EU Leaders "Are Afraid The Syriza 'Virus' Will Spread Across Europe"

by Tyler Durden

As anti-austerity protests continue to build in numbers across Europe (and not just in Spain where Podemos now holds a commanding poll lead over the status quo) KeepTalkingGreece reports that Greek parliamentary spokesman for Syriza, Nikos Filis notes "The wave of protests indicates a new beginning... And it scares the dominant forces in Europe. Because Syriza virus can spread and in their communities." And we suspect that is indeed the Eurogroup's greatest fear...

Via AVGI (Google Translate),

The demonstrations of solidarity with the Greek people against the austerity policies and enrolled in a European perspective changes and upheavals. This scares the dominant forces in Europe. Because the "virus" SYRIZA can spread and in their communities,"said the parliamentary spokesman of SYRIZA Nick Phillis. 

"The wave of protests indicates a new beginning because SYRIZA virus can spread to the rest of Europe, as solidarity rallies in Greek people are against the austerity policies that degrade the lives of European citizens. The protests shall be entered in a European perspective changes and upheavals. And it scares the dominant forces in Europe. Because SYRIZA virus can spread and in their communities."

Commenting on Juncker statements and attitude of Europeans, in recent times, given the current Eurogroup for the Greek issue, Nikos Phillis speaks of "democracy deficit in Europe" and notes:

"They have behind them saying in recent days, seems to insist on completion of the Memorandum program harden their stance. This element is important to take account of people and Greece and Europe. Most likely not end today, having a horizon until 28/2. It is a political issue, not a technical one, because they put issues not related financial interest, such as labor. And on the part of creditors is not the issue of a minimum wage only, is subject a comprehensive, collective bargaining rights of a system, a European acquis in Greece is not the case. When elections take place in a country, we must respect the will of citizens, it is sovereignty issue. But the loan agreement is a bilateral relationship and the Greece and its creditors, the memorandum is a relationship that the Greece and has to do with the domestic legislation. Therefore, it says Juncker and others in Europe is not right, why do not question multilateral European treaties, but a treaty that its internal legislation. This raises issues of sovereignty and democratic representation. The negotiations should take into account the political change in our country. If not taken into account, this shows the perception in Europe for democracy, indicates lack of democracy in Europe ".

The Greek Solidarity anti-austerity protests are spreading...

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Grexit

 

Monetary Aggregates Compared

by Pater Tenebrarum

The Fed has Provided the Bulk of Money Supply Growth since 2008

We have discussed the topic of money supply growth extensively in these pages over time. Below is a brief recap of how the system works in the US. Note that although fractional reserve banking and central bank-directed and backstopped banking cartels are in place all over the world, there are several “technical” differences between them. So the workings of the US system cannot be transposed 1:1 to e.g. Japan’s system or the euro system.

There are two possibilities of growing the fiat money supply: In “normal” times, commercial banks will extend loans which are partially “backed” by fractional reserves. These loans create new deposit money, which once again can serve as the basis of further credit creation, which again creates new deposit money, and so forth. It can be shown mathematically that based on a hypothetical fractional reserve requirement of 10%, extant deposit money in the system can be grown 10-fold (for a detailed discussion of the “money multiplier”, see here).

In actual practice, reserves have not represented a constraint for credit and money supply growth by commercial banks for quite some time. In the US banks can e.g. “sweep” money from demand deposits into so-called MMDAs (money market deposit accounts) overnight, letting these funds “masquerade” as savings deposits, which allows them to circumvent reserve requirements. Moreover, if credit demand is so strong that interbank lending rates (i.e., the Federal Funds rate) threaten to rise above the target rate set by the Federal Reserve, the central bank will supply additional reserves to the extent necessary to keep the rate on target. Thus the required fractional reserves will be supplied even if commercial banks don’t have sufficient excess reserves to lend to banks short of reserves.

None of this has been of importance since the 2008 crisis however, as “QE” has created such an overhang of excess reserves that interbank lending rates have continually wallowed close to the lower end of the 0.00%-0.25% Federal Funds target corridor. Moreover, up until late 2013/early 2014, commercial bank credit growth had slowed to a crawl anyway. So barely any money supply growth has come from the banking sector after the crisis. Enter the Fed, and “QE”.

