To the surprise of many observers, stocks have survived a series
of recent challenges. As Q214 earnings reports starts begin, the
questions has changed:
Can strong corporate earnings spark a renewed rally in
Prior Theme Recap
Two weeks ago
that speculation about a market correction would dominate the time
before earnings season began. This proved to be accurate,
especially when assorted news items were linked to a market decline
of more than 50 bps. It does not take much these days to get the
financial media excited, e.g. The Dow is
down triple digits!!
Whoever happens to be on TV at the moment is asked to "explain" the
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.
This Week's Theme
The stock market has successfully shrugged off a series of
recent challenges, including the following:
- A Portuguese banking "crisis";
- A front-page New York Times story explaining that all
investments are "expensive";
- A streak of weak economic data;
- A series of geo-political concerns - Ukraine, Iraq, and
- Some advice on stocks from Fed Chair Janet Yellen. (See
Steven Russolillo's WSJ piece
Neil Irwin at The Upshot
to get some grounding on this issue!)
Doug Short always
captures the week
in a single great chart. This one shows the resilience last
The chart would be even more dramatic if it included overnight
futures trading on Thursday. Those of us sneaking a peek or two in
the wee hours noted that futures were down "triple digits" on the
Dow. More on that subject in this week's Final Thought.
After surviving these various tests, it may be time to consider
the upside. Will earnings growth be enough to propel stocks
Barron's cites "
earnings based optimism
" as the source of strength.
Eddy Elfenbein notes
that estimates have come down less than we usually see, and also
warns about the deviations in various earnings sources.
Eddy's observation and also notes that we are seeing some revenue
beats as well this quarter.
I am not seeing major sources projecting that earnings will be
poor, but feel free to highlight such forecasts in the comments. I
have some final thoughts, as usual, but focused more on world
events than earnings.
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 important good news last week.
Yellen's Congressional testimony
was market-friendly. Reassuring and no missteps. Whether or not
you agree with the plan, investors should take it for what it is.
four good takes
on the story.
Health care spending
cost forecasts are improving. The non-partisan CBO shows health
care taking a lower share of GDP than projected a few years ago.
Health policy remains a hot-button political issue. Everyone on
all sides is either assigning blame or taking credit. As
investors, we should be interested in facts - especially if
worried about the budget deficit.
at Vox reviews data from a Brookings study. Here is a key
The CBO still sees the "
risk of a fiscal crisis
" without policy changes.
The important economic news last week was mostly negative.
Industrial production missed expectations.
Growth of 0.2% is disappointing.
will cost the US $20 billion in the next decade unless there is
Housing data missed badly.
This included both housing starts and building permits.
Calculated Risk is our favorite source on housing. Bill
acknowledges the miss
, but still sees the single-family data as consistent with his
"broad bottom" thesis. To be fair, this has been his viewpoint
for many months. He has plenty of good charts, but let's focus on
the bad news from this month:
(click to enlarge)
The ongoing conflicts and resulting death and injuries. Whether
terrorism or war, the issues seem intractable.
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 John Lounsbury at Econintersect for
his careful and educational
analysis of Japanese machinery orders
. Your favorite doomer site (a happy hunting ground for those
seeking to win the Silver Bullet) garnered plenty of attention and
page views with the "Japocalypse" headline. It is so easy to take a
volatile data series and pick a single point out of context. It is
especially effective when many see Japan as a good analogy for
issues in the US.
John Lounsbury looks at the complete data history, showing both
the raw data reports as well as long and short-term trends. His
charts tell the whole story, but here is the key summary:
Whether the May readings have any special significance or not
will not be known at least until the June data is reported, and
probably not known with any certainty until at least three more
months are on the books.
In the meantime, terms like "Japocalypse" can be put back on
the shelf (under a dust cover) in case they are actually needed
later when the long-term wild up and down swings in new machinery
orders are ended with an extended move to the downside.
For another side of John, read his post on
employer discrimination against Republicans
. (If you have any questions about this one, please check the end
of this article).
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
: 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. We included Doug's chart of the Big
Four last week, but data devotees should check it whenever there is
a big release. It has now been
updated for the employment data
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
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.
Association of Business Economists survey
puts the odds of a recession in 2014 or 2015 at less than 10%
(looking farther into the future than we find comfortable). They
also see the date of the first Fed rate hike coming sooner.
The Week Ahead
We have a moderate week for economic data.
The "A List" includes the following:
- Initial jobless claims (Th). The best concurrent news on
- CPI ((
)). Real concern about inflation is still not imminent, but the
recent increase has attracted more attention and comment.
