Jeff Miller | Aug 13, 2017 01:26AM ET
In a normal, quiet summer week we would be lazily considering consumer confidence and the Fed minutes. Instead, the escalating war of words between the U.S. and North Korea has claimed the agenda. Expect many to be asking,
Will the North Korea threat be the catalyst for a market correction?
My notion that last week would feature a discussion of revised price targets was pretty good — for exactly one day! Global tensions claimed the attention of markets. Anyone looking for a reason to sell suddenly had one. This occurred despite good earnings and generally positive economic data.
I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the overall decline of 1.43% for the week. With Thursday’s big decline, the sequence of down days, and the accompanying headlines, it probably seemed like more.
Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.
As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. Last week’s deserving winner was Aaron Brown for an excellent analysis of the need for context in reading chart. The article also has a link to past winners and their work. I have another great candidate in mind. I hope that readers and past winners will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome!
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
The economic news last week was generally positive.
And also, the Beveridge Curve, an indicator of where we are in the business cycle. (BLS)
In our office, we enjoyed guessing the richest person in various states – getting past the obvious choice in Nebraska and Washington! The Visual Capitalist has something interesting almost every day.
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.
It is an active economic calendar. I continue to emphasize housing starts and building permits. Retail sales need a rebound – as expected. I do not pay much attention to the leading indicator release, but some swear by it. Several other releases have an impact on GDP calculations.
Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.
Next Week’s Theme
So much for the slow days and the Presidential and Congressional vacations! The North Korean situation has taken center stage, and will probably dominate through most of next week. Investors and pundits alike will be wondering:
Is the North Korean threat the catalyst for a market correction?
I studied the topic extensively to cull the most educational background material, still reflecting a range of opinion. Here are some viewpoints:
Beijing has consistently urged world powers not to push Pyongyang too hard, for fear of precipitating regime collapse and triggering dangerous military action. “Once a war really happens, the result will be nothing but multiple loss. No one can become a winner,” said Chinese Foreign Minister Wang Yi in April 2017, urging the United States and North Korea to show restraint.
The specter of hundreds of thousands of North Korean refugees flooding into China is also a huge worry for Beijing.
That is a lot to read! Please keep in mind that these are merely the top articles on this topic, selected for a range of viewpoints.
As usual, I’ll have more in my Final Thought.
We follow some regular featured sources and the best other quant news from the week.
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.
The Indicator Snapshot
The Featured Sources:
Bob Dieli: Business cycle analysis via the “C Score.
RecessionAlert: Strong quantitative indicators for both economic and market analysis.
Georg Vrba: Business cycle indicator and market timing tools.
Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.
Doug Short: Regular updating of an array of indicators. Great charts and analysis.
Insight for Traders
We have not quit our discussion of trading ideas. The weekly Stock Exchange column is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post, Buy the Dip or Abandon Ship, was our most popular ever. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.
Insight for Investors
Investors should have a long-term horizon. They can often exploit trading volatility!
Best of the Week
If I had to pick a single most important source for investors to read this week it would be a dead heat. This week’s modest market decline brought out plenty of doomsayers, whom you can find easily enough. Instead, I want to focus on some favorite sources who should probably read and perhaps quote each other, but apparently do not.
Each is supporting a business model and questioning whether other approaches will work. While I frequently cite and applaud these sources, I see potential for avoiding the worst of the declines. It is a good question — and worth careful study.
Despite the new market records, there are plenty of ideas.
Brian Gilmartin shows how to take a deep dive when analyzing a stock. His study of Coke (KO) combines his trademark earnings analysis with a look at the Buffett involvement, the long-term record, the dividends, and the technical picture. Finally, he examines how this defensive position might fit in your portfolio. Time for a 20-year breakout?
Looking for bargains? It is not a bargain just because the price is lower! Blue Harbinger screens 100 stocks (the S&P 100) that were big losers on the week and finds three candidates. We already own two of the three. If you are going to buy cheap and unloved stocks, patience is needed!
Eddy Elfenbein is highlighted in a discussion of selected tech stocks. He has a wise and cautious outlook.
Dividends and Yield
David Van Knapp produces a “periodic table” of dividend champions emphasizing defensiveness. This is part of an ongoing series, intended to assist in comparing two characteristics of a stock.
Simply Safe Dividends is a good source who employs strong methods. Here is a little test. This week he looks at two dividend aristocrats, Clorox Company (NYSE:CLX) and S&P Global Inc (NYSE:SPGI). Can you guess which he prefers? Reading both articles is educational as well as a source of ideas.
Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. This week he featured an idea that I have been nurturing for a long time – how to ask the right questions. His kind and wise words on this topic are quite helpful. I hope that readers will understand the need to consider what is NOT said and done as well as what is. I could have picked many examples, but I chose to discuss The Unsolved Mystery of the Cramer Rant. I have a lot of ideas that I do not see elsewhere; some of them might be helpful.
I read Gil’s excellent work every day and encourage you to do the same. While it is ostensibly directed toward financial advisors, it is fertile ground for individual investors.
I especially enjoyed his commentary on cuts in employer retirement support. As he frequently does, Gil raises a topic of importance both to advisors and to individual investors. I read it daily, and you will enjoy it as well.
Abnormal Returns has a special personal finance post each Wednesday. I especially enjoyed these two entries:
A key friction point the app aims to address is to enable users to choose how much information they share.
“One of the hesitation points that we saw in a lot of the couples was that they didn’t necessary want to argue about the little things,” he explains. “Did you take Uber vs Lyft, The number one argument we read in a study was over frivolous purchases. So a lot of couples said that they want to goal set and plan but they don’t necessarily want to argue about did they make frivolous purchases. So one of the features we allow you to is we allow you to track your account balances but choose what you want to share.
I am nearing my 38th anniversary with Mrs. OldProf. We agree that there are some things you just don’t want to know. (For example — the going rate for something called a mani-pedi? She retaliates by citing various “useless gizmos” that do things like test voltage and battery strength.)
Watch out for….
Netflix (NASDAQ:NFLX). Barron’s has a comprehensive takedown as this week’s cover story. The basic idea is that Netflix mostly pays for content and the cash flow is not adequate for this need. There is an interesting analysis of content they own versus what they license. The conclusion is that the company is attracting viewers with a low price – one that does not really cover needs.
Blue Apron Holdings Inc (NYSE:APRN). Stone Fox Capital takes a cautious look at a story stock trading almost 50% lower than the IPO opening. Despite the promise, patience is warranted. They don’t like Snap either.
A debt problem at Chicago Bridge & Iron Company NV (NYSE:CBI)? John Rhodes has an interesting take. (Quick quiz – does the company name reflect its location in Chicago, the making of bridges, or the use of iron?)
The escalation of threats and accusations about N. Korean arms raises a broader question: How should an investor think about geopolitical risks?
Many sources advise ignoring such news items, but that does not really work. You cannot avoid the headlines, but some education and analysis can be helpful. Serious investors who make their own decisions should inform themselves. Those who have delegated responsibility to advisors should be confident that they know what they are doing!
Here is my own current thinking – subject to revision as events change, of course.
Despite the change in Presidents and circumstances, there are many forces pushing for restraint. I especially like that China and Russia joined in the UN sanctions against N. Korea. This is unusual, and clearly positive. I am monitoring events, but not concerned about the media and political feast on this topic.
I have written that this is not yet a “market story.” The key market fundamentals are solid, and not significantly affected by this news. Instead of my words, let’s see what the temperate and sensible Eddy Elfenbein thinks:
With the recent war of words over North Korea, investors are starting to feel anxious. The South Korean economy punches above its weight in the world economy. There are several prominent Korean corporations like Samsung (KS:005930) and Hyundai Motor (KS:005380). But in the last two weeks, the iShares MSCI South Korea Capped (NYSE:EWY) has lost more than 7%.
Over the past several months, Wall Street has brought back its old habit of freaking out in the short-term over something that turned out to be nothing major. Remember the Brexit panic? The S&P 500 had its biggest daily drop in nearly a year. But shortly after that, cooler heads prevailed and doomsayers were yet again proven wrong.
Nearly the same thing happened after last year’s election. At one point on election night, the Dow futures were down more than 800 points. The end of the world never came, and the Dow is sitting on a nice 20% gain since the election.
My point isn’t to defend or criticize any of these political events. Rather, I’m encouraging you not be swept up by unreasonable fears. Stock prices are like a global blood-pressure machine. Historically, the U.S. stock market has been able to rally during highly-unsettling times for the country and the world. Any drop in U.S. equity prices is good for stock-pickers.
There is no compelling reason for action. That said, in times like these some investors find it easier to maintain their positions if they hold a small hedge. 5% or so in gold or gold stocks or some out-of-the money puts might not be profitable by themselves. If they help an investor to feel more secure, it is much better than making a dramatic decision to sell all.
[Some readers might enjoy my recent short paper, Getting Back in the Market. This has more specific suggestions about attractive stock sectors and good tactics. The Top Twelve Investor Pitfalls will help with your plan. Understanding Risk might also be of interest. All are free at your request from info at newarc dot com].
What worries me…
…and what doesn’t
[Answer to the trick question about CBI – none of the above.]
Written By: Jeff Miller
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