Weighing the Week Ahead: Will Policy Uncertainty Increase Stock Volatility?

We have a normal calendar for economic data. There will be important news will come from corporate earnings reports. Since this earnings season is part of an inflection point – the end of the earnings recession– it is special. That said, the uncertainty over policy change has market observers both divided and on edge. I expect the earnings news to get less attention than normal. With the queasy, uncertain feeling, the pundits will be asking:

Will policy uncertainty lead to greater stock volatility?

Last Week

Last week the economic news was strong, but with little reaction from stocks.

Theme Recap

In my last WTWA I predicted a close watch on earnings to see if these reports confirmed the improvement in economic data. There was plenty of attention to earnings, but not much on the economic strength theme. Pundits loved to discuss the various Trump appointees and speculate on the stock implications. At some point the market will refocus on the regular themes. For now – like it or not – the Trump effect is a big part of the daily discussion.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. As has been the recent case, both the range and the weekly change were very small. Doug attributes the Friday pullback to an Inaugural Address that offered little for the wealthy. He offers more analysis in his commentary. (Personally, I do not find any of the moves big enough to merit discussion, but there was plenty of commentary).

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

Personal Note

Since I will be enjoying a Winter weekend away with Mrs. OldProf and friends, I will probably not write next weekend. As always, I’ll be watching, and may post a brief update if it seems necessary.

The News

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

This week’s news was again quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Industrial production rose 0.8%. This beat expectations of 0.6%, but the prior month was revised lower by about the same amount. This series is difficult to interpret in the short run.
  • Philly Fed improved to 23.6 versus the prior month 21.5. This is an exceptional gain for two consecutive months in a diffusion index. It handily beat expectations of 16 or so.
  • Initial jobless claims fell yet again. The series is now at the lowest level since 1973. To my surpriseamazement, some of the punditry is actually finding a way to make this into bad news!

  • Inflation is higher. I understand that many view this as bad news. At some level, it would be. At a time when deflation (more dangerous and harder to fight) has been threatening, a modest rate of inflation is preferred. Scott Grannis has the story, and good charts on other data as well.

  • Homebuilder confidence remains strong. Calculated Risk, our go-to source on all things housing, notes that the reading was “below consensus, but another solid reading.” Anything over 50 indicates that most builders view conditions as good.
  • Housing starts showed a big increase, but mostly because of multi-family. The volatile series remains in the range Bill McBride predicted at the start of the year (4% to 8%). The actual was 4.9%, so the bottom end of the range. More encouraging is that multi-family was down 3.1% for the year while the gains came from the 9.3% increase in single-family.

 

The Bad

  • Building permits had a slight decline to a seasonally adjusted annual rate of 1,210,000. This is down 0.2% from last month but a gain of 0.7% over last year. I tend to place more weight on this series than most other analysts, so I watch it closely.
  • Earnings season began on a soft note. Both earnings and revenue surprises are below the long-term averages. Only 12% of the S&P 500 companies have responded so far, and there is specific sector concentration. I’ll save the charts until we have more data, but you can check for yourself at FactSet. Also, see specific company commentsfrom Avondale, which follows the conference calls.

The Ugly

California budgeting. I have criticized my own state (Illinois) so often. This week the award goes to California for a $1.5 billion “math error.” Put enough of these together and you eventually have real money. (Everett Dirksen).

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. I welcome nominations from readers. As always, ZH is a fertile source of ideas. Write something!

We also published our annual review of winners. If you take a look at the excellent work reviewed (here and here) you will see the advantage of following these contrarian sources. You will be surprised at how much it can help your investing.

There was a popular recent post about “neglected topics.” The article highlighted the heavy hitters who basically control the agenda of what you see. I tried to respond here. I despair! I welcome suggestions about how to get more exposure for those who do great but unpopular work.
The Week Ahead

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

The Calendar

It is back to normal for the volume of economic data, but fewer of the most important reports.

The “A” List

  • New Home Sales (Th). More strength expected in this important sector.
  • Michigan Sentiment (F). Continued strength anticipated. Special interest in future expectations.
  • Q4 GDP (F). The first estimate gets major adjustments, but still attracts plenty of attention.
  • Leading Indicators (Th). Expected rebound from last month’s “No change.” Some swear by this report.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • Existing Home Sales (T). Lacks the economic effect of new sales, but a good read on the market.
  • Durable Goods (F). More stable improvement when the volatile transportation sector removed, but headline rebound also expected.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Fed speakers are still on the trail. Questions will probe the new political environment, with everyone trying to dodge.

Earnings reports will remain important. Early actions from the Trump Administration will capture attention, if only because few know quite what to expect.

Next Week’s Theme

 

It would be nice to have a clean turn to our regular analysis of economic data and earnings. I understand that many (including my readers) are tired of thinking about the Trump Effect. I sympathize, but it is not a good investment strategy. We need to think carefully about what is likely to work, and what isn’t. Since no one really knows what is going to happen (as I suggested a year ago,) the current dubious pundit forecast is more volatility. That will steal the spotlight next week. The key question will be:

Will uncertainty about policy changes lead to more volatility?

The basic positions are simple.

  • Some see the new administration as negative for the market, and some see it as positive. This is frequently interpreted as more volatility.
  • There are several policies on a “hit list.” How rapidly will policy changes occur? Higher volatility?
  • Some speculate that the Presidential Inauguration will represent a market top. The sources look like a list of serial top-callers, but many are embracing the idea.
  • Various worries are somewhat offsetting. Extreme possibilities do not always lead to major changes.
  • President Trump may still prove different from Candidate Trump.
  • There are already executive orders. What are the implications?

What does this mean for investors? As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

Although dropping last week, the yield on the ten-year note has increased significantly since the election. This has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The C-Score has also dropped. The relationship is not linear, and it remains in the “safe” zone.

The Featured Sources:

 

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

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

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

Doug Short: The World Markets Weekend Update (and much more).

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

This illustrates the improvement in economic indicators – a consistent recent theme.

Georg Vrba: The Business Cycle Indicator and much more.Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg has been suggesting that the measure still shows a one-year led time. His most recent take has a wide time horizon, but an onset date of October (the chart below). Please note that Georg’s other indicators are still “friendly.”

 

The question is whether this improves over Dr. Dieli’s original concept, which has worked for decades in real time. He is quite open to new ideas, and is constantly questioning whether anything has changed in the key relationships he studies. Even before I saw Georg’s most recent work, I was planning to share this chart from Bob’s regular monthly update. I regard it as the single most important current concept for investors of all types.

A costly investor mistake has been fear, often incited by those with little knowledge and no track record. Stay tuned!

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested, but the sectors are somewhat less aggressive. The more cautious Holmes has taken some profits, but is still about 90% invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). There are always fresh ideas. You can also ask questions and have a little fun. Give it a try.

Top Trading Advice

 

Tweets activate algorithms! High frequency traders pounce on any piece of information. (MarketWatch). Is there a way to benefit? You cannot beat the HFTs once the news is out. You must either anticipate or react. Please also note that the fundamental news does not really matter. It is quite clear that the new administration will be using the Twitter as a bully pulpit, both issuing warnings and claiming credit for the responses. It is a new world for trading.

Are you making success into a habit? A trading journal helps on that front, as Dr. Brett Steenbarger explains. His near-daily posts are must-reads for every trader, and often for investors as well. This week he also inspired our Stock Exchange gang with this one. Whether your trading is close to our approach, you will find it helpful.

Those who join us in reading Brett Steenbarger’s regular posts will enjoy his appearance on Barry Ritholtz’s acclaimed MiB series.

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Chuck Carnevale’s analysis of Broadcom Limited (AVGO). It combines all the many things that Chuck does so well – a great stock idea, a lesson in several types of fundamental analysis, and a tutorial on his first-rate market tools. I usually do not like videos since I can read fast. In this case I recommend that DIY investors grab a cup of coffee and watch the entire video. While Chuck’s tools allow for a lot of flexibility, his approach is very like what we use in screening our candidates. If you are not doing something like this, you should stick to ETFs!

 

Stock Ideas

 

Exxon Mobil (XOM) is buying up Permian Basin assets “on the cheap.” This may not show up in an immediate stock price change, but it is something I have been expecting. Investors should understand the long-term needs of big integrated oil companies, and the floor placed under reserves.

Where should you look? Eddy Elfenbein considers United States Lime and Minerals. (USLM). Eddy writes:

Fourteen years ago, USLM was going for $3 per share. Today it’s at $77. So how many analysts follow it? Zero.

The stock has a market cap of $425 million. I also have to say that I love that name.

Keep that in mind while considering this post from Eli Hoffman, CEO and Editor-in-Chief at Seeking Alpha. Starting with a WSJ article, he carefully explains the motives of many analysts.

