Stock Exchange: Will Sentiment Turn Bearish Soon?

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and,
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review:

Our previous Stock Exchange asked the question “how soon will tax cuts be forgotten?” Specifically, does our recent market rally already fully reflect Washington tax reform, or are there more adjustments to come? If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Will Market Sentiment Turn Bearish Soon?

Aside from the ongoing stock market rally, and declining market fear/volatility (as shown in the following chart), there are plenty of indications of strong bullishness in the market.

For example, James Mackintosh had two great bullish indicator charts in the Wall Street Journal this week. First, he shows bulls outnumbering bears by the most since 2010.

And next, he shares another survey indicating bulls outnumbering bears by the most since 1987.

It seems the stock market rally, tax reform, low unemployment, and the Fed’s willingness to move interest rates back up toward normal are all indicators and drivers of bullish market sentiment. However, it’s important to not get too comfortable with current market conditions, and to instead stay disciplined in your trading approach. For your consideration, here are a few recent, yet timeless, trading tips from experts. Let us know in the comments which ones you are following and/or challenged by.

1. “Only trade the charts and ignore all other extraneous information.”

This is according to Dave Landry’s trading resolutions for 2018, and it can be a tough one to follow, but also critically important. We live in the information age, and there are all kinds of extraneous information everywhere that can distract and disrupt your trades if you’re not disciplined.

2. “Trading is easier when we don’t have opinions.”

This is according to a Trade Risk article called How I Took My Trading to The Next Level, and it makes a lot of sense. The article goes on to say: “When you trade on your personal opinions, and not what the market is actually showing you, it can lead to some difficult situations.”

3. “Practice Does Not Make Perfect, Perfect Practice Makes Perfect.”

This is according to Vince Lombardi, but it was referenced by Brett Steenbarger in TraderFeed this past weekend, and it’s a good point to consider. Don’t just go through the motions, stay disciplined in your strategy, and it will make you a better trader.

4. “I will place a protective stop after a trade triggers.”

This is one more resolution from Dave Landry (above), and it’s important, as we wrote about in our Stock Exchange 2-weeks ago: Do You Know When to Fold Your Trades?

It’s easy to get lackadaisical in your trading approach, especially in consistently strong conditions (like our current market), but don’t. Market conditions may turn bearish, even for a short while, and if you’re not disciplined in your approach then the impact could be severe.

Model Performance:

Per reader feedback, we’re continuing to share the performance of our trading models, as shown in the following table.

Importantly, we find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

And for these reasons, I am changing the “Trade with Jeff” offer at Seeking Alpha to include a 50-50 split between Holmes and Athena. Current participants have already agreed to this. Since our costs on Athena are lower, we have also lowered the fees for the combination.

If you have been thinking about giving it a try, click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

This week’s Stock Exchange is being edited by Blue Harbinger (Blue Harbinger is a source for independent investment ideas).

Road Runner: This week I like United Rentals (URI). Are you familiar with this stock, Blue Harbinger?

Blue Harbinger: Yes, I am familiar. URI is a North American rental company. They rent all sorts of things like air compressors, scissor lifts, and light towers. Why do you like this stock Road Runner?

RR: As you know, I like to buy stocks that are at the bottom of a rising channel. And based on the following chart, you can see why I like United Rentals.

BH: Interesting pick. This company’s stock price did extremely well in the second half of 2017, as the US economy continued to grow. Also, they completed a big acquisition in April, and they dealt with challenges and opportunities created by hurricanes. There was really a lot going on here, Road Runner. Here is a look at the Fast Graph:

RR: I am a trading model, not a person, so I am not “distracted” by all of the data points you mentioned. Also, as you mentioned earlier “trading is easier when we don’t have opinions” (I am totally objective). Besides, my typical holding period is about 4-weeks. I’ll be in and out of this stock before the company’s long-term fundamental story plays out.

BH: Fair enough. I’ll check back with you on this one in about 4-weeks. Anyway, how about you, Athena—what have you got this week?

Athena: This week I like Teva Pharmaceuticals (TEVA). What do you know about this stock, Blue Harbinger?

BH: I know Teva produces generic and specialty pharmaceuticals. It trades as an ADR. And the shares are up about 12% since Tuesday. When did you buy?

