I could not resist the whimsical title. It is time for the
annual Fed Symposium at Jackson Hole.
, sponsored by the Federal Reserve Bank of Kansas City, has
historically been the scene for various important hints about
policy changes. It is also an occasion for informal, face-to-face
meetings among central bankers and economists from around the
world. This provides for a healthy exchange of ideas among
academics, government officials, and private sector economists. I
am skeptical of reports of discussions during white-water rafting,
but I suppose it can happen while hiking the trails or fishing. You
could probably learn a lot by hanging around the
Blue Heron bar
I expect that central bankers will be doing more personal
unwinding than thinking about reducing their balance sheets! I
expect financial media to be asking:
What is the Fed plan for reducing policy stimulus?
Prior Theme Recap
In last week's WTWA
that the dominant theme would be the various world crises. This was
accurate to start and end the week, although the weak retail
earnings and data drew a lot of buzz mid-week. As the humanitarian
Russian convoy approached Ukraine, there were many nervous stories
about a possible Trojan horse. The fear was exacerbated by
conflicting reports about a second Russian convoy of military
vehicles. Some sources claimed that it was partially destroyed by
Ukraine forces. This raised speculation that Putin was seeking an
excuse to invade. Markets reacted dramatically to each rumor.
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 fun and also
identify some good investment ideas. I look forward to meeting
readers in person. I will probably not be able to write WTWA next
Congratulations to Charles Kirk
Charles is retiring from full-time trading and moving to Hawaii.
His obvious love for teaching and mentoring means that he will
continue his work at
, which I have often recommended as a great resource for both
traders and investors. He intends to focus a bit more on investors,
while still maintaining a daily update and his popular Weekend
Chart Show. The modest membership fee goes partly to charity and is
quickly earned back by those following his screens and setups.
Charles has a concept of retirement that is the equivalent of a
full-time job for many. I hope he finds time for some golf!
This Week's Theme
Jackson Hole has been the scene for some big news in the past.
Most recently this has included the suggestion of two different
rounds of QE (2010 and 2012) and also the Michael Woodford speech
about the significance of forward guidance. This year is notable
for the change in the guest list ---
fewer Wall Street economists
, including some of the biggest names.
What should we expect from this event? Here is the
from the WSJ's Jon Hilsenrath:
Why is the job market improving so steadily when output growth
is slow and erratic? How low can the unemployment rate go before
officials need to worry about wage pressure and inflation? Can
the long-term unemployed be drawn back into the workforce in a
more vibrant economy? Is workforce productivity waning?
At the risk of oversimplifying the sharp contrast in thinking, I
will emphasize two perspectives. I want a neutral name for each
group, since I have smart friends within each. I am struggling to
do better than the "Traders" and the "Academics."
The market wants more clarity. Enough of this story about "data
dependent" decisions and moving targets for unemployment rates.
Many Wall Street types also reject the Fed indicators for
inflation. They want a swift end to the era of aggressive Fed
stimulus and a return to normal trading. There are many advocates
for this concept, including some dissenting FOMC members and
famous TV pundits. For once, it seems appropriate to cite an
anonymous, aggregate source
The Federal Reserve is already
behind the curve
, this is obvious as at no time in our history has the economy
performed on this level with rates basically being held at 'end
of the world' total meltdown levels! Sure Wall Street wants
free money from Central Banks, this has been the easiest money
making era of their lifetimes; now that rates will rise, they
actually have to learn to differentiate between asset classes,
companies, and investment strategies. This was what changed
this week, these two important data points on GDP and Inflation
put the nail in the 'Free Money for Life' coffin, and this sent
shivers up the spine of financial markets!
And the forecast for the speech:
Look for a speech on Friday August 22nd by Janet Yellen where
she officially signals the end of the 'recession era'
ultra-dovish monetary malaise of the last 7 years with a more
hawkish tone to signal to financial markets that they better
start finding their respective chairs before the low interest
rate music stops playing entirely.
The students of markets and data have a sharply different
perspective. "Academic" is an unfair handle, since many have
experience in policy-making roles.
has this valuable combination of experience. His
Jackson Hole preview
covers recent data on labor markets, including these charts
from the JOLTS report:
Since the job market shows some tightening, what is Prof. Duy's
forecast for Yellen's speech?
Bottom Line: Anything other than a dovish message coming from
the Jackson Hole conference will be a surprise. Tight labor
markets alone will not justify an aggressive pace of tightening.
An aggressive pace requires that those tight labor markets
manifest themselves into higher wage growth and higher inflation.
Yellen seems content to normalize slowly until she sees the white
in the eyes of inflation.
As usual, I have a few thoughts to help in sorting through these
conflicting 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.
There was some good news.
Small business optimism
hit the highest level since 2007-95.7. This has been a very
conservative and lagging index. Small business owners have strong
opinions about taxes and regulation. The improvement here is
has the story and this chart:
(click to enlarge)
declined for the sixth consecutive week. I am scoring this as
"good" but prices are still thirty cents higher than last
See Doug Short's analysis
and his famous charts.
