Why? Because if it is in your checking account, you will most likely spend it. You should open up a retirement account, build and save for when you cannot and do not want to work anymore.

Step Four: Look at the companies that you and those around you like and use every day. What are the companies that have a long life? What are the companies that will be here in 10+ years? What companies have made it through the hard times? What do you see around you? Pick a company and research it. Remember to diversify. Don't own only one stock or several stocks in the same sector. For example, you wouldn't want to own three cell phone stocks.

Step Five: This is the hardest – the financial part of the process. What is the value of the company? What is the growth of the company? What is the sustainability of the company? What are the dividends? What is the VALUE of the company? What is the FUTURE VALUE of the company?

Former hedge fund manager and current host of CNBC's Mad Money Jim Cramer says: "Do your homeworkwe should be spending at least one hour per week researching every stock that we own". This is sound advice and one of the hardest for an individual…one hour per stock per week. If you own ten, this ends up being ten hours of your time per week. And yet, you need to know what is happening – if you want more than interest in your checking/savings account with or without an advisor, you need to do the homework.

Step Six: Cost Basis. Keep a list of the stocks that you own and the price you paid. You need to recognize and keep an eye out for a stock that is performing abnormally (good or bad) and learn why. If you are investing $1000 per stock, keep in mind that some stocks may be too high and may not give back enough to you (profit) to make it worthwhile.

Cost basis:

(Price of stock (share price) x the # of shares bought) + the trading commission = your cost to buy the stock

Determining profit/loss:

(Price of stock (share price) x the # of shares bought) – cost – trading commission = Profit or Loss

Examples:

I am going to use two financials. These two stocks have a large difference in their stock price and are good examples as to why the price of a stock needs to be a part of your choice. The first line in each table is the initial cost: $996.69 for Citigroup and $971.39 for American Express.

Citigroup (C): at $3.90/share with a $1000 to use, you can buy 253 shares. I have the stock price going up by 10 cents.

American Express (AXP): at $41.80/share with a $1000 to use, you can buy 23 shares. I have the stock price going up by 10 cents.

Citigroup, Inc. can go up $0.50 and make $100 gain. American Express has to rise $0.90 before you gain $1 and over $5 to gain $100.

Step Seven: Make sure that when you are starting out, you are using money that you can afford to lose. You will have gains and losses. Keep an idea of what the target price that you want to sell your stock and the timeframe in which you want to accomplish that goal. Don't be greedy; do not stay in a stock because you want to see one more rally in price. Keep looking at the financial statements and determine at what price you would sell, and if nothing changes financially within the company, sell it.

We would like to close with a quote by prominent investor Warren Buffett:

"Risk comes from not knowing what you're doing."

Remember always that trading is a learning process. It will take time before you can become an experienced investor.

Feray Alin, NewArc Investments, Inc.

ETF Update: Back to the Sideline

Sometimes great minds think alike, but often they do not.  In the financial world the leading experts often disagree, especially on specific trades.

Method Matters

Regular readers know that I like to use the sports world for examples, particularly the realm of handicapping.  Let us imagine that we have four different football experts:

  • The fundamental football analyst looks at team strengths and weaknesses, injuries, and the matchups he sees on tape;
  • The "smart money" analyst looks at the line moves in the market;
  • The psychological analyst looks at the schedule to see if this is a "must game" or a possible let down;
  • The modeler runs power ratings and makes his own independent prediction.

The very best practitioners of these methods may all be winners.  On a specific forecast, they may disagree.

So it is with investments.  There are many successful investment methods, including a close parallel for each of the football handicappers.

My Favorite Methods

I described my favorite approaches in this article.  To summarize, I have a long-term perspective that plays upon market themes.  It is a long-only program, but it is not "buy and hold."  I also use short-term trading methods.  Finally, I recommend a dynamic asset allocation program that protects investors against big moves.

Each investor is different, but some combination of the methods works well for most people.

Not surprisingly, the methods sometimes disagree.  Let me look more carefully at the trading approach.

Background

Traders all seek rewards but they
have differing appetites for risk.  It is important to find a method
that suits your personality and needs.  Our short-term trading systems are
basically Trend-following, but also include recognition of Cycles and a
touch of Anticipation.  Since we apply the method to ETFs, we call it
the TCA-ETF system.  We follow two versions of this method, designed for
two clients (Oscar and Felix) with different needs and risk appetite.  [New readers can
find more information about the models at the end of this article.]  For convenience, we have named the models based upon the intended clients.

This Week's Results

Felix, the cautious approach, has moved to the sideline.  This does not mean a prediction for a lower market.  If Felix had that forecast (briefly in place last week), the inverse ETFs would be in the buy range.  Instead, everything is in the penalty box.  Felix just sees the world as too unpredictable right now.

Oscar, the more aggressive approach, is always looking for a way to win.  Oscar is unafraid of the volatility and recommends the short side, holding all three inverse ETFs.  (We do not endorse or use leveraged ETFs).

Individual Stock Analysis

With encouragement from Vince (our modeling expert) I have been looking at individual stocks to see if Felix approves.  The results this week are interesting.

The Dow

Felix is not ready to move on my Dow 20K concept!  Felix has every member of the Dow in the penalty box, although two stocks have positive ratings.  I plan to provide regular updates on this analysis if there is reader interest.  I often use Felix to assist when starting a new position, so this could be a useful assist to those considering dipping a toe in the Dow waters.