In theory, if the central bank buys securities directly from banks, it would only issue bank reserves in payment (the selling bank receives a check drawn on the Fed, and upon depositing it, its reserves account at the Fed is credited). In actual practice however, QE in the US system concurrently also creates new deposit money at close to a 1:1 ratio. Most of the broker-dealers the Fed uses as counterparties in its open market operations belong to banks, but they are legally distinct entities (i.e., they are legally non-banks). Hence, when their accounts are credited, not only bank reserves are created, but new deposit money as well.

Our friend Ronald Stoeferle, one of the managers of the Incrementum fund in Liechtenstein, has mailed us an interesting chart that compares the growth rates of the official US monetary aggregates and total debt in system since 2008. It shows how the Fed really had to put the pedal to the metal to create money supply growth. System-wide debt growth meanwhile remained subdued (the government has grown its debt enormously and corporations have also expanded their debt load, households however have deleveraged):

Growth rates of US monetary base, M2, M3 and total credit market debt owed since 2008 – click to enlarge.

Note that the Fed no longer calculates M3, but several people have reconstructed it using alternative data sources (e.g. here is an article explaining how our friend Bart at Nowandfutures is calculating M3 these days. John Williams of shadowstats has also reconstructed the series).

Even though “QE” translates directly into deposit money (which is counted as part of the money supply; by contrast, bank reserves are not part of the money supply, as they remain outside of the economy), the smaller base from which the monetary base started out in 2008 meant that base money had to be expanded to a far greater extent in percentage terms to achieve the growth in the broad monetary aggregates depicted above.

It should be noted that all deposit money created as part of “QE” operations represents so-called “covered money substitutes”, as the bank reserves covering it have been created concurrently. By contrast, if new deposit money comes into being in a commercial bank credit operation based on fractional reserves, the bulk of the money substitutes (i.e., the deposit money) created in the process consists of uncovered money substitutes. If more than a certain percentage of depositors were to attempt to withdraw their demand deposits at the same time, they would find out that the money is actually not there. Due to QE, nowadays a far larger percentage of the deposit money in the system is actually of the covered variety than was previously the case (approx. 29% vs. about 5% in the pre-crisis era).

What Should be Counted as Money?

As readers know, we prefer the “Austrian” measure of the money supply, money TMS (which stands for “true money supply”) over the official broad money supply aggregates. As Murray Rothbard noted in his essay “Austrian Definitions of the Supply of Money”:

[…] money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods and services on the market.”

This seems straightforward enough and surely everyone would agree with this definition. In a fiat money system, we can differentiate between “standard money” – i.e., banknotes – and deposit money. Both are equally serviceable for effecting final payment for goods and services and hence form part of the money supply in the broad sense.

Why was it thought necessary to create the Austrian money measure TMS and what makes it different from the official monetary aggregates? It all comes down to the definition of money cited by Rothbard above. The official measures such as M2 contain components that are actually not money according to this definition, while excluding some that are.

The most important of the non-money components are money market funds. Since money market funds buy short term debt securities and issue share units to investors, they are merely a credit intermediary: The money they use in order to buy e.g. commercial paper shows up in the form of deposit money on the accounts of borrowers. Investors holding mutual fund shares aren’t holding money; they cannot use their mutual fund shares for payment. These shares must first be sold, and only thereafter the money received for them can be used in payment. Counting these money market funds as part of the money supply therefore results in double-counting.

For more details on which components of the money supply aggregates are not part of money TMS and which components that are not part of the “Ms” are included in it, readers should check out Michael Pollaro’s excellent and extensive article on the topic. The article also contains a list of references to essays by various other “Austrian” economists on the topic.

In terms of money TMS – this is to say actual money – the Fed has been a bit more effective in blowing up the money supply than is indicated by the growth of M2 and M3. At the beginning of 2008, the broad money supply measure TMS-2 stood at $5.3 trillion; as at the end of December 2014, it stood at approx. $10.703 trillion, in short, it has more than doubled.

We have recently show the chart of TMS-2 in a different context, but here it is again:

US money TMS-2 (broad true money supply) – click to enlarge.

