Weighing the Week Ahead: Can Corporate Earnings Reports Reverse the Stock Market Decline?

Last week featured a low signal to noise ratio – speech after speech, but little fresh information. This week heralds the start of earnings season. While we have a normal measure of government data, market participants will carefully parse the announcements and conference calls.

This week will be all about earnings.

Prior Theme Recap

In my last WTWA I predicted that the media would focus on the speechifiers, be they central bankers, political leaders, or pundits. This proved to be amazingly accurate. Each of the major speeches was covered extensively and the lesser ones also got significant play. It shows what will happen when there is a vacuum in real news. None of the speeches really broke new ground. We could all have predicted the major theme of each in advance. There was little else to report, and the story had a very negative tone.

Feel free to join in my exercise in thinking about the upcoming theme. 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.

This Week’s Theme

In sharp contrast to last week’s data vacuum important fresh news about corporate earnings. The stories from around the world will continue, and there is a normal flow of fresh economic data. Despite this I expect the earnings stories to dominate the financial news flow. This is independent, non-government data and it is directly relevant for future market performance. It also provides a fertile source for pundit spinning, always a main driver for financial media.

Can corporate earnings reverse the recent market decline?

Here are some key takes:

European bad news may already be priced in. (Michael Purves of Weeden).

Companies might warn of currency issues.

Disaster impends! You already know how to find ZH— do I need to provide more help?

A balanced viewpoint from Brian Gilmartin, who looks at specific sectors.

The upcoming earnings week is an important story. I want to provide more emphasis than usual on last week in addition to the week ahead. Please read the investor section carefully for these ideas.

Before turning to my own conclusions, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

There was not much news. The US economic picture remains solid, while China is a bit weaker and Europe at near-recession levels.

  • Jobless claims remain strong. The four-week average is 287K – not the stuff of economic weakness.
  • Household leverage has further declined. It is “back to the levels of the mid- to late-1990s, a period that saw low inflation and strong economic growth. The “bubble” that was created in the runup to the 2008 financial crisis has completely popped. Households have adjusted to new realities, so perhaps we’ll see more normal, less risk-averse behavior going forward.” Scott Grannis.

Household leverage

  • Gas prices declined again. $3.24 is the lowest in nearly a year. (I am still not seeing this around Chicago). This provides a little extra cash for average consumers. Some will argue that ten bucks a week is not much. Economic analysis is about changes at the margin. Every increase or decrease makes a difference. We noted the negative effects of rising gas prices and now we see the opposite. See Bespoke for analysis and charts. See also NDD for a continuing comprehensive discussion of the effects of energy costs on spending.

Gas Prices Last 12 Months100614

  • Dollar strength is OK. I am having trouble scoring this point in the weekly ratings. The current market action suggestions that a strong dollar is not market friendly. Long-term analysis shows the opposite. With that warning in mind, please read Neil Irwin’s explanation about how to make inferences about the global economy from the increase in dollar strength. Good stuff, good charts. Also please note the Dudley speech (via WSJ’s Hilsenrath) with an unusual mention of dollar strength. This was also part of the Fed minutes. The Fed does not normally comment on currency matters, so it is interesting to note that it might be a factor in future rate policy.
  • US budget deficit declined to $485 B in fiscal 2014 according to the CBO (a good source). This is down almost $200 B from the prior year. Please note the contrast with “fiscal drag” in the bad news. You can’t have it both ways!

The Bad
Most of the bad news was not about the economy. It was about the stock market reaction to last week’s speeches.

  • Germany keeps a hard line on European stimulus. Brian Blackstone of the WSJ has a good article on Jens Weidmann, the German Bundesbank President. He opposes what the ECB has already done, not to mention further moves.
  • German exports declined 5.8%. Matt Phillips has a nice summary article with several good charts, including the one below. Please contrast with “hard line” above and various points on Ukraine sanctions.

monthly-change-in-german-exports-rate_chartbuilder

  • US fiscal policy remains a big drag on GDP Growth. I cannot do a good job by reproducing the interactive chart here, so please look at the Brookings analysis and play with it yourself. (HT reader CS).
  • JOLTs quit rate was unchanged. Many observers try to use the JOLTs report to interpret net job growth. The regular monthly employment report is better for that purpose. JOLTs is better for business dynamics, including length of time to hire and the quit rate. These were both negative.

 

The Ugly

This week’s ugly news is the continuing Ebola story. The need for treatment in West Africa and international issues are now both commanding attention. It is a sad commentary that the story only gets big when there is a single US case. The economic effects are still relatively modest overall, but include concentrated effects in some sectors. Airlines are fighting the battle (via the Hill).

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.

No award this week, although I see plenty of good candidates deserving sharp analysis and refutation. How about the “Satan Omen?” Nominations always welcome!

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.

Recent Expert Commentary on Recession Odds and Market Trends

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (three years after their recession call), you should be reading this carefully. Doug includes the most recent ECRI discussion concerning continuing economic weakness in Japan. Doug covers the possible implications for the US. The ECRI has an update criticizing the Fed analysis of labor markets. This deserves discussion, but is beyond our scope in the weekly article.

 

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, he also has a number of interesting market indicators. His most recent update digs deeper into the breadth deterioration that has been a popular topic over the last few weeks. Dwaine notes the possible actionable events from his most recent Great Trough signal. Read the entire post, but be prepared to add context from your other work.

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. Georg continues to develop new tools for market analysis and timing. Some investors will be interested in his recommendations for dynamic asset allocation of Vanguard funds. Georg also is working on methods to improve performance from low-volatility stocks. I am following his results and methods with great interest.

I added to the recession discussion with some comments on the 2011 ECRI forecast and a possible repeat given current commodity prices.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.” Readers who missed out last week on the WTWA special can still get a free download of Bob’s monthly employment report. Not only does this provide a snapshot of the employment market as of September, there is great historical context. Take advantage while this is still available.

 

The Week Ahead

We have a more normal week for economic data and events.

The “A List” includes the following:

  • Initial jobless claims (Th). The best concurrent news on employment trends.
  • Housing starts and building permits (F). Housing remains important and these provide some leading information.
  • Michigan sentiment (F). An important read on jobs and spending.
  • Retail sales (W). The consumer remains an important read on economic growth.

The “B List” includes the following:

  • Beige book (W). Anecdotal information for the next FOMC meeting. All things Fed remain interesting to most.
  • PPI (W). No sign of inflation so far, so interest is secondary.
  • Industrial production (Th). Rebound in Sept. data for this volatile series?

The speech calendar – loaded up last week – is now at a minimum. Fed Chair Yellen speaks on Friday.

The big stories of the week should come from corporate earnings announcements.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has continued the bearish call initiated two weeks ago. Most sectors have a negative rating and the broad market ETFs are all negative. The Felix trading accounts were completely invested in three inverse ETFs at one point last week. Trading accounts are now 1/3 inverse, 1/3 bonds, and 1/3 a non-US ETF.

You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The recent “actionable investment advice” is summarized here.

Whenever there is a market decline, we are bombarded with “explanations” and predictions of disaster. To keep perspective I want to do three things:

  1. Discuss what is not happening;
  2. Re-emphasize the factors linked to major market moves; and
  3. Consider the best strategy for the current market.

What is not happening

Sometimes you need to begin by clearing away misleading information. Here are assorted explanations that I saw last week:

  • QE is ending. Attributing everything to Fed policy is a popular sport, but this is obviously mistaken.
    • QE has been declining throughout 2014 and is now down to $15 B from a start of $85 B per month. It is already 80% over.
    • Some link the market to the Fed balance sheet. That is at an all-time high and is moving higher.
    • Some think the market is anticipating the end of QE. If so, why didn’t it start in December when the tapering was announced?
  • Ebola problems. The Ebola story is very bad on a human front, but the economic effects have been limited. There were some moves in airline and travel stocks this week, but the economic estimates were about $32 B. This assumed that steps to control panic would not occur.
  • Ukraine. This is also bad news, but not fresh news. The reciprocal sanctions are having an effect. Will policies change?
  • ECB inaction. Some expected the ECB to expand bond-buying. Instead Draghi has increased the calls for fiscal policy changes by member nations. This is also not new. While we do not know whether it will eventually be effective, the combination would be better than monetary policy alone.
  • Declining commodity prices signaled another recession. In fact, prices are making a natural response to changes in the dollar, with both at normal historical levels. (See Scott Grannis).
  • Increased volatility shows that the market will decline further.
    • It was only a few weeks ago when the same voices argued that low volatility signaled excessive complacency, a warning of future stock declines.
    • Volatility is actually just back to normal levels.
  • Someone’s valuation model has been proven accurate. There has been a vigorous debate over valuation methods. Nothing happened to resolve it last week.
  • Small caps are lagging, signaling a market decline. When these stocks were strong, it was proof of “froth.” Sheesh! For a nice discussion of this see The Stock Trader’s Almanac.

Factors behind big market declines

The biggest market declines have all involved either a recession (defined as a significant decline from a business cycle peak) or a major increase in financial stress.

  • A reason for our extensive weekly discussion of recession chances is the desire to avoid major declines. In addition to the weekly quant corner, take a little time to review my summary on this topic.
  • Our weekly table also emphasizes the St. Louis Financial Stress Index. My research identified a value of 1.1 as a place where it would make sense to reduce positions. We did so in 2011. Current risk remains low.

Current best strategy

If you have a good investment strategy, it is unwise to overreact to relatively normal fluctuations. Stocks climb a “wall of worry.” This means that the stories you read and see on financial TV are already “in the market.” You need to think about what might be different. This was the key idea behind my controversial call for Dow 20K (good story here). Scott Grannis does a nice job with this topic, including this chart of volatility.

Walls of worry

If you are a value investor, it is up to you to determine what your investments are worth. If your methods are sound and the market disagrees, then you can use volatility to add more to your most attractive holdings. If you have made a mistake in your choices, you need to re-evaluate and move on. Price is what you pay; value is what you get.

If these fluctuations make you uncomfortable, then it may be right to reconsider your asset allocation.

This approach is basically what Warren Buffett and other leading value investors do. To help you, start reading the work of Chuck Carnevale. He relentlessly focuses on the fundamental value of each stock. Everything he writes has great value. We never buy a stock without consulting his screens as part of the process. While we do not always agree with the final verdict, we always appreciate the analysis. Start with this post, directed at retired investors.

We continue to use market volatility to pick up stocks on our shopping list. We do this because we also sell positions when they reach our (constantly updated) price targets. Being a long-term investor does not require you to “buy and hold.” Taking advantage of what the market is giving you is always a good strategy.

Other Advice

Here is our collection of great investor advice for this week:

There are plenty of good ideas in this interview with Eddy Elfenbein, one of our favorite sources. He has especially strong advice for young investors – mostly to focus on personal finance issues and defer investing in individual stocks. He also provides insight into his own stock picking methods.

 

Tom Lee (via Sam Ro at Business Insider) has four reasons why things will get better for markets.

 

Goldman Sachs has a list of expensive stocks to avoid and cheap stocks to buy. Without commenting on the specific names, I have compared the list to our own screens and recommend these articles as a starting point for your own shopping. We own none of the expensive stocks and many of the cheap ones. I also note the concentration of energy, materials, and economically sensitive names in the “cheap” list. This also fits our current sector analysis for long-term investors.

 

If you are stuck in gold, you might consult us about our gold bug methadone treatment. If you are out of the market completely, you might want to reconsider your approach. The current economic cycle is in the fifth inning. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. You can get our report package with a simple email request to main at newarc dot com. Also check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

I do not have a special insight into earnings season, but I do expect a focus on outlook. A skeptical audience will be watching for companies that are worried about a strong dollar or weakness in Europe or China.

I also do not have a personal forecast for next week’s trading. There are plenty of attractive stocks and plenty of funds that are lagging in performance. At some point the psychology will change. Whether it will happen next week is anyone’s guess. There is a fundamental floor on the market.

Last week I invited people to think about some possible positive events. I got very little in the comments on this topic, partly because it is so challenging to do. Let me illustrate with a few ideas. Since they all seem unlikely, no one is thinking about them.

What if China announced a bid for another oil drilling company?

What if Germany became more active in encouraging fiscal policy changes?

What if OPEC signals a change on production limits? The “instant experts” think that the Saudi’s have a deep conspiracy to crush the US fracking industry. What if the explanation is more mundane? (See this source).

 

What if consumer spending takes a firm upturn in the US?

As he does so often, Joe Weisenthal gets the key point right:

One month ago there were literally no bears left. Everyone had flipped bullish, and nobody could think of a good reason for stocks to go down.

And now, people can’t think of any “upside catalysts,” and everyone thinks the markets are going lower.

What’s interesting is that there’s no obvious change of stories. Sure China is slowing, and the European economy is belly flopping. But so? How is that news? It’s not. It just becomes news and becomes significant after the market sells off.

Weighing the Week Ahead: Investor Lessons From This Week’s Data Deluge

Summary

  • Market divergences were the highlight last week — as expected and in contrast to news.
  • The week ahead features a deluge of data — a test of current market “messages”.
  • The outlook for traders has turned more pessimistic.
  • Investors can enjoy a different time frame, with little risk from recession.
  • Some beaten down sectors offer special opportunities.

