With the official end to summer, there are many topics for
sunburned vacationers to consider as they settle in to their desks
and boardrooms on Tuesday. Economic data has been mixed, but with a
positive tilt. We learned the latest ideas from central bankers.
There are assorted crises around the world. Somehow, in spite of it
all, stocks showed a strong gain for August.
I expect the main topic from this will be the economic focus and
Fed reaction. I expect financial media to be asking:
What does the job picture mean - for the economy, financial
markets, and the Fed?
Prior Theme Recap
In my last WTWA
that the news would focus on central bankers unwinding. That was
indeed the dominant story, in spite of competing world events, but
we got precious little new information. There will be some carry
over from this theme in the week ahead.
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 enjoyed meeting some readers and making new friends during
San Francisco Money Show
. As I warned before the trip, there was too much going on for me
to write my regular weekly update. My stay ended with a wee-hours
wake-up from the earthquake. You can really feel the effects when
on the 17th floor of a hotel! Locals were joking the next morning,
perhaps because the injuries and damage were mild given the size of
the quake (biggest since 1987).
I plan to lay out some of the themes from my presentation in
future posts, but it has been hectic catching up after the trip.
More on that to come.
This Week's Theme
In the holiday-shortened week ahead we have an avalanche of
economic data and crises from around the world. Many different
topics could command attention. Out of these choices, I expect
special attention on employment data - more so than ever. Why?
The Jackson Hole Fed Symposium highlighted the continuing
importance of the employment situation. Here are the key questions
about economic growth:
Are the job gains enough to sustain (or improve?) the rate of
economic growth? Looking beyond the gross numbers, is there enough
improvement in full-time jobs? Is the quality of employment
Even if that hurdle is surmounted, there is the question of
labor market slack. How much room is there to stimulate job
creation without sparking inflation?
Fed Chair Yellen believes that better employment prospects will
improve labor force participation, keeping wage pressures low. This
is a "cyclical" view of the labor force participation decline. Only
after the participation rate improves, will there be a need to
consider emphasizing the Fed's inflation goal rather than
The alternative viewpoint, laid out thoroughly in this week's
Barron's Cover story,
Work's for Squares,
emphasizes structural causes. The argument focuses on those of
prime working age, where the high post-WWII rates have been
followed both by periods of decline and stability.
(click to enlarge)
While there are many possible causes, one intriguing factor is
the growth in disability. The causes are not the old-fashioned work
injuries; in fact, the workplace is safer. Someone on disability
does not get much income, but does (after a wait) receive Medicare.
This is a financial disincentive for returning to work.
(click to enlarge)
The article provides a good summary of data from various
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 important good news.
Q3 Growth on Track for 3%.
Atlanta Fed's Macroblog
provides evidence for this early and tentative conclusion.
Durable goods orders showed record growth.
Scott Grannis understands that it was mostly about aircraft. He
suggests that it shows strong confidence in travel. See his
charts and analysis
Consumer confidence hit a new high
Doug Short has the story
on the Conference Board version, the Michigan version, and
historical context for both.
Ed Yardeni highlights
the importance for the economy. Here is a key chart:
(click to enlarge)
There was also some negative news.
Durable goods orders ex-transportation disappointed.
Looking beyond the headline surge, many analysts immediately
noted that aircraft orders were the whole story. Doug Short has a
more comprehensive analysis
, adjusting both for population and inflation in considering the
The Russian Economy is in Trouble.
The Forbes story from Kenneth Rapoza lays out the problems. I am
scoring this as "bad" because of the effects on the European
economy. It is, of course, the intended result of the
has spiked again -- a contrarian indicator. Bespoke has the full
analysis including this chart:
Personal income and spending
missed expectations. This is a blow to hopes for better economic
Steven Hansen explores this angle
while looking at some history.
New home sales declined.
Calculated Risk notes that the data were OK if the revisions to
prior months are included. (Analysis and charts
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.
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 (almost three years after their recession
call), you should be reading this carefully. Doug includes the most
recent ECRI discussion, which has been consistently bearish,
despite 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
The Week Ahead
We have a big week for economic data and events.