I feel quite strongly about these ideas. We NEVER use sell-side research as the basis for ideas. In fact, it is a negative factor in our general rating system. Individual investors need a similar method. I also agree with Eli that Seeking Alpha provides plenty of grist for the mill. While I have my own methods for generating ideas, it is always a valuable checkpoint on the way.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, including four or five specific ideas that we are buying. This week the dip-buying Holmes (who has been very hot) liked Fomento Economico (FMX) a distributor of soft drinks and an investor in the Heineken Group. I objected. In an action of man over model, or person over dog, or boss over worker, I vetoed the trade. Holmes has gone to Mexico (true!) for further investigation. We will be checking his expense account. FMX does not sell Margaritas!

Seeking yield?

How about Blue Harbinger’s latest CEF idea, Diversified Real Asset Income (DRA). This is another fund trading at a discount to NAV. I am always interested in Mark’s well-researched ideas and always curious about the reason for the discount.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. My personal favorite this week is the FT article about the six different investor personalities. There is a lesson in each!

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest has quickly become a must-read for financial professionals. Somewhat to my surprise, the topics are also especially relevant for active individual investors. They frequently join in the comments, adding to the value of the posts for both groups. Gil has several good topics, but I especially liked this treatment of goals-based investing. I have started following the author, Marshall Jaffe. This is a topic that every DIY investor should consider carefully. There is a lot at stake.

Watch out for…

Tweet targets. This company, a 14% loser, came into the sights a noted short-seller. There is an interesting dynamic here. The reputation of the source would have an immediate effect. Any “in the know” pals would be on board. There is plenty of money to be made, whether you have a short position before the announcement, or like the company and buy into the selling.

Final Thoughts

 

Despite the uncertain environment, volatility has been a matter for individual stocks. The overall market forces seem to have found a balance. I do not view volatility as a concern, and suggest caution to those using this as a hedge.

The improving economic data have not (yet?) shown up in the earnings reports. Perhaps it is because the improvement came so late in the quarter. I see more sources noting that earnings seem to be trailing the improving economic news.

There is plenty of temptation to link your investments to the electoral change. My base position is that you should not regard it as important, instead figuring out how to profit from the new policies. Be politically agnostic.

What I am watching.

A psychological element worth following is the improvement in business and consumer sentiment. This was also suggested in reports from the Davos world economic forum. Just as the pre-election negative environment weighed on the economy, confidence could also become a self-fulfilling prophecy.

Sentiment sometimes trumps the reality of economic data.

 

Stock Exchange: Diverse Ideas, but a Presidential Veto!

Last week’s Stock Exchange illustrated how human traders could call upon models as “consultants,” effectively creating their own trading room. If you missed the post, please check it out. This week the gang is short on fresh ideas — and I vetoed one of them! We never reach for new trades, and that itself is a good tale.

My crew varies widely in reading skills. Felix reads everything – and very carefully. Oscar reads the sports section. Holmes is a dog. Athena does not read since she already knows everything. It is my job to keep up with relevant world events, and our modeling guru’s (Vince) to create and monitor systems. One way that we judge our team is by comparing our approach to the recommendations of Brett Steenbarger. He is the world-class leader when you want to combine the theoretical and the practical. This week he explains why trading methods need a deep foundation.

…(S)uccessful traders must be able to innovate at two levels.  First, they must find new ideas and fresh opportunities.  Second, they must cultivate new sources of ideas and opportunity.  The first involves exploiting the edges we already possess; the second involves identifying additional edges.  The successful trader is never static, never dependent on one type of market condition to make a living.  Just as research and development is the lifeblood of technology and pharmaceutical companies, it is the source of long-term success for traders.

When successful traders aren’t trading, they are researching, developing, and innovating.  When unsuccessful traders aren’t trading, they’re staring at screens and forcing trades.  There is nothing better for trading psychology than being at the cutting edge of a growing business.

This is great advice! Traders who sit staring at a screen when nothing is happening are simply wasting time. It also illustrates the usefulness of having teammates to provide other ideas and spark the thought processes. Let’s take a look at this week’s ideas. As usual, I will conclude with a brief observation.

Getting Updates

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

This Week—When to Reject a Trading Idea

Holmes

This week I’m buying Fomento Economico, a distributor of soft drinks, owner of small format stores, and investments in the Heineken Group.

For the last year this stock has (until Nov 7th) bounced between the mid-80s and mid-90s piquing my interest in a trade. Then (and fortunately) before I had the chance to pull the trigger, it swooned down to 75 and has been basing there for the last 2 months. I don’t really understand why it dropped so quickly and so precipitously, but now that it’s basing I don’t care.

So, I’m buying here with tight stop, 72, and looking for a move back into the mid-80s. It is a nice risk/reward setup.

 

J: You said that you are buying. Did you come into some money?

H: Uhh.. I meant that I am recommending to our clients.

J: It is an interesting idea, but we are not making the trade.

H: Why not? It fits my criteria very nicely.

J: On rare occasions, we humans override decisions from the trading models.

H: Why would you ever do that?

J: Because we know the criteria you use and monitor facts that you might not be seeing.

H: I see the stock price, volume and other technical indicators. What more do I need to know?

J: Sometimes there are dips that do not really provide a near-term rebound potential. In this case, our new President is talking tough on trade with Mexico. The Peso is lower. A time to buy may come, but there are much better opportunities right now.

H: What is a President?

J: That is exactly what I mean!

 

Athena

I admit it. I have nothing new this week. The current market has not generated fresh, strongly-trending stocks.

J: That is fine. As you know, it is a mistake to reach for trades. Stick to those that have significant edge. How about reviewing one of your recent choices?

A: My pick of Zions Bancorp (ZION) hasn’t done much yet. You were skeptical from the beginning. You said that you liked the sector but it had gone too far, too fast. I had originally planned to hang on for a few weeks at most. Part of me feels like it’s time to get out of this holding and move on to the next thing.

J: This is another name caught up in the Trump transition speculation. When the expectations for short-term interest rates get some clarity, the bank stocks will react. This holding is OK – for now.

 

Felix

I will once again begin with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the top overall vote getters from our (free) subscription list as well as some new requests I got during the week.

J: The stocks are about the same as last week.

F: The list changes, but only as the reader favorites change. I encourage my fans to submit requests.

J: The order of the ratings has changed. Are you going to resume showing us the week-over-week comparison?

F: I am thinking about that problem. Some of the stocks were not rated last week. For the moment, readers must follow their favorites each week.

J: Maybe we’ll get some good new suggestions. What is your featured stock for this week?

F: You will not like my answer. I have nothing new this week.

J: That is what you said last week! Aren’t we still reviewing your request for a raise?

F: Yes, but you should base your decision on my results, not the number of picks. My holding period is longer. As you know I have had the best performance since you added me in September. I have been better than the dog, and a lot better than Oscar.

J: The lawyers say that we cannot discuss performance online – only when we have an investor request. Instead, how about reviewing one of your recent selections?

F: My recent pick of PayPal (PYPL) is sure to make Athena jealous. Since I recommended it on December 29, the price has popped a tasty 3%. Of course – short term returns aren’t really my thing. I’ll probably be holding on here for another few months, at the very least.

J: That has worked out well. I agree that it is consistent with some of your other long-term holdings.

 

 

 

 

 

Oscar

Here are my ratings for the top reader interests. There are still three open slots, so keep the questions coming.

J: Interesting. What do you have for us this week?

O: I’m getting into a new sector this week: Healthcare Services. Just look at the chart for Humana (HUM). It’s ridiculous. I don’t think I’ve ever seen a 50-day moving average shoot up at a 45 degree angle before. Now you are the public policy guy, not me, so does this really make sense?

J: No one really knows just yet. We know that there will be a “repeal and replace” policy on ObamaCare. The outlines of this are still pretty vague. I have written on this subject several times; I am standing back until there is more clarity.

O: You cannot always sit on the sidelines. This is worth a shot. As far as timeframes are concerned, I almost certainly won’t hold onto this for longer than a month. That is, unless someone who reads something other than the sports section can find a reason to do otherwise. BTW, I think there could be some upsets this weekend.

J: Isn’t your fantasy football season over?

O: Yes. I am working on becoming an NBA expert while I wait for March Madness.

 

 

Background on the Stock Exchange

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

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

Questions

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

Conclusion

Our models provide diverse ideas, but that is only the starting point. Every trader needs a team to provide ideas, but also the capacity to reject suggestions that are off base.

Diversity in Ideas is a Strength, but Be Ready to Veto!

 

Neglected Investment Ideas

Peter Lazaroff’s series has interesting questions for some of the top investment bloggers. It is getting good attention. I am enjoying it, and I’m sure others are as well. The comments from the heavy-hitters on his list are all very interesting.

Except for one question.