The NASDAQ 100

The fussy Felix has assigned 99 of the 100 stocks to the penalty box.  The sole survivor is O'Reilly Automotive (ORLY).  Here is the chart.

Orly

Now here is the fun part.  Tonight on his popular Mad Money program Jim Cramer cited ORLY as a top choice.  Catch this:

First on the list were auto parts makers Advance Auto Parts (AAP),
O'Reilly Automotive (ORLY) and AutoZone
(AZO). Cramer
said this trend makes sense, when things get bad, people keep their cars
longer and fix them up.

Felix was operating on official closing data, without knowledge of the Cramer pick.  This will be fun to watch.  Will Felix and Cramer agree in the future?

Weekly TCA-ETF Rankings

We are currently out of the market in our Felix ETF
program and short for those following Oscar.  (We are happy to
report and discuss performance with
interested investors.  We also offer a report on how we use the models,
and a free weekly email update.  Write to etf at newarc dot com.  Our
actual trading is a
combination of both models and some weekly timing).

As recently noted, I am changing the timing schedule for this weekly article.  It
will now appear mid-week, with a one-day delay in the ratings.  The
ratings below are from Tuesday's close.

Please
note that these are not recommendations.  Investor needs and risk
tolerance
varies.  We hope everyone finds the ratings to be a useful supplement to
their own work.  The recommendations can change quite rapidly in this
environment.

Here are the
current
rankings for
both Oscar and Felix.


Felix 052510


Oscar 052510

Note for New Readers

Our weekly ETF Update is designed to assist both investors and
traders interested in ETF's and Sector Rotation.  We also have free
reports, available
upon request to etf at newarc dot com.  These reports describe how we
use the system, compare results from Oscar and Felix, and contrast the
method with our long-term trading approach.

Our Method. 
In this past article, we described our basic methodology
and why we believe the rankings are useful for fundamental traders and
technical traders alike.  While we urge readers to check out the entire
article, the key point is that ETF's pose challenges and opportunities
different from investment in individual stocks.  The fundamentals may be
more difficult to assess.  Even with a good grasp on fundamental
trends, there is a lot of technically-based trading in ETF's.  This
means that those trading with a fundamental approach (and we
do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system
synopsis
. We look at Trending sectors, Cyclical Sectors, and build
in an element of Anticipation for both entry and exit — thus the name
of the model, TCA-ETF.  While we do not reveal the exact methodology for
spotting trends and cycles, the system is not a "black box."  The basic
elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box
trading.

We report the rankings each week, now on the
weekend with a one-day delay, using the Thursday output from the model. 
We monitor and trade this daily, and offer a free report (request via
the email address on the top left of the site) for those interested in
our weekly trading program.

Oscar and Felix. We follow two
versions of this method, designed for
two clients with different needs.

  • Oscar believes in the long-term strength of the economy and the
    stock market.  He has a lovable and irrepressible enthusiasm.  When
    things go wrong, he steps back for a bit, but soon tries again.  He
    expects to do better than others during good times.  Oscar understands
    that this approach involves more risk.  Oscar is opportunistic.
  • Felix also has a positive long-term outlook, but he is something of a
    fussbudget.  He is much more cautious, with an emphasis on capital
    preservation.  He is perfectly willing to step aside from the market
    when there are signs of danger.  He knows that he will miss some moves,
    but that is OK.  He scores big gains when the market moves lower and he
    escapes the loss.

There is more detail on Oscar and Felix in this article.  There is more about the Penalty Box here.

ETF Update: Can Banks Benefit from Financial Regulation?

(I delayed this article from my regular Sunday posting time since there was so much volatility, perhaps generating misleading signals.  The ratings have been updated to reflect the current situation and do not include the customary one-day lag).

It now seems clear that new financial regulations will soon become law.  Can banks benefit from this development?

Background

Traders all seek rewards but they
have differing appetites for risk.  It is important to find a method
that suits your personality and needs.  Our trading systems are
basically Trend-following, but also include recognition of Cycles and a
touch of Anticipation.  Since we apply the method to ETFs, we call it
the TCA-ETF system.  We follow two versions of this method, designed for
two clients with different needs and risk appetite.  [New readers can
find more information about the models at the end of this article.]

Let
me discuss this week's featured sector before turning to our own
ratings.

Spotlight on the Banks

We
trade banks via the SPDR KBW Bank ETF (KBE).  The ETF tracks the KBW Bank Index.  It has very good diversification — 25 holdings with most in the 4% to 6% range.  A few large banks are higher, but no single holding is over 9%  The forward P/E ratio is over 17 and the trailing is over 20, but the price to book is only 1.01.  The dividend yield is under one percent.  Here is the chart:

KBE may 2010

Fundamental Analysis

Some of the news for the sector relates to the financial reform bill.  ETF Daily News opined that changes in the bill were favorable to banks.

There is a consensus that the regulations are more significant for large banks.  Even those institutions may have pricing that reflects the pending legislation.  GOP changes have relaxed some concerns raised by the banks, especially those related to cost-cutting as a function of size.

Tom Lydon reached a similar conclusion,  citing a MarketWatch column assessing the regulatory impact.

In my weekly market column I expressed caution about banks because of possible European exposure.  Any improvement in Europe is a positive for financial stocks, so the weekend news was bullish.