The "A List" includes the following:
- Employment situation report ((
)). The most widely followed, despite the many angles and
- ISM Index ((
)). Good concurrent gauge of activity and employment in
- Beige book ((W)). Anecdotal reports that will provide
background color at the next Fed meeting.
- Initial jobless claims (Th). The best concurrent news on
The "B List" includes the following:
- ISM Services (Th). A shorter series than the manufacturing
version, but a bigger slice of the economy.
- Auto sales. Truck sales reflect small business and
- ADP employment (Th). A good independent read on net job
- Trade balance (Th). Important element of GDP
- Construction spending. July data.
- Factory orders. July data, but an important economic
Fed participants are back on the speaking circuit. Did you miss
Breaking news from Ukraine is also likely, but nearly impossible
to handicap on a short-term basis.
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 switched to bullish last week and remains so. This had
little effect on our trading accounts since nearly everything is in
the penalty box. Uncertainty remains high - typical for a trading
range market. Inverse ETFs were highly rated during this cycle but
remained in the penalty box. This mean that Felix went to cash for
a bit and also held bonds, but did not go short. The broad market
ETFs are once again positive.
I frequently hear from young people looking for a trading job.
Brett Steenbarger --- PhD psychologist, author, trading coach,
hedge fund consultant - is a great source for traders on all
advice for those seeking trading jobs
is first-rate: It is more than passion and desire! He provides some
specifics on what to do and what to avoid, including how to build
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.
We continue to use market volatility to pick up stocks on our
shopping list. We do this because we also sell positions when they
reach our (constantly updated) price targets. Being a long-term
investor is not the same as "buy and hold."
Here is our collection of great advice for this week:
The real "smart money" is looking past the obvious worries. The
headlines and financial TV emphasize the scary stuff for the
obvious reasons. Blackstone Advisor
Byron Wein reports
on a series of lunches he hosted, something he does every year.
This is a good item to bookmark and review later as an example of
how experienced investors use the "wall of worry."
Many of the participants are well known and a number are
billionaires. There are hedge fund managers, corporate leaders,
activists, buyout specialists, real estate titans, private equity
folk and venture capitalists, providing some diversity in terms
of their daily activity. I am adding newcomers to lower the
average age. The group was correctly positive during the past two
summer sessions, so I was curious to see if their mood had
changed with so much unrest around the world.
The answer is that the investors almost universally believed
that all of the threatening geopolitical problems would somehow
work themselves out favorably without significantly disturbing
the United States economy or its financial markets.
"Google never forgets"
writes Barry Ritholtz
. The subject was CNBC's feature of David Tice making (yet another)
crash prediction. Barry notes his past history of such calls and
the performance of his Prudent Bear fund.
I was delighted to get an email from a reader on this same
theme. He pointed out the CNBC/Yahoo story citing two "experts" who
were predicting a 60% crash. He did his research on both Tice and
Abigail Doolittle discovering their past records. This reader is a
former scientist who is amazed that the financial world does not
provide accountability for cited sources. In the absence of a
dramatic change in media behavior, only constant reminders will
help people understand "that we are essentially just viewing or
reading a more dangerous version of the National Enquirer."
Google never forgets, but it should not be the responsibility of
each reader to check every source.
Vitaliy Katsenelson has a good tale
on an important subject for investors --- confirmation bias. He
explains how to make the best use of sources where you disagree
with the conclusions.
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.
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
Is the decline in labor force participation structural or
cyclical? I certainly cannot answer that question in the context of
our weekly focus post, but I can suggest how to think about the
- Nothing in the Barron's article would be a surprise to the
Fed's economists. They have looked at the data and reached a
- There is a little truth in both arguments. Some who lost jobs
have simply retired early. Others are restricted by underwater
mortgages. Those who have taken temporary jobs or gone to school
will react to a better job market.
- This means that we should see at least some rebound in
participation before wages really take off. As is the case with
most economic arguments, changes do not come from flipping a
There is another important implication of this debate - one that
we will see repeated for the next two or three years. Many have
argued that the lack of any wage growth is a sign of a weak
recovery and poor prospects for future consumption. If this finally
starts to change, you can expect many of these same sources to warn
about looming price increases.
It is more reasonable to expect an intervening period of
improved economic growth and better wages. The Fed may eventually
be too slow in changing course, but we'll still be raising that
question in a year or two.
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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