Employment week always generates a strong economic focus. Because it falls on an early calendar day this month, we also have an avalanche of other economic reports.

This week will emphasize the message of the economic data.

What can we learn from this news?

Prior Theme Recap

In my last WTWA I predicted that the media would focus on “divergences” and the implications for the broader market. I was out on a limb with that one, since it was certainly one of the more obscure possible choices for a weekly preview. It turned out to be very accurate. Doug Short’s review and summary chart provide one-stop shopping for what happened in equity markets.

dshort market week

The news was actually pretty good, but you would not know it from the markets. The decline on Thursday provided grist for the “divergence theorists.”

Here are some headlines:

From BlackRock: Worlds Apart? Investing in an Era of Divergence 

From Thursday at MarketWatch: This stock selloff has everyone talking about ‘divergence.’

Some of the stories even cited the same sources and charts I used. Apparently I was on target!Feel free to join in my exercise in thinking about the upcoming theme. 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.

Calling All (Young) Writers

The Financial Times and McKinsey and Company have joined to offer the Bracken Bower Prize for the best proposal for a book on the challenges and opportunities for growth. A prize of £15,000 will be given for the best book proposal. It is also a good way to attract a publisher for your idea. Entries close on September 30th. More information is available here.

A Note to Readers

Sometimes I try to review my approach to the WTWA series. As a profitable blogging method it is rather dubious. I could get many more page views if I split apart the various concepts, creating several posts per week. My sense is that the article would not be as helpful, but many prefer short takes on specific topics. Here is what I am aiming for:

  • A thoughtful theme that provides an organizing concept for the week ahead.
  • A frank assessment of how well we guessed about last week.
  • A summary of the good, bad and ugly news from the prior week. Ideally, this includes items you do not see anywhere else.
  • Recognition of peers who have done courageous and excellent work via my Silver Bullet.
  • A data-driven summary of the best quant methods.
  • Some ideas for traders.
  • A lot of ideas for investors.
  • Plenty of charts, tables to tease with links to the best of what I read last week.
  • My own take on interpreting the news of the day.

Some readers will not be interested in all of these topics, but I have organized it so that you can find your favorite parts. Can I do better, either in approach or content? Suggestions are welcome.

This Week’s Theme

In sharp contrast to last week (little fresh data, plenty of room for navel gazing) the week ahead includes plenty of new information. Many observers will try to force the data into their pre-conceived themes. Here are the key competitors:

  • Commodity markets show that global economies are weak. (See this discussion of declining commodity prices).
  • Bond yields imply a weak economy. (Gundlach CNBC interview).
  • The bond message does not signal weakness
    • It reflects European yields and arbitrage (Yardeni)
    • Yields are normal for this stage of the business cycle (Grannis)

The Scott Grannis analysis covers a key point that seems to elude most investors – the exaggeration of the effects of Fed policy, especially on ten-year rates. He writes as follows:

10-yr yields, on the other hand, are largely driven by the market’s expectations for economic growth and inflation. The Fed can influence these expectations to some extent, but not by much. The chart shows that even though the Fed purchased trillions worth of notes and bonds in three rounds of Quantitative Easing, 10-yr yields rose during each episode of Quantitative Easing. Yields rose because the market perceived that the Fed’s bond purchases were correctly addressing a problem and thus improving the outlook for growth. Yields fell after QE1 and QE2 because the market realized that the Fed had not done enough to address the world’s demand for safe assets, and this threatened the outlook for growth. We now know that QE3 is virtually finished, but yields have only declined marginally, which in turn suggests that this time the Fed has done enough.

10-yr vs QE

 

As usual, I have a few thoughts about which approach is best. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

There was a lot of very good news, supporting the general thesis of economic strength.

  • Gas prices declined another five cents. Doug Short monitors this every week, with the impact on the CPI and great historical charts. Take a look.
  • Q214 GDP was revised higher. This is “old news” of course since we have almost completed Q3. As I noted in last week’s preview, it still explains the foundation for future economic analysis. Bob McTeer likes the source of the revisions in the recent report – exports and business investment.
  • Business investment is improving. (Scott Grannis). Capital goods orders are a good proxy. This supports the GDP news.

 

Capital Goods Orders

 

dshort michigan

  • Durable goods orders increased in the core measurement by 0.7%. The noisy headline number reversed the aircraft news from last month. That was expected, so I am treating the news as a net positive. Steven Hansen at GEI does an excellent job of explaining the apparent contradiction.

 

11734843ztemp

  • New Home Sales beat expectations. Calculated Risk reminds us that this is just one month and it was an easy comparison. I am scoring it as a positive, but we should keep the warnings in mind. (Please compare with the “bad news” on existing home sales).

The Bad
There was also some important negative news.

  • Ukraine story. The effects of this continuing saga appear in the weakness of the European economy and dollar strength. In the short term, these are both negative factors for stocks. My estimate is that the market effect is currently about 8-10%. I do not expect a sudden change in the story, but I monitor it closely. To understand why it has been bad news, here are some current headlines:
    • Russia sees US and EU as backing Ukraine “Coup” (Voice of America)
    • Sanctions hurting Europe more than Russia? (Reuters)
    • Ukraine faces a cold winter without Russian natural gas (Calgary Herald). (See also quotes from Ukraine PM in many sources, including Reuters). Europe, too?
    • US sets reform conditions for Ukraine investment. (Yahoo Finance)
  • Sentiment remains bullish. A bit less so, but still tilted that way. Bespoke has the AAII survey and discusses the expected contrarian interpretation.

 

AAII Bullish 092514

  • Economic growth is decelerating via the Chicago Fed’s activity index. Doug Short has a good analysis. Many of the leading GDP tracking measures are showing growth at 3.5% or so, which does represent deceleration. The headlines can be tricky.
  • Argentina is tanking. It might also reflect broader South American concerns. Scott Grannis has a good account, illustrating what happens when you peg a currency in a weak economy.

 

Official vs Blue Rate

  • Existing home sales disappointed. Calculated Risk reminds us of the importance of inventory, which is not seasonally adjusted. With that in mind, the story is not so bad. The housing numbers are a challenge to follow, which is why we read Bill’s reports on all things housing (as well as other matters). Please compare with new home sales in the “good” category.

The Ugly

This week’s “ugly award” goes to the cozy treatment of Goldman Sachs by the New York Fed. You can read a summary by Michael Lewis and also listen to the NPR story at This American Life (available by podcast). I did both. This is only the beginning of the story, I suspect, but the reporters did well to seek balance and offered chances to respond. Neither Goldman nor the NY Fed provided much. I had a unit in my college classes about “captured” regulators. It is a familiar topic without easy answers. Listening to the podcast provides an interesting insight into the issues.

Our “ugly” list for the last few weeks remains unfortunately accurate. We had headline news from all conflicts with plenty of violence and death competing for our attention. The Ebola crisis, which we started to feature many weeks ago, is deepening. Last week I noted that some were calling it a “Katrina moment” for the World Health Organization.

Sometimes the concerted attention to a problem can change the result. Carl Bialik at FiveThirtyEight suggests that the worst of the CDC forecast might be averted for this reason. My investing audience might remember this effect from the Y2K problem, where advance publicity may have contributed to an advance solution. If only we could have a similar result with Ebola!

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 to Michael Batnick, who sought the true story about the “death cross” in the Russell 2000. Please read his entire explanation behind this table:

tumblr_ncd705N9eO1tvtougo1_400

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.

Recent Expert Commentary on Recession Odds and Market Trends

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (three years after their recession call), you should be reading this carefully. Doug includes the most recent ECRI discussion concerning continuing economic weakness in Japan. Doug covers the possible implications for the US. The ECRI has nothing fresh to add, but I expect something soon because of their excessive emphasis on commodity prices.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. Dwaine’s “liquidity crunch” signal played out as projected. This week he highlights his HILO Breadth index which he has designed to pinpoint bottoms and to warn of protracted corrections. Current readings imply an opportunity that usually shows up only once a year. Check out the full post for a description and charts.

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. Georg continues to develop new tools for market analysis and timing. Some investors will be interested in his recommendations for dynamic asset allocation of Vanguard funds. Georg also is working on methods to improve performance from low-volatility stocks. I am following his results and methods with great interest.

I added to the recession discussion with some comments on the 2011 ECRI forecast and a possible repeat given current commodity prices.

The Week Ahead

We have a big week for economic data and events.

The “A List” includes the following:

  • Employment report (F). Rightly or wrongly, the monthly employment data are the most important economic indicator.
  • ISM manufacturing (W). Good general concurrent economic read with some lead qualities for employment.
  • Consumer confidence (T). The Conference Board version reflects both spending and employment.
  • Auto sales (W). Concurrent economic read from non-government data. Also the F150 indicator for construction.
  • Initial jobless claims (Th). The best concurrent news on employment trends.
  • Personal income and spending (M). Important element of the economy and also includes the Fed’s preferred inflation indicator.

The “B List” includes the following:

  • ADP private employment (W). Valuable and independent read on private employment.
  • ISM services (F). Younger brother to the manufacturing index, but earning a wide following.
  • Pending home sales (M). All housing news is important. Pending sales have implications for new sales as well.
  • Trade balance (F). August data relevant for Q3 GDP calculations.
  • Factory orders (Th). August data in a very volatile series.

Once again, there is plenty of Fedspeak on the calendar. We might think that there is little fresh news on that front, but we still see surprises that add color to the official statements.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has shifted from neutral to bearish. Most sectors have a negative rating and the broad market ETFs are also tilting negative. Our Felix trading accounts are still partially invested, but not in mainstream equity ETFs. The trading program can sometimes go short via the inverse ETFs. That has not happened in more than a year, but we might see it soon.

I know a few very successful traders — very few! Most of those who try and fail think that they can look at a few charts and see something no one else notices. I embrace some technical methods. It is Felix’s strong suit. The fancier the method, the worse the prospects. Larry Swedroe writes about Problems with Technical Analysis. Here is an entertaining quote:

Martin Fridson, who currently serves on the editorial boards of Financial Analysts Journal, CFA Digest and the Journal of Investment Management,had this to say about technical analysis: “The only thing we know for certain about technical analysis is that it’s possible to make a living publishing a newsletter on the subject.”

You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here. In addition, be sure to read this week’s final thought.

We continue to use market volatility to pick up stocks on our shopping list. We do this because we also sell positions when they reach our (constantly updated) price targets. Being a long-term investor does not require you to “buy and hold.” Taking advantage of what the market is giving you is always a good strategy.

Here is our collection of great investor advice for this week:

Investing in Russia? Barron’s features Prosperity Capital, which is challenging the conventional wisdom with Russian investments.

To convince investors that better times are ahead, Westman must stray into the political fray he tries to avoid. Russia hasn’t developed indigenous institutional investors; foreigners own most of the free float in its stock market. That means the best hope for a rebound lies in a global rebranding, peace in Ukraine, and persuading capitalists that Russia will not provoke similar conflicts.

Westman has fought this uphill battle by quitting his London desk for fact-finding missions in Ukraine this year, mingling with Kiev politicians and separatist rebels, and offering investors a view he considers more evenhanded than that from most Western media. “I am convinced there is no plan in the Kremlin to restore the Soviet Union,” he asserts. “We are not trying to defend Russian policy, but to explain their point of view, which is that Russia is the one under attack.”

Looking for beaten down sectors and stocks is part of our value style, so I am interested. It still seems early to me, and the average investor cannot go for the private companies that hedge funds choose, joining them in avoiding the state-owned properties.

 

Need stock ideas? If you want to beat the market like the big hedge fund guys, you cannot buy hundreds of stocks. Bill Ackman’s six-stock portfolio illustrates the principle. We don’t own any of these, but that might relate more to our strategy, focus, and client risk profiles. Maybe some of these should be candidates for our “high-octane” program.

 

You cannot buy stocks just because they have declined. Some of them never come back! Ben Carlson has charts, data, and analysis. Here is his summary of stocks that had a catastrophic loss – a 70% or greater decline with minimal recovery.

dont-com-back
Meanwhile, some stocks are just out of fashion, even if fundamentals are solid. In this post I explored the contradictions in the current commodity trade and mentioned a couple of stocks that qualify as current strong buys, perhaps with calls sold against them.

 

Financial media for investors. In yet another strong post, Josh Brown describes the imbalance in incentives (junk food versus eating your veggies). Financial media are escalating misleading rhetoric to gain a share of a declining population. It is too bad that there are fewer incentives for those providing solid investor education. Josh lists a few favorite sites, so take a look and set your bookmarks.

 

Studying mistakes is important! Morgan Housel explains this very well. The entire post is worth your time, but I especially like this section:

 

Spend more time studying failures than successes. You can learn more about money from the person who went bankrupt with a subprime mortgage than you can from Warren Buffett. That’s because it’s easier and more common to be stupid than it is to be brilliant, so you should spend more effort trying to avoid bad decisions than making good ones. Economist Eric Falkenstein summed this up well: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”

His comments are equally true for top-level tournament bridge. I am sure that Mr. Buffett would agree! You can also see the “flip side” from this article at Scientific American. Most of what investors read is completely biased toward the surviving managers.

