In the wake of the FOMC meeting and the IPO hype, we face a week
with little new information - the lull before earnings season. This
sort of vacuum makes it difficult to predict the week ahead, but I
have an interesting idea:
This week will feature discussion about market divergences
- gold, oil, small caps, and bitcoin are losers. Large cap
stocks have been winners. Why?
A lot of buzz came from a
saying that 47% of NASDAQ stocks were "mired in a bear market."
This was portrayed as showing a narrowing appetite for risk and
loosely links it to prospective changes in Fed policy. It is an
intriguing topic for further study.
Prior Theme Recap
In my last WTWA
that the media focus would be the FOMC and the potential for
changing course. That was very accurate, since the Fed meeting was
the center of attention through Thursday. My question of whether
the Fed would change course was answered with a firm, "No."
Feel free to join in my exercise in thinking about the upcoming
theme. 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.
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This Week's Theme
Whenever there is a light schedule for data and events, the
market focus can easily change. We have some important housing data
this week, but my sense is that many are still digesting the
implications of the Fed meeting. It seemed to be a non-event, with
no change in the "considerable time" language or the pace of QE
tapering. Despite media efforts to coax a story out of nothing, the
"spikes" in stocks and bonds exhibited less volatility than we
often see on the average trading day.
What was interesting? The continuing strength of the dollar. The
currency market was the closest to showing a real spike, even when
the Scotland effect removed one threat to the Euro. The dollar
strength is a combination of the perception of increasing US
interest rates, the relative rate advantage for US investors, and
the comparative strength of the US economy. If you are a European
investor, and you do not see a currency risk, why not take the
higher US interest rates? We can guess that some fund managers are
doing this trade on a leveraged basis.
The expectation of higher interest rates comes not from the
official policy statement or from Fed Chair Yellen, but from the
"dot plots." This chart reveals the individual expectations of Fed
members. Despite repeated warnings that this is not official
policy, that the group decision is not the sum of individual
opinions, that not everyone has a vote, etc., etc., the market
takes the dot plot seriously. Here is the recent version
(click to enlarge)
Here are some interesting supporting themes. Expect to read and
hear more about them in the week ahead:
- Outflows from European stocks (
- Smallcaps struggling (
with the chart you expect).
- Gold has "looked like death" according to
Josh Brown highlights
the same point in time, comparing gold to stocks.
Eddy Elfenbein joins in
- Oil prices are falling (
) and so are oil stocks.
- Izabella Kaminska
sees "the end of bitcoin."
wouldn't trade it, but thinks it is a key support level. Kaminska
has some interesting charts, but here is the key argument:
Well it's the same old story of frivolity, irrational
exuberance, hysteria and of course the mistaken belief that
something like a free lunch is truly possible. (Not to mention
the cult's last great hope being lost, that of Scotland
As usual, I have a few thoughts to help with these questions.
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 a lot of very good news, supporting the general thesis
of economic strength.
Dow Transports have been strong.
Bespoke observes, "Many investors look for the Transports to lead
the way, and the fact that it has done so well is a bullish sign
for the major indices like the Dow and S&P 500 in our view."
for the expected fine chart.
BLS benchmark revisions
were extremely low. This little-followed story is actually very
important. Each year, the BLS checks their monthly estimates of
net job change by comparing the employment data from surveys with
actual reports at state employment agencies. It takes months to
compile, but it avoids the popular criticisms of the monthly
employment data. There is no issue about seasonal adjustments,
surveys, revisions, or the birth/death model. The job count is
not exaggerated because no business will pay employment taxes on
non-existent employees. It is our best employment data, but it
comes with a delay.
Barry Ritholtz highlights
the story, quoting from employment experts at The Liscio Report:
The annual benchmark is based on the unemployment insurance
system's records, which cover close to 100% of establishment
employment, and are the last word in employment. It will be
made official early in 2015.
The revision, through March 2014, was an unusually small
7,000 jobs, which is less than +0.05%, far below the +/- 0.3%
average of the last ten years.
This is, of course, a disappointment for those of us who await
the annual benchmark with bated breath, but it might quiet some
chatter about the birth/death model, whose job is done once the
benchmark is in place. It was remarkably accurate for the 12
months ended March 2014.
This is something to keep in mind each month as we get the
employment data. Those who intone "birth death adjustment" while
rolling their eyes, or complain about seasonal adjustments, or
claim that data were fabricated - they were completely wrong last
Initial jobless claims hit a new low.
Most people follow the seasonally adjusted four-week moving
average, shown in the chart below.
also provides the NSA data and chart, the lowest reading for this
week of the year since 2000.