He asks them “What in the world of finance is not getting enough attention?” This is a great question, but he is asking the wrong panel! The collection of top bloggers and the leading curator of financial information basically define the reading agenda. If they really believed that something was not getting enough attention, they would write about it. The answers they give do not really cite anything unique.

If you really want to consider what is neglected, you need to look a bit lower than the most recognized bloggers. Topics that these people write about – but which do not attract notice – are the real answer to this question.

I certainly do not pretend to have the only answer, but I do have a good one. In my regular Weighing the Week Ahead feature I sometimes award a “Silver Bullet” to someone who took up an unpopular cause and provided corrective information. Their articles are not popular and have no natural audience. The authors do great work without reward, so I try to recognize them. Some might disagree with my choices, but not my intent.

Each year I do a review of these outstanding posts. I always hope that my preview will get a lot of buzz — not for me, but for those I try to recognize. None of the most popular bloggers linked to these posts…..something that really surprised me. I guess that I am not the right one to bestow any awards. Tadas, or Josh, or Barry could do it better, and with much more impact.

In case you are interested, here are the posts for last year’s winners: Part one and Part two.

And if Peter had asked, my list of neglected topics would be quite different – emphasizing things that really did not get any attention!

Weighing the Week Ahead: Will Q4 Earnings Confirm Recent Economic Strength?

We have a light calendar for economic data and a short week of trading. The biggest news will come from corporate earnings reports. Some financial stocks reported on Friday, but this is the first big week for Q416. Earnings season is always important, but sometimes it is special. This week the pundits will be asking:

Will improving corporate earnings confirm perceptions of a stronger economy?

Last Week

Last week the economic news was strong, but with little reaction from stocks.

Theme Recap

In my last WTWA I predicted a punditry focused on the incoming Trump Administration. The confirmation hearings provided a lot of fresh news, and there was not much going on in daily trading. My guess that people would be “digging down” for clues about policy changes was a pretty good one.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. As you can readily see, both the range and the weekly change were very small. You can also see the 1% intra-day move during the Trump press conference.

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

The News

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

This week’s news was quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments. This is a good week to illustrate the problem with the so-called “economic surprise” indexes. So much depends on how you determine the expectations. If conditions are good, they are good, even though some expect continued improvement each week.

The Good

  • Mortgage applications up 5.8%, despite concerns that higher rates would hurt the market. This is a very nice surprise.
  • Jobless claims at 247K continues at an extremely low level.
  • Michigan sentiment at 98.1 on the preliminary survey remains very strong (although a slight miss on expectations).
  • Sea container counts end the year on a strong note. Steven Hansen (GEI) does his expected deep dive into the data, providing plenty of long-term analysis. Here is a key table:

  • NFIB small business outlook surges. Scott Grannis has the story, including references to consumer confidence as well.

 

The Bad

  • Retail sales? More spin – good or bad?

U.S. retail sales disappoint at end of the year (MarketWatch) at 9:10 ET.

Holiday retail sales rise 4% to beat NRF expectations (MarketWatch) at 10:29 ET.

 

  • Gasoline prices are up about 20% year-over-year. New Deal Democrat has the story.
  • Business inventories? Some regard this as bad because of the m/o/m increase of 0.7%. Last week I called this a very spinnable number. Inventories are either wanted or unwanted. Going into the number we knew that the level was depleted. This is really a neutral report.

The Ugly

Volkswagen Diesel Scandal. We now know that this was the responsibility of important executives – not just low-level employees or a faceless corporation. Fiat Chrysler is also charged, but claims important differences.

 

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. There is week’s award goes to David Moenning (a nomination from a reader, Lasrman) for his helpful discussion of “Alts.” He writes as follows:

The pitch is strong. “Alts,” as they are called, are touted as a source of diversification, a way to create non-correlated portfolios, and a means toward potential risk reduction during severe market declines. I’ve heard some folks even suggest that alts are a way to produce a solid “riskless” returns!

And….

…who doesn’t want to own an investing strategy that is designed to produce a nice, steady 6-8% return without the vagaries associated with the traditional asset classes?

And the problem….

Investopedia goes on to note that most of these alt strategies are designed for sophisticated investors. “Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex natures and limited regulations of the investments,” the website says.

[Jeff] The most attractive track record I ever saw was from Bernie Madoff – consistent strong returns and minimal drawdowns. It was too good to be true. David’s experience is quite like mine. I get pitches for these products on a regular basis. Some of them are theoretically sound and might work. The average investor does not have the skill to evaluate them.

We also published our annual review of winners. If you take a look at the excellent work reviewed (here and here) you will see the advantage of following these contrarian sources. You will be surprised at how much it can help your investing!
The Week Ahead

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

The Calendar

It is back to normal for the volume of economic data, but fewer of the most important reports.

The “A” List

  • Housing starts and building permits (Th). The most important leading data in a key sector.
  • Industrial production (W). The expected rebound would improve overall confidence in the economy.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Beige Book (W). The Fed’s district-by-district look will be scoured for signs that rate hikes might come more quickly than expected.
  • Philly Fed (Th). Earliest read on the new month has gained more respect in the past year.
  • CPI (Th). Interest in the inflation reports is building, but the worrisome stages are not imminent.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Fed speakers are still on the trail, with appearances every day. Chair Yellen will make two appearances.

Earnings reports will be the most important news.

Next Week’s Theme

 

It is a short week, with a light calendar of data. The Trump story continues as confirmation hearings shed a little more light on possible policies. There will be plenty of FedSpeak.

Despite these factors, the start of earnings season should give the punditry a break from All Trump, all the time. Because of recent economic strength, people will be skeptically searching the earnings news for signs of weakness or a negative outlook. The key question will be:

Do Earnings Reports Confirm a Stronger Economy?

The basic positions are simple.

  • Reports normally beat estimates, and there is plenty of potential this season (FactSet)

  • Some recent laggards are looking strong—energy, tech, financials (Brian Gilmartin).
  • Corbin Perception suggests that expectations are very high. This is an interesting collection of survey data. Read the full report, but here is a nice summary:
    • Heading into 4Q16 earnings season, 85% of surveyed investors expect results to be in line or better than consensus, an increase from 78% last quarter
    • Expectations for improving organic growth surpasses worsening for the first time in more than a year
    • Investor sentiment towards the U.S. has improved dramatically; 70% now forecast higher U.S. GDP while recession fears have pushed out
    • Rate hikes drive sector views: participants most bullish on Financials while Utilities and REITs see dramatic pullback in sentiment
    • 67% of investors report feeling better about the U.S economy post-election; recession fears off the table for 2017
  • Earnings are inflated by peak profit margins and bogus analyst forecasts. “Organic” growth is low and so is revenue growth. (I see these comments, but we would all appreciate some credible sources).

 

What does this mean for investors? As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

Although dropping last week, the yield on the ten-year note has increased significantly since the election. This has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The C-Score has also dropped. The relationship is not linear, and it remains in the “safe” zone.

The Featured Sources:

 

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

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

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

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

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

Doug Short: The World Markets Weekend Update (and much more).

Davidson (via Todd Sullivan) notes that Markets Do Not Peak Until Spread Shifts To Zero

The indicators in this fine post are consistent with what we see from our regular sources. Many of these subsume the concept mentioned.

 

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested, but the sectors are less aggressive. The more cautious Holmes has taken some profits, but is still about 90% invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). There are fresh ideas each week. You can also ask questions and have a little fun.

Top Trading Advice

 

Sir Michael Hintze suggests that “Trump volatility” is good for active managers. This is also true for investors and traders. Check out Eddy Elfenbein’s account of the Trump press conference effects on healthcare.

Adam H. Grimes has advice aimed at new traders, but everyone can benefit. a useful and timely post for traders turning the page on the calendar. While the focus is on motivation, he has several specific suggestions. He analyzes each of the following important points:

Decide if you want to trade or gamble.

Have an open mind, but a critical mind.

Understand what “proof” looks like.

If you want to trade, bet size is really important.

Psychology matters, but these things are more important.

Dr. Brett Steenbarger illustrates how to make Internet discussions work well. He links to the Grimes post and extends some of the arguments. An intelligent discussion of important factors is one of the most important sources for traders (and investors). He has almost daily posts. Any serious trader should read them all. Another great example from this week shows how to turn failure into strength.

Those who join us in reading Brett Steenbarger’s regular posts will enjoy his appearance on Barry Ritholtz’s acclaimed MiB series.

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Morgan Housel’s account of his dinner with Daniel Kahneman. It is a nice summary of Kahneman’s basic ideas – all worth reading. Morgan has a great sense for what is important and what you need to know about it. Here is my favorite quote:

On education changing thinking: “There are studies showing that when you present evidence to people they get very polarized even if they are highly educated. They find ways to interpret the evidence in conflicting ways. Our mind is constructed so that in many situations where we have beliefs and we have facts, the beliefs come first. That’s what makes people incapable of being convinced by evidence. So education by itself is not going to change the culture. Changing critical thinking through education is very slow and I’m not very optimistic about it.”

