- Important economic data with a forward look;
- Earnings news from major companies reporting on Q114;
- Corporate conference calls explaining the outlook for future
earnings; and finally
- Economic implications for improved economic growth and
business conditions worldwide.
It is a big week for news and data.
Prior Theme Recap
the theme to emphasize volatility. The market was at interesting
technical levels and there was plenty of news to push it one way or
the other. In a sense I was right about the theme, since the
talking heads made the moderate crossings of "unchanged" seem like
big news. The volatility cocktail was more like a
The potential was there, but the economic news was mostly
calming. The contribution of mixed corporate earnings was enough to
prevent a major market move either way. It is easy to measure
volatility objectively. The VIX index gauges the market
expectations for changes in the S&P 500. (If you spend five
minutes with this
post from Bill Luby at VIX and More
, you'll know more than almost anyone about the VIX). Here is the
chart for the week:
By the end of Thursday's trading, the options market was already
factoring in a quiet three-day weekend.
While the theme did not play out last week, it looked promising
on Monday and Tuesday. Here is what I wrote last week:
If earnings satisfy, it might have a calming effect. This will
be especially true if we get a little more confidence in forward
outlook, some hints about future hiring, and more planned capital
expenditures. In that case we could have a rebound, with plenty
of reduction in the VIX.
As I try to emphasize, 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
At economic inflection points it is normal to have a mix of
optimists and pessimists.
- Representing the pessimists we have a
that was well-received at Seeking Alpha. The argument is one I
frequently hear from trader friends and individual investors. The
author examines various trends before concluding as follows:
Hence, I expect the Fed to continue with its one-size-fits-all
approach of QE, opting to reverse tapering and return its foot on
the monetary accelerator. But, having largely continued stalling
for the past five years, I also expect the gears of the economy to
remain stuck in neutral. A stagnant economy that is held up
artificially and not allowed to correct naturally but that also
lacks the inherent energy and dynamism to grow with any persistence
- On the side of the cautious optimists (the only brand we
see), Chuck Mikolajcak at Reuters has the story:
Wall Street Week Ahead: Spring fever brings hope for U.S.
He notes that the upcoming reports reflect a cross-section of
companies, an end to cold weather worries, and special attention
to Chinese growth slowing.
- A more balanced look comes
via Josh Brown
. He notes that we might see the first actual decline in
quarterly earnings since 2012, and explains the lower and beat
pattern of the expectations game. Josh writes as follows (and
also provides a helpful chart):
))he good news is that analysts have been willing participants in
the beat-and-lower phenomenon for years now. You can see the
downward revisions (green bars) being handily exceeded by actual
results almost every time. Beat rates for the S&P as a whole
have been running at a rate of 60 to 70% pretty consistently for
the period pictured. We'll see if they can pull it off again and
avoid the first quarter of year-over-year negative earnings
growth since Q3 2012.
From these sources, it would seem that we should not expect much
economic and market optimism, even as the weather improves. 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 politics.
- It is better than expectations.
There was plenty of economic news, and on balance it was very
is showing strength.
GEI has good advice
on how to look past the noisy weekly data. The post also has
plenty of charts for those who want to do their own
Hotels are having a big year
best since 2000
according to Calculated Risk. That squares with my own travel
Fed news was positive
. The Beige Book showed a positive outlook (
via the WSJ
) and Fed Chair Yellen made an encouraging speech, without any
slips about the timing of rate increases.
rose 1.1% beating expectations.
Greece bond yields decline further, now
Felix Salmon has a nice post
citing the top five reasons for the successful auction. Your
favorite perma-bear or conspiracy site either did not mention
this news, or asserted that disaster still looms. It is
interesting that some use "kicking the can" to apply to policies,
but not to their own errant predictions. If you missed my
"Faceoff" piece -
Jeff versus John Mauldin
on the record you can see what we both thought a few years ago.
That is always more challenging than coming up with reasons after
you know what happened.
LA port traffic
has hit another new high. Bill McBride at Calculated Risk has the
full story and charts
, concluding, "This suggests an increase in trade with Asia in
Sentiment is more negative and
that is a positive since it is a contrarian indicator.
Barry Ritholtz explains
and provides this chart:
Industrial production beat expectations
. Scott Grannis sees this as part of an overall picture of
economic strength. (
Full discussion with charts
There was also some bad news, but not much. I am sure that some
of my commenting community will want to add some bad news, but
remember that it is supposed to be something that happened last
continue to rise. The move has surprised many.
has a great chart and plenty of additional background in his
China disappointed in several economic fronts.