The Scotland independence referendum failed
. Please note that I am scoring this as "good" because it was
market-friendly, not because of the merits of the issue. There
were many dire warnings about what would happen had it passed -
bank failures, plunging European currencies, and worldwide
ripples. Overnight futures rallied as the results came in.
is at the highest level since 2005. (
). Are they seeing something not apparent from the reported sales
data? Builders report an increase in buyer interest and traffic.
Nick Timiraos at the WSJ
were in line, but the revisions were positive.
Ed Yardeni shows
the relationship with his earned income proxy and the continuing
growth of both series.
(click to enlarge)
. No matter what you think of the Fed, the market quietly
celebrated the decision and even held ground through the Yellen
Inflation data were benign
Doug Short's deep dive
for comprehensive analysis and his typical fine charts.
There was also some important negative news, especially housing
Industrial production fell 0.1%.
A gain of 0.3% was expected.
Steven Hansen of GEI
looks at the story from several viewpoints, including the
unadjusted data. See the full post and the interesting collection
Student loan debt is
hurting home sales.
of the WSJ has a helpful account of a report from
John Burns Real Estate Consulting
. The estimate is that each $250 in monthly loan payments reduce
purchasing power by $44,000. Those with $750 payments or higher
are often completely priced out of the market.
Earnings revisions drop significantly
Check out the green line in
Ed Yardeni's chart
below and you will see the dramatic decrease in Q3 estimates. Dr.
Ed looks on the bright side, expecting a strong beat rate.
Brian Gilmartin still
sees a chance for 2014 growth of 10% and highlights the potential
in financial stocks.
(click to enlarge)
High frequency indicators show deceleration.
New Deal Democrat has his regular
important weekly update
for these data.
Housing starts were poor.
So were building permits, my own preferred lead indicator.
Calculated Risk comments
as follows, while noting that the months in 2014 still show
improvement over the same month in 2013:
This was a disappointing report for housing starts in
Starts were only up 8.0% year-over-year in August.
There were 670 thousand total housing starts during the
first eight months of 2014 (not seasonally adjusted, NSA), up
8.6% from the 617 thousand during the same period of 2013.
Single family starts are up 3%, and multi-family starts up 23%.
The key weakness has been in single family starts.
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
ago, is deepening. Some are calling it a "
" for the World Health Organization.
Looking for some new themes to worry about -
a panel has suggested
an overhaul in end-of-life health care. Here is another political
third rail. We are delivering costly care that patients do not want
while depriving them of counseling and comfort that they need.
Until you have witnessed this personally, you do not really
understand how dysfunctional our system is. Despite this, it defies
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 (three years after their recession call), you
should be reading this carefully. Doug includes the most recent
ECRI discussion concerning continuing economic weakness in Japan.
Doug covers the possible implications for the US.
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. Georg continues to develop new
tools for market analysis and timing. Some investors will be
interested in his recommendations for
dynamic asset allocation of Vanguard funds
reasons to expect 3.5% economic growth through 2015. Check out the
four interesting reasons.
The Week Ahead
After last week's avalanche of news, we have a more normal week
for economic data and events.
The "A List" includes the following:
- Initial jobless claims (Th). The best concurrent news on
- New home sales ((
)). Housing remains crucial to the economic rebound and new homes
have the biggest impact.
- Michigan sentiment ((
)). Good concurrent read on employment and consumption.
The "B List" includes the following:
- Existing home sales ((
)). Will we finally see a real rebound?
- Durable goods (Th). Wild swings in the headline number;
ex-transportation was weak last month.
- GDP final estimate for Q214. This is old news, but still an
There is plenty of Fedspeak on tap. We might think that there is
little fresh news on that front, but we still see surprises that
add color to the official statements.
Breaking news from Ukraine and Iraq has become a part of the
investment landscape. These stories are having an effect, but are
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 has shifted from bullish to neutral based upon overall
strength. Ratings for the broad market ETFs are mixed. Our Felix
trading accounts remain fully invested for now because there are
still at least three solid choices. With the generally modest
ratings, Felix might signal a move to more cash during the coming
week. The trading program can sometimes go short via the inverse
ETFs, but that has not happened in more than a year.
Traders should all be reading everything from my friend, Dr.
Brett Steenbarger. This week I especially liked his article about
going "on tilt,"
the emotional response familiar to poker players. Hint: Be
realistic in your expectations.
