By Jeff Miller :
The economic calendar is loaded and there is plenty of non-economic news as well. The punditry will focus on the Trump-Kim summit at the start of the week and then turn to inflation data and the Fed. Who knows what the first might bring, but the market is unlikely to be surprised by the Fed. By week's end the summer doldrums will provide time for some deeper analysis. I might be wrong about that, but I am trying to write about issues that I see as most important. The pundits might be (and should be) asking:
Is this a pivotal decision point for the individual investor?
Last Week Recap
In my last edition of WTWA I asked whether it was time to worry about a trade war. That was a good guess about the topic, since the continuing news about tariffs and retaliation kept the subject on the front burner. This continued through week's end as the President spoke before the G7 summit. The market reaction suggests that most agree with my assessment: It is a problem, but not an immediate problem.
The Story in One Chart
I always start my personal review of the week by looking at a great chart. I especially like the version updated each week by Jill Mislinski. She includes a lot of valuable information in a single visual. The full post has even more charts and analysis, including commentary on volume. Check it out.
The market rose 1.6%, and that was also the trading range for the week. I summarize actual and implied volatility each week in our Indicator Snapshot section below. Volatility is back into the long-term range.
After two years of calm and higher markets, some investors are concerned about this year's drawdowns. One of Jill's regular charts shows the history of drawdowns since the pre-recession closing high. As you can readily see, the pullbacks are quite normal, even in a rising market. I would add that the "explanations" for the declines often make little sense.
Noteworthy - Household Leverage and Social Security
Oftentimes stories about debt look at only one side of the balance sheet. A balanced approach also considers assets and the ability to repay. Scott Grannis provides a series of charts illustrating the deleveraging process since 2009. Leverage is now at a 30-year low. One problem, which he acknowledges, is that aggregate data may fail to represent the situation of average people. Most would be surprised, for example, to learn that "the average person is the U.S. today is worth about $308K….""
There was also plenty of buzz about the problems with government debt and Social Security. As I always have, I recognize these issues. Vote for those who are willing to compromise, since that is the path to a real solution. Meanwhile, you should not expect Social Security to disappear. ( Morningstar ). There are a range of solutions including relaxing immigration (immigrants pay SS taxes) and extending the age requirements for benefits. More at 5 Dangerous Myths about Social Security .
Each week I break down events into good and bad. For our purposes, "good" has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news - and you should, too!
The positive economic trends continue. New Deal Democrat's useful update of high-frequency indicators shows strength in the current and short-term leading indicators, but neutral readings for the long-term group.
- The trade balance for April was -$46.2B, beating expectations of -48.8 and the prior -47.2B.
- Truck tonnage and trucking employment shows an economy that is "pedal to the metal," reports Dr. Ed Yardeni . He also questions the recent contentions about a shortage of truckers.
- Hotel occupancy continues the record pace. ( Calculated Risk ).
- The ISM Services index registered 58.6, rebounding from a three-month losing streak. Bespoke has this story and a chart combining manufacturing and non-manufacturing.
- The JOLTS report showed a continuing solid trend and some new milestones. JOLTS expert and aficionado Nick Bunker notes that job openings now exceed the number of unemployed workers. He also reports that the Beveridge Curve is back to pre-recession territory.
- Factory orders declined 0.8% , worse than the expected -0.4% and much worse than the March's gain of 1.7%. This is another volatile series, even after seasonal adjustments. ( US Census data )
- Trade war retaliation from Mexico -- $3 billion in tariffs. Mexico is the second largest market for US exports. ( CNN Money )
- Auto sales are on a declining pace. Calculated Risk's Bill McBride expects continued sales at near-record levels but concludes that "the economic boost from increasing auto sales is over).
Suicides. The rate is rising across the country according to the Centers for Disease Control and Prevention ( CDC ). This week's report was coincidentally at the time of some high-profile stories. Suicide is the tenth leading cause of death overall, and the second-leading cause for those aged 15-24. There are 25 attempts for each death by suicide. ( Western Michigan ). The CDC link provides suggestions for pubic policy as well as what each of us can do to help those close to us.
The Silver Target
Thanks to everyone who commented on last week's chart. I recognized readers and posted my own views here . As a group, WTWA readers covered the key points. I am considering this as an occasional feature, so more suggestions are welcome.
The Week Ahead
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.