 

Stock Ideas

 

Do you believe that managers with a ten-year success record might have good ideas? If so, look at these picks. (We own several of them, which encourages me to put the rest on our watch list).

Many stocks are attractive, despite the popular valuation perception. Rupert Hargreaves reports the Jefferies take. Hint: Cyclicals and value look good.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, including four or five specific ideas that we are buying. This week the dip-buying Holmes (who has been very hot) likes Michael Kors (KORS). Check out the post for my own reaction, and more information about the trading models.

Seeking yield?

How about Raytheon? William Stamm describes the dividend hike and the potential.

Kohl’s 5% looks safe. (Josh Arnold). This is one where we enhance yield by selling near-term calls.

But watch out for companies where the dividend might not be safe. Can you depend on 5.7% from Blackstone? (Brian Bollinger)

And a key question: Should dividend investors be worried about rising interest rates? Rebecca Corvino provides some great links.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. My personal favorite this week is Megan McArdle’s post on the importance of saving. Investors should understand that the 401(k) is not a substitute for the old guaranteed benefits plans.

I have often commented that when Tadas has the time to write a standalone post, it is a special treat. This week he wrote about the “evidence-based” movement, the endurance of outmoded ideas, and what it all might mean for investors. A general conclusion is that many investors should minimize fees, choosing cheap robo-advisors or doing some basic rebalancing on their own.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest has quickly become a must-read for financial professionals. Somewhat to my surprise, the topics also stimulate comments from active individual investors. It has added to the value of the posts for both groups. Gil engages the same topic as Tadas – the need for financial advisors. (and also here).

This is a topic that hits close to home. I am quite sure that an intelligent investor who never made the common mistakes could avoid the fees of a professional advisor. I even provide a way for investors to check this out. Just ask for our free report, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! If not, you might be losing 4-8% each year. Less than 1% of my regular audience consists of clients. I started writing to help average investors, and that remains my principal motivation. I am disappointed to see what seems like an increasingly commercial approach by so many of my friends. I know that they all seek to provide excellent and special service.

 

Final Thoughts

 

As the Q2 and Q3 earnings seasons began, I wrote about the possible end of the “earnings recession” and an inflection point in forward earnings. Those events have come to pass, but we now have a new concern: the outlook. Conference calls and the company’s guidance is always interesting, but this quarter is special. Companies cannot know what the policy changes will be, nor can they predict the effects on their business.

In each week’s “Final Thoughts” I offer opinions based upon facts. Sometimes my conclusion is a description of what I find important to watch. So it is this week. My scorecard for earnings season will look for the following company characteristics:

  • Confidence. I expect most to have a murky outlook, with no reason to set the future bar very high.
  • Important trade relationships – imports or exports. Comments on these fears may create some buying opportunities.
  • Concern about a stronger dollar. Everyone is teed up to watch for this, and we should as well.

Earnings reports help us interpret the strength of the economy using non-government data. In this earnings season, it is especially important to know the story as well as the numbers.

 

Stock Exchange: Need Some Trading Room Help?

Last week’s Stock Exchange illustrated how different approaches worked to generate varied ideas. If you missed last week, you will find it to be useful background for today’s topic.

In the last two weeks the market has been relatively quiet. Dow 20K is still a gleam in the eye. Some are announcing that the “Trump Rally” is over. If you are an aggressive trader, is there any way to exploit this situation?

Our technical experts have ideas, which are also interesting for those of us emphasizing fundamentals. Anyone who has worked with a group of traders knows that there are many opinions. While you might not agree with them, it is often worth listening. Many traders use social networks for this purpose. One brokerage advertises this feature of their site. Another invites you to call one of their “experts.” The chief problem? Finding people worth following! The brokerages just want you to do a lot of trading. The more opinions the better.

Our Stock Exchange participants can provide better help for those who are not working in a trading room. Even better, the trades work pretty well! Let’s dig in with this week’s ideas. As usual, I will conclude with a brief observation.

Getting Updates

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

This Week—Ideas from the Trading Room

Holmes

This week I’m buying high fashion! Michael Kors (KORS), trading at 42.83.

The stock looks to be consolidating at a higher low from the previous big down move (40.70) of May 17 2016, which is higher than the move before that of 35.79 and Jan 15, 2016. All these higher lows give me the chance to buy here and watch carefully that KORS stays above the previous low. What is my upside target? Well, the highs seem to be lower too…so I’m thinking 48.60 the current 200d MA is a worthy target…but I’ll be watching carefully. If I get the rally and the stock starts to roll over I’ll be a quick seller.

Don’t need to hit homers all the times, many games are won with timely singles.

J: Homers versus singles? Have you been spending more time with Oscar?

H: He did take me to the “dog night” at “The Cell” last year.

J: It is now called “Guaranteed Rate Field.”

H: No!! Oscar still calls it Comiskey.

J: Turning to your KORS idea, have you been following retail sales reports, especially for the luxury sector?

H: As you know, I read charts, not news.

J: The stock looks good on a fundamental basis as well. Here is the basic F.A.S.T. graph.

 

H: It looks like “value” investors might have been stuck in this one for some time. My rebound strategy is clearly better!

 

Athena

My pick this week, Fifth-Third Bancorp (FITB), has started to level off since November’s rally. I like that price action. As you know by now, I’m most enthusiastic about a stock when I think it’s due for a pop. FITB is still underpriced based on my technical indicators. We were closer to fair valuation at the end of December. I might hold onto this one for three or four weeks, and hope for a small gain.

J: Once again you have a choice that fundamental investors can also embrace. I have been recommending regional bank stocks for many months. The recent increase in interest rates has helped the group. If the economy continues to improve, the Fed will raise short-term rates. The prime rate goes up instantly. Rates paid to savers go up more slowly – much more slowly. That means more profit for banks.

A: Your complex methods can sometimes lead you to a conclusion that is obvious from the chart.

J: This time my methods allowed me to enjoy that November surge.

A: Let us see if they get you out in a timely fashion as well.

Felix

I will begin this week with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the top overall vote getters from our (free) subscription list as well as some new requests I got during the week.

J: The stocks are about the same as last week.

F: The list changes, but only as the reader favorites change. I encourage my fans to submit requests.

J: The order of the ratings has changed. Are you going to resume showing us the week-over-week comparison?

F: I am thinking about that problem. Some of the stocks were not rated last week. For the moment, readers must follow their favorites each week.

J: Maybe we’ll get some good new suggestions. What is your featured stock for this week?

F: I suspect that you will not like my answer. I have nothing new this week.

J: Didn’t you just request a raise?

F: Yes. As you know I have had the best performance since you added me in September. I have been better than the dog, and a lot better than Oscar.

J: That is only five months, but I agree about your good start. That does not give you license to take the week off.

F: I worked, but there are no new ideas for my style. You told us all not to trade just to prove we are doing something. The holding period for my stocks averages five quarters. I am not going to have a fresh trade each week.

J: That makes sense. Just stay on the job and don’t reach for new positions. I don’t want to encourage you to get ideas from those high-frequency models in Chicago. They play a very different game.

 

F: So I have heard!

 

 

Oscar

Here are my ratings for the top reader interests. There are still three open slots, so keep the questions coming.

J: Interesting. What do you have for us this week?

O: I’ve talked about oil and oil refiners a lot over the past few weeks. Judging by the dip we’ve seen over the past year – and the rough patch we had in January 2016 – there was an awful lot of value to be found in this sector. I see a similar (albeit more modest) opportunity in Refiners now. Valero Energy (VLO) is a suitable example. Note the contraction so far in the month of January. Our 50-day moving average has spiked, while the 200-day moving average has barely evened out. I would be very surprised to see a correction here continue for much longer – despite the volatility in this sector.

J: Many people mistakenly trade in overall energy ETFs that include refiners. The characteristics are quite different. Crude is a raw material for refiners, so lower prices can be very good. Gasoline demand is important. Twice a year they make a switch from the summer blend to winter, and vice-versa. It is early for the summer switch, but could that be what you are seeing?

 

O: I see what the chart tells me. I just put it in the tank no matter whether it is winter or summer. Gas prices will be going higher and VLO will probably cash in!

 

Background on the Stock Exchange

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

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

Questions

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

Conclusion

Our models provide an interesting “trading group”. We see many interesting ideas. We never know in advance what will be chosen, but a study of the charts is often revealing. Sometimes the trades are attractive on the fundamentals as well. That provides an assist for long-term shoppers who are looking for a good entry point.

Be receptive to methods different from your own. You are not the only expert!

 

2016 Silver Bullet Awards Part Two

Each week I try to give special attention to those who do important work, even though it is probably unpopular. These contributors are so important, and their work is so helpful, that we recommend taking another look at the end of the year. (Part One is here).