The headline GDP report of 7.4% growth missed the official 7.5%
target. While markets seemed to expect this, this does not
suggest more stimulus.
Ed Yardeni reports
on weak exports, deflationary signals, and the failure to sell
about a quarter of a one-year bond offering. The finance minister
would not offer an adequate yield. Here is a great chart on the
disappointing China progress:
show modest growth. Building permits also remain weak. Calculated
Risk continues to see a "wide bottom" in these indicators with a
positive outlook. See
the full post
for more color.
Eurozone growth is lagging
Ed Yardeni suggests
that we need a magnifying glass to see progress from last summer.
Here is a key chart:
(click to enlarge)
Germs. There is a lesson here about perception and reality.
There is a modest risk from a disgusting source, and a big risk
from a routine one. Which do you suppose gets a public
Dirty money (
via the WSJ
) explains that "a body temperature wallet is a petri dish" for
microbes. It is something to think about the next time you see a
food worker handling money. But then you often do that yourself
right before eating.
Portland empties a reservoir
after security cameras showed a thoughtless and selfish act. This
had a negligible effect, but it was widely reported.
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 Canadian
stocks, Georg has
unveiled a new system
: Great work on the "
". Dwaine's fans should also check out his
S&P warning system
, based on market breadth.
Bob Dieli does a monthly update (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
: 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 also has an update of his
"Big Four" chart, examining the most recent data. This is
the single best look at concurrent indicators
of a potential business cycle peak:
The Week Ahead
We have plenty of news and data in a short trading week.
The "A List" includes the following:
- New home sales . Important read on both housing sector and
- Initial jobless claims (Th). Best concurrent read on
employment. Will the improvement be maintained?
- Michigan Sentiment ((
)). Best way to get concurrent information on spending and
- Leading indicators ((
)). Somewhat controversial, but still widely followed. A big jump
The "B List" includes:
- Existing home sales .
- Durable goods orders (Th). March data important to GDP.
- FHFA housing prices . Very accurate, but only for a subset of
Former Fed Chairman Bernanke speaks in Toronto on Tuesday. ECB
President Draghi speaks on Thursday.
The big news is the avalanche of earnings reports.
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 once again continued with a neutral rating. We have
been completely out of US equities, but fully invested for trading
accounts - all in Latin American or China. This was not as good as
the US ETFs last week. Given the current ratings, it is possible
that Felix will give a buy signal on an inverse ETF this week.
Those who want to follow Felix more closely can check us out at
, where he makes a daily appearance to join in vigorous discussions
about trading. This assumes that I can awaken him from his Spring
fever and the attractions of those "high-frequency" models so
popular here in Chicago.
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
This is still an important time for long-term investors. We all
know that market corrections of 15% or so occur regularly without
any special provocation. Recent years have been the exception. Over
the last several weeks I have emphasized the need to maintain
perspective, using market declines to add to positions.
It helps if you have been actively rebalancing your portfolio
and trimming winners. Then you have some cash. Some readers have
asked me to write more on this topic, so I have placed it on the
agenda. For now, let me do a quick summary.
- Review your holdings regularly. (For me, that means at least
weekly, but it is my day job. Quarterly is probably enough for
most people, perhaps with some price alerts). Make sure that your
original reasons for the investment are still valid. Revise your
fair value and price target estimates.
- Do not fall in love with a position. If hanging on to a
disappointing holding, make sure your reasons are sound.
- Sell if your price target is hit.
- Rebalance by trimming if a stock appreciates massively, but
remains below the price target.
Because we have been selling in our "long stock" program, we
have prepared to buy on dips. We are following the rules that I
have recommended for you. I have not added to these positions yet,
but we are shopping. I am especially interested in regional banks,
energy and some "old tech."
Those following our Enhanced Yield approach should have had a
great month and quarter. We have experienced only modest
volatility, continuing to beat our upside target for the year
despite overall market losses. 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.
Here are some key themes and the best investment posts we saw
Beware the Bubble Talk.
It just does not stop. When one sign or signal fails, the
enterprising bubble community finds a new one. Now it is the number
Barry Ritholtz has a nice column
at Bloomberg, analyzing five different indicators raised by Mark
Hulbert. It is worth it to read the entire piece, and all the
specific points, reaching the conclusion:
Taken as a whole, these five points suggests that speculation
hasn't run rampant today the way it did in 2000. The list above
contains two strong points, one moderate and two that perhaps could
be rationalized away.