 

Do not over-emphasize short-term returns. Many investors rush to study their portfolios whenever there is any news. This distracts from your fundamental goals, explains Kris Venne.

 

Most of us would be better off if our 401(k) / IRA had a 30 year lock up feature. Maybe even a 90% surrender charge if cashed in early.

 

If you are stuck in gold or out of the market completely, you might want to reconsider your approach. The current economic cycle is in the fifth inning. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. You can get our report package with a simple email request to main at newarc dot com. Also check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

The disparity between the fundamental factors of stock valuation and the noisy price fluctuations provides ample ammunition for those emphasizing worries. Instead, I suggest a successful formula:

  1. Analyze the potential for a big risk by monitoring recession odds (very low) and financial risk (also very low). If these risks become high, then cut back your position size. You get this information free of charge each week by reading WTWA.
  2. Pay attention to the growth in corporate earnings, especially expected earnings. You can monitor this by reading Brian Gilmartin. He provides the data you need without the bombast. Here is his current take, showing both continuing solid growth and which sectors are featured.
  3. In the absence of problems in #1 or #2, take advantage of market volatility with confidence, especially in beaten-down sectors.

And most importantly – Ignore the sources that make their profit by scaring you instead of helping!

Weighing the Week Ahead: Will Job Growth Sustain the Rally?

With the official end to summer, there are many topics for sunburned vacationers to consider as they settle in to their desks and boardrooms on Tuesday. Economic data has been mixed, but with a positive tilt. We learned the latest ideas from central bankers. There are assorted crises around the world. Somehow, in spite of it all, stocks showed a strong gain for August.

I expect the main topic from this will be the economic focus and Fed reaction. I expect financial media to be asking: What does the job picture mean – for the economy, financial markets, and the Fed?

Prior Theme Recap

In my last WTWA I expected that the news would focus on central bankers unwinding. That was indeed the dominant story, in spite of competing world events, but we got precious little new information. There will be some carry over from this theme in the week ahead.

Naturally 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.

San Francisco Appearance

I enjoyed meeting some readers and making new friends during last week’s San Francisco Money Show. As I warned before the trip, there was too much going on for me to write my regular weekly update. My stay ended with a wee-hours wake-up from the earthquake. You can really feel the effects when on the 17th floor of a hotel! Locals were joking the next morning, perhaps because the injuries and damage were mild given the size of the quake (biggest since 1987).

I plan to lay out some of the themes from my presentation in future posts, but it has been hectic catching up after the trip. More on that to come.

This Week’s Theme

In the holiday-shortened week ahead we have an avalanche of economic data and crises from around the world. Many different topics could command attention. Out of these choices, I expect special attention on employment data – more so than ever. Why?

The Jackson Hole Fed Symposium highlighted the continuing importance of the employment situation. Here are the key questions about economic growth:

Are the job gains enough to sustain (or improve?) the rate of economic growth? Looking beyond the gross numbers, is there enough improvement in full-time jobs? Is the quality of employment adequate?

Even if that hurdle is surmounted, there is the question of labor market slack. How much room is there to stimulate job creation without sparking inflation?

Fed Chair Yellen believes that better employment prospects will improve labor force participation, keeping wage pressures low. This is a “cyclical” view of the labor force participation decline. Only after the participation rate improves, will there be a need to consider emphasizing the Fed’s inflation goal rather than employment.

The alternative viewpoint, laid out thoroughly in this week’s Barron’s Cover story, Work’s for Squares, emphasizes structural causes. The argument focuses on those of prime working age, where the high post-WWII rates have been followed both by periods of decline and stability.

ON-BF883_CovLos_G_20140829223008

While there are many possible causes, one intriguing factor is the growth in disability. The causes are not the old-fashioned work injuries; in fact, the workplace is safer. Someone on disability does not get much income, but does (after a wait) receive Medicare. This is a financial disincentive for returning to work.

ON-BF882_CovDis_G_20140829222938

The article provides a good summary of data from various sources.

As usual, I have a few thoughts to help in sorting through these conflicting viewpoints. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

There was some important good news.

  • Q3 Growth on Track for 3%. The Atlanta Fed’s Macroblog provides evidence for this early and tentative conclusion.
  • Durable goods orders showed record growth. Scott Grannis understands that it was mostly about aircraft. He suggests that it shows strong confidence in travel. See his charts and analysis.
  • Consumer confidence hit a new high. Doug Short has the story on the Conference Board version, the Michigan version, and historical context for both. Ed Yardeni highlights the importance for the economy. Here is a key chart:

dshort consumer confidence

 

us-nonresidential-fixed-investment-quarterly-annualized-rate-us-nonresidential-fixed-investment-quarterly-annualized-rate_chartbuilder-3

The Bad

There was also some negative news.

  • Durable goods orders ex-transportation disappointed. Looking beyond the headline surge, many analysts immediately noted that aircraft orders were the whole story. Doug Short has a more comprehensive analysis, adjusting both for population and inflation in considering the long-term trend.
  • The Russian Economy is in Trouble. The Forbes story from Kenneth Rapoza lays out the problems. I am scoring this as “bad” because of the effects on the European economy. It is, of course, the intended result of the sanctions.
  • Bullish sentiment has spiked again — a contrarian indicator. Bespoke has the full analysis including this chart:

aaiibullbear

  • Personal income and spending missed expectations. This is a blow to hopes for better economic growth. Steven Hansen explores this angle while looking at some history.
  • New home sales declined. Calculated Risk notes that the data were OK if the revisions to prior months are included. (Analysis and charts here).

The Ugly

Our “ugly” list for the last few weeks remains unfortunately accurate. We had headline news from all conflicts with plenty of violence and death competing for our attention. The Ebola crisis, cited a few weeks ago, continues to worsen.

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. No award this week. Nominations are welcome.

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.


Recent Expert Commentary on Recession Odds and Market Trends

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (almost three years after their recession call), you should be reading this carefully. Doug includes the most recent ECRI discussion, which has been consistently bearish, despite the blown call on the recession.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. Dwaine’s “liquidity crunch” signal played out as projected. This week he highlights his HILO Breadth index which he has designed to pinpoint bottoms and to warn of protracted corrections. Current readings imply an opportunity that usually shows up only once a year. Check out the full post for a description and charts.

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. For those interested in hedging their large-cap exposure, Georg has unveiled a new system. Georg now has another new program, with ideas for minimum volatility stocks for tax-efficient returns. He also has new advice for those seeking a safe withdrawal rate, now featuring the use of put options to protect against extreme events.

The Week Ahead

We have a big week for economic data and events.

The “A List” includes the following:

  • Employment situation report (F). The most widely followed, despite the many angles and adjustments.
  • ISM Index (T). Good concurrent gauge of activity and employment in manufacturing.
  • Beige book (W). Anecdotal reports that will provide background color at the next Fed meeting.
  • Initial jobless claims (Th). The best concurrent news on employment trends.

The “B List” includes the following:

  • ISM Services (Th). A shorter series than the manufacturing version, but a bigger slice of the economy.
  • Auto sales (W). Truck sales reflect small business and construction.
  • ADP employment (Th). A good independent read on net job growth.
  • Trade balance (Th). Important element of GDP calculation.
  • Construction spending (T). July data.
  • Factory orders (W). July data, but an important economic sector.

Fed participants are back on the speaking circuit. Did you miss them?

Breaking news from Ukraine is also likely, but nearly impossible to handicap on a short-term basis.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix switched to bullish last week and remains so. This had little effect on our trading accounts since nearly everything is in the penalty box. Uncertainty remains high – typical for a trading range market. Inverse ETFs were highly rated during this cycle but remained in the penalty box. This mean that Felix went to cash for a bit and also held bonds, but did not go short. The broad market ETFs are once again positive.

I frequently hear from young people looking for a trading job. Brett Steenbarger — PhD psychologist, author, trading coach, hedge fund consultant – is a great source for traders on all topics. His advice for those seeking trading jobs is first-rate: It is more than passion and desire! He provides some specifics on what to do and what to avoid, including how to build your credentials.

You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here. In addition, be sure to read this week’s final thought.

We continue to use market volatility to pick up stocks on our shopping list. We do this because we also sell positions when they reach our (constantly updated) price targets. Being a long-term investor is not the same as “buy and hold.”

Here is our collection of great advice for this week:

The real “smart money” is looking past the obvious worries. The headlines and financial TV emphasize the scary stuff for the obvious reasons. Blackstone Advisor Byron Wein reports on a series of lunches he hosted, something he does every year. This is a good item to bookmark and review later as an example of how experienced investors use the “wall of worry.”

Many of the participants are well known and a number are billionaires. There are hedge fund managers, corporate leaders, activists, buyout specialists, real estate titans, private equity folk and venture capitalists, providing some diversity in terms of their daily activity. I am adding newcomers to lower the average age. The group was correctly positive during the past two summer sessions, so I was curious to see if their mood had changed with so much unrest around the world.

The answer is that the investors almost universally believed that all of the threatening geopolitical problems would somehow work themselves out favorably without significantly disturbing the United States economy or its financial markets.

“Google never forgets” writes Barry Ritholtz. The subject was CNBC’s feature of David Tice making (yet another) crash prediction. Barry notes his past history of such calls and the performance of his Prudent Bear fund.

I was delighted to get an email from a reader on this same theme. He pointed out the CNBC/Yahoo story citing two “experts” who were predicting a 60% crash. He did his research on both Tice and Abigail Doolittle discovering their past records. This reader is a former scientist who is amazed that the financial world does not provide accountability for cited sources. In the absence of a dramatic change in media behavior, only constant reminders will help people understand “that we are essentially just viewing or reading a more dangerous version of the National Enquirer.”

Google never forgets, but it should not be the responsibility of each reader to check every source.

 

Vitaliy Katsenelson has a good tale on an important subject for investors — confirmation bias. He explains how to make the best use of sources where you disagree with the conclusions.

My own worries. While on the subject of evidence and disconfirmation, I made a list of things that I was watching and what evidence would lead to less optimism about equities. I published it here as the Final Thought, and I keep it in mind.

If you are worried about possible market declines, you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. You can get our report package with a simple email request to main at newarc dot com. Also check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

Is the decline in labor force participation structural or cyclical? I certainly cannot answer that question in the context of our weekly focus post, but I can suggest how to think about the problem.

  • Nothing in the Barron’s article would be a surprise to the Fed’s economists. They have looked at the data and reached a different conclusion.
  • There is a little truth in both arguments. Some who lost jobs have simply retired early. Others are restricted by underwater mortgages. Those who have taken temporary jobs or gone to school will react to a better job market.
  • This means that we should see at least some rebound in participation before wages really take off. As is the case with most economic arguments, changes do not come from flipping a light switch.

There is another important implication of this debate – one that we will see repeated for the next two or three years. Many have argued that the lack of any wage growth is a sign of a weak recovery and poor prospects for future consumption. If this finally starts to change, you can expect many of these same sources to warn about looming price increases.

It is more reasonable to expect an intervening period of improved economic growth and better wages. The Fed may eventually be too slow in changing course, but we’ll still be raising that question in a year or two.

Weighing the Week Ahead: Can Earnings Growth Reignite the Stock Rally?

To the surprise of many observers, stocks have survived a series of recent challenges. As Q214 earnings reports starts begin, the questions has changed:

Can strong corporate earnings spark a renewed rally in stocks?

Prior Theme Recap

Two weeks ago I expected that speculation about a market correction would dominate the time before earnings season began. This proved to be accurate, especially when assorted news items were linked to a market decline of more than 50 bps. It does not take much these days to get the financial media excited, e.g. The Dow is down triple digits!! Whoever happens to be on TV at the moment is asked to “explain” the decline.

Naturally 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.

This Week’s Theme

The stock market has successfully shrugged off a series of recent challenges, including the following:

  • A Portuguese banking “crisis”;
  • A front-page New York Times story explaining that all investments are “expensive”;
  • A streak of weak economic data;
  • A series of geo-political concerns – Ukraine, Iraq, and Gaza.
  • Some advice on stocks from Fed Chair Janet Yellen. (See Steven Russolillo’s WSJ piece and Neil Irwin at The Upshot to get some grounding on this issue!)

Doug Short always captures the week in a single great chart. This one shows the resilience last week.

dshort market week

The chart would be even more dramatic if it included overnight futures trading on Thursday. Those of us sneaking a peek or two in the wee hours noted that futures were down “triple digits” on the Dow. More on that subject in this week’s Final Thought.

After surviving these various tests, it may be time to consider the upside. Will earnings growth be enough to propel stocks higher?

Barron’s cites “earnings based optimism” as the source of strength.

Eddy Elfenbein notes that estimates have come down less than we usually see, and also warns about the deviations in various earnings sources.

Brian Gilmartin confirms Eddy’s observation and also notes that we are seeing some revenue beats as well this quarter.

I am not seeing major sources projecting that earnings will be poor, but feel free to highlight such forecasts in the comments. I have some final thoughts, as usual, but focused more on world events than earnings.

