By Jeff Miller :
A holiday-interrupted week is loaded with important economic data. Since many market participants will skip Monday to stretch their weekend, the action will focus on Friday's employment situation report. People will be asking:
Just how strong is the labor market?
Last Week Recap
The big economic news last week was the (slight) increase in volatility. Tuesday's decline was attributed to the ACA repeal/replace delay and what it implied for the Trump agenda. That was forgotten by Wednesday. Thursday saw technology selling right at the opening. Art Cashin attributed the rotational decline to dueling programs. That had little carry over to Friday.
Our question from two weeks ago - a possible change in market leadership - got some real attention. Financial stocks did well in the wake of the bank stress test results.
The Story in One Chart
I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. You can see the day-to-day shifts, as well as the small overall effect, less than 0.5% for the week.
Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.
Note to Readers
Thanks to Investopedia for including us among the top 100 most influential advisors. Some of these lists only go for the huge firms. Others emphasize those with great fame, and fame alone. We have a nice team at NewArc, but we are all busy and wear many hats. I am delighted to have the chance to write as much as I do, since we emphasize communication and accessibility. For me it is all after-hours.
Congratulations to Josh Brown for his well-deserved #1 ranking and Michael Kitces at #2.
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 economic news last week was good.
- Chicago PMI recorded a three-year high of 65.7 This is often a good hint about the national ISM direction. ( ISM Chicago )
- Consumer confidence was solid in both the Conference Board and Michigan versions. Doug Short's great chart, updated by Jill Mislinski draws together many themes - economic strength, recessions, and overall trend as well as the recent result. Here is the Conference Board version. Read the full post to see several other interesting comparisons.
- Q117 GDP revised higher to 1.4%. This is backward looking, with Q2 now over, but it is more encouraging as the base for the start of the quarter.
- High frequency indicators remain mildly positive.New Deal Democrat does his valuable weekly update, separating leading, long-leading and coincident indicators. The current picture is mixed to positive.
- Personal income rose 0.4%, a touch better than expectations. Spending was up only 0.1%, in line. Steven Hansen ( GEI ) reports on both, including this interesting table:
- Durable goods orders declined down 1.1% on the headline and down 0.1% ex-transportation.
- Jobless claims increased to 244K.
- Pending home sales unexpectedly declined 0.8% over the prior month and 1.7% year-over-year. Most sources attributed the decline to limited supply. ( Investing.com )
Illinois once again grabs the spotlight. With no action in Friday's session, the state enters a third year without a budget. The longer it takes, the more difficult a solution becomes. As of today, a court ordered the completion of certain Medicaid payments, but that just shifts the problem. Bond agencies are poised to reduce state debt to junk status - a first for any state. The head of the Illinois House Speaker Michael Madigan is asking the agencies for more time.
It is easy to blame "the politicians," and that is what everyone is doing. It is a good illustration of what happens when two sides each represent a viewpoint with no ability to compromise. Each side's constituents are supportive. No one is held accountable.
Gil Weinreich's recent commentary is still on target.
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.
It is a busy calendar, especially for a short week. Employment data, ISM manufacturing and services, and auto sales are all important.
There is also plenty of FedSpeak, and the release of minutes from the last meeting.
Next Week's Theme
In sharp contrast with recent weeks, there will be plenty of economic candidates to discuss. Despite the competition from the Fed news, the crucial role of employment will provide a focus. People will be asking:
How tight is the labor market?
Here is a range of opinion.
- The employment numbers are all fake data.
- 93 million adults do not have jobs. Brookings has a nice piece on those 25-64 who are out of work, including the size of the group (about 79 million), 4 million unemployed, and 16 million who are not looking for work (varied reasons).
- The BLS birth/death adjustment accounts for most of the reported job growth.
- Labor participation is very low because people have given up looking.
- Increasing the minimum wage will destroy more low-income jobs. FiveThirtyEight has a reasonably balanced look at prior research as well as the Seattle increases.
- Robots and self-driving cars will destroy jobs. ( Fortune - not a binary question). Value Walk on Goldman's take, also some balance. Dean Baker - contra.
- Wage growth has not matched jobs growth.
- Fed forecasts are not consistent. ( Tim Duy ).
- Many workers have been forced to accept part-time work, rather than full-time.
- Some full-time workers are really working multiple part-time jobs. ( Time on the disappearing summer jobs).