 

7/13/16

In a WTWA first, CNBC anchor Sara Eisen earned a Silver Bullet Award for her excellent interview with Fed Vice-Chairman Stanley Fischer (Transcript and video via CNBC). As we wrote at the time:

One-by-one she asked all of the key questions in the current debate over Fed policy – potential for negative rates, Brexit impact, does the Fed make decisions based the economic impact abroad, the state of the economy, recession potential, employment, George Soros, and the strong bond market. Whether or not you agree with Vice-Chairman Fischer, it is important to know what he thinks.

Sara Eisen displayed first-rate journalism, as expected from a Medill School graduate. Unlike so many other financial interviewers she did not argue with her subject nor push her own agenda. She did raise all of the current Fed misperceptions common in the trading community. Her preparation and poise helped us all learn important information. It was well worth turning off my mute button and dialing back the TIVO.

8/13/16

We gave the Silver Bullet to Justin Fox for his writing on one of the most persistent myths – the manipulation of government statistics. His whole post is available here, but we particularly liked this bit:

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

To those with even basic experience in civil service, the political manipulation theory makes little sense.

9/3/16

Ben Carlson won a Silver Bullet for investigating the apparent link between Fed meetings and stock performance. While many (including at least one WSJ writer) took the rumor at face value, Ben asked a clever question: What happens if you change the starting date of the analysis?


As it turns out, any relationship between the two is likely a result of 2008.

9/11/16

Menzie Chinn was a big winner this year. Professor Chinn, a Wisconsin economist, debunked many annoying data conspiracies in one fell swoop. In so doing, he also illustrated how an inappropriate use of log scales can mislead readers.

We called his piece the most profitable thing for investors to read that week – if you missed it, be sure and catch up!

9/17/16

By late in the year, it was increasingly apparent that individual investors were misreading the VIX as a “fear indicator” rather than a measure of expected volatility. Chris Ciovacco did an excellent job in making that distinction. His image here is particularly persuasive.

Runner up awards to Jeff Macke and Adam H. Grimes for their similar conclusions on the same subject.

10/8/16

Shiller’s CAPE method has often caused some eyebrow-raising on A Dash, most notably since he doesn’t use it himselfJustin Lahart of the Wall Street Journal thought to analyze just how this method (and others like it) would work in practice:

For New York University finance professor Aswath Damodaran, this is the real sticking point. He set up a spreadsheet to see if there was a way that using the CAPE could boost returns. When the CAPE was high, it put more money into Treasuries and cash, and when it was low it put more into stocks.

He fiddled with it, allowing for different overvaluation and undervaluation thresholds, changing target allocations. And over the past 50-odd years, he couldn’t find a single way he could make CAPE beat a simple buy-and-hold strategy. In the end, he doesn’t think it represents an improvement over using conventional PEs to value stocks.

“This is one of the most oversold, overhyped metrics I’ve ever seen,” says Mr. Damodaran.

Mr. Shiller agrees that the CAPE can’t be used as a market-timing tool, per se. Rather, he thinks that investors should tilt their portfolios away from individual stocks that have high CAPEs. But he says he isn’t ready to modify his CAPE for judging the overall market.

10/23/16

With the blogosphere in full election season fever, some started to worry that the 2016 stock market gains were a precursor to something much worse. We gave the Silver Bullet to Ryan Detrick of LPL Research for discrediting this argument with two easy charts:

11/5/16

We make a special effort to recognize writers trying to debunk the endless onslaught of recession predictions. Bill McBride of Calculated Risk did this very effectively, with a few key points:

Note: I’ve made one recession call since starting this blog.  One of my predictions for 2007 was a recession would start as a result of the housing bust (made it by one month – the recession started in December 2007).  That prediction was out of the consensus for 2007 and, at the time, ECRI was saying a “recession is no longer a serious concern”.  Ouch.

For the last 6+ years [now 7+ years], there have been an endless parade of incorrect recession calls. The most reported was probably the multiple recession calls from ECRI in 2011 and 2012.

In May of [2015], ECRI finally acknowledged their incorrect call, and here is their admission : The Greater Moderation

In line with the adage, “never say never,” [ECRI’s] September 2011 U.S. recession forecast did turn out to be a false alarm.

I disagreed with that call in 2011; I wasn’t even on recession watch!

And here is another call [last December] via CNBC: US economy recession odds ’65 percent’: Investor

Raoul Pal, the publisher of The Global Macro Investor, reiterated his bearishness … “The economic situation is deteriorating fast.” … [The ISM report] “is showing that the U.S. economy is almost at stall speed now,” Pal said. “It gives us a 65 percent chance of a recession in the U.S.

The manufacturing sector has been weak, and contracted in the US in November due to a combination of weakness in the oil sector, the strong dollar and some global weakness.  But this doesn’t mean the US will enter a recession.

The last time the index contracted was in 2012 (no recession), and has shown contraction several times outside of a recession.

We strongly recommend reading the original post in its entirety.

11/27/16

Jon Krinsky of MKM and Downtown Josh Brown both earned the Silver Bullet award in late 2016, for taking on myths about currency strength and stock performance. In sum: there is zero evidence of a long-term correlation between stocks and the dollar.

12/31/16

Our final Silver Bullet award of the year, given on New Year’s Eve, went to Robert Huebscher of Advisor Perspectives. His full article is definitely worth a read, but choice excerpts follow below. Good financial products are bought, not sold!

But I caution anyone against buying precious metals from Lear Capital. It is not an SEC-registered investment advisor and its web site states that there is no fiduciary relationship between it and its customers.

And also…

For example, Lear will sell you a $10 circulated Liberty gold coin (1/2 ounce) for $753.00 (plus $24 shipping). I did a quick search on eBay and found a circulated Liberty coin selling for as low as $666 (with free shipping).

Buying silver is no different. Lear will sell you a pre-1921 circulated Morgan silver dollar for $30 (plus $10 shipping). On eBay, I quickly found one of these for $22.00 (plus $2.62 shipping).

Conclusion

As always, you can feel free to contact us with recommendations for future Silver Bullet prize winners at any time. Whenever someone takes interest in defending a thankless but essential cause, we hope you’ll find them here.  Have a Happy New Year and a profitable 2017.

2016 in Review: Best of the Silver Bullet Awards Part One

Since the earliest days of A Dash of Insight, Jeff has brought attention to journalists and bloggers who dispel myths in financial media. We congratulate these writers with the Silver Bullet Award – named in honor of the Lone Ranger, who lived by a strict code: “…that all things change but truth, and that truth alone, lives on forever.”

In a year rife with misinformation and disinformation, it is fitting that we gave out a record 23 Silver Bullet Awards in 2016. For that reason, we’ll be doing this year in two parts; our winners for the first half of the year are summarized below. Readers may also want to check into our 20132014, and 2015 compilations, as many of the same issues persist to this day.

Have any thoughts or predictions on what will dominate news cycles in 2017? Know of a great analyst flying below our radar? Feel free to post in the comments with any suggestions or nominations.

1/3/16

It didn’t take long to find our first Silver Bullet winner of 2016. Matt Busigin took on US Recession Callers ahead of the ISM data release:

Through a combination of quackery, charlatanism, and inadequate utilisation of mathematics, callers for US recession in 2016 are embarrassing themselves. Again.

The most prominent reason for recession calling may well be the Institute of Supply Management’s Manufacturing Purchasing Manager Index. The problem with this recession forecasting methodology is that it doesn’t work.

As we now know, the US economy did not slip into a recession in 2016 – lending further credence to Busigin’s critique of these methods.

2/7/16

Paul Hickey of Bespoke Investment earned the second Silver Bullet award of 2016. While others were content to see doom and gloom in the level of margin debt on the NYSE, Hickey dismissed this as a minor concern.

Although declining margin levels are often cited as a bearish signal for the market, Hickey believes that it is a small concern given the indicator’s coincidental nature. On the other hand, the prospect of rising rates spooks investors much more, and holds them back from buying stocks.

“Margin debt rises when the market rises and falls when the market falls,” Hickey said. “If you look at the S&P 500’s average returns after periods when margin debt falls 10 percent from a record high, the forward returns aren’t much different than the overall returns for all periods.”

3/5/16

The causation-correlation fallacy is a favorite of ours on A Dash. Robert Novy-Marx distinguished himself with an excellent paper titled “Predicting anomaly performance with politics, the weather, global warming, sunspots, and the stars.”

“This paper shows that several interesting variables appear to have power predicting the performance of some of the best known anomalies. Standard predictive regressions fail to reject the hypothesis that the party of the US President, the weather in Manhattan, global warming, El Niño, sunspots, or the conjunctions of the planets are significantly related to anomaly performance. These results are striking and surprising. In fact, some readers might be inclined to reject some of this paper’s conclusions solely on the grounds of plausibility.”

