Into the economic news vacuum, summer doldrums, and sports
stories, there was finally some real news - the renewed conflict in
Iraq. This had all of the features that make for good financial
television and web punditry - action, plenty of people with
opinions and accusations, and the potential for a dark outcome.
Whether or not this is a big story, there was clearly a media
drive to make it one. My guess is that it will continue to lead for
the early part of the week ahead.
Prior Theme Recap
a focus on a rebound in volatility, with potential for an upside
breakout for stocks. I suggested that we should all "be prepared."
Sure enough, the quiet upside started the week, but lasted only two
days. I did not guess that the House Majority leader would lose his
primary race, sparking a round of instant-punditry on the future of
many policies. The expanding Iraq conflict also demonstrated what
can happen to markets in a low-volatility backdrop. Investment
strategist John Canally,
cited in Barron's
opined that the shock to energy markets would have had a big effect
thirty or forty years ago. It is less important for a service
economy. The same article notes that many market participants
confessed to watching the beautiful game during working hours.
Forecasting the theme is an exercise in planning and being
prepared. Readers are invited to play along. I work on it each week
because, it helps to prepare your game plan for the week ahead. It
is not as easy as you might think. Feel free to suggest your own
likely theme in the comments.
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.
This Week's Theme
The market discussion will start with a recap of events in Iraq,
with media sources milking the story as much as possible. By
mid-week the attention will probably shift to the Fed meeting and
the housing data.
I have covered the latter two topics quite thoroughly in recent
weeks, so I want to take a deeper look at the Iraq issue.
Here are some interesting perspectives.
- The breathless coverage from CNBC. I love the updates from
Art Cashin, which accurately reflect what floor traders are
thinking. Here is the sequence:
- Jim Cramer, with television in both morning and evening has
plenty of air time to fill. The general theme of the Cramer
warnings is that everyone remembers the stock declines associated
with prior Iraq conflicts.
- On Tuesday
Cramer was warning
about declines while also saying that most declines since 2009
have been buying opportunities.
- On Thursday night
Cramer advocated caution
, profit-taking, and sitting on cash.
- Jim Cramer, who has a lot of air time to fill,
opined on Friday morning
that oil would move to $120/barrel in a straight line.
- The 24/7 coverage from your favorite conspiracy and doomer
site. If you are determined to focus on what could possibly go
wrong and get some confirmation for your opinions, you know where
to go! The "analysis" there makes the CNBC stories seem wildly
- Focus on expansion of the conflict. Whether you watch CNN or
read the New York Times, The Washington Post, Politico, or The
Hill (all favorite sources here) you will understand that this is
not another round of major U.S. involvement
. A key question is whether Sunni tribal leaders
this particular insurgency.
- Potential effects on energy prices - maybe $15-20 per barrel
at the max. This is enough for a serious economic effect. Most of
the fighting (in the North) does not currently threaten reserves
or exports. (Good
overall analysis at MarketWatch
- Many factors limit the impact on
, including production slack. (Helpful
story at Yahoo Finance
- Stocks are
likely to suffer a major decline
from the Iraq crisis. The chief investment officer of the Gabelli
Funds thinks that the story will be with us for some time, but
expects another 7.7% upside this year for stocks.
Which of these viewpoints is correct? I track them all as part
of the job, but you need not. As usual, I have some thoughts that I
will share in the conclusion. 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 encouraging news.
Short interest is higher
and that usually leads to market gains. (
Job openings increased
by almost 10% to 4.45 million. This was the positive aspect of
the JOLTS report. (See below for the negative on quit
Small business optimism is surging
. I do not usually emphasize the NFIB results. As a small
businessman and board member for two other small companies, I
understand the frustration with regulation and policies that seem
to stall growth. The NFIB statements express this viewpoint, and
attitudes plunged with Obama's election. It is interesting to
note the improvement (
via the WSJ
also has a great chart and a table of business concerns.
PPI declined by 0.2%.
Ostensibly this is good, but some take any decline as a sign of
economic weakness. The market had little reaction.
Rail shipments surge
Simon Constable notes
the correlation with industrial production, including this
(click to enlarge)
The economic news was slightly negative for the week.
The "quit rate"
from the JOLTS report
showed no change
. Job openings are a bit higher. Most people would be surprised
to learn that almost 2.5 million people voluntarily quit their
jobs last month, but it is not an improvement.
World Bank cut the growth forecast
for 2014 to 2.8% from the prior 3.2%. In a sense this is old
news, since it is reflecting Q1, but it is still discouraging. (
Retail sales growth
disappointed - only 0.3% after some good private data. The
ex-auto results were also soft.
