Jeff Miller | Sep 28, 2014 01:55AM ET
Employment week always generates a strong economic focus. Because it falls on an early calendar day this month, we also have an avalanche of other economic reports.
This week will emphasize the message of the economic data.
What can we learn from this news?
h2 Prior Theme RecapIn my last WTWA Doug Short’s review and summary chart provide one-stop shopping for what happened in equity markets.
The news was actually pretty good, but you would not know it from the markets. The decline on Thursday provided grist for the “divergence theorists.”
Here are some headlines:
Some of the stories even cited the same sources and charts I used. Apparently I was on target.
Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.
h3 A Note to Readers /h3Sometimes I try to review my approach to the WTWA series. As a profitable blogging method it is rather dubious. I could get many more page views if I split apart the various concepts, creating several posts per week. My sense is that the article would not be as helpful, but many prefer short takes on specific topics. Here is what I am aiming for:
Some readers will not be interested in all of these topics, but I have organized it so that you can find your favorite parts. Can I do better, either in approach or content? Suggestions are welcome.
h3 This Week’s Theme/h3In sharp contrast to last week (little fresh data, plenty of room for navel gazing) the week ahead includes plenty of new information. Many observers will try to force the data into their pre-conceived themes. Here are the key competitors:
The Scott Grannis analysis, above, covers a key point that seems to elude most investors – the exaggeration of the effects of Fed policy, especially on ten-year rates. He writes as follows:
10-Year yields, on the other hand, are largely driven by the market’s expectations for economic growth and inflation. The Fed can influence these expectations to some extent, but not by much. The chart shows that even though the Fed purchased trillions worth of notes and bonds in three rounds of Quantitative Easing, 10-yr yields rose during each episode of Quantitative Easing. Yields rose because the market perceived that the Fed’s bond purchases were correctly addressing a problem and thus improving the outlook for growth. Yields fell after QE1 and QE2 because the market realized that the Fed had not done enough to address the world’s demand for safe assets, and this threatened the outlook for growth. We now know that QE3 is virtually finished, but yields have only declined marginally, which in turn suggests that this time the Fed has done enough.
As usual, I have a few thoughts about which approach is best. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information .
h3 Last Week’s Data/h3Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
The Good
There was a lot of very good news, supporting the general thesis of economic strength.
The Bad
There was also some important negative news.
The Ugly
This week’s “ugly award” goes to the cozy treatment of Goldman Sachs by the New York Fed. You can read a This American Life (available by podcast). I did both. This is only the beginning of the story, I suspect, but the reporters did well to seek balance and offered chances to respond. Neither Goldman nor the NY Fed provided much. I had a unit in my college classes about “captured” regulators. It is a familiar topic without easy answers. Listening to the podcast provides an interesting insight into the issues.
Our “ugly” list for the last few weeks remains unfortunately accurate. We had headline news from all conflicts with plenty of violence and death competing for our attention. The Ebola crisis, which we started to feature many weeks ago, is deepening. Last week I noted that some were calling it a “Katrina moment ” for the World Health Organization.
Sometimes the concerted attention to a problem can change the result. Carl Bialik at FiveThirtyEight suggests that the worst of the CDC forecast might be averted for this reason. My investing audience might remember this effect from the Y2K problem, where advance publicity may have contributed to an advance solution. If only we could have a similar result with Ebola!
The Silver Bullet
I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. Think of The Lone Ranger. This week’s award goes to Michael Batnick , who sought the true story about the “death cross” in the Russell 2000. Please read his entire explanation behind this table:
Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here .
Recent Expert Commentary on Recession Odds and Market Trends
Doug Short : An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (three years after their recession call), you should be reading this carefully. Doug includes the most recent ECRI discussion concerning continuing economic weakness in Japan. Doug covers the possible implications for the US. The ECRI has nothing fresh to add, but I expect something soon because of their excessive emphasis on commodity prices.
Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”
Check out the full post for a description and charts.
improve performance from low-volatility stocks . I am following his results and methods with great interest.
I added to the recession discussion with some comments on the 2011 ECRI forecast and a possible repeat given current commodity prices.
h3 The Week Ahead/h3We have a big week for economic data and events.
The “A List” includes the following:
The “B List” includes the following:
Once again, there is plenty of Fedspeak on the calendar. We might think that there is little fresh news on that front, but we still see surprises that add color to the official statements.
How to Use the Weekly Data Updates
In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.
To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?
My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.