Other ETF Experts

We always monitor the
conclusions of other ETF experts when considering a trading position. 
This week none of our sources cited the group on technical grounds.  (It is important to note the absence of support for a position).  It is fair to say that this group is "unloved."

Weekly TCA-ETF Rankings

We are currently fully invested in our ETF
programs,  but there are only a few remaining candidates in the "buy" range.  We are happy to
report and discuss performance with
interested investors.  We also offer a report on how we use the models,
and a free weekly email update. 
(Write to etf at newarc dot com).  Our actual trading is a
combination of both models and some weekly timing.

We usually publish the ratings list as of
Thursday's close in our weekend update, a one-day delay.  Given the wild market gyrations from the last few days, I felt that the Thursday ratings would be unhelpful and perhaps even misleading.  Instead, I delayed the article for a day.  I am also including today's current ratings.

Please note that we are not
recommending these sectors, since investor needs and risk tolerance
varies.  We hope everyone finds the ratings to be a useful supplement to
their own work.  The recommendations can change quite rapidly in this environment.  I would not be surprised to see every sector in the penalty box in a few days.

Here are the current rankings for
both Oscar and Felix.  It is interesting to note that Oscar is even more negative than Felix.  While we are mostly following Felix, fans of Oscar should note that the inverse ETFs have positive ratings.


  
Felix special 051010


Oscar special 051010

Note for New Readers

Our weekly ETF Update is designed to assist both investors and
traders interested in ETF's and Sector Rotation.  We also have free
reports, available
upon request to etf at newarc dot com.  These reports describe how we
use the system, compare results from Oscar and Felix, and contrast the
method with our long-term trading approach.

Our Method. 
In this past article, we described our basic methodology
and why we believe the rankings are useful for fundamental traders and
technical traders alike.  While we urge readers to check out the entire
article, the key point is that ETF's pose challenges and opportunities
different from investment in individual stocks.  The fundamentals may be
more difficult to assess.  Even with a good grasp on fundamental
trends, there is a lot of technically-based trading in ETF's.  This
means that those trading with a fundamental approach (and we
do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system
synopsis
. We look at Trending sectors, Cyclical Sectors, and build
in an element of Anticipation for both entry and exit — thus the name
of the model, TCA-ETF.  While we do not reveal the exact methodology for
spotting trends and cycles, the system is not a "black box."  The basic
elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box
trading.

We report the rankings each week, now on the
weekend with a one-day delay, using the Thursday output from the model. 
We monitor and trade this daily, and offer a free report (request via
the email address on the top left of the site) for those interested in
our weekly trading program.

Oscar and Felix. We follow two
versions of this method, designed for
two clients with different needs.

  • Oscar believes in the long-term strength of the economy and the
    stock market.  He has a lovable and irrepressible enthusiasm.  When
    things go wrong, he steps back for a bit, but soon tries again.  He
    expects to do better than others during good times.  Oscar understands
    that this approach involves more risk.  Oscar is opportunistic.
  • Felix also has a positive long-term outlook, but he is something of a
    fussbudget.  He is much more cautious, with an emphasis on capital
    preservation.  He is perfectly willing to step aside from the market
    when there are signs of danger.  He knows that he will miss some moves,
    but that is OK.  He scores big gains when the market moves lower and he
    escapes the loss.

There is more detail on Oscar and Felix in this article.  There is more about the Penalty Box here.


Weighing the Week Ahead: Fixation on the Fed

The “Week Ahead” series is a relatively new concept for me.  I have only been doing it for a few weeks.  It is “thinking out loud” since it is work I always did anyway.  I am open to suggestions.

There are many good services that do a complete list of every event for the upcoming week, so that is not my mission.  Instead, I try to single out what will be most important and help investors think about it.  My theme for the week is what will be the big story for print media and financial television.  It is what I am looking for, and maybe you should as well.

So far, my weekly guess about what will be important has been pretty accurate.  This week I foresee another bout of Fed Fixation.  It is a light week for the economic calendar and I do not expect much on the political front.  On Tuesday afternoon we will see the minutes from the March Fed meeting.  The Fed has made some major improvements in transparency over the years.  When I started in the business, you had to infer the result of the Open Market Committee’s decision by watching the New York Fed’s open market operations at “Fed time,” the regular hour for Fed intervention in the marketplace.  It took some experience to interpret what they were doing — system repos, matched sales, etc — and compare it to the Fed funds rate at the time.

The new approach is so much more sensible, both to communicate policy intentions and also to share information about discussion and dissent.

The Bearish Case

To summarize briefly, here are the various bearish positions:

  • The Fed should not even exist, so whatever they do harms the country;
  • The Fed should have allowed  various banks to fail, mortgage lending to cease, and normal commercial lending to end;
  • The Fed has stoked inflation and nothing that they do now can solve the problem;
  • The Fed actions have been totally inadequate to deal with incipient deflation, so we face multiple years of economic malaise, crashing housing prices, and high unemployment;
  • The Fed is “in a box” where any decision will exacerbate some problem.

A Calmer Look

The Fed has stepped in to fill the post-Lehman void in lending.  The expansion in the monetary base was large in the Lehman aftermath, but it has not continued.  The Fed also augmented a near-zero interest rate policy with an array of special lending facilities and direct purchases of securities.  Despite these actions, credit in the general economy remains tight.

The Fed communications have consistently indicated an emphasis on stabilizing and strengthening the economy with little concern about inflation.  There are now the first signs that some members of the FOMC want to prepare to reverse these policies.