Remember that the Fed is seeking an increase and also uses the
PCE, which is still benign. If the measures diverge, it will
become controversial, so I am promoting this to the "A
- New home sales (Th). Important driver of economic
The "B List" includes the following:
- Existing home sales. Less economic significance than new home
sales, but still a good concurrent read on housing.
- Durable goods ((
)). Bounce back in June data expected.
Earnings stories will dominate.
Events in any of the world hot spots could also command
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 neutral with confidence reduced. Uncertainty
remains high - typical for a trading range market. This week we
were only partially invested in one or two of the top sectors for
our trading accounts. That remains our position going into the week
ahead, although some of the strength is outside of the US.
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 still did not provide the "dip to buy" sought by so
many. The gentle upward action is fine for long-term investors and
excellent for those trying out our Enhanced Yield approach. We
added positions in stocks that represented good value with solid
income from call premiums.
Here are some key themes and the best investment posts we saw
Worried about a market top?
Josh Brown provides
a short lesson about market tops
, comparing key points from the current situation with 2000 and
2007. As he often does, he hits the most important element of the
difference, low interest rates and resulting private growth.
also has a column showing the huge extremes of investor behavior at
market tops and bottoms. (Summary: We are not close yet).
Some of our holdings have hit their price targets. Unlike some Wall
Street analysts we adjust these regularly, not just when they are
hit! This means we are always on the lookout for ideas. It is fine
to do screening, but sometimes the quantitative rules do not tell
the whole story. Here are two sources with some stocks worth
considering. Do your own research, as we do.
Morgan Stanley - via Elena Holodny at Business Insider -
ideas for the next 12 months
Larry Robbins of Glenview Capital
discussed holdings at ideas
at the Delivering Alpha conference.
the role of bonds in adjusting your overall volatility. He
illustrates with helpful data from Morningstar. I strongly agree
with the idea of understanding and limiting risk. We use both our
Bond Ladder and our Enhanced Yield programs to generate some return
from the safer parts of the portfolio.
Read about an
FBI Pump-and-Dump scam
to learn the signs.
Richard Bernstein Advisors (HT reader CS) has an interesting
explanation for the high equity risk premium: uncertainty on the
part of investors and corporations. He has
data and charts to prove his point
, concluding as follows:
RBA's corporate motto is Uncertainty = OpportunitySM.
Certainty implies risks not anticipated, and potential
disappointment. Uncertainty, however, often suggests higher-
than-normal risk premiums and investment opportunity.
A broad swath of data, whether focused on investors or
corporations, continues to suggest meaningful uncertainty.
Accordingly, we continue to believe this may be an elongated
cycle that still offers unrecognized investment
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
I expect next week's theme to be earnings, but given current
events it is also important to consider world events and risk. Josh
Brown, after expressing concern for those suffering casualties,
takes the role of the professional investment manager,
writing as follows
Suffice it to say that there is never any more or any less
risk of geopolitical threat in the world - there are only changes
in perception and the attention paid to the various threats, new
and old, that have been with us since the dawn of time.
The notion that there is more uncertainty now than there was
last month because of a plane being shot down in the Ukraine or
an Israeli incursion into Gaza is both childish and ahistorical.
Just because we choose not to be concerned with uncertainty at a
given moment - like on September 10th, 2001 for example - that
doesn't mean an outbreak of violence or hostility is any less
likely to occur.
So what we're discussing here now is not a rise in uncertainty
but a rise in the awareness of that uncertainty
and its subsequent effect on stock prices.
This is very good advice for the average investor, but let me
add a few thoughts.
- Many big world changes - end of the cold war, trade
expansion, etc. - take longer and provide a longer recognition
period. Cam Hui, who has recently been cautious, asks if this is
a modern Archduke Ferdinand. Good question!
Read his post
- Some events do provide new information. You need to know what
to watch. In the current crises that meant chances for a direct
military conflict between Russia and Europe or the US, sanctions
on Russia that would affect the world economy, something in any
conflict that would further increase
- If you know what to watch for, you wake up during the night
and check news. For most investors, the specific news would not
- Knee-jerk reactions are usually wrong. Investors who sold on
Thursday probably did not get back in on Friday.
And most importantly --
If you were frightened about your investments last week, your
stock positions are too big
. You cannot react logically and effectively if you are paralyzed
[Final notes - The John Lounsbury piece on discrimination
against Republicans is satire - a clever way to show the potential
confusion between correlation and causation. I trust that most
readers of "A Dash" did not need this help, but sometimes the
political agenda gets in the way of clear thinking.
I will probably not write WTWA next weekend, but I hope to do
some interim posting.]
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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