First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

There was some important good news last week.

Beat Rate Q214

  • Yellen’s Congressional testimony was market-friendly. Reassuring and no missteps. Whether or not you agree with the plan, investors should take it for what it is. Here are four good takes on the story.
  • Health care spending cost forecasts are improving. The non-partisan CBO shows health care taking a lower share of GDP than projected a few years ago. Health policy remains a hot-button political issue. Everyone on all sides is either assigning blame or taking credit. As investors, we should be interested in facts – especially if worried about the budget deficit. Matthew Yglesias at Vox reviews data from a Brookings study. Here is a key chart:

15_cbo_budget_outlook_fig1-1

The CBO still sees the “risk of a fiscal crisis” without policy changes.

 

The Bad

The important economic news last week was mostly negative.

  • Industrial production missed expectations. Growth of 0.2% is disappointing.
  • Tax inversions will cost the US $20 billion in the next decade unless there is action. (Via WSJ).
  • Housing data missed badly. This included both housing starts and building permits. Calculated Risk is our favorite source on housing. Bill acknowledges the miss, but still sees the single-family data as consistent with his “broad bottom” thesis. To be fair, this has been his viewpoint for many months. He has plenty of good charts, but let’s focus on the bad news from this month:

Starts20132014June

 

ConSentPreJuly2014

The Ugly

The ongoing conflicts and resulting death and injuries. Whether terrorism or war, the issues seem intractable.

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 to John Lounsbury at Econintersect for his careful and educational analysis of Japanese machinery orders. Your favorite doomer site (a happy hunting ground for those seeking to win the Silver Bullet) garnered plenty of attention and page views with the “Japocalypse” headline. It is so easy to take a volatile data series and pick a single point out of context. It is especially effective when many see Japan as a good analogy for issues in the US.

John Lounsbury looks at the complete data history, showing both the raw data reports as well as long and short-term trends. His charts tell the whole story, but here is the key summary:

Whether the May readings have any special significance or not will not be known at least until the June data is reported, and probably not known with any certainty until at least three more months are on the books.

In the meantime, terms like “Japocalypse” can be put back on the shelf (under a dust cover) in case they are actually needed later when the long-term wild up and down swings in new machinery orders are ended with an extended move to the downside.

For another side of John, read his post on employer discrimination against Republicans. (If you have any questions about this one, please check the end of this article).

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.


Recent Expert Commentary on Recession Odds and Market Trends

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis.

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (2 ½ years after their recession call), you should be reading this carefully. Doug includes the most recent ECRI discussion, which has been consistently bearish, including the blown call on the recession. We included Doug’s chart of the Big Four last week, but data devotees should check it whenever there is a big release. It has now been updated for the employment data.

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. For those interested in hedging their large-cap exposure, Georg has unveiled a new system. Georg now has another new program, with ideas for minimum volatility stocks for tax-efficient returns. He also has new advice for those seeking a safe withdrawal rate.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.” One of his conclusions is whether a month is “recession eligible.” His analysis shows that none of the next nine months could qualify. I respect this because Bob (whose career has been with banks and private clients) has been far more accurate than the high-profile TV pundits.

The National Association of Business Economists survey puts the odds of a recession in 2014 or 2015 at less than 10% (looking farther into the future than we find comfortable). They also see the date of the first Fed rate hike coming sooner.

 

The Week Ahead

We have a moderate week for economic data.

The “A List” includes the following:

  • Initial jobless claims (Th). The best concurrent news on employment trends.
  • CPI (T). Real concern about inflation is still not imminent, but the recent increase has attracted more attention and comment. Remember that the Fed is seeking an increase and also uses the PCE, which is still benign. If the measures diverge, it will become controversial, so I am promoting this to the “A list.”
  • New home sales (Th). Important driver of economic growth.

The “B List” includes the following:

  • Existing home sales (T). Less economic significance than new home sales, but still a good concurrent read on housing.
  • Durable goods (F). Bounce back in June data expected.

Earnings stories will dominate.

Events in any of the world hot spots could also command attention.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has turned neutral with confidence reduced. Uncertainty remains high – typical for a trading range market. This week we were only partially invested in one or two of the top sectors for our trading accounts. That remains our position going into the week ahead, although some of the strength is outside of the US.

You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here. In addition, be sure to read this week’s final thought.

The market still did not provide the “dip to buy” sought by so many. The gentle upward action is fine for long-term investors and excellent for those trying out our Enhanced Yield approach. We added positions in stocks that represented good value with solid income from call premiums.

Here are some key themes and the best investment posts we saw last week.

Worried about a market top? Josh Brown provides a short lesson about market tops, comparing key points from the current situation with 2000 and 2007. As he often does, he hits the most important element of the difference, low interest rates and resulting private growth. Barry Ritholtz also has a column showing the huge extremes of investor behavior at market tops and bottoms. (Summary: We are not close yet).

Stock ideas? Some of our holdings have hit their price targets. Unlike some Wall Street analysts we adjust these regularly, not just when they are hit! This means we are always on the lookout for ideas. It is fine to do screening, but sometimes the quantitative rules do not tell the whole story. Here are two sources with some stocks worth considering. Do your own research, as we do.

Morgan Stanley – via Elena Holodny at Business Insider – ideas for the next 12 months.

Larry Robbins of Glenview Capital discussed holdings at ideas at the Delivering Alpha conference.

Portfolio management? Brian Gilmartin explains the role of bonds in adjusting your overall volatility. He illustrates with helpful data from Morningstar. I strongly agree with the idea of understanding and limiting risk. We use both our Bond Ladder and our Enhanced Yield programs to generate some return from the safer parts of the portfolio.

Avoid scams. Read about an FBI Pump-and-Dump scam to learn the signs.

Upside? Richard Bernstein Advisors (HT reader CS) has an interesting explanation for the high equity risk premium: uncertainty on the part of investors and corporations. He has data and charts to prove his point, concluding as follows:

RBA’s corporate motto is Uncertainty = OpportunitySM. Certainty implies risks not anticipated, and potential disappointment. Uncertainty, however, often suggests higher- than-normal risk premiums and investment opportunity.

A broad swath of data, whether focused on investors or corporations, continues to suggest meaningful uncertainty. Accordingly, we continue to believe this may be an elongated cycle that still offers unrecognized investment opportunities.


If you are worried about possible market declines, you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. You can get our report package with a simple email request to main at newarc dot com. Also check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

I expect next week’s theme to be earnings, but given current events it is also important to consider world events and risk. Josh Brown, after expressing concern for those suffering casualties, takes the role of the professional investment manager, writing as follows:

Suffice it to say that there is never any more or any less risk of geopolitical threat in the world – there are only changes in perception and the attention paid to the various threats, new and old, that have been with us since the dawn of time.

The notion that there is more uncertainty now than there was last month because of a plane being shot down in the Ukraine or an Israeli incursion into Gaza is both childish and ahistorical. Just because we choose not to be concerned with uncertainty at a given moment – like on September 10th, 2001 for example – that doesn’t mean an outbreak of violence or hostility is any less likely to occur.

So what we’re discussing here now is not a rise in uncertainty itself – but a rise in the awareness of that uncertainty and its subsequent effect on stock prices.

This is very good advice for the average investor, but let me add a few thoughts.

  • Many big world changes – end of the cold war, trade expansion, etc. – take longer and provide a longer recognition period. Cam Hui, who has recently been cautious, asks if this is a modern Archduke Ferdinand. Good question! Read his post.
  • Some events do provide new information. You need to know what to watch. In the current crises that meant chances for a direct military conflict between Russia and Europe or the US, sanctions on Russia that would affect the world economy, something in any conflict that would further increase oil prices.
  • If you know what to watch for, you wake up during the night and check news. For most investors, the specific news would not help.
  • Knee-jerk reactions are usually wrong. Investors who sold on Thursday probably did not get back in on Friday.

     

And most importantly —

If you were frightened about your investments last week, your stock positions are too big. You cannot react logically and effectively if you are paralyzed with fear.

[Final notes – The John Lounsbury piece on discrimination against Republicans is satire – a clever way to show the potential confusion between correlation and causation. I trust that most readers of “A Dash” did not need this help, but sometimes the political agenda gets in the way of clear thinking.

I will probably not write WTWA next weekend, but I hope to do some interim posting.]

Seasonality and the Tuesday Lesson

How should traders and investors take advantage of seasonal patterns?

There are so many opportunities for dividing the calendar!  This year, the best has been to go long on Tuesday.  Here is the 2014 summary from the Bespoke Team:

avg daily change day of the week1

 

You could have done even better if you had sold short on the other days of the week.

Issues

You might well be skeptical about this easy system.  When I offered it for comment to the Scutify community they suggested that there were not enough cases and that it did not make sense.   Market veteran Robert Marcin suggested that this pattern would quickly be learned by the market.  Monday buying would anticipate the Tuesday effect, and it would quickly disappear.

In fact, prior years have had different days as the best performers.

So far, so good.  There have been eighteen Tuesdays to establish and test a pattern.

  1. There was no a priori hypothesis
  2. There is no “out of sample” data that could be used for a test
  3. The results are “data mining” covering a specific time period.

Those who are skeptical are fully justified.  The pattern broke down last week.

Implications

Let us take the conclusions and find a new setting.  How about the Presidential Election cycle.  This is getting a lot of buzz as “experts” opine about why the second year of the second term should be bad.  How many cases are there?  If you wanted to get 18  (the same number for this year’s Tuesdays), you would need to go back 144 years.  Would that really be relevant?

We have better data on the “Tuesday effect” than we have on the oft-touted Presidential Election Cycle.

Most of those discussing seasonality violate all three of the points listed above.

Challenge for the Seasonality Crowd

Why hasn’t the market “learned” this behavior and adjusted?

Did any of those parroting “sell in May” advise you to “buy in October” last year?

[Note to readers.  I have had several suggestions about improving the blogging platform, the graphic images, and the ability to deal with comments.  While people have expressed appreciation about the content, they have requested a better platform.  This is a “test post” on my new site.  Comments are very welcome.  Send to main at newarc dot com. Please bear with me as I work out the kinks.  Thanks!]

 

Weighing the Week Ahead: Should We Fear Market Divergences?

The latest bearish meme is the focus on market divergences. The idea is that a “healthy” market shows confirmation from various sectors. The Dow made a new record high this week, which does not really reflect the overall market. Many smaller stocks have experienced a significant decline from their highs.

In a week that will have fewer earnings stories and less important economic data, I expect many to ask, “Should we be worried about divergences?”

Prior Theme Recap

Last week
I expected a focus on the Ukraine crisis. My main idea is that it is important for citizens but not really a market crisis. The muted impact from news last week provided some support for my thesis, although there were clearly some intra-day moves attributed to news from the region. The impact on Russian stocks is certainly important.

It proved not to be a primary theme, but the idea of fading this “news” is still sound.

Forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.

Naturally 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.

This Week’s Theme

What is a divergence and should we worry about it?

Josh Brown cites Peter Boockvar who warns as follows:

You don’t typically want to see large caps struggling at recent highs with less underlying participation by individual stocks – narrowing of participation at highs is how tops are formed. You also don’t typically want to see new all-time highs for the S&P while the more economically sensitive small caps are in a correction. These things can resolve in either direction, but the historical bias is toward a resolution to the downside.

Josh, open-minded about the final resolution, illustrates the divergence between the Russell 2000 and the S&P 500 with this chart:


Is the divergence a cause for concern? Boockvar does not really provide any evidence about small caps being more economically sensitive, nor about how divergences are usually resolved. Here are some other viewpoints.

  • The average stock is already in a bear market. Sam Ro cites J.C. O’Hara, who echoes Boockvar’s message about “masking internal weakness.”


  • It is a rotation, emphasizing dividend stocks (see Bespoke).


  • It is a rotation, resulting from pension fund reallocation (via Cam Hui).
  • You see what you are looking for with trend lines. Greg Harmon has good charts and examples.

As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.


Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
  2. It is better than expectations.

The Good

There was little news, but it was mostly good.

  • ISM services increased to 55.2. That is the highest level in months. Read Doug Short’s complete report for discussion of the underlying components and additional charts. Here is the headline series:


  • The quit rate is higher. There is some really bad analysis of the JOLTS report. Those who change their choice of indicator with the wind have thousands of choices. I emphasize the quit rate as the most important aspect of this report. It is not as good as other methods for analyzing overall job growth or unemployment. It is focused on turnover. The number of those voluntarily leaving their jobs is a good indicator of market health, and one that most do not know. 2.5 million people voluntarily quit jobs in February, the highest number since July, 2008. Nick Timiraos of the WSJ has a nice analysis with good charts. Here is the quit rate:


  • Initial jobless claims declined to 319K. This relieved some concern about the recent spike in this noisy, but important weekly series.
  • Hotels are on track for the strongest year since 2000. Calculated Risk reports the details – not surprising to this traveler!
  • Sentiment has turned bearish (a contrarian indicator). Bespoke has the story.


