posted on 15 May 2016
by Jeff Miller, A Dash of Insight
This week's economic calendar includes some key data on the housing market and few other major reports. The debate about the strength of the U.S. economy continues. The housing market is an important contributor to the economy. As we enter the key season for real estate many will be asking:
Is it Springtime for housing?
Prior Theme Recap
In my last WTWA, I predicted that there would be special attention to the mixed message of economic reports, contrasting the relative strength of employment with other data. That was a major theme. Some insisted that the employment was overstated. Others said it was a lagging indicator. A few mentioned that GDP was probably understated. Friday's relatively strong data continued the mixed message. I also suggested that the political sideshow would grab attention, but that was obvious.
Once again the early strength faded at the end of the week. Doug Short captures the story of the decline, the third straight) with his excellent weekly chart. (With the ever-increasing effects from foreign markets, you should also add Doug's World Markets Weekend Update to your reading list).
The entire post adds more analysis on the major themes as well as a multi-year context.
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. You can make your own predictions in the comments.
This Week's Theme
The economic calendar has mostly secondary reports again this week. Friday's stronger economic data only intensified the debate, as the market reacted negatively. This week features three important housing reports and two of lesser significance. Since springtime brings higher expectations for this sector, I expect more attention than usual. The punditry will be asking:
Is it Springtime for Housing?
Attention focuses on housing with some frequency since it is important to the economy. Wells Fargo notes that residential investment rose 14.8% in the past year, contributing 0.5% to the Q1 GDP growth (which coincidentally was 0.5%). Last year the National Association of Homebuilders calculated that housing was over 15% of GDP. The impact is not just home sales, but also remodeling.
The basic themes, moving from bearish to bullish on stocks are as follows:
It is easy to find disciples for each viewpoint.
As always, I have my own opinion in the conclusion. Make your own choice, and feel free to make your case in the comments.
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 an "ugly" and on rare occasion something really good. My working definition of "good" has two components:
There was some good news.
Let's keep this simple.
The Atlantic has an article that is geared toward non-economists, but explains the key points. The article notes that quits are highest in low-paying jobs and lowest among financial services workers and government employees.
Doug Short illustrates the strength of the voluntary quit rate versus layoffs.
Some of the news was negative.
The TSA. Airport security lines have grown much longer. People are missing planes and some airlines are even delaying flights. Baggage is sitting outside because of inspection delays. There are no immediate plans for more TSA resources, so it is a matter allocating what is available. Here is a good story in The Guardian (via a tweet from Real Clear Markets). A video of the lines at Chicago's Midway airport now has over two million views.
The comments from Guardian readers suggest that the situation is having an impact on potential international travelers.
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. Nominations are welcome. I see plenty of opportunities!
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. I recently made some changes in our regular table, separating three different ways of considering risk. For valuation I report the equity risk premium. This is the difference between what we expect stocks to earn in the next twelve months and the return from the ten-year Treasury note. I have found this approach to be an effective method for measuring market perception of stock risk. This is now easier to monitor because of the excellent work of Brian Gilmartin, whose analysis of the Thomson-Reuters data is our principal source for forward earnings.
Our economic risk indicators have not changed.
In our monitoring of market technical risk, I am now using our new model, "Holmes". Holmes is a friendly watchdog in the same tradition as Oscar and Felix, but with a stronger emphasis on asset protection. We have found that the overall market indication is very helpful for those investing or trading individual stocks. The score ranges from 1 to 5, with 5 representing a high warning level. The 2-4 range is acceptable for stock trading, with various levels of caution.
The new approach improves trading results by taking some profits during good times and getting out of the market when technical risk is high. This is not market timing as we normally think of it. It is not an effort to pick tops and bottoms and it does not go short.
Interested readers can get the program description as part of our new package of free reports, including information on risk control and value investing. (Send requests to info at newarc dot com).
In my continuing effort to provide an effective investor summary of the most important economic data I have added Georg Vrba's Business Cycle Index, which we have frequently cited in this space. In contrast to the ECRI "black box" approach, Georg provides afull description of the model and the components.
For more information on each source, check here.
Recent Expert Commentary on Recession Odds and Market Trends
Doug Short: Provides an array of important economic updates including the best charts around. One of these is monitoring the ECRI's business cycle analysis, as his associate Jill Mislinski does in this week's update. She respectfully cites their most recent article. In my view it uses tortured logic to reach a negative conclusion of the JOLTs report (discussed further above). The Doug Short analysis of this report is much, much stronger. The ongoing review of the ECRI is comprehensive and provides an interesting comparison with Recession Alert, one of our featured sources. Chart lovers will love this regularly updated article.
Doug's Big Four update is the single best visual review of the indicators used in official recession dating. You can see each element and the aggregate, along with a table of the data. Doug's updates cover both the individual elements and a chart-packed summary helping to see what it all means.
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." His view of where we are in the business cycle differs sharply from that of the ECRI. His approach has been more accurate over a long period and especially in the last decade. I am overdue for an update comparing the recession methods. (So many great topics to consider, so little time).
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 systems. These include approaches helpful in both economic and market timing. He has been very accurate in helping people to stay on the right side of the market.
Georg Vrba: provides an array of interesting systems. Check out his site for the full story. We especially like his Business Cycle Indicator, updated weekly and now featured in our table. Georg also has an unemployment rate recession indicator. This has long confirmed that there is no recession signal. What would it take to change the prognosis? In this interesting post he suggests that an increase of 0.3% in unemployment would warn of a recession.
The Week Ahead
We have a modest week for economic data. While I highlight the most important items, you can get an excellent comprehensive listing at Investing.com. You can filter for country, type of report, and other factors.
