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 remains the focal point in evaluating the economy, and this is the most responsive indicator.
- Michigan sentiment index (F). This remains a good concurrent indicator for employment and spending. This is the final reading for July, but it sometimes differs significantly from the preliminary report.
- Existing home sales (M). Housing remains as a crucial driver for the U.S. economy.
The “B List” includes the following:
- New home sales (W). Important, but less interesting than permits
- Durable goods (Th). More interesting than normal given the low GDP.
And especially – Earnings!
A quiet time on the Fed speechifying front.
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, now fully reflected in our trading accounts. We have maintained our long position in oil and also added two equity ETFs. 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. Felix has dodged some of the market volatility, profited from a short bond position, and made gains in oil (via USO).
Insight for Investors
This is a time of danger for investors who are stubbornly sticking to losing ideas. This was the subject of some great posts last week.
Abnormal Returns wrote about those who have missed the rally, citing several other helpful articles. Here is a key quote:
…(W)e investors have a tendency to personalize these things. The past five years has been a difficult for investors. Especially for those investors who have fought the rally all the way higher. Those who did so have often been enamored of one theory or another on why the economy (and stock market) were headed for a fall. Unfortunately the market doesn’t care about your theories.
I encourage reading the entire post and all of the links cited. This is a great way for those who have missed the rally to gain a new perspective.
Meanwhile, our readers with a long-term perspective should find this approach as quite familiar. If you have followed our indicators on earnings, recession risk, and the St. Louis Financial stress index you have had a much more constructive viewpoint. If you follow Bob Dieli’s business cycle work, you have a special edge.
My recent themes are still quite valid. If you have not followed the links below, please 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. Check out Georg Vrba’s bond model, which continues to signal the risk. Other yield-based investments have also suffered, and it is not over. Check out the latest interest rate forecast from LearnBonds. Or the timetable to a 4% ten-year note from Goldman Sachs (via Joe Weisenthal).
- 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 have had a number of questions about this suggestion, so I recently wrote an update. That post provides background as well as concrete examples showing how you can try this strategy yourself. There is nothing quite as satisfying as watching your account grow while the market is doing nothing or trading in a range.
- 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. Recent weeks have been tough for traders. Most were surprised by the market reaction to more FedSpeak and the spike in interest rates.
For investors it was a different story. If you had your shopping list, there have been good opportunities to buy stocks. For those following our enhanced yield approach you had both the chance to set new positions and to sell calls against old ones. This week’s Barron’s has a nice list of inexpensive stocks. You need a subscription or to purchase a copy, but I like the list — perhaps because we hold three of the seven stocks mentioned!
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 have no special insight in how the rest of the earnings season will play out.
Regardless of the current results, we will soon enter a period of seasonal strength. The “sell in May and buy in October” meme defies logic. Most good investment ideas disappear. When they are known, people follow them.
Here is a clue about why seasonality works. This is a quotation from Andrew Bary in this week’s Barron’s
“The S&P 500 trades for about 15 times projected 2013 profits and 14 times estimated 2014 earnings. Small-cap indexes have higher valuations, with the Russell 2000 index fetching about 17 times projected earnings in the coming year. The S&P 500 is up 18% this year and the Russell, 24%.”
It is July, so he is citing a multiple for both 2013 and 2014. In a few months no one will talk about the 2013 multiple; they will all look ahead.
This may seem silly, but I have watched it for two decades. Earnings are reported and summarized by calendar years, and that is how they are discussed. At some point, if earnings are growing (as is usually the case) the market just seems cheaper since the multiple is for the next year. You can gain a solid advantage by always using a 12-month forward earnings approach, as I describe here. I also do this with my individual stock analysis.
I expect the market to digest the current numbers, but also to look beyond the current earnings season.