We often note how bloggers and media search back to find tedious explanations and tie a day together. For more reading, we recommend our old post “The Costly Craving for Explanations.”

3/20/16

“Davidson,” by way of Todd Sullivan, was recognized for writing on the confusion of nominal and real data on Retain and Food Service Sales. His key takeaway:

Retail and Food Service Sales are at the highest levels ever measured and trending higher. Would you believe that today’s pace is more than 35% higher than our last recovery. Comments in the media would lead you to believe otherwise. Perhaps you have heard a number of recession forecasts. I have heard at least a dozen well known investors say a recession will occur before this year is out. My view differs considerably and remains very positive.

3/26/16

Jacob Wolinsky found it suspicious that Harry Dent was predicting the next big crash – and happened to have just the product to help investors cope. This “Rounded Top” chart had started to make its way across the panicky world of financial media:

The whole of Wolinsky’s article is still worth a read (especially given its twist ending).

4/3/16

The economic impact of lower oil prices in early 2016 was surprising to many observers. We recognized Professor Tim Duy for his research on the economic impact of lower oil prices.

This problem, however, just scratches the surface. Look at either of the first two charts above and two red flags should leap off the screen. The first is the different scales, often used to overemphasize the strength of a correlation. The second is the short time span, often used to disguise the lack of any real long term relationship (I hope I remember these two points the next time I am inclined to post such a chart).

Consider a time span that encompassed the entirety of the 5-year, 5-year forward inflation expectations:

4/10/16

If we spent a little time looking for the newest conspiracy theory about the Federal Reserve, we could probably give out the Silver Bullet every week. Ethan Harris of Bank of America Merril Lynch (via Business Insider) got this week’s award for shutting down a new “theory” about central banks and the dollar.

“There is a much simpler explanation for all of this. Central banks have turned more dovish because they are being hurt by common shocks: slower global growth and a risk-off trade in global capital markets,” he argued.

“Hence it is in the individual interest of the ECB to stimulate credit and bank lending, the BOJ to push interest rates into negative territory and the Fed to move more cautiously in hiking rates,” he continued.

Some may also point out that there’s a gap between Yellen’s recent messages and some of the recent speeches from FOMC members.

But Harris has thoughts on this, too:

  1. Yellen has consistently leaned more dovish than others.
  2. Most of those more hawkish speeches were from nonvoting members.

4/17/16

The mythology surrounding the Fed bled over into the next week as well. We gave Steven Saville a Silver Bullet award for targeting ZeroHedge with this very thorough rebuttal:

A post at ZeroHedge (ZH) on 8th April discusses an 11th April Fed meeting as if it were an important and unusual event. According to the ZH post:

With everyone’s focus sharply attuned on anything to do with the Fed’s rate hike policy, many will probably wonder why yesterday the Fed announced that this coming Monday, April 11, the Fed will hold a closed meeting “under expedited procedures” during which the Board of Governors will review and determine advance and discount rates charged by the Fed banks.

As a reminder, the last time the Fed held such a meeting was on November 21, less than a month before it launched its first rate hike in years.

As explained at the TSI Blog last November in response to a similar ZH post, these “expedited, closed” Fed meetings happen with monotonous regularity. For example, there were 5 in March, 4 in February and 5 in January. Furthermore, ZH’s statement that 21 November was the last time the Fed held such a meeting to “review and determine advance and discount rates charged by the Fed banks” is an outright falsehood. The fact is that a meeting for this purpose happens at least once per month. For example, there were 2 such meetings in March and 1 in February.

4/23/16

During the economic recovery following the Great Recession, critics often argued that net job creation emphasized part-time and low-paying jobs. Jeffry Bartash of MarketWatch thought to look at the data, and concluded the US economy is still creating well-paid jobs. The key takeaway is in the following chart:

5/8/16

Breaking down mean averages can produce some strange results, and you can never be sure how financial bloggers might spin that data. We gave a Silver Bullet award to Jeff Reeves for breaking down this baffling valuation of Tesla.

$620,000 for every car it delivered last year, or $63,000 for every car it hopes to produce in 2020.

By comparison, General Motors Co’s (GM.N) $48 billion market value is equivalent to about $4,800 for every vehicle it sold last year.

Reeves’ full article, still available on MarketWatch, is still very smart and very readable.

5/21/16

The “flattening” yield curve had become the newest scare issue by late May. Barron’s Gene Epstein and Bonddad’s New Deal Democrat both took this to task, with satisfying results. In particular, the latter’s article had a solid mix of compelling charts with snappy writing:

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

5/29/16

We gave this week’s award to the former President of the Minneapolis Fed, Narayana Kocherlakota. As conspiracy theories persisted, he explained the nature of Fed meetings and their timing:

Timing alone, though, hardly merits so much attention. To understand why, consider two possible scenarios. In one, the Fed starts raising rates in June and then adds another quarter percentage point at every second policy-making meeting (once every three months) for the next three years. In the other, the Fed waits until the second half of 2017 and then adds a quarter percentage point at each of the next 12 meetings. The second path represents slightly easier monetary policy, but most economic models would suggest that there would be almost no difference in the effect on employment or inflation.

6/12/16

New Deal Democrat earned a second Silver Bullet award for his work debunking a notoriously deceptive chart:

“The problem with this graph is that includes two slightly to significantly lagging indicators.  Your employer doesn’t start paying withholding taxes until after you are hired.  State tax receipts aren’t paid until a month or a quarter after the spending or other taxable event has occurred.  Worse, since both have seasonality, both have to be measured on a YoY basis, which means the turn in the data will come after the actual turn in the economy.”

Conclusion – Part One

As always, you can feel free to contact us with recommendations for future Silver Bullet prize winners at any time. Whenever someone takes interest in defending a thankless but essential cause, we hope you’ll find them here. Expect to see Part Two of our Silver Bullet review later on in the week. Happy New Year!

Weighing the Week Ahead: Digging Down on the Trump Effect

We have a reasonable volume of economic data, but few important reports. We are awaiting earnings season. The elephant in the room (sorry – I just couldn’t help myself) is the transition to the Trump Administration. Many are tired of hearing about this and thinking about the consequences, but that is not a sound plan for the intelligent investor. The punditry is far from exhausting this topic. They are making their own transition from Candidate Trump to President Trump. In the coming week, the punditry will be asking:

What can investors really expect under Trump?

Last Week

Last week the economic news was strong, but with little reaction from stocks.

Theme Recap

In my last WTWA I predicted a focus on more reaction to PEOTUS versus the regular Santa Claus rally. Despite all the economic data, that was in fact a popular topic. Go figure.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the story for the week and the continuing narrow range.

(click to enlarge)

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

The News

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

This week’s news was quite good-almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Chemical activity ends the year strongly. Get the full story and a helpful table of the relevant data at GEI.
  • Construction spending was up 0.9%, to the highest level in ten years. (Washington Post). According to our go-to source, Calculated Risk, it was another solid report.
  • Earnings pre-announcements were more positive than usual in Q416. (FactSet).
  • Home loan originations are stronger than they were one year ago. (CoreLogic via GEI).
  • ISM manufacturing reached 54.7, the highest level in two years. The ISM also has a strong interpretation of the data, headlining their press release with some leading indicators and including a supporting table.

New Orders, Production and Employment Growing
Inventories Contracting
Supplier Deliveries Slowing

  • Auto Sales were strong, reflecting the overall economy. “Davidson” (via Todd Sullivan) discusses the data, some of the credit relationships, and this interesting relationship with employment.

  • Employment data showed continuing strength. Some call the Friday data “weak.” Those were the headlines in the morning, right after the market opened. When stocks closed higher, the headlines changed —- referring to the same data. I had to put the mute on as the punditry tried to draw inferences from a 20K miss when there is 120K sampling error – plus revisions. There were both good points and weak points in last week’s data.
    • Good
      • Employment growth remains consistent with moderate economic growth
      • Unemployment remains very low
      • Wages have started to increase, something that critics have called necessary for the last few years.
      • Initial jobless claims tumbled again, close to a 43-year low (Jeff Bartash, MarketWatch)

  • Weak
    • ADP private payroll growth, which I view as important, declined 60K from the prior month and missed expectations by 20K.
    • The headline payroll gain was also a 20K miss from expectations.

The WSJ has a nice chart pack that is republished in several places. Take a look here.

The Bad

  • Factory orders declined 2.4% on a monthly basis, but it was mostly noise from transportation changes.
  • Mortgage applications turn negative. New Deal Democrat’s valuable high frequency indicators highlight this news, but you should read the entire post.

The Ugly

Bitcoin. Not that long ago the debate was whether this would work as a substitute currency. Last week it dropped 20% in a single day. Yes, that followed a 40% increase in the prior two weeks. It is still more like leveraged commodities trading than a currency. (Reuters).