The difference between the growth rate of TMS-2 and M2 is largely due to the latter’s money market funds component – M2 started from a much higher base in 2008, and due to the stock and bond market rally since 2009, money market fund investments have been drawn down in favor of investment in “risk assets”.

Note that while changes in money market fund holdings may occur on account of people replacing them with investment in stocks and bonds, this decision has no influence whatsoever on the amount of money in the system, as every purchase of securities is matched by a sale. All that happens is that the ownership of securities and the money used to pay for them changes.

This is also why the “money on the sidelines” argument often cited by stock market bulls really makes no sense. Whenever a trade takes place, there is as much “money on the sidelines” after it as there was before it. Only a change in ownership occurs. The only sensible thing that can be said in this context is that the overall supply of money has more than doubled since 2008 courtesy of the Fed’s electronic “printing press” – in that sense, there is indeed more “money on the sidelines”.

Recent Developments

Below is a chart showing the annualized growth rate in commercial and industrial loans in the US. The annualized rate of growth has recently accelerated to about 13.8%, which means that commercial banks have so to speak taken the baton from the Fed in terms of creating money supply growth:

Annualized growth rate of US commercial and industrial loans – click to enlarge.

These are actually typical boom time credit growth figures. They are counterbalanced a bit by a much slower growth rate in consumer credit. This is the main reason why the contribution of bank lending growth to money supply growth hasn’t been strong enough to achieve much more than keeping money supply growth roughly steady since the end of “QE”.

It remains to be seen whether the recent collapse in the oil price will affect these credit growth rates. A lot of credit has been pumped into the oil patch in recent years, and this activity seems now likely to grind to a halt. It seems therefore possible that the slowdown in the broad money supply growth rate in evidence since its 2010 and 2011 peaks will soon resume. Currently (i.e., as of year-end 2014), the year-on-year growth rate stands at 7.97%, which is down from the 16.7% and 15.67% peak growth rates in 2010 and 2011 respectively, but roughly still in the same range that has prevailed since late 2013 when “QE” was discontinued.

TMS-2, year-on-year growth rate – click to enlarge.

As this chart also indicates, asset price bubbles tend to peak with a lag to peaks in money supply growth rates, usually after a certain (unknowable) threshold in the annual growth rate is undercut. The threshold just prior to the 2008 crisis was very low (less than 2%), but it was e.g. at about 5% in 2000 before the Nasdaq bubble broke. What level of money supply growth will be decisive this time around is something we will once again only be able to ascertain in hindsight, but the fact remains that such a threshold exists.

Conclusion:

The Fed has been responsible for the bulk of money supply growth since 2008, but this has recently changed. For the moment, the commercial banks are “back in the game” and have replaced the effect “QE” had on money supply growth by ramping up their inflationary lending. Traditional bank credit growth has ergo once again become an important measure to watch. The sideways move in broad money supply growth that could be observed over the past year could still continue for a while, but we suspect that there will eventually be a further slowdown. If so, it will be bad news for the asset price bubble.

See the original article >>

Key Market Gauge Hits All-Time High

by Dana Lyons

You’ve heard me mention many times that we consider breadth, i.e., the number of stocks advancing versus declining, to be an important barometer of the market’s overall health. The more stocks that are advancing, the healthier the rally. One way to measure market breadth is by looking at indices on an “equal-weight” basis. Again, an equal-weight basis is just that: it places an equal weight on each of the components in the index as opposed to placing greater weight on those stocks with the largest market cap. This way, it is easier to tell if there is broad participation across the whole market or sector rather than perhaps just a few of the larger-cap issues leading the way.

Thanks to the Rydex/Guggenheim family of funds, we can easily monitor these equal-weight indices through ETF’s. We looked at one example the other day in the Equal-Weight Materials ETF (ticker, RTM). While the broad materials index has been lagging, RTM was hitting an all-time high. As of yesterday, we can say the same thing about the Equal-Weight S&P 500 ETF (ticker, RSP). It too is now at an all-time high.

As the chart shows, after moving sideways for the past few months, the Equal-Weight S&P 500 broke out to a new all-time high. This again is important considering it takes all constituents equally into account. Thus, if the ETF is at an all-time high, the majority of its components must also be doing well. This is good news for the broad stock market at the present time.

