The Week Ahead
This week brings little data and scheduled news, an artifact of the calendar and the holidays.
The “A List” includes the following:
- Initial jobless claims (Th). Employment will continue as the focal point in evaluating the economy, and this is the most responsive indicator.
- Personal income and consumption (Th). A key measure of the pace of the economic rebound (May data).
- Michigan sentiment index (F). This remains a good concurrent indicator for employment and spending – after removing the noise of fluctuations in gas prices as political news.
- Conference Board sentiment (T). While I prefer the Michigan approach, the Conference Board method usually has a very similar results.
The “B List” includes the following:
- Durable goods (T). Another measure of the economic recovery (May data).
- Chicago PMI (F). Important as an indicator of the national ISM index, which comes out the following week. This is the most reliable of the regional indicators.
- Case Shiller home prices (T). This indicator is a three-month average of twenty cities, but it is widely followed
- New Home sales (T). Another piece of the housing puzzle.
We will also have more speeches by Fed regional bank presidents – Fisher and Lacker, as well as Fed Governor Powell.
I continue to watch earnings pre-announcements and also a few early reports. I am not very interested in the final revisions to Q1 GDP, which is “old news.”
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 continued a neutral posture, now fully reflected in trading accounts which have no positions. We sold our partial positions (a bond inverse fund and a commodity) last week. The overall ratings are slightly negative, so we are close to an outright bearish call. This could easily be the case by the end of next week. While it is a three-week forecast, we update the model every day and trade accordingly. It is fair to say that Felix is cautious about the next few weeks. Felix did well to avoid the premature correction calls that have been prevalent since the first few days of 2013, accompanied by various slogans and omens.
Insight for Investors
This is a time of danger for investors – a potential market turning point. My recent themes are still quite valid. If you have not followed the links, find a little time to give yourself a checkup. You can follow the steps below:
- What NOT to do
Let us start with the most dangerous investments, especially those traditionally regarded as safe. Interest rates have been falling for so long that investors in fixed income are accustomed to collecting both yield and capital appreciation. An increase in interest rates will prove very costly for these investments. It has already started.
- Find a safer source of yield: Take what the market is giving you!
For the conservative investor, you can buy stocks with a reasonable yield, attractive valuation, and a strong balance sheet. You can then sell near-term calls against your position and target returns close to 10%. The risk is far lower than for a general stock portfolio. This strategy has worked well for over two years and continues to do so. (I freely share how we do it and you can try it yourself. Follow here, and scroll to the bottom).
- Balance risk and reward
There is always risk. Investors often see a distorted balance of upside and downside, focusing too much on news events and not enough on earnings and value. You need to understand and accept normal market volatility, as I explain in this post: Should Investors be Scared Witless?
- Get Started
Too many long-term investors try to go all-in or all-out, thinking they can time the market. There is no reason for these extremes. There are many attractive stocks right now – great names in sectors that have lagged the market recovery. Ignore all of the talk about the Fed and focus on stocks. Here are two great sources:
- This article by Chuck Carnevale is loaded with great stock ideas backed by sound reasoning and analysis.
- Talk stocks and sectors every day with the gang at Wall Street All Stars. You can get good answers to your own stock questions and listen in on the ideas of successful professionals and individual investors. There is a small subscription fee, but I have asked for last week’s investor chat to be unprotected so that my readers can get a free look.
And finally, we have collected some of our recent recommendations in a 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 feedback).
Final Thought
I find it helpful to think about a likely destination for the economy and financial markets. This is helpful in avoiding excessive focus on any single variable in a world where so many things are correlated. I expect the economy to improve, interest rates to move higher (starting with the long end), PE ratios to increase (as is usually the case when rates go to 4% or so), profit margins to decrease somewhat, and the U.S. deficit to decrease. This climate will be very negative for some stocks and sectors and very positive for others. (I provide more detail here.)
A key element is to avoid the fixation on the Fed. The idea that the Fed determines long-term interest rates is rapidly being proven wrong. James Hamilton shows (It’s not just the Fed) that interest rates actually increased after the announcement of both QE2 and QE3. He writes, “It’s worth emphasizing that the recent rise in interest rates has been a global phenomenon, not just something seen in the United States.”
I have demonstrated that Fed buying is only 1% of daily trading in the cash markets. Nearly everyone confuses net new issuance of debt, total new issuance, and the float. This is a big mistake, and it can be a costly one.
Here is some wise advice from Eddy Elfenbein’s weekly update:
“I think the markets are making a few mistakes here. First, too many people assume that without the Fed’s help, the stock market is toast. The Fed has obviously helped the market so far, but that started when the economy was flat on its back. That simply isn’t the case now.
The other mistake is thinking the Fed is running away. Not so! Short-term rates are still going to be near 0%. The bond buying is going to continue. It will just be in progressively smaller amounts. Remember that all of this is predicated on pretty optimistic economic projections. In the policy statement, the Fed said that downside risks to the economy have diminished. Let’s hope they’re right.”