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. This week’s award goes to KraneShares for an excellent post taking on several popular misconceptions about China – ghost cities, currency manipulation, and the significance of manufacturing weakness. I find their KWEB product a good way to invest in China despite limited knowledge about individual stocks – or confidence in reports and accounting. The conclusions are not just opinions of the fund managers. Here is one example:

Stephen Roach, former Morgan Stanley Chief Economist and Senior Fellow at Yale University’s Jackson Institute for Global Affairs, once said that China’s modernization is “the greatest urbanization story the world has ever seen” and that ghost cities will soon become “thriving metropolitan areas1.” Regardless of what Mr. Roach, and many other China scholars, have said the notion of widespread Ghost Cities in China has persisted with many US investors.

The Week Ahead

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

The Calendar

It is back to normal for the volume of economic data, but fewer of the most important reports.

The “A” List

  • Retail sales (F). There is great interest in the December results, particularly after weak reports from some big players.
  • Michigan sentiment (F). Continuing strength in January?
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • JOLTS report (T). Important as a read on the structure of the labor market, not some macro indicator as usually cited.
  • PPI (F). Interest in the inflation reports is building, but the worrisome stages are not imminent.
  • Consumer credit (M). The big increase expected in November will get plenty of spin.
  • Business inventories (F) . Volatile November data, but relevant for the Q4 GDP calculation. Another spin candidate.
  • Wholesale inventories (T). See Business Inventories (above).
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

Fed speakers are out in force this week, including Chair Yellen. Enjoy!

Next Week’s Theme

Like it or not, the market focus on Trump is continuing. It is not my job to pick what I want others to think about. The purpose of WTWA is to help us all prepare, whether we like the current topics or not. Without much fresh data, expect another round of punditry about Trump. It might get a little stronger, with more people engaged in:

Digging Down on the Trump Effect

The initial discussion on the post-election effect is already outdated. Dr. Ed Yardeni explains that the reaction was not very surprising.

Whether this continues is another question. Hoover and Carter are among the best starts while Obama was among the worst. Where you wind up has a lot to do with where you start.

Some investors may already be tired of the Trump theme, but it will remain the most popular topic in the weeks ahead. The punditry has gone through two stages. First, the immediate knee-jerk reaction to the election. Second, a period of wondering, “Is that all there is?” The stage is now set for a more careful look at the implications of the Trump Administration.

Unlike transitions of the past, this President-elect is already taking an active role. Each week we learn a little more both through statements (often via tweets) and from cabinet appointments. Serious investment analysts (including me) are going through a careful, three-step process:

  1. How will President Trump differ from Candidate Trump? There are some normal patterns, but those have not worked well in this case!
  2. How quickly can policies be changed?
    1. Immediate actions, under the President’s direct control;
    2. Steps requiring cooperation from a friendly Congress;
    3. Policies where Congressional cooperation is required, but his party is not unified;
    4. Policies that are exceptionally complicated, requiring more time and planning; and
    5. Changes where building the necessary support is unlikely.
  3. What are the investment implications for the most likely policies?

There is no reward for jumping the gun in this analysis, especially with a daily infusion of more relevant data.

What does this mean for investors? As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

Although dropping last week, the yield on the ten-year note has increased significantly since the election. This has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The C-Score has also dropped, but is still well out of recession warning territory.

The Featured Sources:

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

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

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

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

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

Doug Short: The World Markets Weekend Update (and much more). Jill Mislinski updates the ECRI coverage, noting that their public leading index has reached an all-time high. Surprisingly, the ECRI public statements remain bearish on the U.S. economy, the global economy, and stocks. It is as if they never recovered from their mistaken recession call in 2011. They have been out of step ever since.

Doug also provides regular updates for the most important economic indicators used in defining business cycle peaks (AKA the start of a recession). A recession requires both a peak and a significant decline in the important indicators. The first chart shows how that happened in the last recession as well as the action after the most recent peak in November, 2014.

This is the chart showing each of the Big Four indicators.

How to Use WTWA (especially important for new readers)

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

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

Most of my readers are not clients. While I write as if I were speaking personally to one of them, my objective is to help everyone. I provide several free resources. Just write to info at newarc dot com for our current report package. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! While that is true for most of my very sophisticated audience, some might benefit from our help.

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). There are fresh ideas each week. You can also ask questions and have a little fun.

Top Trading Advice

Howard Lindzon covers the key topic of information overload, and what to do about it. He offers some concrete guidelines on how to cut down the size of your stock screens and the number of people you follow. Great ideas.

Adam H. Grimes has a useful and timely post for traders turning the page on the calendar. While the focus is on motivation, he has several specific suggestions.

Dr. Brett Steenbarger continues to be the MVP for traders who want to improve. He combines his knowledge of psychology, his experience in training traders, with a broad knowledge of markets and key indicators. The combination provides regular insights for traders. One of his helpful posts from last week was some help on “how to break our worst trading habits“. I have been very concerned about this topic recently. Many traders seem uninterested in improving.

Brett’s most powerful post helps to explain why. Most short-term traders need some big moves. Big moves are usually declines. When the market is not delivering, it leads to frustration, bias, and reaching for explanations.

This bearish bias can be deadly, as it leads traders to ignore the actual flow of supply and demand and color their market perceptions with their preferences. More than once, I’ve heard traders complain that a move higher was “fake” or “manipulated” or caused by “machines”, thus discounting what the market was doing and instead sticking with a bias.

He goes on to explain why this attitude is unrealistic in the face of big market forces

I look at many sources for good trading ideas, but I welcome suggestions from readers to broaden the list of candidates.

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be … maybe none of the above.

Throughout the year, I highlight the best efforts from various sources. Each week I find some outstanding advice. This week I sense that Brett Steenbarger’s analysis of trading bias also applies to investors. People are bombarded with claims that help to justify their decisions if they have been on the wrong side of the market.

Scientific American describes the difficulty in trying to convince people “when facts fail.” Some of the examples are from the failed end of the world predictions. Ben Carlson reviews the success of Harry Dent, whose doomsday predictions remain popular no matter how costly to investors.

Trying to help people find a way out of this trap – and more success – I crafted some investor New Year’s resolutions that you would not see anywhere else. Unless I have lost my mind, it is loaded with good advice. Yet it was not a highly-recommended post. Perhaps that supports the basic point about bias, but I still hope a few people were helped.

Stock Ideas

Buy CRAP? That is the creative acronym from Tom Lee. He has been accurately bullish for years, but now sees little upside in the overall market. In his mind, it is time to focus on Computers, Resources, American banks and Phone carriers – all levered to investment recovery, inflation and deregulation.

Tiernan Ray suggests considering FANG. This helpful article includes several other tech ideas.

How about biotech? Bret Jensen considers the possibility for a rebound.

Great analysis in a humorous presentation? Abba’s Aces has a playoff bracket consisting of stocks. Each win represents a nice analysis of two companies. The factors represent a process like ours, and the results make sense. Here is the current bracket:

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, including four or five specific ideas that we are buying. This week Holmes (who has been very hot) likes Mallinckrodt (NYSE:MNK). Check out the post for my own reaction, and more information about the trading models.

Seeking yield? Blue Harbinger highlights a closed end fund trading at a discount. It has a yield of 4.1%, but should be regarded as contrarian. The question with CEF’s at a discount is whether the discount is deserved. In this case, it is mostly about the interest rates. Read the full post and give it some thought before you go on your own personal REIT expeditions.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the simple advice from Allan S. Roth in the WSJ – risk, rebalancing, tuning out noise, and watching fees.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest has quickly become a must-read for financial professionals. Somewhat to my surprise, the topics also stimulate comments from active individual investors. It has added to the value of the posts for both groups. This week, although I disagree with the basic conclusion, I recommend that you read the discussion of debt in this post. My own view is that individual investors should carefully assess debt versus their assets. The preoccupation with societal debt and market effects is overdone – a subject for another day.

Watch out for…

Questionable investment practices. In contrast with the famous Ronald Reagan line, the government actually is there to help you “…make better informed investment decisions and avoid common scams in 2017.” GEI reports on ten tips from the SEC. #5 is especially sad, but very common:

Be alert to affinity fraud. Affinity frauds target members of identifiable groups, such as the elderly, religious or ethnic communities, or the military. Even if you know the person making the investment offer, be sure to check out the investment and the person’s background – no matter how trustworthy the person seems.

Final Thoughts

My analysis of Trump Effects remains a work in progress. I can give you a few hints about the conclusions.

  • Some sort of fund repatriation will be part of the package. All else equal, that suggests a bias to companies that might gain the most. The Atlanta Fed provides some hard data.

  • Expect tax cuts, probably including some nods to Democrats. This will represent fiscal stimulus.
  • Cyclicals continue to show strength, partly from the expectation noted above. (Eddy Elfenbein).
  • The trade war is likely to be a bargaining approach. It is an error to over-react on speculation.
  • The health care issue is far from settled. Early symbolic repeal? Yes. Real changes? Unclear.
  • And that is just a start.