As usual, I'll have more in my 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
The Featured Sources:
Bob Dieli : Business cycle analysis via the "C Score.
RecessionAlert : Strong quantitative indicators for both economic and market analysis.
Georg Vrba : Business cycle indicator and market timing tools.
Brian Gilmartin : All things earnings, for the overall market as well as many individual companies.
Scott Grannis writes that real yields on tips are a "must-watch" indicator. I agree, which is why we recently added it to our weekly snapshot.
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 Paul Merriman's checklist article about learning when you can retire. It is good DIY advice if you are careful. My own process with clients and potential clients is quite similar, including the realistic alternatives in the conclusion:
You know what your portfolio is worth now. You know how much you'll add every year. You know where you need to wind up, and when. From that information, a financial calculator can, in the blink of an eye, tell you the investment return that will get you there.
(Don't have a financial calculator? Find one online at feedthepig.org , a site sponsored by the American Institute of Certified Public Accountants. You'll find calculators for almost every planning need.)
Ideally, the answer will be similar to the return you have been achieving. If it turns out you will need a substantially higher return, this will tell you that you should do one or more of the following:
Save more money.
Plan to retire later.
Plan to spend less in retirement or work part-time so you take less out of your portfolio.
This is extremely useful information, because it takes information that came directly from you and shows you how to turn it into a call for action that is quantifiable.
This is one of the best weeks ever for stock ideas. Many of my regular sources had a special quality this week: Not just specific stocks, but advice on how to find them.
Chuck Carnevale always provides a lesson along with a suggestion. While he often writes about dividend stocks , this week he applies his metrics and analysis to Celgene ( CELG ), a biotech growth stock! If your process is solid, the results can be dramatic. I especially like his discussion of compounding of your returns. Interestingly, Barron's also featured Celgene in this week's issue.
Peter F. Way uses market maker behavior to evaluate risk and reward for stocks. To understand this better, you need to read the entire post. For a mere introductory idea, look at the analysis of the biotech sector, which he features. Celgene is in a pretty good position on this chart as well.
David Van Knapp has an interesting meld of his dividend lists (champions, contenders, and challengers) with smart beta. Many stocks are included in the start of this process, but few emerge. Here is a list of the very top group. It is only a partial list, and only a hint of the value of the entire article.
Davidson (via Todd Sullivan ) uses insider buying. Here is part of his explanation:
One of the tools I use is to track insider activity. The most important aspect of investing on which few focus is the quality of the management team. I spend most of my time on research developing an understanding of corporate management's skills and outlook. If one spends the time detailing management's background, their business relationships and couples this to their business performance and cash commitments to future common stock performance, one can build an investment case for a business at a particular price range.
The commentary of insiders must align with their business decisions, i.e. they must 'walk the talk', and how they execute must result in improving financials.
Read the full post for more as well as his specific pick this week.
Simply Safe Dividends does a comprehensive business analysis on Johnson and Johnson ( JNJ ). While he includes a variety of important metrics, he looks more deeply into the business model, risks, and potential. For another choice, see here .
Eddy Elfenbein does his own deep dive at the start of each year, changing a portion of the portfolio and then holding it for the year. This method has been very effective and is the basis for his new ETF ( CWS ). You can either buy the ETF, or check out Eddy's mid-year update to consider some individual candidates.
Lee Jackson has a finger on the pulse of the research from the big firms. Here are some ideas for "undervalued" utilities. Two of them seem to be OK. We bought a position in one, although we wrote calls against it to enhance the yield.
Abnormal Returns always has first-rate, daily links for investors. The Wednesday topic is personal finance - of special interest to the individual investor. I especially liked the discussion of reverse mortgages by the White Coat Investor . He explains what you need to consider. It could still be right for certain people, but your eyes should be open.
Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. This week I especially enjoyed his discussion of " time diversification. " This is basically the idea that you can buy and hold a diversified portfolio and all will be well, even if there is a protracted decline. Gil disagrees (and so do I). You should compare the discussion here with the EIB conference below.
The Evidence-Based Investing Conference created a lot of buzz last week. There is an interesting perspective about investor needs and the role of the advisor. Here is the lead presentation from Barry Ritholtz , which has excellent ideas about the traps faced by the average investor, and his conclusions about how to deal with them. I encourage you to read the presentation slides.