Athena: Early this week, like every week I do trades.

BH: And why did you buy, Athena?

Athena: I am a momentum trader. And you can see why I like this stock based on the following chart.

BH: That’s an interesting chart Athena. What is your typical holding period?

Athena: I typically hold my positions for about 17-weeks. For risk control, I use price targets and stop orders.

BH: Teva presented at a big JP Morgan conference earlier this week, and apparently the big institutional audience members liked what they heard and bought up the shares. The company is facing some big challenges and they’re being forced to take steps with urgency. For example, the company has significant debt obligations coming due in the next four years, and they’ve been facing more competition than expected in generics. Teva is trying to reduce their cost base and divest of non-core assets just to meet liabilities. Here is a look at the Fast Graph.

Athena: Thanks for that information, but I’m not thinking about the next four years. As I mentioned, I typically hold positions for about 17-weeks, and Teva is looking good.

BH: Fine—thanks, Athena. How about you Felix—what have you got this week?

Felix: I have no stock picks this week, but I did run the 30 Dow Stocks through my model, and I’ve ranked the top 20 in the following list.

BH: What? GE didn’t make your top 20? That company is on fire this year (+9%), and now that Immelt is gone, the new CEO is going to lead GE much higher.

Felix: I am a momentum trader. And I typically hold my positions for about 66 weeks—which is much longer than the other models. I exit when my price target is hit, and I use stops and macro considerations to control risks.

BH: So as a momentum trader, I suppose that means you didn’t like GE’s 45% price decline last year? I also suppose your top 3 (Boeing, Caterpillar, and Walmart) also make sense considering they outpaced the market significantly last year. And I guess as long as the market keeps booming there is reason to believe they too will keep gaining, although I’m personally more of a contrarian myself.

Felix: Did you happen to notice my strong performance in the performance table earlier in this report?

BH: Nice job, Felix. How about you, Oscar—what have you got this week?

Oscar: This week I’m sharing my top ranked high-volume ETFs. The following list includes my top 20.

BH: Wow—you’ve ranked (JNUG), the 3x Bull Gold Miners Index first. I guess you liked the strong December? You also have Oil (USO) and Oil and Gas (XOP) ranked highly. I am tempted to call you a contrarian invetor considering all of those ETFs are down a lot in recent years. But I know you like momentum, correct?

Oscar: That’s correct. I am a momentum trader, and my typical holding period is about six weeks, not years! I use stops to protect against downside, and I exit by rotating into another sector.

Conclusion:

It’s important to not get too comfortable with the markets. Strong economic conditions have been leading the market higher for a while now, but that doesn’t mean sentiment can’t turn bearish quickly, thereby causing significant challenges for traders. It’s important to remain disciplined in your approach so when market sentiment does change, you can remain profitable in your trades. We prefer a blended approach including both momentum and dip-buying strategies. And we believe we can continue to generate trading profits whether or not sentiment turns bearish.

Background On The Stock Exchange:

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

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

Stock Exchange Character Guide:

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum 17 weeks Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

What Investors Must Know About the Fed and Inflation

Prices are edging higher. There is great interest in how the Fed might react. To understand the implications, we need to start with how inflation is measured and then turn to how the Fed thinks about it.

 

The FRED blog puts the main indicators together in one chart.

Key Questions

Why use a “core” calculation? Core values are less volatile and provide a better reflection of the underlying trend. This makes it more valuable for policymaking. It does not mean that food and energy are unimportant. Doug Short’s chart illustrates this point. Read the entire post for a longer time series.

What are the seasonal adjustments? Price changes follow distinct seasonal patterns. These adjustments make sense, but for current purposes I am citing year-over-year data.

Why is this important to the Fed? The Fed’s dual mandate includes both price stability and employment. The definition of price stability is a topic of current debate. The current Fed policy is that an annual increase of 2% in the core PCE index constitutes stability. The Fed wants to control inflationary expectations more than the exact price level. A modest amount of inflation is thought to facilitate economic growth, if it can be expected. The Fed views this target not as an alarm or upper bound, but the middle of a range.