Insight for Traders
Felix has shifted from neutral to bearish. Most sectors have a negative rating and the broad market ETFs are also tilting negative. Our Felix trading accounts are still partially invested, but not in mainstream equity ETFs. The trading program can sometimes go short via the inverse ETFs. That has not happened in more than a year, but we might see it soon.
I know a few very successful traders — very few! Most of those who try and fail think that they can look at a few charts and see something no one else notices. I embrace some technical methods. It is Felix’s strong suit. The fancier the method, the worse the prospects. Larry Swedroe writes about . Here is an entertaining quote:
Martin Fridson, who currently serves on the editorial boards of Journal of Investment Management ,had this to say about technical analysis: “The only thing we know for certain about technical analysis is that it’s possible to make a living publishing a newsletter on the subject.”
You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.
Insight for Investors
I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here . In addition, be sure to read this week’s final thought.
We continue to use market volatility to pick up stocks on our shopping list. We do this because we also sell positions when they reach our (constantly updated) price targets. Being a long-term investor does not require you to “buy and hold.” Taking advantage of what the market is giving you is always a good strategy.
Here is our collection of great investor advice for this week:
Investing in Russia? Barron’s features Prosperity Capital , which is challenging the conventional wisdom with Russian investments.
To convince investors that better times are ahead, Westman must stray into the political fray he tries to avoid. Russia hasn’t developed indigenous institutional investors; foreigners own most of the free float in its stock market. That means the best hope for a rebound lies in a global rebranding, peace in Ukraine, and persuading capitalists that Russia will not provoke similar conflicts.
Westman has fought this uphill battle by quitting his London desk for fact-finding missions in Ukraine this year, mingling with Kiev politicians and separatist rebels, and offering investors a view he considers more evenhanded than that from most Western media. “I am convinced there is no plan in the Kremlin to restore the Soviet Union,” he asserts. “We are not trying to defend Russian policy, but to explain their point of view, which is that Russia is the one under attack.”
Looking for beaten down sectors and stocks is part of our value style, so I am interested. It still seems early to me, and the average investor cannot go for the private companies that hedge funds choose, joining them in avoiding the state-owned properties.
Need stock ideas? If you want to beat the market like the big hedge fund guys, you cannot buy hundreds of stocks. Bill Ackman’s six-stock portfolio illustrates the principle. We don’t own any of these, but that might relate more to our strategy, focus, and client risk profiles. Maybe some of these should be candidates for our “high-octane” program.
You cannot buy stocks just because they have declined. Some of them never come back! Ben Carlson has charts, data, and analysis. Here is his summary of stocks that had a catastrophic loss – a 70% or greater decline with minimal recovery.
Meanwhile, some stocks are just out of fashion, even if fundamentals are solid. In this post I explored the contradictions in the current commodity trade and mentioned a couple of stocks that qualify as current strong buys, perhaps with calls sold against them.
Financial media for investors. In yet another strong post, Josh Brown describes the imbalance in incentives (junk food versus eating your veggies). Financial media are escalating misleading rhetoric to gain a share of a declining population. It is too bad that there are fewer incentives for those providing solid investor education. Josh lists a few favorite sites, so take a look and set your bookmarks.
Studying mistakes is important! Morgan Housel explains this very well. The entire post is worth your time, but I especially like this section:
Spend more time studying failures than successes. You can learn more about money from the person who went bankrupt with a subprime mortgage than you can from Warren Buffett. That’s because it’s easier and more common to be stupid than it is to be brilliant, so you should spend more effort trying to avoid bad decisions than making good ones. Economist Eric Falkenstein summed this up well: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”
His comments are equally true for top-level tournament bridge. I am sure that Mr. Buffett would agree! You can also see the “flip side” from this article at Scientific American . Most of what investors read is completely biased toward the surviving managers.
Do not over-emphasize short-term returns. Many investors rush to study their portfolios whenever there is any news. This distracts from your fundamental goals, explains Kris Venne .
Most of us would be better off if our 401(k) / IRA had a 30 year lock up feature. Maybe even a 90% surrender charge if cashed in early.
If you are stuck in gold or out of the market completely, you might want to reconsider your approach. The current economic cycle is in the fifth inning. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. Check out our recent recommendations in our new investor resource page — a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love and use feedback).
h3 Final Thought/h3The disparity between the fundamental factors of stock valuation and the noisy price fluctuations provides ample ammunition for those emphasizing worries. Instead, I suggest a successful formula:
And most importantly – Ignore the sources that make their profit by scaring you instead of helping!
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