The Fear and Greed Trader's updates overlap a bit with my summaries, with perhaps a bit more emphasis on technical analysis. He has a balanced approach and draws sensible, unemotional conclusions. This week I especially like this chart where he gives credit to Chris Ciovacco's Twitter post. It is like an "anti-1929 chart" to cite the popular scary chart of a few years ago. I doubt that ZH will publish this one.
In my view, far too many get obsessed in what the PE multiple looks like at this very minute. As stated above, valuations appear high the majority of the time.
Jeff Saut , Raymond James research analyst, noted in a recent article:
"The stock market's P/E has proven to be not a good predictor of the market future direction. For example, a bear market began in 1980 when the P/E ratio on the S&P 500 was 9.5"
If one has to be so focused on a PE ratio, it should be slanted to what the earnings picture will look like down the road. Far too many have sat out the advance because of their overvaluation fears.
And the reminder about modern life expectancy.
Recent research says a 65-year old has a 50-50 chance of living another 17 years. If one makes it to 65 today, they have a 25% chance of seeing 95. The ladies out there should be smiling; if they make it to 65, they have a 33% chance of seeing 90. That's about 30 year's worth of living that needs to be accounted for. Please don't forget the probability is great for us to expect that percentage will increase with time. By 2029, a 65-year old will have a 50% chance to see 90.
In essence, the long-term view on the chart presented may apply to a lot more people than we think. Food for some reasonable thought.
Watch out for….
Reverse Mortgages. See personal finance above. Another possibility was in today's mail. Mrs. OldProf and I had a chance to match some plastic thing with a scratch-off to determine whether we won a prize. The possibilities were a Prius, a cruise plus airfare, a big, expensive TV, and an iPad. She is the lucky one, so she did the scratching. We won! Now she must call to see which prize we got, but she cannot be bothered. You cannot win if you don't play! This thinking is probably the best hope for Illinois, since they have been kicked out of Powerball. Maybe that will get voters riled up more than schools, pensions, and sick people.
Employment data provide the greatest scope for spinning. There are so many different measures, methods, and subgroups that there is scope for "proving" almost anything. This is great fun for the punditry, but confusing for most investors.
Here are some examples of truths, lies, and half-truths.
- The 90+ million who cannot find jobs is the biggest lie. It counts retired people and many others who have chosen not to work. It has been refuted many times, but has staying power. Meanwhile, the BLS site provides plenty of information about various elements of the work force. The Brookings article cited above is also much better on this topic.
- The birth/death claim is a close second. This is another favorite for people who want to dismiss government data. In fact, there is an annual benchmarking using state employment office data. The adjustment has been proven to have a minimal effect, but one that makes results more accurate.
- Careful studies of labor force participation distinguish between demographic effects and discouraged workers. Once again, the BLS tracks the discouraged worker group.
- Robots and job losses make for a great article. The categories of jobs that might be lost are easy to see. The new jobs created are much less visible. The effect of progress, invention, and innovation is a long-standing question. The historical answer is pretty obvious.
- Job growth has not been concentrated in part time or in low-paying jobs.
- Wages have lagged, raising the question of how tight the labor market really is.
- The jury is still out on the minimum wage effect. It might depend upon the size of the increase.
- There has been no increase in multiple part-time jobs, another data series reported by the BLS.
I have written about all of these topics in the past, some of them several times. Both writers and the public exaggerate unemployment. I have a guess concerning the reason. Even when net job growth has been positive, about 28 million jobs (gross) are lost during the year. Many people experience unemployment each year. Nearly everyone has contact with someone who lost a job.
The employment progress has been solid and should be viewed in the context of a series of data points - not just one number with a sampling error of over +/- 100K - not including revisions!
What worries me…
- Continuing contention in Washington. We will need bi-partisan compromise to deal with the big issues like growing government debt and entitlement programs, not to mention infrastructure and tax reform.
- The G20 Summit concerns me a bit. Trump administration diplomacy is still in a nascent state. This meeting will feature a Trump/Putin face-to-face meeting.
…and what doesn't
- The delay in the ACA repeal/replace. More time might well help to develop a reasonable compromise, and increase public involvement.
- Earnings growth - so far. Reports from both Brian Gilmartin and FactSet have been encouraging on this front. The second week of July is the peak of the "preannouncement" season.
See also Sand In My Shoes - June Update on seekingalpha.com