In a holiday-shortened week, there is plenty of data. The
Case-Shiller home-price index will set the tone on Tuesday morning.
After last week's soft housing reports, many will be asking, "
Will housing weakness undermine economic growth?
Prior Theme Recap
a focus on bonds versus stocks. It was a light week for data and
the bond market rally was an ongoing mystery. That theme was as
good as any, but nothing really stood out. The appetite for content
created many "fluff" pieces and trading was very quiet.
As long as you did not take small moves seriously, there was an
opportunity to do some buying at mid-week.
Forecasting the theme is an exercise in planning and being
prepared. Readers are invited to play along with the "theme
forecast." I spend a lot of time on it each week. It helps to
prepare your game plan for the week ahead, and it is not as easy as
you might think.
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
Has the housing recovery stalled out? If so, what does it mean
for the economy?
Here are some perspectives:
- Housing is a leading component. It is not responding to
interest rates as expected, and those good times may be ending. (
New Deal Democrat
- Nearly ten million Americans have underwater mortgages. These
are concentrated in low-priced homes (30%). Some of the least
expensive homes were purchased by investors and are now rental
properties. This leads to poor prospects for entry-level buyers
and also interferes with those wanting to "move up." Many others
lack real equity that allows them to trade up or trade to move to
a new job. (Various accounts of the Zillow story. See
Erin Carlyle of Forbes
- Home affordability is challenging, especially given sluggish
income growth. (
- Big investors are betting against housing. Bill Miller
- Expect sideways movement and gradual progress. (
It all seems pretty negative.
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 little news, but it was mostly good.
are looking strong, up seven percent
according to private research firms
in a strong spring selling season.
Forward earnings estimates
rose for the sixth consecutive week. (
Via Brian Gilmartin
Leading economic indicators
rose 0.4%, beating expectations. Doug Short has a
. This chart (typical of his skill in bringing data to life)
tells the story:
(click to enlarge)
(click to enlarge)
- New home sales beat expectations, but this is a noisy series.
I am scoring this as "good" on the monthly improvement and the
market reaction, but it is a close call.
Calculated Risk notes
that the first four months of 2014 are down 2.6% from last year.
John Lounsbury and Steven Hansen
reach a similar conclusion, after viewing the data in various
There was a little bad news as well.
Immigration reform is stalled again.
Nearly all of the economic studies show the benefit of more
immigration and also reassure that immigrant labor is a
complement to native-born workers.
is from a liberal source, but many conservative leaders (former
Speaker Dennis Hastert, for example) take a similar position.
This is one of many economic issues that has become
increased by 28K, worse than expectations.
Existing home sales
missed growth expectations.
Tensions between Russia and Ukraine
of Franklin Templeton Investments discusses the sanctions and the
Penny stocks, a market that is once again seeing a lot of
SEC is acting
against the worst frauds. Cody Willard often warns investors at
about these dangers (
especially in pot stocks
), hearkening back to his
excellent 2011 article
If you missed the
video interviews with NYU
grads about Janet Yellen's commencement speech, take a minute for a
few chuckles. While some have a general idea of who she is, others
were wondering and would have preferred a different choice. (Tina
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 there
was no award. This week I have two great candidates. I'll save one
for our next installment.
This week's award goes to Barry Ritholtz for
The Truth About Auto Sales
on the same theme. When things get a little slow on the bad news
front, some sources are happy to recycle old stories as if they
were current. I wonder how many readers looked carefully at the
pictures of the cars.
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
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
: 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.
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.
Blaine Rollins at 361 Capital
always has some interesting ideas, with good charts and data. This
week he cites an analysis from JPMorgan comparing current
conditions to past market peaks - quite different!
The Week Ahead
We have a lot of data stuffed into a short week. Here is what to
The "A List" includes the following:
- Initial jobless claims (Th). Best concurrent read on
- Michigan sentiment ((
)). Information on spending and employment that you cannot get
- Personal income and spending. April data. Important read on
the consumer and the economy.
- Durable goods ((
)). April data, but a component for GDP.
The "B List" includes the following:
- PCE prices. This is the inflation indicator the Fed watches.
Whether or not you agree with this choice, you should pay
- Pending home sales (Th). All things housing are of great
- Chicago PMI. I do not place much emphasis on regional
results, but this one is a good predictor of the national ISM
index - a major indicator. I am especially interested when a
weekend separates the two releases.
- GDP second estimate. Everyone knows this will be very weak,
possibly a decline of 0.5%. As usual with GDP releases, we are so
far into the next quarter that interest will be modest. It does
provide the baseline, showing how weak things were at the start
of the year.
- Case-Shiller home prices. This index has the brand name
value, but is actually a bit slower to pick up changes. Expect
the Professor to do some interviews with a worried look and a
Ukraine remains a wild card. There will be a little FedSpeak but
possible hints about ECB policy
from a European conference. Negative rates in store? I don't care
much about the regional Fed surveys.