If there is a chink in the armor here, it is in the relative ratio of RSP to the S&P 500 (specifically, we are using the SPDR S&P 500 ETF, SPY). Despite the new high in RSP, its ratio versus SPY has not yet surpassed the high it made last June. We have seen this sort of divergence before (i.e., RSP goes to a new high but the RSP/SPY ratio does not), generally near tops in the market. For example, in 2007 (not shown) the RSP/SPY ratio peaked in February. Meanwhile, the RSP continued to make new highs into June. Of course, the market topped soon afterward.

We are not saying that the RSP/SPY ratio must confirm the new highs or else the market will collapse. If asked which was more important, the absolute price or the ratio, we would say the absolute price of the RSP. It is unquestionably a bullish sign to have it hitting all-time high ground. We are simply pointing out the fact that conditions are not “perfect” (when are they?), despite the breakout. The ratio divergence in the past has been a good warning sign of danger in the market. That’s why we bring it up.

The main takeaway, however, is a bullish one. The fact that a broad index like the equal-weight S&P 500 is making an all-time high suggests that the rally is healthy and that the market top is not imminent. Of course the market can top at any time. However, history would suggest that, like with the NYSE Advance-Decline Line, any market decline would likely result in at least 1 more eventual marginal new high in the S&P 500 before THE top is in.

See the original article >>

Greece and Euroland's Crumbling McMansion of Debt

by Charles Hugh Smith

All the gimmicks lenders press on borrowers to maintain the artifice that the loan is being serviced are financial frauds.

Sometimes the best way to summarize a complex situation is with an analogy. The Greek debt crisis, for example, is very much like the subprime mortgage crisis of 2007-08.

As you might recall, service workers earning $25,000 annually got $500,000 mortgages to buy McMansions in subprime's go-go days. The applicant fudged a bit here and there on income and creditworthiness, and lenders reaping huge profits from originating and selling mortgages were delighted to ignore prudent underwriting standards and stamp "low-risk" on the mortgage because it was quickly sold to credulous investors.

The bank made its money in transaction and origination fees, and passed the risk of default on to investors who accepted the fraud that the loan was low-risk.

The loan was fundamentally imprudent and risky because the borrower was not qualified for a loan of such magnitude. But since the risk was distributed to others, the banks ignored the 100% probability of eventual default and skimmed the profits upfront.

Greece was the subprime borrower, and its membership in the euro gave the banks permission to enter the credit rating of Germany on Greece's loan application. Though anyone with the slightest knowledge of Greece's economy knew it did not qualify for loans of such magnitude, lenders were happy to offer the loans at interest rates close to those of Greece's northern neighbors, and then sell them as low-risk sovereign debt investments.

In effect, the banks were free-riding the magical-thinking belief that membership in the euro transformed risky borrowers into creditworthy borrowers.

It's as if the $25,000/year worker wrote in a rich cousin's sterling credit score on his mortgage application. The lender and applicant conspired to fudge the numbers to lower the apparent risk of the loan. In the case of Greece, Greece and the lenders each fudged the numbers; there was no real penalty for doing so, and the rewards for doing so were substantial.

Marginal borrowers eventually default, and sure enough, both the subprime borrower and Greece soon defaulted. Life isn't perfect; people lose their jobs, get divorced, have medical emergencies, etc., and recessions lower GDP and national income.

Prudent lenders make allowances for these risks. But lenders who make big money originating loans and offloading them to others have no incentive to be prudent; rather, they have every incentive to make as many loans as they can, as quickly as they can, to maximize their profits.

Faced with massive writedowns, the lender has two choices: it can loan the defaulting borrower more money, with the explicit guarantee that the borrower will use the money to pay interest on the original mortgage. The total loan amount goes up, but the loan stays on the books at full value.

Or the lender can roll the mortgage into a lower-interest loan, effectively entering partial forbearance: the promised return on the mortgage plummets, but as long as the borrower makes small monthly payments, the loan stays on the books at full value.

Both of these strategies have been deployed in Japan for decades to keep impaired debts on the books at full value.

The last choice is to turn the mortgage into a zombie loan: the loan is neither written off nor listed as being in default: it enters a zombie state, not in good standing but not in default, either. The mortgage can stay in this netherworld for years, as the lender waits for the market to rise enough that the house can be sold without the lender absorbing a huge loss on the mortgage.

