In the past week there has been a dramatic change for the worse
in everything we have been tracking in our "Ugly" section. Risks
that are generally described with the euphemism of "geopolitical"
have become expanded military actions - Ukraine, Gaza, and
With no sign of an early resolution, the crises deserve
I expect financial media to ask:
How will the "headline risk" from crises affect financial
Prior Theme Recap
In last week's WTWA
that attention would focus on the Fed and the end of QE. That was
accurate only for about two days! World events quickly provided
more dramatic stories. We face much the same problem this week. In
the absence of a clear economic or earnings theme, the impact from
the world's hot spots become even more important to financial
Naturally 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.
San Francisco Appearance
I have agreed to speak at the
San Francisco Money Show
on August 23rd. Here is
. I am working on some special themes. We will have some fun and
also identify some good investment ideas. I look forward to meeting
some readers in person.
This Week's Theme
The stock market's small change on the week masked some big
daily swings. Doug Short always
captures the week
in a single great chart. There was pretty strong selling from
Monday afternoon through Friday morning, giving the week a very
negative feel. Many active traders were satisfied with short
positions, which reached peak value during the overnight hours
before the Friday opening. The chart dramatically shows how quickly
a headline or two can change the markets in the current
What explains last week's market action? The answer helps in
deciding what to expect in the week ahead. The headlines started on
Tuesday afternoon, with a statement by Polish Foreign Minister
Sikorski speculating about the meaning of massed Russian troops on
the border with Ukraine.
- Technical factors. Art Cashin (via
) argues that the Monday and Tuesday action represented a rally
and a failed retest of prior highs. Cashin also notes that gold
and oil markets did not react as one would expect in a crisis. He
concluded that the Sikorski comments were merely
- Ukraine effects. Others (including Jim Cramer) saw the market
reaction as trading directly with the Ukraine news. This
viewpoint gained support when Thursday news of a possible Putin
"emergency" speech coincided with mid-day selling. There was
further support when Friday's stock rally followed news that
Russian troops had "completed" a military exercise.
- Iraq. Overnight futures declined with news of US air strikes
What does this mean for the coming week? In the low-volume
August trading environment, it takes less real news to move the
market. This may be especially true during options expiration
The Schwab team
thinks the market has a "binary feel" with the chance of a big move
in either direction.
that Putin's use of sanctions (rather than a military action) is
bullish. His sources see this as a sign of an eventual diplomatic
, President of political risk research and consulting firm Eurasia
Group, thinks that a Russian invasion of Ukraine remains very
likely. He sees humanitarian aid as a cover for such an action.
sees the economic impacts from Ukraine as limited, instead
emphasizing the possible energy effects from Middle East
As usual, I have a few thoughts to help in sorting through these
diverse viewpoints. 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
Last Week's Data
Each 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 news is market-friendly. Our personal policy preferences
are not relevant for this test. And especially - no
- It is better than expectations.
Most of the important news last week was very good.
did even better than the manufacturing version, hitting a
post-recession high at 58.7.
looks at the internals and concludes, "All of this adds to the
already-long list of indicators pointing to continued growth and
forward economic momentum." This chart also adds the Eurozone
(click to enlarge)
Rail traffic was strong
- the best July in history.
for complete analysis and charts.
hits an innovative new low. Historically people have had
disapproval for Congress as a whole while supporting their own
representative. This implied little chance for change even when
performance was very poor, especially since incumbents already
enjoy a big advantage.
Vox highlights the findings
, but warns not to expect big changes any time soon.
failure of Portugal's Banco Espirito Santo
is an exception, showing that European banking regulation is
George Hay at Breakingviews
contrasts the process and outcomes with the Cypriot bank rescue
as well as the bailouts of five years ago.
prime working-age group is growing
again. Calculated Risk has
an analysis of the demographic trends
as well as some helpful charts. He concludes that this is a
positive for future economic growth.
Earnings growth remains solid
on the strong (and almost final) results from Q2 and also notes
that, unlike most recent years, the estimates for the rest of the
year have not been revised much lower. Brian's updates are very
helpful for investors trying to focus on fundamentals.