- It was a
happy earnings season
, with growth of 9.6% y/y. (
are higher. As Scott Grannis reports,
Taxes Don't Lie
Calculated Risk shows the progress
via this chart:
may have stabilized. At least at my time of writing - Saturday
night. Whatever the
concerning the Russian "military" convoy and the Ukraine attack,
both sides seem to be backing off
. The "humanitarian" convoy (although it has a lot of
mysteriously empty trucks)
seems to have been approved
. Had this news hit during market hours on Friday, stocks would
probably have finished higher and bonds a bit lower. For the
moment, it seems to be a positive.
There was also some negative news.
The data have been confusing.
John Foley at BreakingViews
explains the impact on confidence - a crucial element for growth.
It doesn't really matter what economists think. But
consumers and depositors are important. There the picture looks
less fuzzy. Housing sales fell 17.9 percent year on year. The
central bank's quarterly confidence indices suggest people's
feelings about future income are the worst they have been in
over a decade. Expectations are the most important part of the
economy, and the hardest to manage. When China's citizens are
worried, there's room for concern.
- Despite positive overall earnings, the
average stock reaction was negative
. Reports had to meet several tests beyond the basic report:
quality of earnings, revenue, and outlook. Here is the result
(click to enlarge)
- University of
Michigan consumer sentiment
is at a nine-month low. This remains at the level at the start of
the last recession. Whatever the progress on corporate profits,
it is not necessarily reflected in confidence - a good indicator
of employment and spending. Once again I point to
, who generates my favorite chart on this series, showing several
variables in a single clear picture:
(click to enlarge)
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,
cited a few weeks ago, continues to worsen. See the
story and interactive graph
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. No award this
week. Nominations are welcome.
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."
: A variety of strong quantitative indicators for both economic and
market analysis. Dwaine's
"liquidity crunch" signal
played out as projected. This week he highlights his HILO Breadth
index which he has designed to pinpoint bottoms and to warn of
protracted corrections. Current readings imply an opportunity that
usually shows up only once a year.
Check out the full post
for a description and charts.
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
Antonio Fatas, has in interesting "
." He asks about the implications if we were starting a recession
right now. You need to read this very carefully. The conclusion is
that it would represent a major change from all past indicators -
essentially what I have been reporting here for several years,
despite the ECRI forecast.
The Week Ahead
We have a big week for economic data and events.
The "A List" includes the following:
- FOMC minutes ((W)). Will mark the start of the week's Fed
- Housing starts and building permits ((
)). Rebound in housing remains key for a robust economic
- Initial jobless claims (Th). The best concurrent news on
- Leading indicators (Th). Despite retail and housing, this
indicator has remained strong.
The "B List" includes the following:
- CPI. Inflation is not a matter of key concern - yet.
- Existing home sales (Th). Good read on the housing market,
but not as important for the economy as new sales.
I am not very interested in the Philly Fed, but it sometimes
gets attention if the move is big.
The Jackson Hole previews, interviews and first speeches will
dominate financial news at the end of the week.
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 remains bearish, but it is a very close call with little
conviction. Uncertainty remains high - typical for a trading range
market. This week we were only partially invested and ended only
with bonds. Inverse ETFs have positive ratings, but are still in
the penalty box. Felix remains cautious, but has not yet gone
Brett Steenbarger highlights
a long-term research study of day trading results. The good news is
that there is persistence among those who do well in the first year
of trading. The bad news is that the odds are terrible:
In other words, 87% of day traders in a given year lose money
after fees are taken into account. About .28%--one in 360--is
able to make money after fees year over year.
To be sure, that small group of very successful day traders
earns a significant return. After expenses, they average +28 bps
per day. Compare that to the 350,000 out of 360,000 daytraders
who average a daily loss of 5.7 bps per day after expenses.
In another post Dr. Brett also highlights the
relationship between skill at chess and trading
. In the Chicago
world we had some chess and backgammon players, but bridge players
had the best results.
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
Keep in mind this
market move interpretation
from Morgan Housel:
Stocks gained momentum on Monday, with the Dow Jones
Industrial Average closing up 48 points, reversing losses from
last week's decline.
Experts hailed both moves as a "remarkable, textbook example
of pure statistical chance," chalking up Monday's gains to a
couple random marginal buyers being slightly more motivated
than a few random marginal sellers.
"Imagine you pick 1 million random people from around the
world every day," said Toby McDade, chief investment officer of
Momentum Fee Capital Management. "Some days, 51% would be in a
good mood, 49% in a bad mood. The next day maybe it's the
opposite. Other days, random chance could mean 8% of people are
really pissed off for no real reason. This is basically what
the market is on a day-to-day basis," he said.