  • Earnings growth has been solid. 5.4% for Q1 and 8.36% on forward estimates. Earnings expert Brian Gilmartin has the full story. His insights have been very strong, both overall and on individual stocks.
  • Consumer credit continues to grow. This has been an economic and market positive for many years. (See Steven Hansen for an alternative viewpoint and details on the rate of growth).
  • A college education is worth $800,000. (From the SF Fed’s Research) With plenty of recent emphasis on student loan debt, we should also keep in mind that education is an investment. Staying in school makes special sense when job markets are weak.

     

The Bad

There was also some bad news.

  • European deflation concerns. On one hand it is a positive that Eurozone countries can roll debt at low rates. (Remember the scary warnings from a couple of years ago?) We must also consider whether the reason is confidence or a different brand of fear. Ed Yardeni sees the plunging yields as deflation concern. Here is a key chart:


  • Productivity fell by 1.7% in the first quarter, the first drop in a year. The flip side is that unit labor costs were higher. The WSJ has a good account, evaluating the possible weather effects.
  • Continuing Ukraine effects are negative, even with the stalemate. Robert Kahn, of The Council on Foreign Relations, has a thoughtful analysis of the contagion from sanctions against Russia.


 

The Ugly

Drug shortages – not just specialized drugs, but generics as well.

The problem built for years, and Congress finally gave the FDA expanded powers to address shortages. The shortages averted have increased from 38 in 2010 to 170 in 2013, but the active number is still 300 per day. The extended article from Remapping Debate makes a proposal that we free-market types will question: Government manufacture and distribution of some drugs.

What is wrong with the market solution? Among various reasons, this one stands out:

…companies choose which drugs to manufacture based on projections for demand and, if they have competitors, what others may produce. Oftentimes, they prioritize newer generics with bigger profit margins, even if that increases the likelihood of shortages, according to a report released in February on the drug shortages by the Government Accountability Office. What’s more, the watchdog agency said, older generics are routinely “discontinued in favor of producing newer drugs that are more profitable or that have more demand.”

When older, less profitable generics are made, they’re produced in limited quantities because unsold pharmaceuticals can’t be stockpiled like bricks; they have a short shelf life. As HHS pointed out in its 2011 economic analysis: “There is little cost (except reputational) of producing too little of one drug (rather than another), but a potentially high cost of producing too much of that drug.”

This is a truly ugly problem, and it is getting worse.

Housing Revisited

Following up on last week’s data, we have more analysis of housing. Here are two interesting articles, both worth reading in full.

Logan Mohtashami, a senior loan officer, explains that prices are too high and there are not enough good jobs for strong new buying.

Calculated Risk has nine reasons to look on the bright side of housing, responding to many recent concerns.

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. Reader nominations are always appreciated! (Thanks to C.S. for this one).

In a world filled with two-variable “correlation charts” it is difficult for most to remain objective. Everyone knows, in theory, that correlation does not imply causation, but the stories sometimes sound so plausible. Tyler Vigen at Spurious Correlations has some good ones. (HT to Dina Spector at Business Insider, who highlights some favorites). Here is mine, showing per capita chicken consumption versus total US oil imports:


You might also enjoy this vintage “Dash” where I looked at Ben Bernanke, the balance sheet, and the S&P 500.

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.


Recent Expert Commentary on Recession Odds and Market Trends

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. For those interested in hedging their large-cap exposure, Georg has unveiled a new system.

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.” One of his conclusions is whether a month is “recession eligible.” His analysis shows that none of the next nine months could qualify. I respect this because Bob (whose career has been with banks and private clients) has been far more accurate than the high-profile TV pundits.

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (2 ½ years after their recession call), you should be reading this carefully. He notes that the ECRI has emerged from hibernation. “Interestingly, the interview includes no reference to ECRI’s recession call, instead focusing on whether the winter economic downturn was weather-related or reflective of a cyclical downturn.”

Philosophical Economics has a provocative analysis about projected stock returns for the next ten years. Unlike some modelers who take hundreds of variables, all of the available data, and create a back-fitted regression equation, this is a simple bivariate approach. It is history, of course, so the reasoning is important. The article is long and thoughtful. I recommend it.

The basic conclusion is that the expected future return from stocks is inversely related to the average investor stock allocation. The resulting chart is compelling. It suggests an annualized 6% return over the next ten years.


How does this stack up against the other models that you always see quoted? Better, much better. Better than the “Buffett indicator,” and much better than the Q-ratio or CAPE.


 

The Week Ahead

We will have a moderate week for news and data. Some sources are doing better with an approach similar to mine – not listing everything, but highlighting what is important. Kathleen Madigan at the WSJ has a nice take with five things to watch.

The “A List” includes the following:

  • Initial jobless claims (Th). Best concurrent read on employment.
  • Housing starts and building permits (F). Housing remains crucial if the economic rebound is to gain real strength. Building permits are a good leading indicator.
  • Michigan Sentiment (F). Good concurrent read on employment and spending.
  • Retail Sales (T). Continued rebound from the bad weather months?

The “B List” includes:

  • Industrial production (Th). Also capacity utilization, now approaching 80%, a level that suggests more Capex spending.
  • PPI (W). Inflation will someday be important, but not until it has exceeded the Fed’s target level.
  • CPI (Th). See PPI above.

There are a number of regional Fed surveys. I do not regard these as very important (at least not individually) and it takes a big move in one for any real market impact. It is an active week for FedSpeak, including more from Chair Yellen.

Earnings season winds down. Ukraine remains a wild card.

It is options expiration week, so surprising moves sometimes become exaggerated. Option strike prices thought to be irrelevant suddenly come into play.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has continued the bullish rating, and the choices have become more aggressive. The broad market ETFs look better, except for IWM (The Russell 2000), which is neutral. More sectors have emerged from the penalty box, reflecting higher confidence in the ratings.

Those who want to follow Felix more closely can check us out at Scutify, where he makes a daily appearance to join in vigorous discussions about trading.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here.

Despite a little daily volatility, there have not been many good dips to buy for long-term value investors.

Those trying out our Enhanced Yield approach should have enjoyed yet another good week in a sideways market. It is important and helpful to own value stocks that pay dividends and add some hedging via short calls. I have written several times about examples that you can try on your own. It reduces your risk. Start small and get the sense of how to do it.

Here are some key themes and the best investment posts we saw last week. For some reason, these are all things that you should try not to do!

Individual investors are bad market timers. Jason Zweig is a champion for this group with his regular column, The Intelligent Investor. He aggressively asks, Just How Dumb Are Investors?
Stock fund investors made 3.7% annually over the last 30 years while the S&P 500 had annual gains of 11.1%. Basic reason? Investors chase returns, buying and selling the wrong mutual funds and getting out of the market at the wrong times.

The economy is stronger than you think, according to these nine reasons from Jeff Reeves’s Strength in Numbers. He describes an unexciting story of modest growth, suggesting that it might be time to “push aside” the doom and gloom crowd. What fun would that be?

Beware of the advice from famous hedge fund managers. Barry Ritholtz warns about the need to distinguish between some famous “headline” calls and the overall results. Here is a key quote:

The 2013 results were similarly disappointing: a 3.8 percent loss for the conference’s best picks versus the Standard & Poor’s 500 Index gain of 15.2 percent. The pattern was the same in 2012: a 19 percent gain for the Sohn picks versus 22 percent for the S&P 500. (Note the gains are calculated conference to conference, and not on the calendar year).

Beware of the bubble callers. The legendary Jeremy Grantham has pedestrian returns, even with a defensive position during the last recession. Why? He was too early and got back in the market too late. Here is the full story, typical of many bubblers. For contrast, read also James A. Kostohryz, who asks what might happen if Americans were actually optimistic.

Beware the hype machine. Tom Brakke describes what happens when sell-side analysts write about companies where there are also stock offerings. See his great case story and chart.

Beware of “inside” information. Most people are suspicious of those who are selling information instead of using it themselves. Here are several reasons for walking the other way!

 

If you are obsessed about possible market declines, you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. Check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

Divergences seems like a manufactured problem. Take a look at this chart from Bespoke.


They analyze the strength of the NASDAQ Internet Group last year and the recent weakness, noting that “the tortoise could catch up to the hare.”

It is normal. It is what you should expect when attitudes change about sector valuations. We always see changes based upon perceptions of where we are in the business cycle as well as sentiment. It is not just about company size. At some point, I expect the current dividend favorites to lose ground to cyclical and financial names. That is business as usual.

Here is a simple test:

When these more speculative stocks were surging last year, did analysts now warning about “divergences” celebrate the “confirmation” of the strength of the market? Or did they warn that the market was in a “bubble?”

If the latter, isn’t it healthy to restore more normal valuations?

Weighing the Week Ahead: Is the Ukraine Crisis a Market Crisis?

How worried should we be about the Ukraine crisis?

Last week some regular readers whom I respect asked why I did not mention the Ukraine situation. It was a fair question, given the attention from the financial media. My answer was that it was an important story on many fronts – defining the future Putin role, setting precedents for NATO and the us, and of course, the people directly suffering in the conflict. I did not view it as a “market crisis” despite the 50 basis point moves that are often attributed to Ukraine news.

Since it is a light week for data, the field is open for more pundit pontification, perhaps including a few who can actually find Crimea on a map and know a few facts.

Prior Theme Recap

Last week
I expected a repeating chorus of “sell in May” no matter what happened on the economic front. That was a good guess. We were bombarded with articles on that theme and most cited that type of data that I warned about last week. The actual data were quietly positive, and so was the market.

Forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.

Naturally 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.

This Week’s Theme

Is the Ukraine situation a market crisis?

Saying “Yes” are those who take one of the following positions;

  1. There is a chance of armed conflict between Russia and the US or NATO;
  2. Sanctions against Russia will cripple the entire European economy, upsetting the oil trade relationship;
  3. Increased energy prices will derail the European economy with a possible ripple effect.

Saying “No” are those who focus on quantitative impacts.

  1. There is no indication of direct conflict, only an escalation of sanctions;
  2. Global trade is supposed to bring the world closer together. This is a test:
  3. Increased energy prices may not enrich the leading Russians.

This might be a compelling story in a week that is light on data. There will be some early spin on the Buffett weekend, and also some earnings news. Will the market decide to take the Ukraine issue seriously?

As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.


Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
  2. It is better than expectations.

The Good

There was plenty of economic news, and on balance it was pretty good.

  • Earnings – both reported and expected – are solid. Brian Gilmartin has an excellent analysis of the current earnings season and the implications. Higher expectations are in place. What multiple will the market accord?
  • Case-Shiller home prices were up almost 13% year-over-year. This was the expected increase, but “good news” because of question marks on other recent home sales data.
  • Auto sales were encouraging, especially the Ford F-150 truck, which tracks small business and construction. This is a good one for those conspiracy buffs who are suspicious of the “official” numbers. (Via Bespoke).


The Bad

There was also some bad news.

  • GDP growth in Q1 was anemic. It is certainly bad news as the base for future growth. The market seems to be granting a “weather exception.” We shall see. Some sources see the quarter in negative territory. (Merrill Lynch via Calculated Risk).
  • Initial jobless claims rose again, to 344K. Job losses are only half of the story when it comes to net job creation, but this data series has been a good indicator.
  • Employment growth is concentrated in the low-wage jobs. The NY Times has good coverage.


The Ugly

Dissatisfaction with where you live. I confess that I was astounded by the recent Gallup survey asking people if they would prefer to live in a different state. Before looking at the result, what do you suppose would be the high and the low? Do you think that many people want to move, or are generally satisfied?

It turns out that even in Hawaii (and Montana) 23% of the residents would rather live elsewhere. That is the best. I am surprised.

On the negative side, half of the residents of my state (Illinois) would rather move on. This would be a good question for “Family Feud.” How many of the best and worst states could you name? I think the big story is that so many would like to move. This probably has implications for employment, inability to sell homes, and other issues. Here are the tables of the worst states and the best:



Runner-up this week: Prop traders’ failure rate. The TV ads make it seem so easy……

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.


Recent Expert Commentary on Recession Odds and Market Trends

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. For those interested in Canadian stocks, Georg has unveiled a new system.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.” One of his conclusions is whether a month is “recession eligible.” His analysis shows that none of the next nine months could qualify. I respect this because Bob (whose career has been with banks and private clients) has been far more accurate than the high-profile punditry.

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (2 ½ years after their recession call), you should be reading this carefully. He notes that the ECRI has emerged from hibernation. “Interestingly, the interview includes no reference to ECRI’s recession call, instead focusing on whether the winter economic downturn was weather-related or reflective of a cyclical downturn.”

If you had to pick a single indicator for concurrent economic strength, a summary of what the NBER looks at when determining the start and end of recessions, you would follow Doug Short’s regular Big Four summary.


The Week Ahead

We have a light week for news and data.

The “A List” includes the following:

  • Initial jobless claims (Th). Best concurrent read on employment.
  • ISM services (M). Not as widely followed as the manufacturing index, but still significant.

The “B List” includes:

  • Trade balance (T). Key GDP component.
  • JOLTS report (F). Job openings rate is interesting but the quit rate is most important.

With the FOMC meeting over, we can expect the resumption of FedSpeak. I do not expect anything significant.