We have a big economic calendar, featuring inflation data and the FOMC rate decision. Later in the week we will see key economic reports on retail sales and industrial production. Expectations are positive for all, and the market is prepared for another interest rate increase. The result? We may not get much volatility from the economic news.
Geopolitical news is another matter. The aftermath of the G7 meeting will provide a new read on trade issues. The Trump-Kim summit on Tuesday (Monday night in the US) will receive live coverage on several networks. Meanwhile, the US has taken measures to avoid Chinese eavesdropping. Maybe they should just watch the news!
It could be a short program, since the President says he will know if something good is going to happen within the first minute.
Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.
Next Week's Theme
There is plenty of news on the calendar - economic reports, the FOMC, and the US/North Korean summit. I expect the punditry to move from topic to topic through the first part of the week, but there may not be much market reaction.
I try to anticipate themes and issues. Sometimes I have an idea in mind, and it also pops up in the news. This week, the pundit-in-chief had morning comments about the reaction to some earnings reports. He also had a fine segment on Mad Money, which I consider further in the Final Thought. The seminal idea is that the various economic and market forces have stretched some valuations and depressed others. For anyone paying attention, this represents a fine opportunity. People should be asking:
Is it time for a pivotal decision by individual investors?
This pressing question, unrecognized by many, has multiple levels.
- Exposure to stocks despite volatility, rhymes, and scary news headlines.
- Avoiding over-reaction to news headlines.
- Pretending that you will stick with an "all-weather" portfolio, when in your heart, you know the risk of buy-and-hold is too great.
- Chasing what worked last month or last year.
- A blind pursuit of yield, without regard to the underlying dangers.
- A short-term focus - investors trying to imitate traders.
- A failure to match your plan with your needs.
These are all crucial decisions. As usual, I'll offer my conclusions in today's Final Thought.
We follow some regular featured sources and the best other quant news from the week.
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards . I monitor many quantitative reports and highlight the best methods in this weekly update.
The Indicator Snapshot
Short-term trading conditions continue at favorable levels, much improved from the month-ago data.
Also noteworthy is the reduced volatility. Some investors were spooked out of their holdings by volatility earlier in the year. Even though levels were in line with historic norms, and even though volatility is not a leading indicator of declines, it was too much for some. Will those who sold when volatility was high change their minds with the change in data? This is one of the causes of "buy high, sell low" behavior.
The Featured Sources:
Bob Dieli : Business cycle analysis via the "C Score.
Georg Vrba : Business cycle indicator and market timing tools. None of Georg's indicators signal recession.
Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis.
Brian Gilmartin : All things earnings, for the overall market as well as many individual companies.
RecessionAlert : Strong quantitative indicators for both economic and market analysis. As of this week, Dwaine's leading indicators for the global economy now show some signs of a slowdown. Onley 34% of the 40 countries monitored have positive leading economic indicators. Since the indicators include sentiment data, they may reflect the trade war talk. He concludes that downward pressure on the US LEI is likely, but it "by no means implies a US recession…" S&P Global's chief economist, Paul Gruenwald, agrees with both the conclusion and the reasoning ( CNBC ).
David Templeton ( HORAN ) has an excellent warning about making recession inferences from a single chart. In this case, it was a type I have often complained about: If things are so good, something bad must be about to happen! David goes on to review several important indicators.
James Picerno covers a similar theme, emphasizing the need for a diversified set of business-cycle metrics. His current conditions look fine, but he stresses the need for constant monitoring.
Insight for Traders
Check out our weekly Stock Exchange post. We combine links to important posts about trading, themes of current interest, and ideas from our trading models. This week we asked fellow traders whether they started their day with a plan and how they determined the need for adjustments. As always, we featured suggestions from several leading experts. We also discussed some stock ideas and updated the ratings lists for Felix and Oscar, this week featuring the Dow stocks. Blue Harbinger is our editor for this information and ringleader for the group discussion.
As is often the case, there are lessons for investors as well as traders. Investors also need a plan of action and a plan for adjustment. They just use a different time frame.
Insight for Investors
Investors should have a long-term horizon. They can often exploit trading volatility.
Best of the Week
If I had to pick a single most important source for investors to read this week it would be-a tie! Chuck Carnevale keeps bringing it, article after article. It is difficult to choose a favorite. This week he highlights a possible turning point for dividend growth investors, writing:
After coming out of the true bear market inspired by the Great Recession, stocks have generally been enjoying a very strong and long-lasting bull market. Additionally, as interest rates have been in a steady freefall, high-quality dividend growth stocks have become investor favorites. Consequently, high-quality dividend growth stocks have for the most part become overvalued as a result.