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 lost enthusiasm for the market. Few choices in our ETF
universe qualified as fresh buys. (We use a rating of 20 or higher
and exclude sectors in the penalty box). The broad market ETFs look
a little worse than last week. The overall picture is neutral -
with the Qs (
) slightly positive and the Russell 2000 (
) slightly negative. We are still fully invested for Felix trading
accounts, but the ratings are marginal holds. We will probably have
reduced positions and might even be completely out by next week
unless there is some improvement.
Those who want to follow Felix more closely can check us out at
, where he makes a daily appearance to join in vigorous discussions
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
We had enough volatility to do some additional buying, replacing
some enhanced yield positions lost at options expiration.
Those trying out our Enhanced Yield approach should have enjoyed
yet another good week in a sideways market.
Bespoke illustrates this
in the current market:
The time decay in last week's slow trading was dramatic but
rather predictable. It is always satisfying to make money when
nothing is happening. To do so it is important and helpful to own
value stocks that pay dividends and add some hedging via short
calls. I have written several times about examples that you can try
on your own. It reduces your risk. Start small and get the sense of
how to do it. This week on
I responded to a reader question about [[IBM]]. I explained that I
traded it versus the JUN 190 calls. This has been a rinse, lather,
repeat position for us. The stock does not seem explosive to the
upside. We have collected dividends and call premiums and played
the trading range. Today the stock moved a little higher while the
calls actually declined in anticipation of the long weekend. You
won't read that in any book about option deltas!
Here are some key themes and the best investment posts we saw
Summer melt-up? I am not necessarily predicting this, but we all
need some balance in our reading. It seems like the pundits and the
media are very negative. The emphasis on top-calling makes the
risk/reward seem out of balance. The source expects a final surge
and then does the obligatory crash prediction. Sheesh! (
BAML via Business Insider
Time to avoid small caps? The noisy sources emphasize the dire
implications of the small cap weakness. Our programs hold these
stocks only in our "Aggressive Program" and even then in small
allocations. The entire Russell 2000 is equal to about six stocks
in the S&P 500. There is big reward, but also big risk. If you
are worried about risk, choose larger stocks. Here is a
showing the distinction between small and mid-caps.
Be careful with ETF choices and trading. Many investors treat
ETFs as a cheap substitute for mutual funds with the advantage of
more liquidity. There are some problems with that liquidity.
Sometimes the ETF holds illiquid holdings, preventing a fair
settlement price. On other occasions there are too many sellers
hitting the exits at the same time. I regularly trade in ETFs and I
am not warning against the entire asset class. You just need to use
caution in your choices and trade timing.
Tracy Alloway at the FT
has a good post on the subject.
Watch out for slick salesmen selling yield. Josh Brown already
warned you about brokers and incentives in his excellent book,
). Josh knows the pitch and shares it with the authenticity of an
insider. This time he flips it with a conversation you will NEVER
hear. I cannot do justice to this with a quote, so you need to read
Conclusion: Someone selling you an amazing yield is probably
exaggerating and collecting a big fee. Maybe you suspected
Want to know the most popular stocks owned by big hedge funds?
They must reveal the holdings and you can see the list in this
by Steven Russolillo of the WSJ
. Pretend that you are playing Family Feud and try to guess stocks
from the top 5. Answer at the end of the post.
Barry Ritholtz seems to have a new great theme each week in his
BloombergView column. This time he discusses risk, using odds of
death to provide an out-of-the box challenge to investors. We all
over-estimate the odds of dying from terrorism rather than mundane
causes like heart disease. The same story is true for investors who
exaggerate the odds of market crashes. Read the
Leon Cooperman, Chairman and CEO of Omega Advisors
spoke at Columbia Business School
. His chart-packed presentation illustrated the improved financial
situation for both households and businesses, as well as catalysts
for near-term action. Here is one of the many good charts, leading
to his conclusion that "treasuries and corporate bonds are
uninteresting and unattractive."
If you are obsessed 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
I was surprised at the traction from the Zillow story about
underwater mortgages. Everyone's focus was on the 18.8% rate with
little comment that this is much better than the 31.4% rate from
only two years ago.
The stories also characterize the market in terms of simple
stereotypes. This makes for a compelling story, but it is not good
economic analysis. Markets actually reflect a distribution of
participants with different price points and motives.
A real economic study would take note of a few factors:
- If 30% of low-cost homes are underwater, then 70% are not. It
reduces the supply, but does not end it.
- Many homes are still purchased without 20% down via mortgage
- If low-cost existing homes are in short supply, builders can
provide new ones. (
And they are
- If there is real demand for low-cost homes, those purchased
for investments can be offered for sale.
To summarize, if you view housing as a market instead of a few
stereotypes, it is easier to see how some progress could be
possible, progress that includes new construction. Economic growth
would be better if we simply had some relief from the housing
"drag" of the last several years.
Top Hedge Fund Stocks
Top five include Google (
), Apple (AAPL), General Motors (GM), American International Group
(AIG), and Time Warner Cable (TWC). How many did you guess? How
many do you own?
I am long IBM versus short IBM calls. I wrote this article myself,
and it expresses my own opinions. I am not receiving compensation
for it. I have no business relationship with any company whose
stock is mentioned in this article.
The Government Confirms Slower Long Term Economic