We have continuing earnings news, as well as more from Ukraine.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has continued the bullish rating, but it is still a close call. We have been mostly out of US equities, but fully invested for trading accounts. Somewhat to my surprise, we never got a “buy” signal on the inverse ETFs. The Dow and the S&P 500 look better and the QQQ’s have also rebounded to the neutral range. Many more sectors have earned good ratings, but are still in the penalty box, reflecting higher uncertainty.

Those who want to follow Felix more closely can check us out at Scutify, where he makes a daily appearance to join in vigorous discussions about trading.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here.

Because we have been trimming winners in our “long stock” program, we have prepared to buy on dips. I have added some to these positions yet, and we are shopping. I am especially interested in regional banks, energy and some “old tech.”

Those following our Enhanced Yield approach should have enjoyed yet another good week in a sideways market. It is important and helpful to own value stocks that pay dividends and add some hedging via short calls. I have written several times about examples that you can try on your own. It reduces your risk. Start small and get the sense of how to do it.

Here are some key themes and the best investment posts we saw last week.

Be a good consumer of investment information. Regular readers know that I applaud the advice from Barry Ritholtz, suggesting that you take the role of skeptical litigator. Ask about the motives and biases of the source. Barry writes:

 

If you consume lots of stock research or market commentary — or much of anything from the financial media — then you will find this exercise especially important. Let’s look at the motivations of various pundits, strategists and fund managers. Suit up in your finest barrister gear; we are going to play “cross-examining litigator” for fun and profit.

You should read the entire list of characters, but I will take the liberty of quoting two entries – enough to whet your appetite. The combination is powerful, and an explanation of how so many have been so wrong for so long.

 

The end-of-the-worlders: Since the rally began in 2009, we have seen the usual crowd of Web sites, newsletter writers and pundits forecasting a terrible crisis that you simply must note: The Fed has run amok. We are running out of food. Fiat currency is soon to be worthless.

They seek to take advantage of your tendency to succumb to the recency effect, where you place excess value on what just happened. After the financial crisis, your natural tendency is to look for another one, and they have just the newsletter to help you with that. Let me remind you that the end of the world bet has yet to pay off, and when it finally does, whom are you going to collect from?

Gold bugs have a narrative, which they pursue regardless of new data. My favorite oft-forgotten factoid is that the SPDR Gold Shares ETF (GLD) was the brainchild of the World Gold Council. WGC was created by global mining companies for the sole purpose of promoting the sale of gold. The GLD ETF came about after “two decades of depressed prices and a growing glut of the yellow metal.” As we discussed here, GLD was a bit of a Hail Mary to find a way to deal with price and inventory pressures. (Mission accomplished).

Imagine a Venn diagram showing a cross-section of gold bugs and doomers, and you end up with the “physical gold” crowd. They insist: “The whole system is going to collapse, you cannot even own the ETF — you must own physical gold!” And they are happy to sell some to you.

Don’t mix politics with your investing! (Where have we heard that before?) A big fund manager has this warning for his wealthy investors:

 

The founder of Greenspring — which manages nearly $1.8 billion from Towson, Md. — says basing investment decisions on emotional views about Obamacare, unemployment or the deficit instead of more relevant information can seriously threaten a client’s financial plan. “The worst short-term risk is missed opportunity,” says Collins. And in the long term, “going to cash will make it so that you can’t sustain your lifestyle as you should.”

Bullish Charts. The charts showing a gloomy ten-year forecast get a lot of press. Here is an alternative view from Ryan Detrick – you need to read the entire post to understand the analysis. He concludes, “…bigger picture this says there is still a lot of room to move higher over the coming years.”

 


 

 

If you are obsessed about possible market declines, you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. Check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

Let us suppose that you are a trader. You are trained to look for the market implications from any news. Suppose that there is some escalation of tension in the Ukraine. It cannot possibly be good news, so the general reaction is to sell. Depending upon where the market is in the daily trading range, a little selling can beget more selling. It really does not mean much.

If you are a long-term investor, shopping for new positions, you can use volatility to your advantage.

If you are a trader, these news events are not very helpful. The news from the Ukraine is unpredictable in nature, size, and market effect. Traders are reacting without much evidence.

That is why the market moves – despite the media hype – are rather small. The quest to explain every 50 basis point move in the markets is Quixotic.

Weighing the Week Ahead: Time to Sell in May?

Can positive economic trends overcome the weight of market seasonality?

We all love simple rules, especially when supported by data. Throw in a rhyme or some alliteration and you have the makings of a powerful slogan. “Sell in May and go away” fits the bill.

Despite the biggest flow of fresh news and data we have seen in recent memory, I expect the financial punditry to repeat the rhyme and ask that question to anyone willing to step in front of a microphone.

Prior Theme Recap

Last week I expected the theme to be economic optimism. There were several stories on that subject early in the week. It played out pretty well until the release of the new home sales data. That caused most to reconsider. Despite that, the balance of news and corporate reports were upbeat on the economy.

As I try to emphasize, forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.

Naturally 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.

This Week’s Theme

Is it time to “Sell in May?”

There are many articles on this subject, but charts like this one (from Sam Ro at Business Insider) highlight the seasonal difference:

We’ll let that chart stand for a thousand words!

If you insist on more detail, you can find scores of articles that suggest that this is the exact moment for many bearish predictions to come true – “only pain ahead.”

On the positive side, there are five important trends suggesting solid economic improvement:

  1. Less economic uncertainty. Remember all of the complaints that business was reluctant to expand because of unpredictable government policies? That has gotten better. Fivethirtyeight has a nice update article in an objective indicator, the economic policy uncertainty index.

Economic uncertainty

  1. Corporations are finally putting cash to work (via Bloomberg) although it is only a start (via Scott Grannis).
  2. Expected earnings growth remains strong. Brian Gilmartin provides regular updates of the growth in the forward estimate, now 7.68%.
  3. US oil production is surging, up 67% in four years. Scott Grannis calls this a “huge boost for the US economy.”
  4. Business economists see improved hiring. These are not Wall Street economists or academics (although their message is similarly upbeat). These are corporate economists offering evidence about their own business or sector. This is the best kind of survey. Josh Brown has a nice discussion, noting that we have had four annual “false starts” toward the elusive goal of economic “escape velocity.”

How much of an anchor will seasonal forces provide? Will economic progress be reflected in stock prices?

As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.


Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
  2. It is better than expectations.

The Good

There was plenty of economic news, and on balance it was very good (including key trends highlighted above).

  • Durable goods growth was strong at 2.6%, well above forecasts of 2.0%. Growth in core goods was also well above expectations. See Steven Hansen at GEI for comprehensive analysis and charts.
  • Michigan sentiment climbed to 84.6. This was the second highest reading in almost seven years. Values are still well below the pre-recession days, but the results are encouraging. See Doug Short for complete analysis and my favorite chart of this series.
  • Leading economic indicators were up 0.8% — strong and above consensus.
  • Property tax collections are back at the pre-recession peak. (See Calculated Risk).

The Bad

There was also some bad news, most importantly the housing data.

  • The revenue beat rate is weak – only 50%, which is well below the 59% average. The earnings beat rate has been acceptable at 62%, the average of the last few years. Bespoke has the full story including this chart:

  • China’s growth remains disappointing. The Manufacturing PMI edged higher, but has been in the contraction range for three months. Dr. Ed Yardeni explains that the weakness reflects less government stimulus and is affecting demand for commodities, including oil. Here is a key chart:

Yardeni china growth

  • Initial jobless claims spiked to 329K. This is a noisy series, so the focus is on the four-week moving average, but it bears watching.
  • New home sales plunged by 14.5% on a seasonally adjusted basis. The March data should have had reduced effects from weather. John Lounsbury and Steven Hansen analyze this noisy series with a focus on unadjusted data and comparative moving averages. New Deal Democrat wants some dap for his bearish call on housing, so check out his reply to Calculated Risk and Joe Weisenthal. Here is a chart from the GEI analysis:

  New home sales

The Ugly

Health care costs for the elderly. A new study suggests that middle-class retirees may need to use their entire Social Security benefits to offset health care costs. The costs are the Medicare and Medigap premiums as well as co-pays. The costs are projected at 98% of Social Security benefits for a healthy copy retiring in ten years.

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.

Indicator Snapshot 042614

Recent Expert Commentary on Recession Odds and Market Trends

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. For those interested in Canadian stocks, Georg has unveiled a new system.

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.” One of his conclusions is whether a month is “recession eligible.” His analysis shows that none of the next nine months could qualify. I respect this because Bob (whose career has been with banks and private clients) has been far more accurate than the high-profile punditry.

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (2 ½ years after their recession call), you should be reading this carefully. He notes that the ECRI is back in “hibernation.”

The Week Ahead

We have a very big week for news and data.

The “A List” includes the following:

  • Employment situation report (F). A complex and heavily revised story, but viewed as the most important read on the economy.
  • FOMC decision (W). Strong consensus on the outcome, but wording will get attention.
  • ISM Index (Th). Key gauge of trend in manufacturing and employment.
  • Personal income and spending (Th). Important element of GDP.
  • Consumer confidence (T). Good read on employment and spending.
  • Initial jobless claims (Th). Best concurrent read on employment. Will the improvement be maintained?

The “B List” includes:

  • ADP employment (W). Good independent measure of private job growth.
  • Auto sales (Th). Will growth rebound?
  • Pending home sales (M). Plenty of attention on housing.
  • GDP (T). Backward looking and low expectations, but still the ultimate growth measure.

Fed Chair Yellen speaks on Thursday, after the FOMC meeting. No press conference for this one.

Major earnings reports continue and may overshadow economic news.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has shifted to a bullish rating, but it is still a close call. We have been mostly out of US equities, but fully invested for trading accounts, mostly in Latin America. Somewhat to my surprise, we never got a “buy” signal on the inverse ETFs. The Dow and the S&P 500 look better and the QQQ’s have also rebounded to the neutral range. Many more sectors have earned good ratings, but are still in the penalty box, reflecting higher uncertainty.

Those who want to follow Felix more closely can check us out at Scutify, where he makes a daily appearance to join in vigorous discussions about trading.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here.

Because we have been trimming winners in our “long stock” program, we have prepared to buy on dips. I have not added to these positions yet, but we are shopping. I am especially interested in regional banks, energy and some “old tech.”

Those following our Enhanced Yield approach should have enjoyed another good week in a sideways market. It is important and helpful to own value stocks that pay dividends and add some hedging via short calls. I have written several times about examples that you can try on your own. It reduces your risk. Start small and get the sense of how to do it.

Here are some key themes and the best investment posts we saw last week.

Most investors are still sidelined. A Bankrate.com poll shows that 73% of people are still “nor more inclined to invest in stocks.” Chief financial analyst Greg McBride notes, “A lot of individual investors got burned twice and as a result they swore off investing in equities.”

Investors favor real estate and gold rather than stocks according to Gallup. Gold is especially popular with low income Americans.

Gallup on Gold

Meanwhile, affluent US investors are very bullish on equities (according to a Legg Mason survey). 74% thought that equities were the best choice for 2014.

We all have a choice about investments, but it is interesting to see how others are behaving and which groups are more similar to your own thinking.

Ideas? For those interested in finding some solid stocks, there are plenty of attractive values. David Bianco highlights Apple (AAPL), JP Morgan (JPM) and Chevron (CVX) as examples of companies that will do fine if the economy muddles through the rest of the year and even better if it accelerates. He states, “Either way you win with these stocks.” (I am long all three names in our stock and/or enhanced yield programs, since this value approach is much like ours).

If you are obsessed about possible market declines, you can see that you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. Check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

The seasonal slogans often substitute for thinking and analysis. The powerful-looking chart that leads today’s post actually translates into a 1% monthly difference in performance. The “good months” gain 1.3% on average while the “bad months” gain about 0.3%.

To make a wise decision you need to make an objective quantitative comparison between the economic trends and the small seasonal impact. The Great Recession has been followed by a slow and plodding recovery. We have an extended business cycle with plenty of central bank support. Since I am expecting the current cycle to feature (eventually) a period of robust growth, I do not want to miss it. The 1% seasonal effect will be minor in a month where we get a real economic surge.

If instead we get the typical sideways market with some volatility, it is a perfect environment for selling short-term calls against attractive, dividend-paying stocks.

Take what the market is giving you – often a path not chosen by the crowd.

Weighing the Week Ahead: Will Springtime Bring Some Optimism?

Some weeks feature a contrast between past and future — a possible inflection point. Here are the current elements:

  1. Important economic data with a forward look;
  2. Earnings news from major companies reporting on Q114;
  3. Corporate conference calls explaining the outlook for future earnings; and finally
  4. Economic implications for improved economic growth and business conditions worldwide.

It is a big week for news and data.

Prior Theme Recap

Last week
I expected the theme to emphasize volatility. The market was at interesting technical levels and there was plenty of news to push it one way or the other. In a sense I was right about the theme, since the talking heads made the moderate crossings of “unchanged” seem like big news. The volatility cocktail was more like a Shirley Temple.