…the fundamentals of virtually every company are constantly changing. To me this is simply another way of saying that fundamentals are dynamic. Individual companies will have good and bad quarters and good and bad years. Frankly, I have never witnessed any company that produced consistently perfect fundamental results….Consequently, valuations can become irrationally high or irrationally low when the stripes, so to speak, of the company have not materially changed.
Chuck's invaluable FAST Graphs analysis is the single best way to focus on what a company is really worth. You then have a foundation when you look at the current market price. In our fundamentally-based investment programs we never buy a stock without first checking FAST graphs. The ability to change assumptions to fit our approach is crucial. We can consider, in a few minutes, data that used to take days to compile.
So, read the post about Campbell Soup, but the story is far more important. And watch the video for a great lesson.
Discussing a similar theme is Rob Marstrand , in an interview with SA Marketplace . Read the entire piece for more about Rob as well as a deeper look at his rationale. Meanwhile, here is a key quotation from the interview:
The best time to buy anything is when it's cheap, whether it's socks or stocks. To me, this is blindingly obvious, but lots of people seem to ignore this basic truth. The cheaper a stock is - all other things being equal - the higher the chance of a profitable outcome and the lower the risk of a negative one.
The long-term prospects of established companies don't change much from year to year, even if short-term profits can swing about. Most of the value of any stock derives from many years… actually decades… into the future - which is something else I've written about. Hence, it's not a very big leap of logic to realise that you'll generally get the best results buying stocks that are near the ground floor, rather than those that are flying too close to the sun.
You can readily see the similarity to Chuck's approach, and why I wished to highlight both.
Individual investors seeking high-quality research on their stock holdings and ideas already use the many resources at Seeking Alpha. Just in case you are not following the Today's Editors' Picks series, take a look. You will find ideas that you would otherwise have missed.
Brian Gilmartin does his customary comprehensive analysis of Bed, Bath, and Beyond (NASDAQ: BBBY ). The stock has had a rough ride, leaving the valuation metrics "obscenely cheap." Be sure to read his entire analysis, including suggestions about stops.
Palo Alto Networks (NYSE: PANW )? Stone Fox Capital analyzes the conflicting signals in the stock, including the CEO transition.
Dollar Tree (NASDAQ: DLTR ) or Dollar General (NYSE: DG )? D. M. Martins Research looks at both ( here and here ).
FedEx (NYSE: FDX ) is a good idea for total return, concludes William Stamm .
Consumer staples? Hale Stewart looks at this out-of-favor sector.
Charlie Bilello writes, Buy and May and Stay Invested . You will enjoy the list of articles from the start of the month giving the rhyming advice instead. As he notes, "It is their job to entertain. It is your job to ignore…."
Seeking Alpha Senior Editor Gil Weinreich has expanded his excellent series for financial advisors (and serious individual investors) to include some podcasts. This week I especially enjoyed his post on contrarian investing. So many confuse being "contrary" with a reasoned contrarian approach. Gil's work highlighted our Best of the Week winner. There is similar value in his daily citations and personal observations.
Abnormal Returns has instituted an important series of articles which include some useful links. This week I especially appreciated the helpful discussion about how to donate appreciated securities . Understanding this process can help investors get the most impact from their donations, so it is worth exploring with a financial advisor.
Watch out for…
Emerging market investments. If these are a big part of your portfolio, you should consider the effects of rising U.S. interest rates. The Angry Bear explains the initial impact of higher rates as well as how effects are transmitted. (see also WSJ on currency effects. A US investor needs to be right both about the foreign stocks and the currency effect).
Broker sales of investments not approved by his or her firm. The SEC (via GEI ) helps with some tips, including these potential red flags:
- Your broker asks you to make out a check, or to wire money, to any person or to a different firm;
- Your broker tries to sell you an investment without any paperwork about the investment;
- Investments or deposits you made through your broker do not appear on your account statement from the firm; or
- You receive an account statement that does not appear to be from the firm.
Casino stocks. Bespoke notes that there is not much benefit so far from the Supreme Court decision. [Jeff- I have a greater interest in the effect on pro sports franchises. There is no market for Green Bay Packer stock, even if value increases. How about Madison Square Garden (NASDAQ: MSG )? This "asset play" is challenging to value.