Banks are easing lending standards
. This is part of the answer to the low velocity of money and the
high level of excess reserves. The Fed's QE programs, despite the
hype, have not really had the hoped-for impact on economic
activity. Commercial lending is especially important.
Calculated Risk examines
the survey results (See also
on loan growth) and provides the following chart for commercial
real estate ((CRE)):
(click to enlarge)
High frequency indicators
remain positive. Sometimes it is difficult to find the "hook" for
excellent weekly update
from New Deal Democrat. I always read it, and so should you. (I
wish he had a different pseudonym since some people probably do
not give sufficient credit to the economic analysis. I feature a
very wide range of perspectives, including economic analysis from
conservative Republicans and Libertarians, but these may not be
so easily recognized because of the names). This week there is a
nice summary of the entire picture. I am going to quote at
length, hoping that readers will embrace this source:
Summary: There was no big change this week. All of the long
leading indicators, excepting mortgage applications, were
positive, including money supply, bank lending rates, real
estate loans, corporate and treasury bonds.
The short leading indicators also all positive. The 4 week
average for Initial jobless claims is at a decade+ low.
Credit spreads have widened slightly in the last few months
but remain near their post-recession low. Temporary jobs were
again close to their seasonal all-time high. Commodities were
positive. The Oil choke collar has seasonally disengaged.
Housing prices still appear to be at or near an interim
The coincident indicators were mixed. Two measures of
consumer spending was positive, but Gallup has turned
negative again. Steel production was positive, as was rail
traffic although less so than recently. Shipping has declined
recently but has stabilized.
Growth for the rest of 2014, and early 2015, looks intact.
But weakness in the housing market evident in the first part of
this year may be spreading into the rest of the economy,
suggesting that growth will slow down.
Bearish sentiment hits a 52-week high
. This is viewed as a contrarian indicator, so it is a market
Bespoke has the analysis
and charts, including this one:
There was also some negative news.
were disappointing. This is difficult data to interpret. It is
noisy and we also always wonder how much is actually planned.
Steven Hansen at GEI
has a thorough analysis, concluding that it is a mixed picture. I
am calling it "bad news" since I expect it to be a negative
adjustment to Q2 GDP.
US Households are in poor financial shape
according to a recent survey by the Fed.
Matthew C. Klein at FT Alphaville
has a good report, noting the following highlights along with a
helpful chart of retirement plans:
- Among Americans aged 18-59, only a third had sufficient
emergency savings to cover three months of expenses.
- Only 48 per cent of Americans could come up with $400 on
short notice without borrowing money or sell something.
- 45 percent of Americans save none of their income.
Home price increases are slowing
The CoreLogic data confirms other sources. The year-over-year
increase is 7.5%, but Calculated Risk notes the reduction in the
pace of increases and expects the trend to continue. See the
for details and charts.
1/3 of Adults have Debt in Collection
Jeanne Sahadi at CNN Money has the story.
Housing drag on GDP continues
Nick Timiraos of the WSJ highlights five charts - all interesting
and helpful. Here is one that illustrates the specific GDP
Italy has a triple-dip recession
Much of the concern about worldwide growth funnels through Europe
with Italy a major drag - economic performance even worse than
Matt O'Brien at Wonkblog
has a good analysis, summarized with this chart:
(click to enlarge)
Our "ugly" list for last week was unfortunately accurate. We had
headline news from all conflicts with plenty of violence and death
competing for our attention. The Ebola crisis, cited a few weeks,
has spread to Lagos, a densely populated city of 21 million and a
center for travel. With a few US cases from foreign travel,
Gwynn Guilford at Quartz
explains that people should not be "freaking out" over the risk.
Check out her thoughtful piece, which corrects a lot of
great info from Rand
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.
Last week I asked whether readers might point out the obvious
with this chart
(click to enlarge)
The most important thing to note is that the series begins in
the middle of a recession. This should always be a warning,
especially when it is a subject like tightness in labor markets.