Unfortunately for buyers of sovereign debt, there is no house that can be sold to pay down the debt. Lenders can demand the debtor-nation sell off its assets to make good on the loans, but there is little recourse should the debtor-nation refuse.

When the borrower can barely make the monthly payment, he becomes a zombie. The loan principal barely budges, and so the future is unending penury. The borrower can cut expenses--bike to work, only eat beans and rice, only buy thrift-store clothing, etc.,--but this austerity doesn't change anything: he still can't afford the loan.

This is why austerity is a fake solution: no matter what the guy earning $25,000 a year does, he will never be able to pay down the $500,000 mortgage.

Meanwhile, the poorly constructed McMansion is falling apart. The loan didn't boost the borrower's productivity, or create a new income stream; the borrowed money was squandered on something that did nothing for the borrower that something much, much cheaper could have done just as effectively.

What did Greece get for its $300+ billion in debt? Did it transform the lives of all citizens for the better, fix all its dysfunctional systems, and build an economy for the 21st century? No; the borrowed money simply masked the dysfunctional systems and allowed the Status Quo kleptocracy to reap fortunes.

Greece's lenders want to keep the imprudently issued loans on the books at full value.They followed the strategy of loaning Greece more money, but only to make the interest payments. Now there is fevered talk of some version of partial forbearance: rolling the debt into new loans, perhaps writing off a chunk of the debt, etc.

None of this changes the fundamental fact that Greece was unqualified to borrow that much money. No matter what the guy earning $25,000 a year does, he will never be able to service the $500,000 debt in a way that frees him from zombie servitude to the lender.

So the hapless subprime borrower with the crumbling McMansion and Greece both have the same choice: decades of zombie servitude to pay for the crumbling structure, or default and move on with their lives.

All the gimmicks lenders press on borrowers to maintain the artifice that the loan is being serviced are financial frauds. They are simply new frauds piled on the initial fraud of issuing a visibly imprudent loan. The borrower was not creditworthy and the lender should never have offered him loans of that magnitude and at that low interest rate. The losses belong to the lenders, period.

See the original article >>

Weighing the Week Ahead: Will Energy Stocks Support the Market Breakout?

by oldprof

Stocks show continuing strength, testing the top of the recent trading range and making new highs. The sector rotation has favored “risk on” despite rather soft economic data. At the heart of this anomaly is the energy trade. In a holiday-shortened week, I expect markets observers to ask:

Is there a bottom in energy stocks? Will this support the overall market breakout?

Prior Theme Recap

In last week’s WTWA I predicted that the punditry (in the absence of much fresh data) would be asking whether it was time for “Risk on.” This was a very accurate call, with plenty of attention throughout the week. The general market reaction was “yes” and the traders were taking note of the decline in utilities and bonds, and the strength in oil prices and commodities.

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.

This Week’s Theme

Last week’s trading was something of a mystery. The “risk on” question got a definite “yes” with an increase in stocks and cyclical sectors combined with selling in bonds and defensive stocks like utilities. This happened despite rather soft economic news.

While there is a fairly normal economic calendar, I expect the punditry to focus instead on the new record in stocks. In particular, most will be asking:

Can Energy Stocks Support the Market Breakout?

Background

Over the last two months I have carefully raised and explored the “message” from various markets.

• Oil Prices (12/13/14)
• The bond market (1/11/15)
• Earnings (1/18/15)
• Europe (1/25/15)
• Risk On? (2/8/15)

These themes all gave due respect to the approach of seeking a “message from the market.” This is a favorite for most traders and pundits, but it often serves to explain the past. Few seem to find predictive edge from this approach, although it sounds good on TV.

The alternative is to use economic data and corporate earnings to discover where markets may not be efficient. This helps to identify sectors and stocks that are mispriced. My own approach is to emphasize economic data to predict markets, as I explained in my 2015 Annual Preview. Last week the thesis seemed wrong, but the result was a winner. The jury is still out for this year, but it is a subject of continuing interest.