Do individual investors face a pivotal decision? Yes. And it is not an easy one to get right. Reviewing the key questions above, you need to understand the market fundamentals, ignore the noise, find relevant data to compare approaches, resist the chase for yield, and think for the long run. A tall order. And most importantly, you must have a plan for a major market decline. Without one, you will never stick to your program.
I am frequently asked how I deal with these questions. Here are the messages I discuss with clients, offered freely for anyone who might benefit. (Someone asked me this week why I did this work at no charge. Why didn't I sell WTWA? I have 100 clients and as many as 50,000 readers from all sources. I hope to help people, just as I did when I was a professor. In those days I could watch the progress and careers of individual students. Nowadays I have a greater reach. While that is my compelling motivation, I appreciate those who choose to let my team help them).
I have several key conclusions.
Reject short-termism! This week the powerful combination of Warren Buffett and Jamie Dimon launched an assault on the practice of issuing quarterly earnings guidance. In various forums they stated, "Quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability,"
This is right on target, from two leaders who have the power to set the agenda. The same principle applies to the individual investor and quarterly reports. The more frequent the assessment of results, the worse you are likely to do.
The rise of ETFs presents opportunities and traps. Those who focus on costs (easy to measure) can get cheap exposure to the overall market or to a variety of sectors. This may work well for those steeled to "set it and forget it."
Those of us who seek opportunities for edge see an ETF as a combination of over-valued and under-valued stocks. Why pay for the bad stuff? We cannot know exactly when the valuations will equalize, but history shows that they will. Take a look at this report.
Morningstar updates the choices from their "ultimate stock pickers." Take a close look at the column for "Fair Value Uncertainty."
Find unfairly punished stocks. There are several reasons for this, and we are seeing them all.
- An analyst becoming an amateur economist instead of following the company. Trained economists have enough trouble with economic forecasting. Analysts following the company have incentives to be different.
- Companies that are not aggressive in conference calls. I watch and later read many of these. They company reports with solid earnings, revenue, and a reasonable outlook. In the conference call the executives provide an honest assessment, rather than puffing up future results. The stock declines after the call, despite the good earnings.
- A one-off result from another company. When one company in a sector has a problem, the trading community instantly infers that others do as well.
- Delayed revenues. An analyst reports that some revenues may not hit the current quarter. Since this affects the earning estimate, the stock instantly takes a hit. For investors, it really makes no difference.
A good example.
The Pundit-in-Chief had a Mad Money segment that precisely hit the theme I was planning for this week. It even had the same example. Cramer went back two years to the time when Apple (NASDAQ: AAPL ) was hated by all. Since I held it for myself and for clients, I remember it well. No one was interested in fundamental valuation, cash parked overseas, or revenue growth rates. We were told that the fundamentals were irrelevant and urged to look at charts instead. Cramer had this one right, and so did I. Those of us who stuck to our guns on valuation were rewarded. Those who bailed? Here is the Mad Money segment , inspiring me to turn off the mute and back up the TIVO. Look at about the five-minute mark.
[I asked Mrs. OldProf what she thought about buying the best of breed, but she answered with a comment about a horse race. I booked her bet and lost money. She also bought a consumer staple this week (NYSE: KMB ) in her own account, probably influenced by our consumption during allergy season].
My own conclusion?
There are many investment opportunities analogous to Apple in 2016. You just need a good method to find them - an approach like that featured in our "best of the week" segment.
Here is the frequent pattern, which I highlighted in my recent Trading, Fast and Trading Slow . It describes how a news story ripples through the trading community.
The temptation for investors is to conclude that news-driven price movements are meaningful.
Most intelligent investors can follow these recommendations on their own, generating greater returns with less risk. I am always willing to consult with those who want to evaluate their own portfolios, get beyond the ETF all-weather approach, or to share some of the responsibility. Just email to main at newarc dot come for some basic, no-obligation information.
I'm more worried about:
- Trade policy. The rhetoric got even worse this week. One problem is that the rationale for Presidential action was national security. Some allies have taken offense.
- The North Korea summit. Expectations seem pumped, emphasizing what might go wrong.
I'm less worried about:
- The overall economy. The general pattern of economic data, more useful than reaction to individual reports, remains firmly positive.
- Corporate earnings. While we are between seasons, the news suggests another round of positive results next month.
See also Bulletproof Investing Performance Update: Week 28 on seekingalpha.com