“Prepare” is the operative word.  I expect the process of returning to a neutral policy stance to take about two years.  There will be many small, incremental moves along the way to neutral.  This gradual withdrawal of accommodation is not bearish.  It is a sign of strength.

Look for many commentators to fill pages and air time with speculation about the Fed’s exit strategy next week — and for the next eighteen months or so!

Last Week’s Action

Here is my take on the key data from last week.  I make no effort to be comprehensive, nor am I taking a viewpoint.  I will highlight what I found significant, trying to be objective.

The Good

There was some good news.

  • The ISM manufacturing report beat expectations and is consistent with an annualized GDP growth of 5%.  James Hamilton summarized the week’s data with “It looks good to me.”

 

The Mixed

For a change, the economic news was not so bad.

  • The March Employment Report.  The first month of significant net job gains is good news and it generated a positive response in holiday futures trading.  The payroll job gain was better than most expected if one considers the revisions to prior months and the size of the census hiring, only 48K so far.  The household survey has a larger margin of error (400K versus 100K), but it has now registered a net gain of a million jobs in three months.  This might be overstated, but it is probably not zero.

This is only a start.  The unemployment rate of 9.7% did not move, and will not until net job gains are higher.  An improving economy will also attract people back into the labor force.  The unemployment rate is a popular focal point, but not the earliest indicator of improvement.

Mark Thoma cites the same facts, but is discouraged about the prospects for improvement.  For the really bearish takes, you can see a roundup of comments from the usual suspects here.

Our Trading Forecast

Our own indicators are now bullish, and that was our vote in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:

  • 87% (87% last week) of our ETF’s have positive ratings.  This is very strong.
  • The median strength is +31 (up from +24 last week).
  • 69%  (down slightly from 80%) of the sectors are in the “penalty box,” showing a continued high level of uncertainty.
  • Our Index Package now has a solid, positive rating, consistent with a gain in the market over the next three weeks.

Investment Implications

With a quiet economic calendar and a lull in earnings, it is time to be flexible.  I continue to pick up health stocks and economically sensitive names on dips.

 

Deficits: What is the meaning for the individual investor?

This week has a new avalanche of articles and TV programs about deficits.  All emphasize the maximum in scare tactics.  The sources are readily identifiable:

  • The politcians on the "outside."  This is currently the GOP, but it can work either way.  (Regular readers know that I made similar comments when President Bush was in office).
  • The perma-bears.  They are talking their books.
  • The top bloggers.  They have accurately identified their Internet audience and know how to go for page views.

None of this has anything to do with investment returns — unless you are willing to consider the opposite side.

Let me state this quite simply and clearly:

If you are going to wait for a widely accepted solution to the deficit problem, you are a PermaBear!

We have faced federal budget deficits for decades.  The Clinton Administration was the only surplus producer in recent times.  This problem will eventually be addressed.  As an investor, if you wait for the official solution, you will be far too late.  The key problem is that most observers want to "solve" the deficit question while we are still in the middle of an economic crisis.  Savvy public policy analysts take a different view.

Here are some hints:

  • It is going to take a bi-partisan commission so that neither party can be ostracized for cutting benefits.
  • Benefits will be cut — most prominently for social security recipients.  People are living longer so the ratio of beneficiaries to payees is totally out of proportion.  When the program was started, people only lived to 68 or so on the average.  It is past time to increase the official retirement age.  72 is the new 65!
  • Increased immigration will help.  Immigration has been demonized and mis-represented.  I was surprised at the consensus at Kauffman — supporters of immigration.

Where to Find Information

I am delighted to see the debate about lightweight versus long-form blogging.  Abnormal Returns has an excellent article on the subject.

This is an important subject that deserves some extra time.  Do you want to read short-form, bullet point pieces, or do you want more analysis?  Do you want something that caters to your pre-existing opinion, or something that challenges you to think?

An interesting question is whether gatekeepers like Abnormal Returns will start to make these distinctions.  One of the key lessons from the Kauffman conference was the overwhelming flow of information and the importance of knowing what to read. 

A Suggested Answer

In the aftermath of the passage of the health care legislation, there is renewed interest in deficits.  The actual experts on this subject are specialists in public policy — people who understand how the US government grapples with long-term issues.

To my amazement, the Kauffman Conference on Economic Blogging had a featured panel on this topic with no representation from a political scientist or public policy expert.  No wonder they concluded that we have no hope!  (I am still waiting for the link to the final video.  I'll update when available).

I wrote one of my best pieces on this subject a month ago, before it hit the mainstream radar.  If you want a politically neutral article — policy analysis and investment implications — it is still worth a read.  I got a few emails thanking me for clarifying a scary topic, so at least some have been helped.

Meanwhile, here is a good alternative — a discussion from Modeled Behavior.  Karl Smith is a young Public Policy prof whom I hope to meet some day.  This is a nice departmental discussion that captures many of the current issues.  It goes on for several articles and lots of video time, so it is a nice test of how serious people are about learning.  I recommend that you try it — at least for a few minutes.  Karl makes many strong arguments that deserve a wider audience.  There are a number of practical solutions that will enhance your understanding.

Summary

It is easy to write the short takes and the list of bullet points.  Writing a thoughtful, analytical piece takes hours.  Meanwhile, the market treats both equally.  Those sources that rely on revenue and page views have an easy choice of strategy.