The "A List" includes the following:
The "B List" includes the following:
There is a little FedSpeak. The Supreme Court will announce some decisions, perhaps including Obama actions on immigration and Puerto Rico. Political news will continue, and some are indeed attributing market weakness to the probable candidates. There are still a few important earnings reports.
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 six 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?
WTWA often suggests a different course of action depending upon your objectives and time frames.
Insight for Traders
We continue our neutral market forecast. Felix is still 100% invested, but with less aggressive sectors. REITs and utilities have moved near the top of the list. The more cautious Holmes is also fully invested. Holmes uses a universe of nearly 1000 stocks, selected mostly by liquidity. Even when the overall market is neutral, there will often be some strong candidates. Holmes holds a maximum of 16 positions at one time. For more information about Felix, I have posted a further description - Meet Felix and Oscar. You can sign up for Felix and Oscar's weekly ratings updates via email to etf at newarc dot com. They appear almost every day at Scutify (follow here). I am trying to figure out a method to share some additional updates from Holmes, our new portfolio watchdog. (You learn more about Holmes by writing to info at newarc dot com.
Dr. Brett offers innovative ideas for traders, and he does it week after week. Are you a perfectionist? Then prepare to be frustrated in your trading.
Holmes is barking agreement. Felix would also agree if he were here instead of at a blackjack table in Vegas (emailing daily results). I hope Felix doesn't get caught count counting cards like some of those other models.
Todd Sullivan provides us with another valuable insight from "Davidson." This quotation shows what traders should really be watching, if they want to catch short-term moves:
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 page summarizing many of the current investor fears. If you read something scary, this is a good place to do some fact checking. Pick a topic and give it a try. Feel free to suggest new topics if your own "fear" is not on the list.
Some readers expressed concern about the overall market valuation. I discussed this last week. If you are worried about all of those valuation indicators (which supposed worked for centuries, but not in the last couple of decades) I urge you to read, Is the Market Cheap? Three things you need to know about valuation, but don't.
Many individual investors will also appreciate our two new free reports on Managing Risk and Value Investing. (Write to info at newarc dot com).
Here is our collection of great investor advice for this week. If I had to pick a single most important source for investors to read, it would be David Merkel's post, You Can Get Too Pessimistic. He notes the low probability of real disaster scenarios. In the context of a thoughtful analysis, he provides the following advice:
If you give into fears like these, you can become prey to a variety of investment "experts" who counsel radical strategies that will only succeed with very low probability. Examples:
Chuck Carnevale has an interesting recommendation for retired investors - Cisco Systems (CSCO). As usual he does a thorough analysis, using his first-rate methods. See the whole story for illustrative charts and the key points.
Barron's has a cover story on Regeneron (REGN), which it calls the best of the biotechs. I see many attractive names in this beaten-down sector. The article does a good job of explaining why Regeneron is special.
Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in this special edition. There are several great choices worth reading, but my favorite is from Josh Brown. He explains that many investors have a "toxic combination" of reducing financial literacy and increasing confidence. It is nothing personal, but a general consequence of aging.
Outlook on China
There has been a lot of very negative commentary about China in recent weeks. Some of this comes from outspoken hedge fund managers who have significant short positions. To balance this, investors need information from those who study and invest in China. One such source is KraneShares, which provided an excellent briefing for financial advisors last week. While there were many key points, her are two worth extra emphasis:
And also, most observers focus on manufacturing, ignoring the planned shift to a service-driven consumer economy.
My conclusion is that investing in China is not a matter of if, but when and how. The financial press emphasizes data points like the "flash PMI" which have little relevance to the key issues. (Full disclosure: KraneShares offers KWEB. We own it in our aggressive program, and I am considering expanding it to more investors who need more international exposure).
Some individual investors are missing opportunities because of the perceived unfairness of the system. If you are trading in modest size, high frequency trading may actually have slashed your trading costs and increased your potential gains.
Watch out for....
Onecoin. This cryptocurrency seems to include elements of multi-level marketing, Ponzi schemes, and a lack of liquidity. There is always a great temptation to make money fast, but recent economic conditions may have increased the appetite. Before "investing" I urge you to do some careful research. Here is an opinion from a crypto currency site and also one from a CPA who has a great quotation from the Association of Certified Fraud Examiners:
Check out the full post to see the comparison to the Onecoin marketing materials.
Last week I offered a strong opinion about resolving the tension between various economic data sources. I make most of WTWA a balanced summary of what is happening, with an emphasis on a current theme. It is in the conclusion where I do my editorializing. As I noted last week, when I do not have a solid answer to the weekly theme question, I am not afraid to say so. If only more observers would do the same! Readers sometimes complain that I do not give a specific answer to my own question. That misses the point. The weekly question is my prediction for the market theme - what you will see in the media. I cannot control that, and it would be dishonest to claim an answer that I do not really have.
With respect to housing, I expect growing strength. It might not show up this month, since we are still following Bill McBride's "long bottom." I plan to watch Calculated Risk stories this week for the best interpretation of the data. He writes this week:
My own reasons for longer-term optimism include the following:
Trading and Investment Implications
Traders must continue to work the trading range, guessing daily reaction to Fed speculation, the moves in the dollar, and the shifts in oil prices. On Friday, stronger economic data sent the market lower. For the short term the message is that "good news is bad news".
Investors should take the opposite perspective. The worry about the economic message from oil prices and interest rates is overdone. A good investor looks for good value. There is a method for this:
Find sectors and stocks that are currently unloved.
While I have been cautious about adding to our underweight energy positions (not just unloved, but hated) I do like and own homebuilders and regional banks.
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