Later in the post I provided the reference to the
Washington Post article
about favorite FRED charts. This was #4, from Michael R. Strain. As
you can see, the current levels are not overly tight by historical
standards. John Lounsbury of GEI notes that they covered this
truncated chart "behind their wall." Good work!
(click to enlarge)
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,
Recent Expert Commentary on Recession Odds and Market
: An update of the regular ECRI analysis with a good history,
commentary, detailed analysis and charts. If you are still
listening to the ECRI (2 ½ years after their recession call), you
should be reading this carefully. Doug includes the most recent
ECRI discussion, which has been consistently bearish, including the
blown call on the recession.
Bob Dieli does a
(subscription required) after the employment report and also a
monthly overview analysis. He follows many concurrent indicators to
supplement our featured "C Score." One of his conclusions is
whether a month is "recession eligible." His analysis shows that
none of the next nine months could qualify. I respect this because
Bob (whose career has been with banks and private clients) has been
far more accurate than the high-profile TV pundits.
: A variety of strong quantitative indicators for both economic and
market analysis. Dwaine's
"liquidity crunch" signal
played out as projected. His market timing method is "armed for the
next possible long signal."
Updates his unemployment rate recession
, confirming that there is no recession signal.
Georg's BCI index
also shows no recession in sight. For those interested in hedging
their large-cap exposure, Georg has unveiled a new system. Georg
now has another new program, with ideas for
minimum volatility stocks for tax-efficient
. He also has new advice for those seeking a
safe withdrawal rate
, now featuring the use of put options to protect against extreme
Dr. Ed Yardeni also sees
little chance of a recession
unless the Fed acts much sooner than expected.
Neil Irwin of the NYT
looks at the GDP contribution of various market sectors, analyzing
the main sources of the continuing below-trend growth. Biggest
(click to enlarge)
The Week Ahead
We have a rather quiet week for economic data and events.
The "A List" includes the following:
- Initial jobless claims (Th). The best concurrent news on
- Michigan sentiment ((
)). Watch closely for any rebound from recent weakness.
- Retail sales (W). Not much expected from this important
coincident growth indicator.
- JOLTS report ((
)). I am promoting this in importance because it provides
information on structural unemployment.
The "B List" includes the following:
- PPI . Inflation is still not a matter of key concern and this
report does not yet have much impact.
- Industrial production. A noisy series, but a key element of
- Business inventories (W). June data relevant to Q2 GDP
Earnings news is winding down, but there are still some
important reports from retailers. There is only a little reported
from the Fed "Speakers Bureau." Vice-Chair Fischer will speak in
Stockholm on the Great Recession and the NY and Boston Presidents
speak at a conference on Tuesday. While policy comments are not
part of the plan, sometimes questions elicit new information.
Breaking news from world hot spots will command attention.
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
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 turned bearish, but it is a close call with little
conviction. Uncertainty remains high - typical for a trading range
market. This week we were only partially invested for most of the
week and one of the positions is in bonds. Inverse ETFs have
positive ratings, but are still in the penalty box. Felix remains
cautious, but has not yet gone short.
Noah Smith at Bloomberg View
warns about blindly following trends. He has a creative example of
a strategy that seems to work on that basis (check it out) and this
warning as his conclusion:
The moral of this story is simple: The trend is your friend
till the bend at the end. Don't be fooled by it. Sometimes the
world really has shifted under your feet, but most of the time
the risk is just hidden, and normality is waiting for the chance
to reassert itself with a vengeance.
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
. In addition, be sure to read this week's final thought.
The market has finally provided some volatility. This is
attractive for long-term investors who have a good shopping list.
We may some position changes and also added to our Enhanced Yield
versus near-term short call options). These new positions are best
established on down days.
Here are some key themes and the best investment posts we saw
Looking for the best investment advice? I emphasize this theme,
recommending against sources that make macro commentary designed to
sell a single product, be it bonds, stocks, gold, or annuities. But
what about those who recommend stocks that they already own?
