by Jeff Miller
Sometimes markets emphasize simple themes, rejecting even modest efforts at nuance. The current big stories are the record highs in stocks, the length of time since the last significant correction, and the "market is rigged" meme. These themes are all easily grasped and interesting media fodder. It has set the agenda. Meanwhile, the economy seems to be providing a positive answer to early 2014 skepticism – Weather (!) or Not? The contrast between the economic fundamentals (and impending earnings results) and the "soft" stories will be the dominant theme during the upcoming week. Prior Theme Recap In the last installment of WTWA before my vacation, I expected the theme to feature new Fed Chair Janet Yellen in her first press conference. Some might have questioned that forecast, since we had already heard plenty from Yellen both in confirmation hearings and in her "Humphrey-Hawkins" testimony to Congress. What could be new? The era of Fed transparency yields ever longer statements, economic forecasts, and assurances about future guidance. There are also many speeches. The press conferences by the Fed Chair, given only when the overall forecast has been updated, require extemporaneous answers to questions from financial reporters. It can be a minefield. In response to question about how long the Fed might delay raising rates after QE ended, she hesitated and said a considerable time. With further pushing she mentioned "six months." This sent stocks into a downward spiral, since there is an over-reaction to any hint of Fed tightening even a modest reduction in the extremely easy Fed policy. Those who have been reading "A Dash" know better than to invest on such reactions, so we had yet another buying opportunity as the clarifications ensued. The theme actually extended over the next ten days. This all reminded me of Ben Bernanke's first year, when he made a few comments to CNBC's Maria Bartiromo at the White House correspondents' dinner. This is a fun affair, but Bernanke learned that he was not "off the record" and the result was a market-moving story. Bernanke admitted that it was a "lapse in judgment." This is a perfect illustration of the reason for my weekly post – planning for the week ahead. 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. This Week's Theme In the absence of much fresh news, we can expect another week of pundits on parade. I am calling this fluff versus fundamentals. On the fluff side I expect to see the following:
On the fundamental side we have the following:
The discussion will include some early speculation about Q1 earnings reports. 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 background information. 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 Good It was a big week for data including plenty of good news.
The Bad There was also some bad news.
The Ugly Middle East peace talks. Some believe that the White House has pulled the plug on Secretary Kerry. (See the CFR story). Whatever the reason, the lack of progress is disappointing. Humor We all deserve some laughs. Here is an amusing contrast. Congressman James P. Moran (D. VA) explains that members of Congress are underpaid at $174,000 per year with assorted benefits and perks. He explains that it is expensive to live in DC. Moran is retiring this year. (Rollcall) Former Fed Chair Ben Bernanke is raking in the speaking fees. He scored over $250K on his first gig, beating his full-year salary working for the Fed. This seems to be just a starting point. Given the frequency of Bernanke testimony and speeches, I wonder what additional information he has to offer? What sort of incentive structure does this create? Quant Corner 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, check here. Recent Expert Commentary on Recession Odds and Market Trends Georg Vrba: Updates his unemployment rate recession indicator, 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. Doug Short: 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 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 high-profile punditry. RecessionAlert: Great work on the "Yellen Dashboard" as noted above! Putting it all together, it is time for another look at the "Big Four" indicators monitored by the NBER when defining recessions. As you look at the chart, remember that a recession starts at a business cycle peak. First we need to see a potential peak, and then there must be a significant decline. Doug Short updates this regularly, providing the best concurrent evidence on the economy: The Week Ahead This is a light week for data. The "A List" includes the following:
The "B List" includes:
We will also have some FedSpeak, speeches by assorted foreign leaders and politicians, and some lesser data releases. Tuesday market the "official" start of earnings season with the Alcoa report. In recent years that has been less of a bellwether, so I expect the earnings story to start in earnest next week. 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 circumstances? 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 into neutral leading us to sell stock positions as more ETFs were sent to the penalty box. This is not a bearish sign, but an indication of extreme uncertainty. By Thursday Felix was completely out of stocks and was 1/3 invested in bonds (via TLT). Those who want to follow Felix more closely can tune it at Scutify.com, where he makes a daily appearance. Compare this with Charles Kirk's outlook, summarized above. 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 summarized here. 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.
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. Barron's notes that "value stocks" are doing fine. In our Enhanced Yield program we hardly noticed Friday's selling. Positions declined by less than 0.2%, despite declining stocks and increased volatility on our short calls. Each week I highlight some of the best advice I see. Here are some highlights. Bonds beat stocks in Q1. Bespoke has the story with some great charts. This was a surprise for many, including me, but I acknowledge all evidence, and we will continue to monitor this story. I expect the bond to stock rotation to continue. Morgan Housel has thoughtful comments about expectations and volatility. He writes as follows:
I have frequently written that no one can time the smaller fluctuations. Those who claim success have a standing bearish prediction, claiming success when it works but ignoring years like 2013. I recommend that investors accept the moderate declines as a cost of doing business and try to avoid the bigger moves by using the indicators I report each week. This combination would have caught all of the major declines. Eric Parnell highlights some risks for those over-emphasizing the dividend growth stocks. Investors perceive an extra measure of safety from dividends and the group has performed well. It is a part of the quest for yield that I have documented, and it has become a crowded trade. It is fine to have a long-term focus on investing, but you should still look for value. Here is one of Eric's charts: Robert Shiller suggests that most people would benefit from using an investment advisor. (See the WSJ article). Most people misquote and misuse Prof. Shiller by concluding that they should currently be out of the stock market because of his CAPE ratio. In fact, he personally holds an aggressive stock position (for his age) and has consistently recommended that others should hold significant stock positions. He notes that most people do not have the training to pick stocks. To this advice, I add that most people do not have the discipline to buy and sell at the right times. Every week I hear about people who bailed out of the market in 2009 and never got back in. You can be a do it yourselfer, but you need to ignore most of the pundits, popular web sites that promote fear, and focus on hard data. If you are missing the stock rally, 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 feedback). And a special thought (and chart) for young investors……from Sam Ro of Business Insider: Study the effect of saving early and consistently! Final Thought There are three important themes.
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