See Calculated Risk
for analysis and charts, including this one:
(click to enlarge)
Oil prices spiked
. Gasoline prices have been stable, but will probably soon follow
the oil price increase.
New Deal Democrat has the story
on this, along with his regular collection of high-frequency
indicators. While the gas prices are a negative, he is looking
for strength in Q2 GDP.
Bullish sentiment is spiking
. Normally we treat this as a contrarian negative.
Bespoke has this story
as well as the chart (below). The
AAII has their own study
. It is a bit long for most readers, but it is worth the time for
those who like to follow sentiment. The gist is that most studies
incorrectly include some hindsight in the analysis of past data.
If you use only data available at the time, the contrarian
interpretation is not very persuasive. High neutral readings are
actually encouraging for stocks and bullish readings not much of
remains discouraging, missing expectations at 81.2.
There is plenty of ugly news in the world, but I wanted to enjoy
Father's Day without dwelling on the negative. I miss my Dad. I
wrote about him
six years ago in this signature family story about a young sailor.
It has plenty of insight for investors, which I tried to explain. I
hope to enjoy tomorrow with my son, and I am sure that we'll
remember his grandfathers as well.
The Big Question for This Week
The Fed has not managed to satisfy markets when it comes to
communication. Fed Chair Yellen was the communications guru before
assuming the lead. The problem is that traders want a clear,
unambiguous message. They frequently respond as if each Fed speaker
was on a mission to add nuance to the latest official
Unlike those of us who have worked in non-business
organizations, the market types are uncomfortable with debate,
dissent, and nuance. The decision is not Yellen's, although she has
special influence from her leadership. It is the vote of a
committee. There are also non-voting members. Even when the vote is
unanimous, the opinions vary. In an effort to improve
communications, the Fed is sharing the projections of each
participant. Markets seem to be focusing on this rather than the
result of the voting process. Thomas Simons of Jefferies (
cited at MarketWatch
) has taken the public statements of Fed members and constructed
chart for those who want to score at home:
(click to enlarge)
If there is a deviation between the "dot plot" and the official
summary, we can expect a repeat of the "taper is tightening" market
fuss from a year ago.
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
Bill McBride of Calculated Risk
. There is a lot of debate about labor force participation and also
many misconceptions. My friend and fellow Michigan man Dean Baker
is an expert economist on labor markets, and
that the decline in prime-age workers shows weakness in labor
Bill responds by looking at the trend for this age group, noting
that a researcher in 2000 might well have predicted today's
participation rate. This implies reasons other than economic
weakness, including stay-at-home dads. I will be interested in
whether Dean has a response.
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
: A variety of strong quantitative indicators for both economic and
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.
: 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. He compares their "consistent"
forecast with the spread of conclusions from mainstream economists
in the most recent WSJ survey. I always encourage reading this
summary, but I find this one surprising for three reasons:
- It seems rather obvious that a group report will have a wider
range than that of a single source;
- Doug produces no evidence that any single member of the panel
has been inconsistent; and
- Inaccurate consistency is not a virtue.
Doug does not mention whether he expects GDP for Q2 GDP to
follow the ECRI prediction of that of about 35 of the economics
panel who are looking for something between 3 and 4%. Here is the
chart in question:
Doug also has the
best continuing update
of the most important factors to the NBER when they analyze
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
Jan Hatzius made important news. The inimitable "Stalwart" Joe
Weisenthal says it is the
Call We've Been Waiting 5 Years to Hear
. Hatzius believes that growth will now be back above trend. Joel
quotes him as follows:
Despite the 1% drop in real GDP in the first quarter,
we believe that the US economy is now growing at an
. The best way to see this is via our current activity indicator
((CAI)), which grew at an annualized rate of 3.4% in May, similar
to the average of the prior two months. Although an estimated ½
percentage point of this sequential growth is due to a bounceback
from the weather distortions of the first quarter, even the
year-on-year CAI now stands at 2.7%, the fastest pace of the
expansion so far and above our estimate of potential growth of
2%-2½%. In our view, the CAI is a far more reliable indicator of
economic activity than real GDP because it is more timely, more
broadly based, less noisy, and less subject to revision.
Hatzius also cites housing as one of the key drivers of
Readers should also note that he was cited by Nate Silver as the
economist who got the Great Recession called right, and for the
right reason. This is important to keep in mind as we learn more
news about how bad things were in Q1. I am seeing revisions taking
Q1 GDP down as low as -2.0%.