Which measure is best for policy purposes? The FRED Blog analyzes the situation as follows:

What price index should monetary policymakers use to track the economy? For starters, it should have three characteristics: 1) encompass a substantial part of the economy; 2) be available without delay; 3) contain little noise from short-lived price fluctuations. Looking at the four prime candidates, there is no clear front-runner. From the top down: the CPI covers only consumption and includes highly volatile food and energy prices, but it is available quickly. The CPI less food and energy looks more stable and informative, but misses part of consumption. Personal consumption expenditures (drawn from the national income and product statistics) is available only at a quarterly frequency and after a delay of several months, a drawback that pertains also to the GDP deflator. The GDP deflator, though, covers all the economy.

Their interactive chart provides a helpful comparison.

Conclusion

The world has an abundance of inflation cynics. It is natural to think about our personal market basket, not the basis for each calculation. The rising parts of our budget stand out. The savings and quality improvements, not so much.

My purpose is certainly not to convince readers about a “correct” value for inflation. Believe what you will. As an investor, you should put that belief aside. It is more rewarding to understand the viewpoint of policymakers. You can still call them idiots, but at least you will know what to expect!

References:

Difference between CPI and PCE: https://www.bea.gov/faq/index.cfm?faq_id=555

PPI Facts: https://www.bls.gov/ppi/ppifaq.htm#1

GDP Implicit Price Deflator https://fred.stlouisfed.org/series/GDPDEF

Weighing the Week Ahead: Should Investors Start Worrying About Inflation?

The economic calendar is about normal, with market participants back from holiday vacations (but perhaps fighting the snow). The key reports are the PPI and CPI. Inflation is the key 2018 worry for many, so these reports will get more attention. Especially if the numbers are a little hot, I expect the punditry to be asking:

How worried should we be about inflation?

Last Week Recap

In the last edition of WTWA I foresaw (despite significant fresh data) another week of punditry. It was time for everyone to lay out what to worry about. This allows them to claim victory at the end of the year. This was the dominant theme, if you ignored White House gossip and nuclear war with North Korea. The stories have little beyond what I reported last week, including plenty of help from readers. Here are a few samples in case you need to stay awake at night.

These Are the Top 10 Risks to the World in 2017


5 Things to Fear in a Strong Global Economy

 

Byron Wien Announces Ten Surprises for 2018


(not all worries, and always interesting)

Trump in 2018: What happens when the next recession hits?

Some kind of disaster

2018: TEN SURPRISES FOR JAPAN

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I especially like the Doug Short design with Jill Mislinski updates and commentary. You can see many important features in a single look. She notes the new records along with other indicators. The entire post is well worth reading for the collection of charts and analytical observations.


The trading range for the week was the highest in recent weeks, almost 2.6%. This increased actual volatility, but not the VIX. Our indicator snapshot tracks this important comparison.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news was mixed, especially on the employment front. Before the employment numbers I published a guide to assist interpretation. Many seemed to find it useful, and one of my plans for the new year is to more analysis of economic indicators.

The Good

  • ISM Index registered 59.7, beating an expected 58.0 and the prior month at 58.2 Bespoke shows the significance with one of their typical great charts.


  • Construction spending for November gained 0.8%, .1% lower than October but above expectations.
  • Rail traffic ended a good year (Steven Hansen, GEI).
  • ADP private employment showed a very nice gain of 250K, handily beating expectations of 190K.
  • Auto sales, especially trucks finished a strong year by beating expectations.
  • Employment via the Household survey was strong. The WSJ has ten excellent charts. Below is one showing the range of unemployment measures, showing the state of part-time and discouraged workers. People frequently cite these alternative measures without making clear that the employment picture has gotten much better – no matter what the measure.


Labor force participation, as explained by the BLS, is also improving as demonstrated with this helpful explanatory table.

Persons who are neither employed nor unemployed are not in the labor force. This category includes retired persons, students, those taking care of children or other family members, and others who are neither working nor seeking work. Information is collected on their desire for and availability for work, job search activity in the prior year, and reasons for not currently searching.

The Bad

  • ISM Services of 55.9 missed expectations and the prior month reading by about 1.5 points.
  • Initial jobless claims edged higher to 250K rather than moving back toward recent levels, as most expected. Bespoke’s chart:


  • Investor sentiment has become more bullish, a contrarian indicator. (David Templeton, HORAN).
  • Headline payroll employment net increase of 148K was a disappointment compared to expectations. Some were also concerned about the changes by industry (WSJ).