As the financial noose tightens, MSM bloggers may be tempted into sensationalism and symbiotic relationships with the most popular "independent" bloggers.  We live in an interesting time.

ETF Update: Midcap Move

In addition to taking a couple of days off, I have had some computer problems.

It is a day late for our regular ETF update, but I will post the basics for our ratings below.  Those interested in a more complete description of our methodology can check any of our prior updates.

When I finish the upgrade to Windows 7 — the Vista experience was not good — I'll devote an article to the transition.

Meanwhile, here are the ratings from last Thursday at the close.  Those who subscribe to our weekly reports received timely updates, but I apologize for missing yesterday online.

Summary

The index package is still bearish on the market, but we are slightly long with specific sectors.  If I had written a full post, I would have emphasized the move in the midcaps and small caps.  That may still be the theme for next week.

This is really just a service for those who have interest in the updates, but are not subscribing to the email list (etf at newarc dot com).  Sign up there for a weekend email with the ratings.

030510

February Employment Report Preview

The monthly employment situation report remains the "A list" economic indicator.  Pundits love it.  There are so many facets.  If you want to spin, opportunities abound.

The official data is the best effort of capable and talented people.  They have created a methodology.  When new data are available, the BLS revises the result.

The result?  A happy hunting ground for critics. Since so few understand the methodology, and so many have a deep suspicion of government, the bearish spinners have the upper hand.  Let's start with how I approach the problem.

Background

As regular readers know, I have a unique viewpoint on the payroll report.  I wish I could get more professional colleagues to join me.

There is an actual job change which we might call "TRUTH."  There are many efforts to measure that change, including that of the BLS.  While the BLS does a good job, they are hampered by their approach, including the following:

  • They do not focus directly on the job change.  They attempt to count every job for two different months and subtract one from another.
  • They rely on a survey.  This is a fine method for identifying properties of the surveyed population.  It is much more troublesome when the objective is to COUNT the population.
  • The survey has non-respondents who might be either firms that did not respond, or firms that are out of business.
  • The survey is forced to impute business births, because there are always many business births.  The BLS does it pretty well, but it is inherently difficult.
  • The survey has a sampling error of more than 100K jobs.

To summarize, the BLS result is important not because it is the best measure, but because we are so interested in employment.

Meanwhile, many independent analysts have other approaches.  A fair method of scoring would be to look at the final job changes, after all of the revisions, and see whether anyone did better than the BLS.  Trying to guess the monthly "as reported" data is a different problem.  Nonetheless, billions of dollars will trade on that information.

Our Own Estimate

Each month we ask the question, "What change in payroll employment would be consistent with other economic data from the same time period (the middle of the prior month)?

This is not a forecast, per se, since we do not posit any causal relationship among these variables.  They are all concomitant indicators of economic activity. 

  • We use the four-week moving average of initial unemployment claims, culminating in the week of the employment survey.  This is the best direct indicator of new lob losses.  This has gotten worse in the last month— 468K versus 447K.  Ignore the recent weeks which are not in the survey period.
  • We look at the University of Michigan sentiment survey, which we find to be more useful than the Conference Board's sentiment index.  Michigan uses a panel, where some families are carried over from month to month.  This is a good technique.    Sentiment is influenced by employment.  When people have lost jobs, or are worried about losing jobs, it shows up in sentiment.  It is a good concurrent indicator.  The Michigan index is now at 73.6, down a little from last month.
  • We use the ISM manufacturing index, which came in at 56.5, down from last month's surge to 58.4.  This is still a strongly bullish for the overall economy.

Our long-term record has been pretty good, especially when compared to the final revised data.  This makes sense because our model was derived from the final data.  In recent months we have been too bearish.  The BLS benchmark revisions suggest that we have been much better than first thought.  I am working on a comparison with the final numbers.

This month, our estimate is for a net job loss of 51,000.

Other Forecasts

It is always interesting to compare the job forecasts from different sources.  We follow several because of the interesting and widely varying methods they use.  A wise interpretation would be to consider all of  these disparate sources of information.

ADP has proprietary data because of its payroll management business.  ADP sees losses of 20K.  This estimate does not include government jobs.

TrimTabs has another valuable approach — tax deposits.  Their forecast is for a loss of 30K jobs.

WANTED Technologies has resumed estimating the monthly change after a protest because of the benchmark revisions.  I sympathize with the problem, but I am glad to see them back in action with their unique method.  They bring information from online ads, a source that others miss.  They see a job gain of 5000.

Briefing.com cites the consensus as a loss of 20K and their own forecast is a loss of 50K.  I get several other private estimates with similar methods — all in this range.

All of these sources are valuable.  The 90% confidence interval on the BLS estimate, something that no mainstream media sources report, is +/- 100K or so.  And that is after revisions and benchmarking.  It is a survey — a good one — but it has an error band.

Investment and Trading Take

I have frequently recommended being short in front of the payroll number.  This month there has been plenty of advance information about possible weakness.  It is pretty silly.  There will be discussion about weather factors.  Anyone who did not work the week including the 12th was not on a payroll.  Meanwhile, people ignore the large sampling error.

As a result, the data may draw less attention than usual.  Meanwhile, our read on the employment growth is somewhat bearish.  The jobs are not adding up as rapidly as we might hope.

A Final Thought

There are so many, measuring employment change in so many ways.  This month there is a strong consensus.  If the BLS number is at wide variance, it is best to put it aside and await more data and more revisions.

