Jeff Miller | Jul 09, 2017 01:23AM ET
Trading desks will be closer to normal staffing. Chair Yellen’s biannual Congressional testimony will be a feature on Wednesday and Thursday, but the economic calendar is light. With little going on, the punditry will be wondering:
What should we expect for the rest of 2017?
h2 Last Week Recap/h2The big economic news last week featured employment – as expected. The start of the G20 meetings and North Korean missile tests grabbed some headlines, but without much effect on stocks.
The Story in One Chart
I always start my personal review of the week by looking at this great chart of the S&P 500 from Doug Short via Jill Mislinski. Despite the Thursday selling, the result for the week was essentially unchanged (up 0.07%). Not much in the way of fireworks!
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.
h3 The News/h3Each 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 good.
The Good
“Overall, business is strong. We are seeing price increases for packaging and handling materials as well as some MRO supplies” (Plastics & Rubber Products)
“Overall, demand is up 5-7 percent and expected to continue through the end of the year, at least. ” (Transportation Equipment)
“Demand is picking up; meeting budget expectations.” (Electrical Equipment, Appliances & Components)
Get The News You WantRead market moving news with a personalized feed of stocks you care about.Get The App“Business is still very robust. Have continued to hire to match increased demand.” (Computer & Electronic Products)
“Business [is] steady; not great, but good and fairly solid.” (Furniture & Related Products)
“Business globally continues to show improvement.” (Chemical Products)
“Environmental regulations have strong effects on our business. We continue to watch for any changes as a result of the new administration.” (Paper Products)
“Dry weather helping demand.” (Nonmetallic Mineral Products)
“International business outside North America on the upswing.” (Machinery)
“Metal pricing continues to drag down our profit margins, but we are very busy quoting new business, so our customers have a good outlook on the rest of the year.” (Fabricated Metal Products)
“Business is strong both domestically and internationally. Supplier deliveries are quick domestically, international supply chain is slowing. We are in a hiring mode.” (Food, Beverage & Tobacco Products)
The Bad
Bob’s analysis, unbiased and representing quality you will not see elsewhere, focuses our attention on when and if business confidence will start to show up in the numbers. You see this only via a deep study of the components.
The ADP report, which I regard as a solid independent measure, disappointed with an estimate of a net gain of only 158K private jobs.
The Ugly
Russians are now suspects in the hacking of nuclear sites. (Bloomberg ). This is certainly a time for effective diplomacy.
Illinois finally got off our ugly list (after over two years) by passing a budget. While not a complete answer, it is a step. Road construction, promised educational payments, debt repayment, and Powerball will now resume.
Noteworthy
I spotted some great charts that you will enjoy (Visual Capitalist ). One of them, which I cannot represent here, shows worldwide immigration over the last 200 years or so. Take a look, to see the streams of people change throughout history.
For a US focus, consider how immigration patterns have changed. Part of the changes reflect the changing identification of residents.
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.
h3 The Calendar/h3It is a light calendar, with mostly secondary reports. Chair Yellen’s testimony before Congress – House Financial Services Committee on Wednesday and a repeat for the Senate Banking Committee on Thursday – could prove interesting. I expect a more hawkish tone and the usual challenging questions from some. Retail sales is important. It is an important sector and there was weakness in the prior report. The inflation data will eventually be important, but not yet.
There is also some FedSpeak, and the release of the Beige Book. Those who want to focus on the Fed will have plenty of material.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
With the light calendar and low volatility, what will people write and talk about?
Mrs. OldProf provided the answer this morning at breakfast. As usual we split the Trib – sports for her and front section for me. She soon observed that it “was hard to be a Cub.” Encouraged to elaborate, she explained that whatever the specific news, the story was always about the disappointing first-half performance. A star hits two home runs. The team releases a catcher who allowed seven stolen bases in a single game. Both are treated similarly: Will this turn the Cubs around? The celebrated general manager, who was acclaimed as a genius until a few weeks ago, is expected to stir the pot somehow.
She is quite right. It sounds so familiar. Since I was thinking about this week’s theme, her comment was especially helpful. What she described is just what we are seeing in the “analysis” of the current stock market. Most stories are about the long bull market. Often there is an angle about the end of the rally. How much longer? What can go wrong?
It is a Seinfeld market. The story is about nothing, but must be described along the way. With nothing better to discuss, people will be asking:
What should we expect for the rest of 2017?