The conclusion is that we are not in a speculative bubble.
I will add that if there were few IPO's, that would be cited by
many as a sign of market weakness. This is what comes from starting
with a conclusion - more of a mission - and then seeking an
Some sector selling might be excessive
. It is early for any firm conclusions, but this is how you build
your watch list.
has an interesting analysis of the 2014 correction (!?). This gets
plenty of media play. In fact, it is pronounced in some sectors and
hardly noticeable in others. This is a good summary chart:
Energy is worth a look
, according to
expert Brian Gilmartin
. As he notes, I agree.
Dividend stocks can be dangerous
. Some have yields that cannot be sustained or have reached
excessive valuation levels.
Michael Fowlkes offers
some specific suggestions.
A simple timing method
from Eddy Elfenbein will surprise you. It is much more powerful
than the normal seasonal ideas you hear so much about. Just stay
invested as long as inflation is between 0% and 5%. He
writes as follows
A few years ago, I ran the numbers on how the stock market
reacts to inflation.
Here s what I found
Now let's look at some numbers. I took all of the monthly
returns from 1925 to 2012 and broke them into three groups. There
were 75 months of severe deflation (greater than -5% annualized
deflation), 335 months of severe inflation (greater than 5%
annualized), and 634 months of stable prices (between -5% and
The 75 months of deflation produced a combined real return of
-46.77%, or -9.60% annualized. The 335 months of high inflation
produced a total return of -70.84%, or -4.32% annualized. The 634
months of stable prices produced a stunning return of more than
177,000%. Annualized, that works out to 15.21%, which is more
than double the long-term average.
Here's an interesting stat: The entire stock market's real
return has come during months when annualized inflation has been
between 0% and 5.1%. The rest of the time, the stock market has
been a net loser.
Investors might enjoy seeing Eddy's
speech to The Motley Fool
new investor resource page
There is a great divide in the economic blogosphere.
On one side you have non-economists who write pop economics.
They are good with numbers and charts, and they speak a language
that is plausible for a mass audience. The average person in the US
claims economic expertise from being a consumer! Articles from
these sources are replete with charts and references to headwinds.
These are often "strategists" or people who became Wall Street
economists without even studying the subject. Some are famous for
On the other side you have those with formal training and years
of experience building and testing models. Their success is usually
(with some exceptions) measured by accuracy of their forecasts and
insight. They often have much less visibility, and frequently no
specific mission, unless they work for a firm that emphasizes a
One of the easiest ways the average investor can sort through
the noise is by demanding some qualifications. Just check the bios
of the sources. There are people who rise to the top of economic
and statistical analysis without going through the program - Bill
McBride and Nate Silver come rapidly to mind - but they are
exceptions. They use professional techniques. Join me in becoming a
demanding consumer of economic conclusions. (Hint: Quit reading
when the post refers to Econ 101!)
Collective surveys like that reported monthly by the Wall Street
Journal can be very helpful. Right now the
is an improving economy growing to the 3% trend level. Why? The
long-term history shows that a free market economy works to employ
slack resources, and we have plenty of that! This is not a business
cycle peak, and therefore we do not face an imminent recession.
The investment conclusion should be that we are still in the
middle innings of a prolonged recovery cycle, with plenty of time
to enjoy the results.
What does that mean for investors? Stay focused on risk and
fundamentals - not stock prices. The post-2000 market results have
frightened an entire generation of investors. Whenever there is a
bad stretch in the market, however brief, they are afraid of
another "big one."
You can imitate what I do for clients.
- Use our recession and financial stress indicators to warn of
major risk. None of the major market declines occurred without a
warning from these signals. When we get an elevated level, we
- Right-size your positions. Expect that there will be 15-20%
market drawdowns without a fundamental explanation. If this move
will be too upsetting, your position is too big and you will bail
out at the wrong moment. This is how I approach it with
investors, and it is better than the silly questionnaires that
some big firms use for CYA compliance.
- If your position is the right size, then you are ready to be
greedy when others are fearful - and vice-versa.
- And most importantly, be willing to change with your
indicators. If we see heightened risk, we will cut back on
position size, just as we did in 2011.
And keep in mind, what we saw two weeks ago was a minor pullback
from fresh highs. It was not even close to a full-blown correction,
despite the media coverage. If you became uncomfortable and blew
out of your position, it shows that you had not accurately
Investing is not like a poker game, where you go "all in" or
completely sit out.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. 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.
Are Currency Wars The Next Chapter?