The retail decline looks bad, fueling the many worries about the Amazon effect. Economist Michael Mandel is a leading expert on changes in the labor market structure. He frequently discovers important data and draws sound conclusions that you just don’t see anywhere else. For retail jobs, which have varying and sometimes short hours, he uses FTE instead of the simple job numbers. The increase in hours (and thus FTEs) has been dramatic since the peak of brick and mortar.

So let’s look at the two years since brick-and-mortar FTE peaked. Over those two years, brick-and-mortar retail FTE jobs fell by 123,000. That’s a decline of about 1%. The increase in FTE ecommerce jobs was 178,000 over the same stretch. That’s based on hours worked in the electronic shopping and mail-order industry, and the warehousing industry, where many fulfillment centers are reported. FTE jobs at couriers and messengers, including express delivery companies, rose by 58,000. All told, the gains in ecommerce and delivery services was almost twice the size of the losses in brick=and-mortar retail.

Change in FTE jobs, 3Q15-3Q17 (thousands)

Brick-and-mortar retail             -123

Ecommerce                                 +178

Express delivery and couriers  +58

Data: BLS, PPI.

The data are from October, but on Twitter he cited the continuing improvement.

The Ugly

The lie that won’t die — continuing misrepresentation of the employment situation. How can anyone possibly believe that the US, with a population of 323 million, has 95 million able-bodied people unemployed and looking for work. Check out this video to see two frequent CNBC commentators calling this the most important job statistic. When (via Twitter) I pointed out the error to Mr. Bianco, showing him the BLS chart above showing that the group includes retirees, students, and stay-at-home parents he replied that the chart showed that 90 million people were looking for work. Apparently unfamiliar with this regular employment chart, he missed the word “not.” When I pointed that out, he called me an “angry troll.” He is half right! Investors are harmed by huge distortions in economic data. Instead of gracefully acknowledging his blunder, he switched to a different metric.

I rarely point out errors, preferring to cite excellent work. I sometimes award the Silver Bullet to recognize those who take up the unpopular task of explaining popular but erroneous claims. It is nearly impossible to provide effective refutation, especially when the message is repeated so often. [I have been called many things, but this is a first for “troll”!!]

Noteworthy

Maria Bartiromo’s success at Fox. She is now #4 among digital influencers and the top person in finance. She is also beating CNBC in her time slot. A favorite of mine for interview style, she delivers news, but has a touch more opinion than when at CNBC.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

The new year starts with a normal calendar, featuring the inflation numbers. JOLTs should be considered in this context, since it is more important for interpreting labor market structure than job growth. This has direct bearing on inflation. Retail sales will also be important, but less so than the upcoming earnings. Fed speakers are back on the road, and Congress will be back on the job!

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.


Next Week’s Theme

The normal calendar has an emphasis on inflation and, perhaps, the Fed. I expect plenty of speculation about a more aggressive Fed policy, especially if the inflation numbers are a bit “hot.” Many will be asking:

Should we start worrying about inflation?

 

As usual, here is a typical range of opinion, from bearish to bullish. As a general classification, often confused by those commenting, we have opinions on the rate of inflation, how it is measured, whether the Fed is “behind the curve, and the implications for the yield curve. The links cited provide information about the topic, not necessarily an endorsement of that viewpoint.

  • The yield curve will soon invert, leading to a recession.
  • Inflation is not well-measured, already out of control in commodity pricing. (Check out the Bonddad chart pack).
  • The Fed has waited far too long to raise rates, necessary to prepare for the next recession. (Capital Spectator on the underlying, if not the effect).
  • The new Fed will represent a far different viewpoint.
    • Higher rates faster, as suggested in the GOP campaign.
    • Lower rates longer, as seem to be sought by the President.
  • The Fed has been patient, measured, and willing to resist political pressures.

It is a complicated question with many dimensions. I’ll provide my own interpretations in today’s Final Thought.

Quant Corner

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

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot


 

Recession odds remain low and many economic indicators are improving.

The Featured Sources:

 

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession. Here is the unemployment indicator.


Doug Short: Regular updating of an array of indicators. Great charts and analysis.