Weighing the Week Ahead: It’s All About Jobs

Jobs are so important.  What you do is not just a source of income, it is part of your identity.  Jobs are about security, confidence, and self-esteem.

Losing your job threatens everything.  It is no surprise that most people evaluate the economy in terms of jobs.

The recession figures do not tell the entire story.  Most sources focus on net job changes, the current unemployment rate, and maybe the number of people who are under-employed.  These numbers, bad as they are, understate the magnitude of the problem.

This is why I emphasize keeping track of business dynamics.  When we finally get the actual data from state employment offices, as we did last week, we get some really solid data.  The gross job losses — actual payroll jobs that disappeared — were about 33 million during the year ending in June, 2009 (the last numbers we have).

Over 25% of the payroll jobs were lost during that twelve months.

While many of these jobs were reclaimed through job creation, it helps to explain why so many have been touched by the recession.  Even those who dodged the cutbacks have friends and relatives who were not so lucky.

Luck is a Factor

If you think that luck is not a factor, you are not paying attention.  Many people who have done a fine job for their entire lives have lost their jobs in this recession.  People in their 50's, with a strong career record, are among the losers.  Their prospects for new employment are uncertain at best.  Here is one way of considering the prospects of someone fired by his/her company:

Anybody who ever built an empire, or changed the world, sat where you are now. And it's *because* they sat there that they were able to do it.

Those are the words of Ryan Bingham, the hatchet-man character played by George Clooney in Up in the Air, nominated for various awards.  I liked the film and the actors.  It does have comedic moments, but the general job loss theme is very tough.  The opening scenes include actual victims of job cuts, invited to respond to Clooney with what they actually said, or wish they had said, when informed of the "downsizing."  These interviews ended with a severance packet and a request for security keys.

Hatchet Man

This week's focus will be Friday's employment situation report.   But first, let's do a review of last week.

Last Week's Action

Here is my take on the key data from last week.  I am not trying to be comprehensive, nor am I taking a viewpoint.  I will highlight what I found significant, trying to be objective.

The Good

There was a glimmer of good news.

  • The testimony of Fed Chair Bernanke was well-received by Congress and the markets.  Sure, there was the usual criticism, but most seemed to be reassured.
  • The GDP report was better than expected.  I see this as old data and not very important, but it did show a nice increase in technology spending by business, more than 18%.  This supports one of my theses for the year:  Businesses catching up on delayed technology purchases.
  • The Chicago NAPM number, thought by many to presage the national ISM report, was very strong.

The Bad

The bad news included most of the economic data for the week.

  • New home sales were the worst in 25 years.
  • Existing home sales had a big drop (sending inventories higher, since these are calculated from the sales rate).
  • Initial jobless claims rose again.  There is a lot of noise and some blame the weather, but I like to focus on actual data.
  • The GDP gain depended heavily on changes in inventory.  This was not yet re-stocking but rather a decrease in the rate of inventory reductions.  The GDP numbers are not very helpful for those of us looking forward, and the inventory debate will go on for at least two more quarters.
  • Home prices declined again, no matter which source you pick to measure.

The Ugly

The worst news of the week was the Conference Board's consumer confidence survey. The reading of 46 was more than ten points below last month.  While the survey result was not confirmed by the University of Michigan survey, it was still scary.  The Bespoke Investment Team provided some perspective with the following chart:

Retailspx

The ugly "runner-up" award goes to Thursday's early trading.  Whether the selling was caused by Greece or jobless claims, it was big-time selling.  As has been the recent pattern, there was buying interest.

The Week Ahead

As I noted in the introductory paragraphs, employment will be the focus.  Daily trading continues to react to the dollar, but I expect the dollar weakness=strong stocks relationship to end at some point soon.  It is not the long-term relationship.

I am not optimistic about the jobs report, but I use the ISM data as part of my forecast.  I'll write more about this in my regular preview, probably on Wednesday.

Our Trading Forecast

Our own indicators (see our regular ETF updates for an explanation) are still bearish, and that was once again our vote in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:

  • 18% (up from 11% last week) of our ETF's have positive ratings.  This is very weak, but improving.
  • The median strength is -20 (up from -27 last week), very negative, but improving.
  • 93%  (about the same as 95% last week) of the sectors are in the "penalty box," showing an extremely high level of risk.
  • Our Index Package has a negative rating.  We own SH, PSQ, and DOG, the inverse ETF's for the S&P 500, the NASDAQ 100, and the DJIA.  We also now (as of Friday) own three other sectors, so we are neutral overall in our investment position.

A Final Insight

I get many requests to provide some specific investment thoughts in the weekly update/forecast.  It is difficult, but I'll keep trying.  Even when you have a great long-term record, the exact entry and exit points for stocks can easily be second-guessed.  Some of my best buys were not at the bottom, nor were my best sales at the top.

To understand this, you should read this fine article by Charles Kirk.  He lays it on the line, describing how difficult it is to trade effectively on a regular basis.  The TV commercials (Don't get me started!!) make it seem so easy.   Individual investors need a real commitment to do this right.

I have been pretty accurate on the dynamics of the health care debate, especially including the use of the obscure "reconciliation" process to avoid a filibuster.  The market has not always reacted to factors that seem obvious.  I am still looking for an entry point for part of my health care basket.