The Viewpoints

There is a wide range of opinion on the prospects for oil prices and energy stocks. Here are the main contenders:

• Energy stocks have not bottomed. Citi warns to look out for a “20 handle” on crude oil!
• Crude oil supply and demand are not that far out of balance, and the gap is closing. (Barron’s cover story has this and contra viewpoints, stock ideas, MLP’s). FT on falling rig counts.
• Technicals say “no.” Cam Hui digs deep, including this chart:

As always, I have some additional ideas in today’s conclusion. But 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:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
2. It is better than expectations.

The Good

There was some good news last week.

• Progress in Greece. While some will see the emerging agreement as temporary and merely delaying matters, this type of negotiated solution is actually quite typical. Each side does as little as possible. There is an opportunity for face-saving. The worst crisis outcome is averted. The best case is that the time will be used constructively, while the worst case implies revisiting the issue. Markets seemed less worried about Greece this time, but the progress was a small positive.
• Eurozone GDP was positive and slightly higher than expectations at 0.3%.

• Earnings reports have been positive. It may not seem like it, but 78% of reporting S&P companies have beaten on earnings and 58% on sales. (FactSet). Some readers have accurately objected that these results reflect success against lowered expectations. FactSet reports that 80% of companies are reporting a negative outlook and that Q1 forward earnings have been cut more than any time since 2009. The question right now is whether estimates have fallen enough, and apparently they have. The earnings context has been very negative, and WTWA emphasizes the fresh news. That has been more encouraging of late. Brian Gilmartin continues his more upbeat take, writing as follows:

  The SP 500 is growing earnings on an operating basis, about 6.5% – 9.5% per year, the last few years, and I expect that to continue through calendar 2015.

  q1 ’15 earnings growth is currently expected to be -2%,  including Energy’s drag of a whopping -62%, so excluding that drag, the SP 500 earnings growth on an operating basis is expected at +4.4%

  Full-year 2015 earnings growth is expected at +2.4%, so excluding Energy’s drag of 53%, growth on an Ex-Energy basis is roughly +7.5%.

• Ukraine cease fire. I am scoring the cease fire as a positive. It was better than nothing and I give deference to the market reaction. With that in mind, the initial response from combatants was to increase hostilities. Few serious analysts have great hope for rapid progress. For investors, we are not even close to the reduction in reciprocal sanctions – the factor that would stimulate European growth and worldwide equity markets. Issues via Brookings.

The Bad

The bad news included some significant economic reports.

• West Coast port strike continues – a slowdown and a lockout.
• Weekly jobless claims climbed. The 304K was a disappointing shift from the last two weeks.
• Michigan Consumer Sentiment fell to 93.6, dropping from 98.1 and missing expectations. The chart from Doug Short is the best, showing why this series is an important economic read.

• Farmland values are falling in the Midwest – for the first time in decades. Strong crops – lower prices. (Jesse Newman WSJ).
• Retail Sales missed badly, even when you massage to exclude gasoline sales and include other adjustments. Steven Hansen at GEI has the analysis. (Scott Grannis has the bright side). Calculated Risk calls the result “OK” and provides this chart:

The Ugly

The human cost in Ukraine continues as fighting rages. (WSJ).

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, but nominations are welcome. I am seeing plenty of bad charts, but little refutation.

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

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.”

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting market indicators.

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 (three years after their recession call), you should be reading this carefully. Doug has the latest interviews as well as discussion. Also see Doug’s Big Four summary of key indicators.

Georg Vrba: has developed an array of interesting systems. Check out his site for the full story. We especially like his unemployment rate recession indicator, confirming that there is no recession signal. 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 and TIAA-CREF asset allocation. He has added a method for Vanguard Dividend Growth Funds. I am following his results and methods with great interest. You should, too. This week Georg updates his Business Cycle Index, which made another new high.

Cullen Roche takes a look at the misery index, now at an eight-year low. He even checks out how it would score using Shadow Stat’s “phony inflation” approach.

The Week Ahead

It is a normal week for economic data.

The “A List” includes the following:

• Initial jobless claims (Th). The best concurrent news on employment trends, with emphasis on job losses.
• Housing starts and building permits (W). Permits provide a good sense of future construction.
• Leading indicators (Th). Still seen by many as a good recession warning.

The “B List” includes the following:

• FOMC minutes (W). Pundits will squeeze hard to find some new information.
• PPI (W). Still not important with overall inflation so low. Someday, but not yet.
• Industrial production (W). Volatile series is difficult to predict, but still important.
• Crude oil inventories (Th). Maintains recent interest and importance.