Asked what his clients thought of this view, Mr. McDade
laughed. "Oh my God, you think I could tell my clients that? How
could I justify my salary?" Clients were told Monday's gain was
caused by a mix of reversing geopolitical instability, shifting
uncertainty patterns, a risk-on atmosphere, and a perfect storm
of beta meeting sigma. None knew what those words meant.
And this …
Marc Faber appeared on TV predicting a 20% stock market crash
within the next six months, repeating a call he has made
bi-weekly since the Carter administration. Another pundit
explained that his last failed prediction would have been right
if only he hadn't been so wrong. Executives of financial TV
networks met to discuss why ratings are at decade lows.
The yield on 10-year Treasury bonds fell from 2.42% to 2.38%.
Nobody knows why.
I haven't quoted the funniest parts, so
check it out
Here are some key themes and the best investment posts we saw
. David Merkel has a very helpful post describing his favorite
research sources. He emphasizes those that are free, but also
shares those for which he is willing to pay.
Check it out
and compare with your own favorites.
. The media jumped on a story about George Soros taking a "huge"
bearish bet, as reported in his latest filings.
how the stories misinterpreted the data. If you missed it, you
might find it interesting. I suspect that regular readers of "A
Dash" have an instinctive suspicion about stories like this
. In a brief and well-reasoned post, Robert Seawright explains the
importance of disconfirmation in the inductive reasoning process.
Despite this significance people neither seek nor recognize
information that would disconfirm hypotheses. Try this little test
read the full post
My own worries
. While on the subject of evidence and disconfirmation, I made a
list of things that I was watching and what evidence would lead to
less optimism about equities. I published it
here as the Final Thought
, and I keep it in mind.
At a time when the bullish pundits seem to have one foot out the
door, Federated Investors' Stephen Auth is unabashedly bullish.
). S&P 2500? Possible in 18 months or so. That makes me look
like a piker with my
Dow 20K call from 2010
. Auth's reasoning rests on continuing economic growth and
defeating assorted worries, pretty much as I have argued:
Market valuations depend on growth, bond rates, and
perceptions of risk, and all three of those are going in the
direction that actually expands the price/earnings multiple. At
the same time, earnings are expanding, and that's a recipe for
another leg up in the market. In terms of economic expansion, we
have been stuck in this 2% growth range since 2008-09. But we
think something has happened and that animal spirits have
returned. We've had these sky-is-falling moments, and every time
we get through one of them, more and more people come out of
their caves and say, "Maybe the sky is not really going to
Do stocks look attractive at these levels?
They are not dirt cheap, like they were at the first leg of
the bull market. But they are inexpensive, relative to all the
other alternatives, and that's not a bad situation, considering
that the fundamentals are quite good. Longer-term, say 18 months
to two years out, we see the S&P 500 getting to 2500-about
30% higher than where it is now. We've been telling people to
position themselves for a secular run in equities, because the
economy has several years of expansion ahead of it.
One big call
. Josh Brown
discusses the results
of those who "called the crash." He also puts it in historical
perspective. What we are seeing is just like those who made one big
Some have been uselessly frittering away the benefit of their
having side-stepped the market's decline in 2008 by repeatedly
long, short, in, out
calls that have chopped up their acolytes for more than half a
decade since. Others have called for more and more crashes that
simply haven't materialized, keeping their readers on the
sidelines for one of the top five bull markets in history. And
still others have opened hedge funds, advisories and timing
services that have, to put it politely, sucked.
Almost all of the people who became household names as a
result of having "seen it coming" in 2006 and 2007 have pretty
much spent the post-crash period flailing.
Bad memories linger
. On a similar theme,
Barry Ritholtz describes
the continuing effect of psychology from big crashes. Mark Hulbert
joins in with an
analysis of market timers
It is hard to decide when the stock market has peaked and it
is time to get out. It may be even harder to know when the damage
is over and it is time to get back in.
But pulling off both in succession is exceedingly rare.
The average investor does worse with market timing than the
results from holding cash - or almost any other asset! (Via
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
The chief distinction between the viewpoints I described as
"traders" and "academics" (and I have been a member of both) seems
to be a confusion between personal preferences and reality. That is
why my terms are wrong.
The best traders I have known had no opinion. The worst
academics were on a political mission
. I try to find the best elements of each viewpoint. On this
occasion, I am betting that Fed expert Tim Duy's prediction is on
target. I expect the Fed to reaffirm the very gradual path toward
interest rate increases. The key issue will be labor force
dynamics. Economic skeptics have made a major issue out of the
level of labor force participation. It is now a topic on everyone's
agenda. Can participation rebound significantly? The answer is
important to our evaluation about how much employment slack
I also expect a story that has gotten little play so far. Even
as the Fed prepares to unwind, Europe and Japan are increasing
their own QE variants. Emerging market leaders are pondering the
possible effects. The consequences of these policies will get
plenty of attention.
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
Australia 200: Surges To New Multi-Year High Above