David Jackson explains
why this is both legitimate and valuable. I agree about the concept
and the value of the comments at SA. It is important to verify and
to monitor anonymous authors so that there is genuine
Shopping lists? Here are some interesting ideas:
- Cheap stocks with big dividends. YCharts continues the flow
of great analysis and ideas with
- Russia plays? I am not ready to move on this, but it is an
interesting theme to watch. At some point there will be news of
improvement in the Ukraine conflict. You might miss the initial
pop, but there will still be opportunity. The bold could start to
nibble early. Here is
another YChart article
- Cheap stocks according to CAPE? If you want to use the
Shiller method to pick stocks instead of to time the market, here
is a list - ten cheapest and ten most expensive -- to consider
Worried about market valuation? Many discussions about how to
value stocks seem rather biased, emphasizing only part of the
takes a more careful look at data concerning the length of bull
markets and also the oft-cited CAPE ratio.
Investors should not be trying to time a possible market
Barry Ritholtz spells it out
in plain language, citing all of the bogus catalysts that have
preceded the current issues:
Consider the various narratives that have been used as an
excuse for a correction. The downgrade of U.S. debt by Standard
& Poor's was going to be a deathblow; it wasn't. Treasuries
rallied on the downgrade, just to prove that no one knows
nuthin'. The sequestration of government spending was sure to
cause a slow down in markets; it didn't. Rising interest rates,
the Federal Reserve's taper, earnings misses, and of course, our
winter of discontent, were all cited as triggers for corrections.
And did I mention the
The punditry then shifted to valuations: We have heard
repeatedly that markets are wildly overpriced, that we are in a
bubble. Or if not a broad market bubble, then a tech bubble or an
initial-public-offering bubble or a merger bubble. Some advanced
the theory that Twenty-First Century Fox's bid for Time Warner
was itself proof of a top.
Evaluating dividend stocks versus bonds is a big question for
most investors. This
analysis from Alliance Bernstein
compares the income from dividend investing to gains from bonds,
testing rolling ten-year periods starting in 1968. In nearly all of
the cases, investors get back the original capital and earn
significantly higher returns from the equity approach.
(click to enlarge)
If you sell near-term calls against your dividend stocks, you
can imitate our Enhanced Yield program and collect call premiums as
well as dividends. (We will share how we do it if you request info
from main at newarc dot com).
If you are worried about possible market declines, you have
plenty of company. This is one of the problems where we can help.
It is possible to get reasonable returns while controlling risk.
You can get our report package with a simple email request to main
at newarc dot com. Also 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
There is some truth in each of the explanations for last week's
trading. Much of the daily activity reflects the actions of traders
who are watching key levels of perceived support and resistance.
Trading algorithms parse fees of breaking news emphasizing speed
over nuance. Headline risk (in both directions) is great.
My sense is that the reciprocal sanction story was a negative
for stocks last week. Why? There are direct economic consequences
for Europe, and it hit at a time of concern about slowing growth in
Italy and even in Germany. Anything that suggests an end to the
Ukraine conflict could spark a nice rally in stocks.
The other conflicts are all very important in a human sense, but
translate into economic impacts only through the effect on energy
prices. Steven Russolillo of the WSJ has a nice
Friday wrap-up piece
explaining why stocks could rally with the world on edge.
Dividend stocks like utilities seem to be trading with the bonds
-- part of what I have called the quest for yield. The lower bond
yields seem to be following lower European yields. Those seem to be
dropping with the European economic news and the recalibration of
the impact of reciprocal sanctions. Some market participants are
trading each of these relationships, or at least reacting to the
The potential for extreme volatility can provide an opportunity
if you have a plan.
Beware of instant experts on geopolitics -- all willing and
eager to guess Putin's next move!
The author has no positions in any stocks mentioned, and no plans
to initiate any positions within the next 72 hours. The author
wrote this article themselves, and it expresses their own opinions.
The author is not receiving compensation for it. The author has no
business relationship with any company whose stock is mentioned in
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