There is plenty of FedSpeak. Important corporate earnings continue, although the season is winding down. There are regional Fed reports, but these are usually not important.

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 moved to a “bullish” posture for the three-week market forecast, but it continues to be a close call. The data have improved a bit, but are only slight better than the recent neutral readings. There is still plenty of uncertainty reflected by the high percentage of sectors in the penalty box. Our current position is still fully invested in three leading sectors, and we have gotten more aggressive. For more information, I have posted a further description — Meet Felix and Oscar. You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.

As I have noted for five weeks, Felix continues to feature selected energy holdings. Felix is not just a momentum trader!

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. Major market declines occur after business cycle peaks, sparked by severely declining earnings. Our methods are focused on limiting this risk. Start with our Tips for Individual Investors and follow the links.

We also have a new page summarizing many of the current investor fears. If you read something scary, this is a good place to do some fact checking.

My bold and contrarian prediction for 2015 – that the leading sectors would lose and the laggards would win – looked a lot better over the last two weeks. If I am correct, there is a very, very long way to run for the cheapest market sectors – energy, technology, cyclicals, and financials.

Other Advice

Here is our collection of great investor advice for this week:

Stock and Sector Ideas

Growth and value ideas converging? Bill Nygren of Oakmark explains and also has some ideas, including GOOG, MA, and WFM. More value plays with dividends from Dennis Ruhl of JP Morgan (via Barron’s).

“Safe” energy plays. “Aggressive” plays. (Both from Barron’s).

Tim Melvin shows why liquidity is over-rated for the individual investor. Regular readers know that I like his theme of regional bank stocks.

Bill Miller likes AMZN, AAPL and BABA.

Watch out for falling REITs.

Market Outlook

Michael Batnick revisits the listing of things people used to worry about instead of buying stocks. Enjoy his list of these golden oldies (the 1929 chart?) as well as this distribution of market returns over the last 89 years.

Ben Carlson shows that rising interest rates are consistent with higher stock prices, using the table (below) of average annual returns. I explained the reason for this in 2010, charting the curvilinear relationship between interest rates and stocks. Basically, extremely low rates are associated with intense skepticism about earnings and the economy. The move to normalize rates is positive for stocks.

The “fighting the Fed” part does not start for years. Sam Ro has the data:

Final Thought

I do not know whether we have reached a bottom in energy prices, but I have identified two important themes.

First, low US interest rates reflect a crowded leveraged trade. European bonds (for a change) represent the funding currency and US bonds the source of return. The interest rate margin is only about 1%, but the trade may be leveraged at 15-1. The currency risk in these trades is often hedge, but I suspect that many funds are “going commando” by relying on dollar strength.

This trade is vulnerable to a weaker dollar or to rising US interest rates. If either or both of these occur, long-term rates could rise rapidly as the trade is unwound.

Second, some hedge funds are investing in distressed bonds of energy companies and hedging by shorting the stocks. This puts continuing pressure on stocks, while providing a bit of support in the debt market. The hedge ratio is theoretical, since these are not convertible bonds. A significant increase in the stock prices could lead to short covering as the trade is unwound. This is difficult to measure and to play, but watching short interest in energy stocks is one idea. Bespoke charts it (via BI).

Risk and Reward

There is enough strength in the rest of the market that leadership from energy is not necessary for good returns. I want to reemphasize last week’s final thought. What is often thought of as safe has become risky.

Risk. Many investors wisely begin by thinking about risk. That is how I start each interview with a potential client. Everyone has the need to protect a portion of the investment portfolio, with the assurance that any losses will be modest.

It is not always easy to identify safety. Last year’s most successful investments were bonds and bond proxies. The quest for safe yield has become a crowded trade. Those celebrating the success of bond mutual funds and their utility payouts should look at this week’s results. It is a very small taste of what will happen when interest rates return to more normal levels.

Reward. And we all need some investment reward, either to keep pace with inflation or to increase the retirement nest egg. There is excessive focus on arguments about the overall market valuation. There are plenty of cheap stocks and sectors.

Financials, technology, and consumer discretionary are all attractive and cheap.

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