Here is a range of opinion:
No. 1. Pick a bogeyman: This is your first step to making a top call. Find whatever it is that will precipitate the next collapse, and home in on it. Tweet about it and write 5,000-word screeds explaining why this spells doom. The specific bogeyman isn’t all that important — just so long as you have one. Some good starter examples are: the Federal Reserve (or zero interest rates or quantitative easing), the national debt, hyperinflation, or the collapse of the dollar. Or how about New York Stock Exchange margin debt or that robots will take away everyone’s job? Mix and match these or be creative and invent a few of your own.
As usual, I’ll have more in my Final Thought.
h3 Quant Corner/h3We follow some regular featured sources and the best other quant news from the week.
Risk Analysis
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.
The Indicator Snapshot
The Featured Sources:
Each quarter I highlight the publication of Brian Gilmartin points the way to some key elements. Here is one of my own favorite charts. I recommend some thoughtful study of what happens when rates are rising into the range we might expect. The reason? Economic conditions and earnings improve as well.
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 Morgan Housel’s list of ten things he believes most about investing. I particularly like this example:
h3 Stock Ideas/h3Many failures can be traced to the pointless pursuit of arbitrary benchmarks. Most notable is the calendar, which pushes companies and investors to cut corners before the earth completes its rotation around the sun. Swap out the sun for another celestial body and you’ve described a mental illness. Another is index benchmarks, which use something short-term and broad (industry performance) to guide something long-term and specific (a strategy to meet your goals).
Homebuilders? 24/7 Wall St. closely follows upgrades and downgrades. I do not always agree, but the Merrill Lynch call on Homebuilders makes sense to me.
Energy? Barron’s (subscription required) has an interesting article citing an expert who sees a floor in energy prices. The basic idea is that traders over-reacted to the original OPEC supply limitation, not considering a key loophole. This has led to unwarranted swings in prices. If you are interested, this is one you must evaluate for yourself. There is also an interesting stock pick on this theme.
Lee Jackson (24/7 Wall St. ) cites the public statements from Merrill Lynch, with five picks based upon crude “bouncing” off a low of $42. These are generally bigger, “safer” names.
Chip Stocks? Lee Jackson has more ideas from Merrill. One of these passes some of Chuck Carnevale’s tests, so I am looking. Capital Markets Laboratories does a comprehensive analysis of Lam Research (NASDAQ:LRCX) which we bought a few weeks ago.
Defense stocks? A reaction to N. Korea? Peter F. Way ranks thirteen companies.
Biotech?
Bret Jensen wonders whether Gilead (NASDAQ:GILD) could learn something from Celgene (NASDAQ:CELG). I hope so, since I like both.
Good companies?
Chuck Carnevale examines seven attractive companies and shows how to find those worth further study. I usually prefer reading to watching videos, but Chuck covers key points in an upbeat style.
Dividends? Simply Safe Dividends does a comprehensive analysis of Archer Daniels Midland (NYSE:ADM). He looks at the business history, the current revenue drivers, and all the key metrics. Readers will enjoy the helpful diagrams and charts. Over at the Stock Exchange , our dip-buying model, Holmes, is cheering at the support for his pick of the week.
Personal Finance
Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. This week I especially enjoyed Gil emphasizes longevity , and that is certainly a good place to start.
Watching stock quotes too frequently will reduce your performance (Investment Master Class ). Warren Buffett does not even have a computer on his desk. Suppose you were getting a 15% return with 10% volatility – a combination that most would find attractive. Here is how this translates into returns in different time frames:
See also Bob Seawright, Worrying is a Serious Offense .
Watch out for….
Target date funds. Morningstar’s John Rekenthaler explains why the management choices might not fit your personal situation. He replaces target “date” with target “wealth.” I agree.
h3 Final Thoughts/h3Most market pundits and sell-side strategists are forced to write – whether anything important is happening or not! Some of this is driven by the calendar, especially when doing an annual forecast or revising it for the second half.
Many have allowed some simplistic notions to distort their analytic framework. If you attribute the stock rally to the Fed, ignore what Shiller and Buffett really said about valuation, and use “averages” to tell you how long a business cycle will be – you are starting your risk/reward analysis at a big disadvantage.
I do not make annual market forecasts. I certainly do not get tied to a calendar. Individual investors might find this approach useful.
You are not forecasting. You do not need a year-end market target. You need not call a top or bottom. You should not try to beat the market in a specific time frame, since your inexpensive stocks (at the start) will be out of step with current market perceptions.
A strong investment process is easy to describe, challenging to implement, and rewarding when done well.
What worries me…
…and what doesn’t
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