My main idea for this week's trading is a theme familiar to regular readers:  Time frames.  I run another sector model with a long-term horizon.  There are many attractive themes.  I also have a nice shopping list of stocks.  The world's best trading guru, Brett Steenbarger, also wrote on this theme.  Check it out!  Winning methods can have conflicting signals.

Long-term investors should have their own shopping lists.  If your horizon is longer than a month or two, you can take heart in the market resilience in the face of bad economic news, and some improving indicators.

Opportunity Knocks: Time to Buy Goldman Sachs

This may be a record.  Never before has one of my stories become so relevant, so quickly.

It was just yesterday that I highlighted Charles Kirk's wonderful interpretation of his reader survey:  People feared government and hoped for a correction.

Amazingly, both are coming true.  Will investors act upon their hopes?

Today's Market Action

Quite a number of prominent pundits predicted a big market rally if Brown won in Massachusetts.  The theory was that this would derail both big spending and big tax increases.  The message would be heard, and the policy direction would change.

Brown won.  Instead of a rally, we got the first meaningful selling in months.  The pundits had to reach deeply for other explanations.  Yesterday it was China.  Today it was Obama.

It is amazing that anyone would think the Obama TV appearance had market significance.  The Dow went down about 30 points during the speech and the breathless CNBC commentator said it was "crashing."  There is a market psychology in place, established courtesy of the Bearish Blogging Network and a few famous pundits.  When they can connect some dots between their political and market views, they are really vocal.

The Reality

Why did President Obama pick today for a statement on bank regulation?  I'm not going to fight the obvious answer, a desire to do something after Brown's win in Massachusetts.  I will leave it to others to decide whether this was foolish and/or ill-timed.

Is it significant?  Mostly, it is not.  Congress is holding hearings about the causes of the financial crisis.  I'll get around to that topic in due time.  Meanwhile, expect to hear plenty of debate.  The eventual legislation is months away and passage is uncertain.

The Obama concept was so poorly presented that even those who are normally friendly or objective were having trouble describing what he had in mind.  This is so far from legislation that it is laughable.  Even if one imagined the strictest version of the Obama rhetoric, it would affect only a small portion of revenue from Goldman Sachs or anyone else following that model.

The Parlay

Those who deal with probability theory are familiar with the parlay concept.  This occurs when a prediction requires several different events to occur before it will come true.  Let us suppose that you want to calculate the odds of the Colts winning the Super Bowl.  They must first beat the Jets (one element of the parlay) and then the NFC winner.  If you thought that each was a 50-50 proposition the parlay would be 25% (.5 times .5).

The Obama parlay has much longer odds.

First, his concept has to be accepted as an amendment to existing legislation.  A nice CNBC segment showed that this was unlikely. 

Second, assuming that his approach made it into the bill, it would have to be passed by both Houses of Congress.  The punditry was alive with commentary showing that proprietary trading did not lead to the crisis, and therefore should not be banned from banking.

Third, if the legislation did pass, what would be the reaction of Goldman and similar institutions?  One should not underestimate their creative ability to find new ways to conduct profitable business.

Fourth, while they currently deny the prospect, Goldman could simply choose to go private, making money the old-fashioned way.

Finally, assuming that all of these elements went wrong for Goldman, the revenue from the proprietary trading cited by Obama is only about 10%.  They could abandon that particular form of trading and substitute something else.

The Investment Conclusion

This is really pretty simple.  We have a stock that is trading at 5 or 6 times earnings — a money machine that has almost no equal.  The company is the subject of attack from all sides for an assortment of populist and political reasons.  The leaders and employees are often arrogant.

Is this about popularity and politics, or is it about making money?

Ben Graham created "Mr. Market" who would react to emotional swings and offer the wise investor a price each day.  Goldman Sachs today reported blowout earnings, but Mr. Market is offering you shares at a big discount.

Investors responded to the Charles Kirk survey by saying they hoped for a correction, but I suspect that most do not have the courage or savvy to pull the trigger when opportunity knocks.

Meanwhile, I own GS and I am buying for new accounts.  There are other possible names to buy, but I think this is the best play.

Throwing in the Towel (on the Blog Agenda)

There comes a time to admit defeat.

When I was a grad student I reached a point where I had taken all of the required classes.  I now needed to pass preliminary exams (prelims) in various subjects.  If I passed the prelims, I was an ABD (all but dissertation), and could proceed to propose and execute a major research project.

Since the prelims were conducted by panels of professors, it was important to know the work from their courses.  The problem was that some of them were new, and the courses changed with time.  Some of my peers thought that they needed to "audit" classes they had already taken, to catch up on new material.

My approach was different.  I made a list of all of the things I needed to review, re-read (or perhaps read for the first time!) in preparation for the exam.  When I finished a work, I crossed it off of the list.  When I read something that pointed to some other seminal work in the field, I added it.

As I prepared for the examinations, a clear trend developed.  I ignored the trend, scheduled the exams, and moved on to the dissertation stage at an enviable pace.  What did I notice?

The length of the list of absolutely necessary readings was at its longest on the day I took the exam.

Anyone who is a serious scholar knows this.  The more you study, the more intellectual hooks you find.  They all seem important.

My Current Agenda

I have reached a similar decision point in my blog agenda.  I have so many ideas, so many potential book reviews, so many great readers questions  —- and so little time.  I try to highlight what I think is important, but others do not share my lens on the key issues or on the markets.