There is a much more to this story. It requires both skill and careful research. As a former poli-sci and public policy professor, a long-time expert in economics, and a thirty-year veteran of financial markets, I have a good package of skills for this problem. That is good news, but it also means that I understand the challenge and the complexity.

Most traders and investors are responding from the gut. They may have valid concerns, but they are getting them mixed up with the need for calm, unemotional decisions. In my annual preview at Seeking Alpha I warned about over-reacting to emotion. (I always appreciate participating in this annual series, which generates many ideas you do not see elsewhere).

In the crucial weeks ahead, a mistake could be costly. Study hard and move carefully.

Stock Exchange: Three Approaches Yield Three Trading Ideas

Last week’s Stock Exchange was a discussion of how to find new trading ideas. There are always plenty of names floated, but that is more about media than method. If you missed last week because of the holidays, you might find it useful to catch up.

This week I turn theory into practice. We have new ideas from three members of our panel and an informed abstention from another. We also include ratings for reader requests.

Let’s dig in with the new ideas. As usual, I will conclude with a brief observation.

Getting Updates

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

This Week— Three New Ideas

Holmes

This week I’m buying a company I wouldn’t be able to pronounce, Mallinckrodt (MNK) 53.10. REALLY??? 9 consonants and only 3 vowels. This specialty biopharmaceutical has fallen hard, but I’m sensing some “green shoots”.

The current low price represents a multiple bottom hit a couple of times over the last year before rallying. I don’t see a lot of upside in this unless the stock can break the most recent high of about 82. However, what I like about this is that I can run a tight stop loss, with maybe $2 of downside risk vs. $10-15 of upside profit.

J: Did you read the recent NYT article about the company? They are a possible new target in the overpriced drug crusade.

H: You know that I don’t read.

J: How did you know about the consonants and vowels?

H: I watch Vanna every night.

J: Does the drug pricing issue bother you?

H: News often creates dips. I figure out which are worth buying.

J: Last week you highlighted Palo Alto Networks (PANW). That is off to a good start.

H: I still hold it, but with a trailing stop to maintain my profits.

Athena

Cypress Semiconductor (CY) caught my eye this week. This one was in a nosedive through the month of October, but has bounced back considerably through the end of the year. Based on the shape of the 200-day moving average, I conclude that we haven’t hit the peak just yet. As usual, I would expect to hold this one only for a short time – maybe 2-4 weeks.

J: For once you have picked a stock where I can almost agree. The valuation is reasonable and the dividend of 3.8% is good. The FAST graph shows the excellent earnings growth and the underlying value.

A: Each week I explain that your earnings and ratios are not good indicators.

J: Have you ever heard of Warren Buffett?

A: There are many ways to make money in stocks. His favorite holding period is forever. I lose interest after a few weeks.

J: Are you concerned about the role of chip stocks is modern devices? The Internet of Things?

A: What I need to know is clear from the stock price and volume – and also my methods for filtering out the noise. You cannot gain my wisdom if you spend your time listening to fools.

 

Felix

I will begin with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the top overall vote getters from our (free) subscription list as well as some new requests I got during the week.

J: I see that the number of stocks keeps changing.

F: The list is quite dynamic. Some of those included did not get a rating last week. I encourage my fans to submit requests.

J: Is that because of your incentive bonus?

F: My principal motivation is to help.

J: Maybe we’ll get some good suggestions about what to include. What is your featured stock for this week?

F: I see promising long-term potential from Shopify (SHOP). I don’t deny there have been ups and downs; however, the stock has been able to sustain its significant gains from late summer of 2016. That kind of durability (as seen in the 50 Day Moving Average) is important to me as I look for long term holdings.

J: This is what we call a “story” stock – no earnings and no history. You are investing on faith alone.

F: As I keep explaining, you are too fussy.

J: I am fussier than you?

F: Yes – when it comes to stock picking.

 

Oscar

Here are my ratings for the top reader interests. There are still four open slots, so keep the questions coming.

J: Interesting. What do you have for us this week?

O: Nothing.

J: What? Are you spending all of your time watching football? Your fantasy league is over.

O: I am trying, but you tell me not to force it when there is nothing new.

J: True.

O: We often get caught up in the day-to-day when it comes to market moves. Many investors find themselves twisting in the wind without solid methods of their own. It is useful to step back and take a view from the cheap seats.

This article from Bloomberg is a great example. Not only are traders trying to predict what Trump will do in office – they’re shorting companies they think he might blast on Twitter! In this case, we see over $150 million invested in iShares Global Infrastructure ETF (IGF) – presumably anticipating a bipartisan bill to fix up roads and bridges. However, it quickly became clear that IGF was disproportionately composed of utility stocks. Bloomberg’s Eric Balchunas writes:

Infrastructure ETFs seem like the perfect way to play a Trump administration, but the caveat is they are loaded with utility companies, which tend to be vulnerable to rising interest rates…Don’t judge a book by its cover, and don’t judge a thematic ETF by its name.

J: Good point.

O: Over the past few weeks, I’ve written about airlines, REIT hotels, and diversified media. I’m still comfortable with these picks, and I don’t feel any pressure to shoehorn in a new recommendation. I win because I stick with my methods.

 

Background on the Stock Exchange

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

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

Questions

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

Conclusion

This week is an interesting implementation of the theory from the last few installments of Stock Exchange. The gang is having no trouble finding ideas, at a time when many others are stymied. That said, Oscar shows the discipline we need in a system. Do not reach for something that does not really fit.

There are plenty of trading ideas, and no need to “stretch” your system.

Profitable New Year’s Resolutions for Investors

As part of my preparation for 2017, I asked how I could be most helpful for individual investors. The suggested resolutions are a combination of expert investment methods and avoiding the most common investor mistakes. They may be difficult to follow. If you can, you will find them profitable.

  1. Make a fresh start. We should do this constantly, but the calendar is a good reminder. One of my former bosses took a vacation at the end of each year. His instructions included a list of stocks that he “did not want to see on his sheets” when he returned. He knew the right thing to do, but it was still difficult for this top professional to do it himself.
    1. Review your losing positions. Is the thesis intact?
    2. Review you winners. Is it time to trim? Have you reconsidered your price target? Are there new ideas that are better?
  2. Look past the headlines. Read the actual story. The writer may have one message, while the headline represents another. If you care enough to read financial news, you can spend a few more seconds on each article or post.
  3. Save time by dumping sources. Conduct a review. If a source has not provided anything helpful in the last two or three years, ignore it! You need the time for more important matters. If the information has led you astray, that is even more reason to move on.
  4. Do not blame others for your own poor decisions. If you have not enjoyed the market rally, it is not the fault of the Fed, the Congress, the President, the Plunge Protection Team, high frequency traders, or anyone else except you. Unlike casinos, the odds for investments are in your favor. Accept the reality that government officials, all over the world, are attempting to block, fix, or postpone problems. You may not like the solutions, but why not profit anyway?
  5. Do not be mesmerized by charts including commentary and big, colored lines. Ask yourself whether the underlying argument makes sense. Should you sell your long-held position because a guy on TV says there is “technical damage?” Be sure you know what that means and compare it to your own analysis.
  6. Beware of misleading charts.
    1. Ignore charts that “prove” that current markets are just like some prior time period. With modern software, it is easy to cherry-pick some prior period, adjust the scales, and scare people witless (TM OldProf euphemism). Do not be bamboozled by this cheap trick.
    2. Ignore charts that are too good to be true. They are. Usually the researcher has used too many variables on too little data. If you do not understand what that means, it is even more reason to be skeptical. You will have a high susceptibility to confirmation bias.
  7. Do not blindly accept “headwinds” or “tailwinds” stories. These are popular, easy to write, and require little research. Just ask yourself a few questions.
    1. Is this really likely? Can I even estimate the probability?
    2. How big are the consequences?
    3. Can we expect a policy reaction?
  8. Learn to use “business cycle peak.” Ignore all talk about “recessions.” The term has been corrupted in a way that is beyond repair. My educational effort is a lost cause, since most continue to treat below-trend economic growth as a recession. This makes them live in a state of constant fear. Bad consequences for stocks occur right after a business cycle peak. So far, so good, on that front.
  9. Turn the page when you see “ageing bull” or the like. While it is true that this economic and stock cycle is longer than the norm, it has been gradual and started from a very low point. Suppose we had flipped six heads in a row. Does that change the odds of the next coin toss?
  10. Do not use your conclusions to go “all in” or “all out.”Everything you see urges you to believe that you are a great market timer. Get real! No one does that consistently. The best we can do is to control risk.

So most importantly —

Evaluate the risk of your portfolio and make sure that it is appropriate to your plans and circumstances.