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:
are better than most people think - including Alan Greenspan. Last
week I featured the former Fed Chairman's
9 Reasons Why the Economy Stinks
. It seems only fair to include a
response from John Kim
, Chief Investment Officer at New York Life, who notes that he has
access to a perspective different from Greenspan's. He has 9
Reasons Why Alan Greenspan is Wrong about Everything. This is an
interesting list, and I recommend taking a minute to consider the
various points, listed in reverse order. The final point relates to
big data. The following is a key section:
We are at a point where we can quantify the positive impact of
Big Data, Kim said, noting that as we realize some $300-$600
billion in annual cost savings and productivity gains from Big
Data, the U.S. economy is building fresh GDP equivalent to about
+1.5 to +3%...all from Big Data. The Economist noted that data is
new big natural resource, analogous to what steam was in the 18th
century, what electricity was in the 19th century and what
hydrocarbons were in the 20th century.
And the U.S. is driving it.
Beware of unregulated and leveraged commercial loans
. Lisa Abramowicz at Bloomberg has an excellent story,
Dirty Secret of $1 Trillion Loans Is When You Get Your Money
, showing the dangers, the big payoffs for banks, and the
possibility for cascading effects throughout the financial system.
The reach for yield has driven fund managers to include these
holdings, which are not securities. The article does not explain
exactly how to protect yourself. I am studying this further. It
fits a general pattern of investments that supposedly offer safe
Celebrity stock pickers?
Barry Ritholtz starts
with a story about leading jazz musician Kenny G (a favorite of
Mrs. OldProf). He starts his day with Starbucks - the stock price,
not the coffee! Barry reviews the results from Playmates,
actresses, and models, as well as the infamous story of Lenny
Dykstra. Remember when Gisele Bundchen insisted on payment in
Euros? This article is fun, but it also has an educational
Strong dollar stocks? Here are some ideas
Beware the pump-and-dump
schemes. I know that I have emphasized this topic before, but I am
trying to help individual investors. People continue to fall for
these schemes. What is your defense? My colleague at
, Cody Willard, will not permit the penny stock promotions that you
see on other investment sites. Global Economic Intersection is all
over these stories, with regular updates. Here is the key quote
from the SEC on this one:
Zirk de Maison concocted an array of reverse mergers and
company name changes on his way to gaining control of the vast
majority of Gepco stock in order to conduct a multi-faceted
manipulation scheme. To help avoid the pitfalls of microcap
fraud, it's important to check the histories of companies and
determine their legitimacy before deciding whether to invest in
, there is a new feature that you might want to try. If you
register at the site and add #question to your scuttle, you can get
answers from a number of experts with differing methods. It is
easy, fun, and educational. There was a good debate Friday on
Alibaba. (I was bidding for one of our programs - the "high-octane"
portfolio - but it was too rich for us. Others bought and some were
Don't go "all out" of the market
. The safest investment strategy is not one of all cash.
that even risk-averse investors should have a 20% stock allocation
- even with time horizons of only three years.
If you are stuck in gold or out of the market completely, you
might want to reconsider your approach. The current economic cycle
is in the fifth inning. 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
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 currently have a free trial subscription to an "independent"
take on the news. Each night I am told that the official government
data are wrong, the stock rallies are all contrived, and the wheels
will come off at any moment. Reading it is an interesting exercise,
but I have an advantage. I know what to look for and taught
graduate level classes in research methods and statistical
analysis. My guess is that most consumers are either deceived or
falling victim to confirmation bias.
The divergence story is a bit like that. When small stocks were
leading the rally, we were warned that the market was frothy - a
sign of a top. Now that the big stock/small stock relationship is
coming into line, it is a sign of a "dangerous divergence."
I have two suggestions:
- Ignore the various death crosses and omens.
does a careful analysis of the Death Cross, showing that the
effect lasts only a week or so and then quickly decays. His
method is actually more likely to show an impact than you usually
see, since his comparisons use the upward-sloping baseline from
stock performance. His post, which you should read carefully if
you are an investor who depends on technical indicators, notes
that much of technical analysis depends upon compelling visual
impressions rather than statistical support.
- Many of the current effects are dollar-related and difficult
to time. The obvious first-line effects are energy and materials
stocks. These are core holdings for value managers because they
are all cheap by traditional metrics. Gold is also a
The strong dollar will eventually be good for the US economy,
consumers, and stock investors.
It is important to understand this instead of chasing short-term
dollar effects. Investors who want to understand the time frames
better could start with
this Barron's article
by Schwab's Liz Ann Sonders. It is right on target.
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
Regeneron Pharmaceuticals Has A Bright Future