The potential was there, but the economic news was mostly calming. The contribution of mixed corporate earnings was enough to prevent a major market move either way. It is easy to measure volatility objectively. The VIX index gauges the market expectations for changes in the S&P 500. (If you spend five minutes with this post from Bill Luby at VIX and More, you’ll know more than almost anyone about the VIX). Here is the chart for the week:


By the end of Thursday’s trading, the options market was already factoring in a quiet three-day weekend.

While the theme did not play out last week, it looked promising on Monday and Tuesday. Here is what I wrote last week:

If earnings satisfy, it might have a calming effect. This will be especially true if we get a little more confidence in forward outlook, some hints about future hiring, and more planned capital expenditures. In that case we could have a rebound, with plenty of reduction in the VIX.

As I try to emphasize, forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.

Naturally 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.

This Week’s Theme

At economic inflection points it is normal to have a mix of optimists and pessimists.

  • Representing the pessimists we have a trader perspective that was well-received at Seeking Alpha. The argument is one I frequently hear from trader friends and individual investors. The author examines various trends before concluding as follows:

    Hence, I expect the Fed to continue with its one-size-fits-all approach of QE, opting to reverse tapering and return its foot on the monetary accelerator. But, having largely continued stalling for the past five years, I also expect the gears of the economy to remain stuck in neutral. A stagnant economy that is held up artificially and not allowed to correct naturally but that also lacks the inherent energy and dynamism to grow with any persistence and sustainability.

  • On the side of the cautious optimists (the only brand we see), Chuck Mikolajcak at Reuters has the story: Wall Street Week Ahead: Spring fever brings hope for U.S. earnings. He notes that the upcoming reports reflect a cross-section of companies, an end to cold weather worries, and special attention to Chinese growth slowing.

  • A more balanced look comes via Josh Brown. He notes that we might see the first actual decline in quarterly earnings since 2012, and explains the lower and beat pattern of the expectations game. Josh writes as follows (and also provides a helpful chart):

    …(T)he good news is that analysts have been willing participants in the beat-and-lower phenomenon for years now. You can see the downward revisions (green bars) being handily exceeded by actual results almost every time. Beat rates for the S&P as a whole have been running at a rate of 60 to 70% pretty consistently for the period pictured. We’ll see if they can pull it off again and avoid the first quarter of year-over-year negative earnings growth since Q3 2012.


From these sources, it would seem that we should not expect much economic and market optimism, even as the weather improves. As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.


Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
  2. It is better than expectations.

The Good

There was plenty of economic news, and on balance it was very good.

  • Rail traffic is showing strength. GEI has good advice on how to look past the noisy weekly data. The post also has plenty of charts for those who want to do their own research.
  • Hotels are having a big year, the best since 2000 according to Calculated Risk. That squares with my own travel experience.
  • Fed news was positive. The Beige Book showed a positive outlook (via the WSJ) and Fed Chair Yellen made an encouraging speech, without any slips about the timing of rate increases.
  • Retail sales rose 1.1% beating expectations.
  • Greece bond yields decline further, now below 5%. Felix Salmon has a nice post citing the top five reasons for the successful auction. Your favorite perma-bear or conspiracy site either did not mention this news, or asserted that disaster still looms. It is interesting that some use “kicking the can” to apply to policies, but not to their own errant predictions. If you missed my “Faceoff” piece – Jeff versus John Mauldin on the record you can see what we both thought a few years ago. That is always more challenging than coming up with reasons after you know what happened.
  • LA port traffic has hit another new high. Bill McBride at Calculated Risk has the full story and charts, concluding, “This suggests an increase in trade with Asia in March.” 
  • Sentiment is more negative and that is a positive since it is a contrarian indicator. Barry Ritholtz explains and provides this chart:



  • Industrial production beat expectations. Scott Grannis sees this as part of an overall picture of economic strength. (Full discussion with charts).

The Bad

There was also some bad news, but not much. I am sure that some of my commenting community will want to add some bad news, but remember that it is supposed to be something that happened last week.

  • Gasoline prices continue to rise. The move has surprised many. Doug Short has a great chart and plenty of additional background in his post.


  • China disappointed in several economic fronts. The headline GDP report of 7.4% growth missed the official 7.5% target. While markets seemed to expect this, this does not suggest more stimulus. Ed Yardeni reports on weak exports, deflationary signals, and the failure to sell about a quarter of a one-year bond offering. The finance minister would not offer an adequate yield. Here is a great chart on the disappointing China progress:



  • Housing starts show modest growth. Building permits also remain weak. Calculated Risk continues to see a “wide bottom” in these indicators with a positive outlook. See the full post for more color.
  • Eurozone growth is lagging. Ed Yardeni suggests that we need a magnifying glass to see progress from last summer. Here is a key chart:


The Ugly

Germs. There is a lesson here about perception and reality. There is a modest risk from a disgusting source, and a big risk from a routine one. Which do you suppose gets a public reaction?

Dirty money (via the WSJ) explains that “a body temperature wallet is a petri dish” for microbes. It is something to think about the next time you see a food worker handling money. But then you often do that yourself right before eating.

Portland empties a reservoir after security cameras showed a thoughtless and selfish act. This had a negligible effect, but it was widely reported.

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.


Recent Expert Commentary on Recession Odds and Market Trends

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. For those interested in Canadian stocks, Georg has unveiled a new system.

RecessionAlert: Great work on the “Yellen Dashboard“. Dwaine’s fans should also check out his S&P warning system, based on market breadth.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.” One of his conclusions is whether a month is “recession eligible.” His analysis shows that none of the next nine months could qualify. I respect this because Bob (whose career has been with banks and private clients) has been far more accurate than the high-profile punditry.

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (2 ½ years after their recession call), you should be reading this carefully. Doug also has an update of his “Big Four” chart, examining the most recent data. This is the single best look at concurrent indicators of a potential business cycle peak:


 

The Week Ahead

We have plenty of news and data in a short trading week.

The “A List” includes the following:

  • New home sales (T). Important read on both housing sector and economic growth.
  • Initial jobless claims (Th). Best concurrent read on employment. Will the improvement be maintained?
  • Michigan Sentiment (F). Best way to get concurrent information on spending and employment.
  • Leading indicators (M). Somewhat controversial, but still widely followed. A big jump is expected.

The “B List” includes:

  • Existing home sales (T).
  • Durable goods orders (Th). March data important to GDP.
  • FHFA housing prices (T). Very accurate, but only for a subset of housing.

Former Fed Chairman Bernanke speaks in Toronto on Tuesday. ECB President Draghi speaks on Thursday.

The big news is the avalanche of earnings reports.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has once again continued with a neutral rating. We have been completely out of US equities, but fully invested for trading accounts – all in Latin American or China. This was not as good as the US ETFs last week. Given the current ratings, it is possible that Felix will give a buy signal on an inverse ETF this week.

Those who want to follow Felix more closely can check us out at Scutify, where he makes a daily appearance to join in vigorous discussions about trading. This assumes that I can awaken him from his Spring fever and the attractions of those “high-frequency” models so popular here in Chicago.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here.

This is still an important time for long-term investors. We all know that market corrections of 15% or so occur regularly without any special provocation. Recent years have been the exception. Over the last several weeks I have emphasized the need to maintain perspective, using market declines to add to positions.

It helps if you have been actively rebalancing your portfolio and trimming winners. Then you have some cash. Some readers have asked me to write more on this topic, so I have placed it on the agenda. For now, let me do a quick summary.

  1. Review your holdings regularly. (For me, that means at least weekly, but it is my day job. Quarterly is probably enough for most people, perhaps with some price alerts). Make sure that your original reasons for the investment are still valid. Revise your fair value and price target estimates.
  2. Do not fall in love with a position. If hanging on to a disappointing holding, make sure your reasons are sound.
  3. Sell if your price target is hit.
  4. Rebalance by trimming if a stock appreciates massively, but remains below the price target.

Because we have been selling in our “long stock” program, we have prepared to buy on dips. We are following the rules that I have recommended for you. I have not added to these positions yet, but we are shopping. I am especially interested in regional banks, energy and some “old tech.”

Those following our Enhanced Yield approach should have had a great month and quarter. We have experienced only modest volatility, continuing to beat our upside target for the year despite overall market losses. It is important and helpful to own value stocks that pay dividends and add some hedging via short calls. I have written several times about examples that you can try on your own. It reduces your risk. Start small and get the sense of how to do it.

Here are some key themes and the best investment posts we saw last week.

Beware the Bubble Talk. It just does not stop. When one sign or signal fails, the enterprising bubble community finds a new one. Now it is the number of IPO’s. Barry Ritholtz has a nice column at Bloomberg, analyzing five different indicators raised by Mark Hulbert. It is worth it to read the entire piece, and all the specific points, reaching the conclusion:

Taken as a whole, these five points suggests that speculation hasn’t run rampant today the way it did in 2000. The list above contains two strong points, one moderate and two that perhaps could be rationalized away.

The conclusion is that we are not in a speculative bubble.

I will add that if there were few IPO’s, that would be cited by many as a sign of market weakness. This is what comes from starting with a conclusion – more of a mission – and then seeking an argument.

Some sector selling might be excessive. It is early for any firm conclusions, but this is how you build your watch list. Bill Luby has an interesting analysis of the 2014 correction (!?). This gets plenty of media play. In fact, it is pronounced in some sectors and hardly noticeable in others. This is a good summary chart:


Energy is worth a look, according to earnings expert Brian Gilmartin. As he notes, I agree.

Dividend stocks can be dangerous. Some have yields that cannot be sustained or have reached excessive valuation levels. Michael Fowlkes offers some specific suggestions.

A simple timing method from Eddy Elfenbein will surprise you. It is much more powerful than the normal seasonal ideas you hear so much about. Just stay invested as long as inflation is between 0% and 5%. He writes as follows:

A few years ago, I ran the numbers on how the stock market reacts to inflation. Here’s what I found:

Now let’s look at some numbers. I took all of the monthly returns from 1925 to 2012 and broke them into three groups. There were 75 months of severe deflation (greater than -5% annualized deflation), 335 months of severe inflation (greater than 5% annualized), and 634 months of stable prices (between -5% and +5%).

The 75 months of deflation produced a combined real return of -46.77%, or -9.60% annualized. The 335 months of high inflation produced a total return of -70.84%, or -4.32% annualized. The 634 months of stable prices produced a stunning return of more than 177,000%. Annualized, that works out to 15.21%, which is more than double the long-term average.

Here’s an interesting stat: The entire stock market’s real return has come during months when annualized inflation has been between 0% and 5.1%. The rest of the time, the stock market has been a net loser.

Investors might enjoy seeing Eddy’s speech to The Motley Fool.

If you are obsessed about possible market declines, you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. Check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

There is a great divide in the economic blogosphere.

On one side you have non-economists who write pop economics. They are good with numbers and charts, and they speak a language that is plausible for a mass audience. The average person in the US claims economic expertise from being a consumer! Articles from these sources are replete with charts and references to headwinds. These are often “strategists” or people who became Wall Street economists without every studying the subject. Some are famous for being famous.

On the other side you have those with formal training and years of experience building and testing models. Their success is usually (with some exceptions) measured by accuracy of their forecasts and insight. They often have much less visibility, and frequently no specific mission, unless they work for a firm that emphasizes a single product.

One of the easiest ways the average investor can sort through the noise is by demanding some qualifications. Just check the bios of the sources. There are people who rise to the top of economic and statistical analysis without going through the program – Bill McBride and Nate Silver come rapidly to mind – but they are exceptions. They use professional techniques. Join me in becoming a demanding consumer of economic conclusions. (Hint: Quit reading when the post refers to Econ 101!)

Collective surveys like that reported monthly by the Wall Street Journal can be very helpful. Right now the consensus conclusion is an improving economy growing to the 3% trend level. Why? The long-term history shows that a free market economy works to employ slack resources, and we have plenty of that! This is not a business cycle peak, and therefore we do not face an imminent recession.

The investment conclusion should be that we are still in the middle innings of a prolonged recovery cycle, with plenty of time to enjoy the results.

What does that mean for investors? Stay focused on risk and fundamentals – not stock prices. The post-2000 market results have frightened an entire generation of investors. Whenever there is a bad stretch in the market, however brief, they are afraid of another “big one.”

You can imitate what I do for clients.

  • Use our recession and financial stress indicators to warn of major risk. None of the major market declines occurred without a warning from these signals. When we get an elevated level, we reduce positions.
  • Right-size your positions. Expect that there will be 15-20% market drawdowns without a fundamental explanation. If this move will be too upsetting, your position is too big and you will bail out at the wrong moment. This is how I approach it with investors, and it is better than the silly questionnaires that some big firms use for CYA compliance.
  • If your position is the right size, then you are ready to be greedy when others are fearful – and vice-versa.
  • And most importantly, be willing to change with your indicators. If we see heightened risk, we will cut back on position size, just as we did in 2011.

And keep in mind, what we saw two weeks ago was a minor pullback from fresh highs. It was not even close to a full-blown correction, despite the media coverage. If you became uncomfortable and blew out of your position, it shows that you had not accurately evaluated risk.

Investing is not like a poker game, where you go “all in” or completely sit out.

Weighing the Week Ahead: A Volatility Cocktail!