Brian Gilmartin summarizes expected revenue growth for Q417 (7%) and 2018 (6%). With most preoccupied with earnings, this is valuable information. He also expects upward revenue revisions, something that would be an upside surprise for many. Brian generously shares his data (a great example that others should follow) so you can form your own conclusions if you wish.

GEI republished an excellent discussion of the various measures of financial health. I prefer the St. Louis Financial Stress Index, but readers might wish to know the characteristics of alternatives – construction and correlations.

 

Insight for Traders

Our discussion of trading ideas has moved to the weekly Stock Exchange post. The coverage is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post considers a classic issue for traders, the effect of short-term news. The example is, of course, the tax cut and the conclusions are interesting. Model performance updates are published, and of course, there are updated ratings lists for Felix and Oscar, this week featuring S&P midcap stocks.. Blue Harbinger has taken the lead role on this post, using information both from me and from the models. He is doing a great job, presenting a wealth of new ideas and information each week.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be this essay: How America Lost Faith in Expertise – And Why That’s a Giant Problem. Author Tom Nichols is a professor at the U.S. Naval War College (and a five-time, undefeated Jeopardy champion). His book, The Death of Expertise: The Campaign Against Established Knowledge and Why It Matters, is an excellent, expanded treatment of the same theme.

This is an important thesis for many reasons, which he lays out quite clearly. It is important to investors because the idea that all opinions are equal has invaded the investment community. Many claim expertise and few know how to distinguish real experts. Investors, like consumers of other services, are at risk from this process.

The larger discussions, from what constitutes a nutritious diet to what actions will best further U.S. interests, require conversations between ordinary citizens and experts. But increasingly, citizens don’t want to have those conversations. Rather, they want to weigh in and have their opinions treated with deep respect and their preferences honored not on the strength of their arguments or on the evidence they present but based on their feelings, emotions, and whatever stray information they may have picked up here or there along the way. 

And this …

Experts can be defined loosely as people who have mastered the specialized skills and bodies of knowledge relevant to a particular occupation and who routinely rely on them in their daily work. Put another way, experts are the people who know considerably more about a given subject than the rest of us, and to whom we usually turn for education or advice on that topic. They don’t know everything, and they’re not always right, but they constitute an authoritative minority whose views on a topic are more likely to be right than those of the public at large. 

And also….

Technological optimists will argue that these objections are just so much old-think, a relic of how things used to be done, and unnecessary now because people can tap directly into the so-called wisdom of crowds. It is true that the aggregated judgments of large groups of ordinary people sometimes produce better results than the judgments of any individual, even a specialist. This is because the aggregation process helps wash out a lot of random misperception, confirmation bias, and the like. Yet not everything is amenable to the vote of a crowd. Understanding how a virus is transmitted from one human being to another is not the same thing as guessing the number of jellybeans in a glass jar. And as the comedian John Oliver has pointed out, you don’t need to gather opinions on a fact: “You might as well have a poll asking, ‘Which number is bigger, 15 or 5?’ or ‘Do owls exist?’ or ‘Are there hats?'” 

Moreover, the whole point of the wisdom of crowds is that the members of the crowd supposedly bring to bear various independent opinions on any given topic. In fact, however, the Internet tends to generate communities of the like-minded, groups dedicated to confirming their own preexisting beliefs rather than challenging them. And social media only amplifies this echo chamber, miring millions of Americans in their own political and intellectual biases.

If you read the entire essay, you will see many connections to the current investment world. Anyone who understands these principles will be much better prepared for the market twists and turns we all expect in the next few years.

Stock Ideas

I suggest investors join me in reading selections from the first-rate Seeking Alpha Positioning for 2018 series. There are many good ideas.

Eddy Elfenbein discusses the changes in his highly-followed annual buy list (along with the expected useful advice on the market).

Peter F. Way uses his unique market-maker analysis to evaluate money center banks. PNC?

Interested in closed-end funds? The Stanford Chemist analyzes and curates information from this space. There are many anomalies and special situations to exploit.

Double-Dividend Stocks highlights a mid-stream LP with good yield and payout coverage.

Colorado Wealth Management highlights Simon Property Group (SPG), “arguably the best mall REIT.”