Binyamin Applebaum of the NYT
presents an alternative viewpoint
, featuring George Mason economist Tyler Cowen. His research,
supported by a growing group of economists, suggests that a lower
long-term growth rate is in prospect. There are many sources in the
comprehensive article - well worth reading. The darkest viewpoint
comes from two Brown economists who are concerned about a
The Week Ahead
We have an active week for economic news and data.
The "A List" includes the following:
- FOMC rate decision (W). Taper by the expected $10 B or a
little more? Continuing debate over how to interpret the group
- Initial jobless claims (Th). Best concurrent read on
- Leading indicators (Th). Remains a popular method.
- Housing starts and building permits ((
)). Any sign of a spring rebound. Watch single-family permits for
a leading indicator.
The "B List" includes the following:
- Industrial production ((
)). A read on Q2 GDP after some seasonal fluctuation.
- CPI. Eventually this will be interesting, but currently
remaining in a narrow range.
FedSpeak will be limited to the official variety because of the
FOMC meeting. The regional Fed surveys are not very important
unless there is a very large move. Iraq and related news will
dominate, unless there are clear signs of stability.
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 sees even more opportunities -- fresh buys in the ETF
universe, as more sectors emerge from the penalty box. A high
penalty box level implies less than normal confidence in the
ratings. This week we were fully invested in three of the top
sectors for our trading accounts.
The overall call has become more bullish, after a few weeks of
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
The market did not provide much opportunity for fresh buys. The
gentle upward action is fine for long-term investors and excellent
for those trying out our Enhanced Yield approach.
Here are some key themes and the best investment posts we saw
10 Lessons Learned from Peter Lynch
is a great reminder story at Novel Investor. Jon pulls together
items from two of Lynch's books. I am picking the lesson that most
closely fits today's theme, but all of them are great.
Every day brings something different to worry about -
inflation, recession, depression, natural disaster, war, market
crash, and that bus when you cross the street. In the last 100
years, the market has seen it all and recovered. You can wait for
the sky to fall or you can invest knowing it will happen, you'll
get through it, and the market will too.
The post reminded me of a story from ten years ago, at the North
American Bridge Championship in Reno. One of my friends, a retired
investment professional, was walking along a corridor leading to
the game. A man walking next to her asked if she knew where to find
the partnership desk. (This is a place where people without a
partner or team can find someone with similar experience). She
replied that she did, but that she had no game herself. She said
that she would be delighted to play that afternoon. And that is how
my friend got to play bridge with Peter Lynch. It is amazing that
he was moving through the maze of clueless highly-focused bridge
players in relative anonymity. Bridge players are focused on
winning. It was at this tournament where my team beat Bill Gates in
a short match… but I am getting too far off course!
Beware of using the Dow ETF
for long-term investments. With only thirty stocks and based upon
price weighting, it does not capture an economy that has more
service and technology. Do you think that your "general market
investment" should be 8% in Visa (
Stock prices are consistent with economic fundamentals.
Ed Yardeni provides an
on his Fundamental Stock Market Indicator, which seems to work
better than many others!
(click to enlarge)
Investors have a low exposure to stocks, the lowest since 1959.
Another source (
cited in the NYT
) confirms the conclusion. One observer notes that fear is the
If it wasn't fear, there'd be a much different variation by
age," Ms. Duncan said. "Certain cohorts need more liquidity than
others. When you find consensus across age cohorts, you realize
it's not for liquidity needs but lack of trust across all age and
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.
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 resurgence of conflict in Iraq is a story with many
Most importantly, it raises questions about the prospects for
stability in a country torn by religious and ethnic divisions.
For the U.S., there are questions about foreign policy. Is it
wise to intervene in foreign civil wars? Does it matter if regional
stability is threatened? What if terrorist groups are involved? If
action is taken, should it mean
(which seem to find their way into the wrong hands)? Is there a
special responsibility in Iraq, given the history of U.S.
involvement? These are all difficult questions. While the answers
will seem obvious to many, the problem is that there really is no
The issue provides political ammunition just as the mid-term
elections are gearing up and the Presidential election (already)
getting plenty of play. Reputations and past decisions can and will
These issues are important to us as citizens and the election
angle is fun for political junkies.
This is the wrong attitude for investors! These are the times
when people are most tempted to confuse their opinions about
foreign policy and politics with the cool, unemotional decisions
about their investments.
Investors should focus on two things:
- The chance for an expansion of conflict beyond Iraq. So far
this seems pretty limited.
- The impact on energy prices. This could be a threat to global
economic growth, so it bears watching.
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
International Paper's Spin-Off And Its Subsequent
Merger Creates Veritiv, A Prime Short Candidate