This week brings the makings of an explosive volatility cocktail:

  1. Important economic data;
  2. Key Q1 earnings reports;
  3. Options expiration;
  4. A short trading week; and
  5. An edgy market environment.

This is a very unusual combination, and the various elements will compete for attention.

Prior Theme Recap

Last week I expected the theme to test the divergence between economic fundamentals and what I called “fluff.” The latter term referring to the collection of top-calling, market-rigging, crash charts, and “This is the big one” stories. This was one of my better forecasts. The economic news was excellent. The market was terrible. Everyone had an explanation – all different, all dubious.

This is another good illustration of the reason for my weekly post – planning for the week ahead. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.

Naturally 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.

This Week’s Theme

I have almost 27 years of experience as a market professional. I cannot remember planning for a week like this one. Much depends upon the corporate earnings reports.

If earnings disappoint, it will be seized upon as confirmation of the bad economy, expensive stocks meme. Volatility will increase. Moves during options expiration can be exaggerated, since strike prices formerly thought to be irrelevant come into play. Markets could move much lower.

If earnings satisfy, it might have a calming effect. This will be especially true if we get a little more confidence in forward outlook, some hints about future hiring, and more planned capital expenditures. In that case we could have a rebound, with plenty of reduction in the VIX.

I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.


Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
  2. It is better than expectations.

The Good

There was not a lot of economic data, but it was almost all good.

  • Aluminum demand is strong and growing. Whatever you think about Alcoa as a company or an investment (CrackerJack likes it), it is well-placed to comment on certain markets. Sam Ro has a good post on this topic, featuring the following chart:

  • Greece re-entered the bond market. There was a successful sale of 10-year bonds with a six handle instead of the 30% from a few years ago. Your favorite perma-bear or conspiracy site either did not mention this news, or asserted that disaster still looms. It is interesting that some use “kicking the can” to apply to policies, but not to their own errant predictions. I reviewed this in one of my occasional “Faceoff” pieces – Jeff versus John Mauldin on the record.
  • The Fed clarified the timing on short-term rate cuts. This seemed to walk back Chair Yellen’s explanation during her maiden first press conference. (I would have written “maiden” for a man….. hmmm). The problem is that the Fed reports the forward guidance from the committee as a whole, but also the forecasts of individual members and staff. She warned not to focus too much on the individual forecasts, which have a specialized set of guidelines. There have been plenty of complaints about an excess of transparency leading to a confused message, and this seems to be an example. John Hilsenrath has a good explanation of the difference. The market celebrated the clarification from the Fed minutes.

  • Fewer people are going without health insurance. As always, I do not want to get involved in the politics of this subject. The overall solution is elusive. Meanwhile, there seems to be some progress. John Lounsbury at GEI picks up some key results from Gallup.

  • Jobless claims hit a new low, the best in nearly seven years. Bespoke has the full story and captures the importance for stocks in one of their great charts:

  • Job openings have increased to 4.2 million. Calculated Risk has good coverage. Personally, I would have liked to see a higher “quit rate.”
  • The Ukraine reaction has been muted. I am certainly not saying that the issue is unimportant. It is crucial for the people involved and as a matter of foreign policy. Those are subjects for us as citizens. As investors, we merely note that the market has moved on. Scott Grannis has one of his full chart packs showing the best indicators for evaluating this topic.
  • Sentiment became more negative. AAII bullishness dropped to 28.5%. This is a contrarian indicator which has been recently highlighted by bearish pundits when it reached bullish extremes.
  • Michigan sentiment beat expectations. The current value is still in a range somewhere between healthy and bad. I have a special fondness for this report, and it extends beyond institutional loyalty to my old school. I like the methodology, with a continuing panel as part of the survey. My own research has shown a link between these findings and important variables like employment and spending. Doug Short, as he does so often, brings the data to life by showing the current level, past values, the GDP, and recessions – all in a single chart.

The Bad

There was also some bad news, but not much. I am sure that some of my commenting community will want to add some bad news, but remember that it is supposed to be something that happened last week.

  • China reported weak trade data, down 6.6% from a year ago (via CNBC). I am scoring this as negative, and it was a big disappointment. Asian stocks were lower and it pressured the US. Everyone understands the significance of China for the world economy and especially emerging markets. I track this news, good or bad, with reluctance because I do not really trust the reports. In this particular case, the bad news may be exaggerated because last year was inflated. Bloomberg and Business Insider both have good stories. We need more and better data on China. I do not have a good answer for this.

    “We believe the real situation is not that bad, and could be quite normal, by analyzing two distortions, namely the Lunar New Year (LNY) and fabricated trades last year,” Bank of America’s Ting Lu wrote in a note to clients.

    The impact of the Lunar New Year holiday was expected and Ting thinks frontloading exports, gave the January data a boost.

    It’s the impact of the inflated trade data from last year which is getting a lot of attention.

  • Technical indicators are more negative. Assorted moving averages have been breached and bullish setups violated. Even Felix (see below) has become more cautious, on the verge of an outright bearish three-week forecast.
  • Market reaction. I generally stick to the underlying data, but sometimes the market mood is the story. When good news gets ignored, it is noteworthy. One of the best ways to track the market week is Doug Short’s excellent summary and chart:

The Ugly

The NSA. Reports are that they have long been aware of that Heartbeat Bug that we have been hearing so much about – the one that might be compromising our passwords and online transactions. Bloomberg reports that they chose to use the information for their own purposes. Let the denials begin….

Humor

We all deserve some laughs, so how about this one? Fargo sixth-graders beat college investors in a stock-picking contest! (AP with HT to The Kirk Report’s excellent weekly magazine). The contest organizer made his first ever trip to ND. Here is his reaction and the comment of one of the entrants:

Walia said he was “blown away” with the level of thinking by the Oak Grove investors. Not all of the students were taking credit, however. Ben Swenson, who invested in Stratus Properties Inc., had another explanation for the high returns.

“I think it was sheer luck,” he said.

I recommend taking a look at the winning portfolio (which probably did not do well last week). There is a good lesson in this, in addition to the fun.

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.

Recent Expert Commentary on Recession Odds and Market Trends

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. For those interested in Canadian stocks, Georg has unveiled a new system.

RecessionAlert: Great work on the “Yellen Dashboard” which we cited last week. Dwaine’s fans should also check out his S&P warning system, based on market breadth.

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (2 ½ years after their recession call), you should be reading this carefully.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.” One of his conclusions is whether a month is “recession eligible.” His analysis shows that none of the next nine months could qualify. I respect this because Bob (whose career has been with banks and private clients) has been far more accurate than the high-profile punditry.

Prof. Robert Shiller joins those who believe that recession odds are low. Rob Wile of Business Insider has the story, featuring this chart as the key reason:

The Week Ahead

We have plenty of news and data in a short trading week.

The “A List” includes the following:

  • Housing starts and building permits (W). An important read economic growth for the rest of 2014.
  • Initial jobless claims (Th). Best concurrent read on employment. Will the improvement be maintained?
  • Fed Beige Book (W). Anything from the Fed is still getting a big market reaction. This is the collection of anecdotal evidence that policymakers will have in front of them at the next meeting.
  • Retail sales (M). Rebound after the weather effects?

The “B List” includes:

  • Industrial production (W). Key GDP element.
  • CPI (T). Eventually inflation will matter, but not yet.
  • Business inventories (M) February data, but useful in interpreting GDP and ISM data.

It is a quiet week for Fed speechifying. I do not expect much from the regional Fed surveys.

The big news is the serious start to earnings season.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has continued with a neutral rating. We have been completely out of US equities and enjoyed a brief, but profitable, investment in bonds (via TLT). By the end of the week we were fully invested for trading accounts – all in Latin American or China. Those who want to follow Felix more closely can tune in at http://www.scutify.com/, where he makes a daily appearance – assuming that I can awaken him from his Spring fever and the attractions of those “high-frequency” models so popular here in Chicago.

Felix emphasizes momentum, but with many modifications. Cam Hui has a great post on how many methods work, but not all at the same time. So true.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here.

This is still an important time for long-term investors. We all know that market corrections of 15% or so occur regularly without any special provocation. Recent years have been the exception. Over the last several weeks I have emphasized the need to maintain perspective, using market declines to add to positions.

It helps if you have been actively rebalancing your portfolio and trimming winners. Then you have some cash. Some readers have asked me to write more on this topic, so I have placed it on the agenda. For now, let me do a quick summary.

  1. Review your holdings regularly. (For me, that means at least weekly, but it is my day job. Quarterly is probably enough for most people, perhaps with some price alerts). Make sure that your original reasons for the investment are still valid. Revise your fair value and price target estimates.
  2. Do not fall in love with a position. If hanging on to a disappointing holding, make sure your reasons are sound.
  3. Sell if your price target is hit.
  4. Rebalance by trimming if a stock appreciates massively, but remains below the price target.

When Mrs. OldProf wasn’t looking, I violated our “no work on celebration nights” agreement to post an update on how we were trading the market volatility. If you have been reading the WTWA series, you were not surprised. (And thanks for all of the kind Birthday wishes in comments and emails).

Because we have been selling in our “long stock” program, we have prepared to buy on dips. We are following the rules that I have recommended for you. I have not added to these positions yet, but we are shopping. I am especially interested in regional banks, energy and some “old tech.”

Those following our Enhanced Yield approach should also be doing fine. We have experienced only modest volatility, continuing to beat our upside target for the year despite overall market losses. It is important and helpful to own value stocks that pay dividends and add some hedging via short calls.

Here are some key themes and the best investment posts we saw last week.

Bonds continue to beat stocks. Brian Gilmartin has a thoughtful post that reflects how many of us feel. This demand for Treasuries is unrelenting. There is no easy explanation. Most of those claiming victory were asking “Who will buy our bonds?” only a few weeks ago when the QE tapering became clear. The economy is better. There are new pundit ideas, but they all seem like reaching.

The bond yields make sense only if the economy gets worse. The evidence is against this, so I expect the bond to stock rotation to resume.

To this advice, I add that most people lack the discipline to buy and sell at the right times. Every week I hear about people who bailed out of the market in 2009 and never got back in. You can be a do it yourselfer, but you need to ignore most of the pundits, popular web sites that promote fear, and focus on hard data. Howard Gold provides evidence about the results and the various errors:

The mistake concept is supported by academic research as well. Cass R. Sunstein writes about a personal investment mistake, over-estimating risk and the probability of loss. This is a smart person (like you) who has the same human tendencies. Check out the full article for the three causes of his error.

If you simply must do some hedging of your portfolio, beware the leveraged ETFs. Read this article carefully if your time horizon is more than a single day.

As usual, Barry Ritholtz has some great advice for the individual investor. He hits on the popular theme of the week: “I was right!” Of course that is claimed by many pundits with different explanations. Nothing has changed, but all of a sudden their pet theory has gained traction. He writes as follows:

Of course, all of these narratives serve a singular purpose: They give the appearance of meaning and rationality to actions that are meaningless and irrational. The daily action in the markets is a form of noisy, random, Brownian motion. If you are looking for a clear reason as to why stocks did what they did, then you are in the wrong line of business.

Given that truth, it was with great pleasure this morning I read a headline in the Wall Street Journal that accidentally reflected this reality: “Biotech Stocks’ Rout Perplexes Analysts.”

If you are obsessed about possible market declines, you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. Check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

While it is easier to say than to do, investors should focus on risk and fundamentals – not stock prices. The post-2000 market results have frightened an entire generation of investors. Whenever there is a bad stretch in the market, however brief, they are afraid of another “big one.”

You can imitate what I do for clients.

  • Use our recession and financial stress indicators to warn of major risk. None of the major market declines occurred without a warning from these signals. When we get an elevated level, we reduce positions.
  • Right-size your positions. Expect that there will be 15-20% market drawdowns without a fundamental explanation. If this move will be too upsetting, your position is too big and you will bail out at the wrong moment. This is how I approach it with investors, and it is better than the silly questionnaires that some big firms use for CYA compliance.
  • If your position is the right size, then you are ready to be greedy when others are fearful – and vice-versa.
  • And most importantly, be willing to change with your indicators. If we see heightened risk, we will cut back on position size, just as we did in 2011.

And keep in mind, what we saw last week is a minor pullback from fresh highs. It is not even close to a full-blown correction, despite the media coverage. If what you see makes you uncomfortable and interferes with your regular life, your position is too big.

The fundamental story is an improving economy and a reduction in risk that we can measure objectively. Calculated Risk has a nice summary of the economic prospects for the rest of the year. Bill is drawing upon the work of Goldman’s Ian Hatzius, who is no perma-bull. Hatzius was Nate Silver’s “hero” in the 2007-08 cycle. Here is the outlook:

US economic growth is accelerating as the economy bounces back from the inventory and weather-related weakness of the first quarter. Our current activity indicator (CAI) is up a preliminary 3.6% in March, well above the 2% pace of the prior three months and consistent with our forecast for a rebound into the 3%-3.5% range for real GDP growth in the remainder of 2014.

If this is accurate – or even close, we will see stronger corporate earnings, higher bond yields, and higher stock prices.