So I am throwing in the towel — not on the blog, but on the agenda.  I am going to do some short hits on certain ideas, with my plans in mind.  I will try to respond to feedback on what is important and useful.  I also ask current readers to remember that I am reaching out to an audience that is currently not reading — the individual investor who may be struggling with conflicting information.

The Current List

Here are a number of topics.  In each case, I am going to state a viewpoint.  Unlike prior articles from me, it will be a conclusion with a hint of reasoning.  In all cases I am prepared to make a more detailed case.  It is not a lack of analysis, just a lack of time to write it up.  The list includes must do items, things that I "star" from other comments, and good reader questions.  It is not comprehensive.  I have scores of items; these are the most pressing.  In no particular order, please consider the following:

  • Reader "Yo" asks, apparently in response to my article on how many are analyzing Fed policy in the future instead of the market, whether the people who "called the real estate bubble and were wrong for years" were stupid.  My answer is a resounding "No!"  I was one of the earliest in identifying outlandish real estate prices.  I advised clients (prematurely as it turned out) to be wary of excessive real estate investments in 2004, pre-dating this blog.  It is not "wrong" to see a potential problem, but it is better to see the time frames, and invest accordingly.  I also avoid disparaging any large group by characterizing their prediction.  Members of the group all have different reasoning and methods.   I really hate arguments that go "these are the guys that got us into this, why trust them now."  The subject deserves more careful consideration.
  • Bob McTeer (a favorite source) takes off on this theme.  Why don't more people pay attention to this sources?  He has outstanding credentials, a free-market attitude, and a practical bent to his work.  He explains why this broad-brush approach is wrong for banks.
  • Reader Mike C continues to ask many excellent questions.  I have decided to do an article each week related to choosing stocks.  I started this last week, and I'll try to keep it up.  Other astute comments have echoed this theme.  I'll next turn to methods for finding specific ideas.
  • Several readers have inquired about our "penalty box" and why we do not buy the highest-rated sectors from our TCA-ETF model.  The simple answer is to think of this in terms of a stop loss, commonly used by nearly every trader.  Our modeling guru, Vince Castelli, has analyzed thousands of situations with risk/reward and hot money in mind.  His conclusion helps us to find faster exits and to avoid trades with high danger in our three-week time frame.  While I cannot reveal all of the elements of his method, I have conducted many tests.  The penalty box is a good short-term indicator, but may not be relevant for investors taking a longer view.
  • Market strategist Ramsey King writes as follows:   "Once again, just like in July, August & September, Benito juiced the system during expiry week."  I have an immediate negative reaction to those who believe that using some spiffy name for the Fed Chair proves their point.  If King wants to make his point, why not look to the data, as I have done in the past.  We have many years of official Fed transcripts available.  If he wants to do real research, why not find evidence for the conspiracy in actual data from prior meetings.  These meetings include about 60 people, many of whom have now moved on to other jobs.  If there is real evidence of juicing the market, plunge protection, or whatever, let us see some evidence.  Otherwise, this is just another opinion piece masquerading as investment advice.
  • Market strategist John Mauldin thinks that the economy will no longer even "muddle through," his long-held viewpoint.  For evidence he cites one economist on the topic of the economic multiplier, an obscure issue that most will not understand.  I am disappointed with John's approach to being a gatekeeper and an explainer of economics.  He should, at the very minimum, state this viewpoint (from a widely-cited source) is not the only one, and represents an extreme.  There is a debate among macro-economists.  The impact of economic stimulus is important and deserves careful analysis.  He footnotes a page in a $200 book that most people cannot verify, and does not provide even a quote.  The conclusion seems at odds with other published material from the same source.  Whatever we might conclude, his article does not provide a complete and balanced picture.  If he wants to cite various sources and explain why he picked this one, that would be stronger and more persuasive.  Mauldin is important because he has a much wider readership than any blog.  It is reasonable to expect a high standard of scholarship and balance.
  • The BLS estimate of job creation has broken down.  Unlike most of their critics, they look at the results when actually available from state data.  I need to write a more comprehensive piece on this, with special emphasis on where we are now.  Hint:  Our own more bearish estimates, published monthly, have been closer to the truth on employment.  I think that there are many people trying to assess the employment problem.  I have often stated that we should not view the honest efforts of the BLS as the official answer, but rather one measure among many.
  • Brad DeLong highlights a question on my plate:  How to deal with seasonal adjustments when there is a dramatic change in trend.  Good question, tough to answer.  I actually have some cooperating experts working on this question.
  • My "summer quiz" has a winner.  I need to reveal him, review the answers and award the prize.  The point of the quiz was to get people thinking on the right track, and I hope that many did so.

This is only a start.  There are many other interesting topics.

Tonight is my anniversary (number 30) and I am getting some static, although we have a nice weekend planned.  I do not know whether this approach has shortened my list of work, or made it longer.  I have barely scratched the surface on the points I try to highlight:

  • Finding true experts.  I am not an expert on everything, but I am good at finding them.
  • Analyzing data.  This is my sweet spot.  I taught the classes on this, and I can spot the impostors.
  • Putting together risk and reward.  There are always opportunities.  I see two big mistakes — polar opposites.  Some are trying to "get it all back" with a big play on a risky stock.  Others are frozen out like a deer in the headlights.  Most of my public recommendations have done well — CAT was today's example — but many think they have missed out, looking backward instead of ahead.