Todd Sullivan sees higher oil prices and also features “Davidson” with an endorsement of some energy stocks.

Morningstar has 32 undervalued stocks by sector.

Outlook

Alan Steel takes up a number of investor traps using a clever analogy. Those who have been reading his commentary have been both entertained and enlightened (and improved their investment results). He begins:

It seems to me that there’s a big financial world out there that’s just bursting with assumptions, eh?

Strange that. 

You’d think a process essentially governed by maths and how they’re engineered would be less prone to fantastical imaginations, marketing prose and correlations of the strangest (and often stupidest) kinds.

One example: “Did concerns over the Gaza strip really keep Joe investor from going out to dinner and a movie and thereby reduce GDP by 0.3% last quarter?”

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich continues his excellent series. It is helpful both for investors and advisors. This week included several great entries, but I must confess. My favorite was his “Are You an Astute Investor?” which included some kind words for me. As usual, Gil grasps and conveys the key points from the work he cites. My lessons for investors from quarterbacks is intended to help people prepare at a time of calm rather than waiting until it is too late. I am delighted that he provided some extra visibility on a topic that, unfortunately, may not be on the agenda of most. The quarterback part may be of greater interest, partly thanks to Mrs. OldProf, a regular viewer of NFL Matchup.

Watch out for

The Bitcoin space. Fool’s gold, says Blue Harbinger who goes on to cite several sound yield plays. The criminal underworld is dropping Bitcoin? A company changes its name to include “blockchain” along iced tea, and the stock soars 300%. But perhaps a “legitimate blockchain play?” Can it be combined with marijuana?

FAANG stocks. Barron’s notes the risk after the recent surge and identifies funds with high concentrations in the highly valued names.


 

Inflation “assisted” plays. The Fear and Greed Trader advises patience.

A cautionary note. It’s not wise to load up on these inflation-assisted groups now. While we are being told that inflation risks are elevated, that doesn’t mean they have to occur to the extent that suggest being wildly overweight these groups. Proceeding slowly by adding some exposure now to these sectors is wise. Then it will be time to assess and reassess as the situation develops. Same with dumping Technology just because the stocks have had good runs with the belief they could stumble in 2018.

Final Thoughts

Here are my own conclusions about inflation.

  • We will see it eventually, but not quite yet. The key elements are starting to show, but it could easily take another year.
  • The Fed response.
    • The Fed prefers core readings (less volatile and more reflective of something they can control) and the PCE deflator (less emphasis on housing) to the CPI or PPI. The latter two run “hotter” than the PCE.
    • The Fed does not view 2%, by itself, as a terminal point. Various statements have suggested that variation up to 2.5% might be accepted to make sure that the economy was back on track.
    • With a new Fed Chair and other new appointments, we do not know if these preferences are still in place.
    • If history is a guide, the Fed will be too late to act, move too far, and start another recession.
  • The yield curve. The recent interest in yield curve slope as a recession indicator includes many waiting with bated breath – hoping to be among the first to predict a recession.
    • For the slope to flatten, we would need to see an increase in short-term rates without a similar increase in the long end of the curve. I expect inflation expectations and stronger economic growth to send long-term rates higher. The same factors will stimulate Fed action centered on the short end.
    • The yield curve gives a healthy warning of a recession. One does not need to jump the gun by guessing how the curve will react.
    • There are other important components to recession forecasting, as I review every week.
  • Inflation is not all bad.
    • In the short term, borrowers are helped a bit and lenders are hurt. Savers and retirees get a boost in cash flow.
    • Tighter labor markets are a key. If we start to see wage inflation, it is likely to spread. But – it also will strengthen the economy.

The biggest mistakes people make about inflation are assuming it occurs without any accompanying economic changes, expecting this to be the only Fed focus, and using their personal experience to opine about overall levels.

[Do the economic challenges seem complicated and threatening? Need a year-end tune up for your portfolio? This is the time to schedule a free consultation, read my paper on the top investor pitfalls, or both. If you are concerned about major declines, you might be interested in my paper on risk. Just write for our free information on these topics. While they describe what I am doing, the do-it-yourself investor can apply the same principles. Both the concepts on recessions and how we used it to forecast Dow 20K are available for free from main at newarc dot com].