posted on 02 April 2017
We have a big economic calendar and potential Fed news. Those stories will take a back burner this week. This is the week that east meets west at Mar-a-Lago. My safest prediction is that we are about to see a new rash of China experts both in print media and on CNBC! These freshly-minted pundits will be asking:
What will the Trump-Xi meeting mean for the economy, and for stocks?
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Last week the news was mostly positive, but light. Markets continued the attention to the Trump Administration’s next policy steps - especially the chances for tax reform.
In my last WTWA I predicted a discussion about the aftermath of the ACA repeal decision. That was a good call, as assorted pundits explained what the next policy moves might be. The more adventurous speculated about whether the Freedom caucus would block changes in the debt ceiling or tax reform. Some of that discussion will continue in the early part of next week.
The Story in One Chart
I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the overall weekly gain of 0.80% and the quarter one increase of 5.5%. The biggest takeaway might be the general rebound from last week’s market reaction to the failure of the ACA repeal.
Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.
Each week I break down events into good and bad. Often there is an “ugly" and on rare occasion something very positive. My working definition of “good" has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news - and you should, too!
This week’s news was slightly positive.
U.S. Bridges. (No, not the recent North American Bridge Championship, where Bill Gates had a nice win. While that particular event was limited to players with fewer than 10,000 masterpoints, it still included many experts. It was a nice victory, and his best career result). Turning back to actual structures, the American Society of Civil Engineers (ASCE) notes that 40% of bridges are more than fifty years old. Over the next twenty-five years the U.S. is short of needed spending by about $3 trillion.
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. No award this week, but nominations are always welcome. There are many bogus claims and charts out there! I wrote about headline spinning last week, and the misleading recession forecasts that resulted. We should all encourage astute analysts to help on this front!
The Week Ahead
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.
We have a very big week for economic data, featuring the most important reports.
The “A" List
The “B" List
While the schedule is not as heavy as last week, FedSpeak will be featured on several days.
The Thursday meeting between President Trump and China’s President Xi Jinping could be extremely important for economic policy and the markets.
Next Week’s Theme
This is a big week for economic data. We could usually expect daily analysis of the news, focusing on the Friday employment data. A secondary theme might be the emerging change in Fed policy, with speakers and the release of minutes on Wednesday.
Not this week! The visit of Xi Jinping and the meetings at Mar-a-Lago have significance extending beyond recent economic news. The commentary next week will raise the question:
What will the Trump-Xi meeting mean for the economy and stocks?
No one knows what will happen. The best we can do is collect relevant facts and decide what to watch for. Here is some key background.
What does this all mean for investors? As usual, I’ll have a few ideas of my own in today’s “Final Thought".
We follow some regular featured sources and the best other quant news from the week.
Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.
The Indicator Snapshot
The Featured Sources:
Bob Dieli: The “C Score" which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment. (see below).
Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.
RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed.
Georg Vrba: The Business Cycle Indicator and much more.Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. His interpretation suggests the probability creeping higher, but still after nine months.
Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% - the highest level since October, 2014.
Doug Short: The World Markets Weekend Update (and much more). His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating. The latest update now includes the real income data.
Scott Grannis writes this week about the equity risk premium, which I currently score as “high." This means that I find stocks to be much more attractive the bonds. Here is Scott’s chart of this relationship. The above-average value is IMHO the best gauge of market sentiment - still negative on stocks versus bonds.
How to Use WTWA (especially important for new readers)
In this series, I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in." If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have eight different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:
Are you preserving wealth, or like most of us, do you need to create more wealth?
Most of my readers are not clients. While I write as if I were speaking personally to one of them, my objective is to help everyone. I provide several free resources. Just write to info at newarc dot com for our current report package. We never share your email address with others, and send only what you seek. (Like you, we hate spam!)
Best Advice for the Week Ahead
The right move often depends on your time horizon. Are you a trader or an investor?
Insight for Traders
We consider both our models and the top sources we follow.
Felix, Holmes, and Friends
We continue with a strongly bullish market forecast. All our models are now fully invested. The group meets weekly for a discussion they call the “Stock Exchange." In each post I include a trading theme, ideas from each of our five technical experts, and some rebuttal from a fundamental analyst (usually me, but sometimes a guest expert). We try to have fun, but there are always fresh ideas. Last week the focus was on “Voodoo Chart Reading" inspired by Michael Kahn (see below).
Top Trading Advice
Like everyone else, I like reading about Jesse Livermore. He enjoys a reputation as a great trader despite multiple bankruptcies and a life ending in suicide. That certainly is one measure of success!
Joe Fahmy has a nice post highlighting Livermore trading rules from almost 80 years ago. Most still make plenty of sense. It would be a nice project for someone to analyze how these might be different under modern conditions. Out of the many rules I endorse, I especially like this one:
Brett Steenbarger remains at the top of trader “must-reads." My favorite post this week is about trading resilience. Many traders do not recognize how negative factors can affect their work. You need the ability to bounce back.
Chartered Market Technician Michael Kahn uses the “Voodoo" word in discussing charts. He has a great post on what you can and cannot expect to learn from your chart study. I especially like his dismissal of the “death cross".
Insight for Investors
Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility!
Best of the Week
If I had to pick a single most important source for investors to read this week it would be Michael Kitces great article, The Evolution Of The Four Pillars For Retirement Income Portfolios.He presents an excellent history of retirement needs and alternatives. He also analyzes the consequences of each of the current choices. I especially like this element of the conclusion, an issue that we frequently discuss with clients:
Nice work, with many great points. Please read the entire post.
David Fish has updated the list of dividend champions, challengers, and contenders. This is always a good source of ideas. This week he features McGrath RentCorp (MGRC) and includes some analysis from Chuck Carnevale.
Chuck is back with a deep dive on United Parcel Service (UPS). The quantitative metrics are solid, so he takes on the key concern - the challenges in business to consumer deliveries. This is a typically first-rate analysis.
Brian Gilmartin’s earnings-driven analysis still favors energy stocks. Like everyone else, we will be paying even more attention to Brian next week as earnings season begins.
Barron’s agrees with the energy theme, and also features Under Armour (UA) and Lowes (LOW).
Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. Felix, who is most aligned with long-term traders, likes Wynn Resorts (WYNN). The most recent post provides descriptions of each model. You will probably identify with one of the characters, and your questions are welcomed.
Lee Jackson has five “safe stocks" if you think the “Trump magic" has worn off.
Blue Harbinger has some dividend ideas in health care.
Wade D. Pfau does a nice job in describing bond ladders. I especially like the rolling ladder, which we offer as a complement to higher-yielding programs. Anyone interested in safe yield, with the potential to grow with the market, should read this post.
Frank Holmes opines that the time has come.
Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is this week’s best investment advice (see above). Other great posts included the question of whether you would prefer $1 million or $5000 per month for your retirement, and the pragmatic warning about making financial decisions on your smartphone.
In his regular column, Seeking Alpha Editor Gil Weinreich takes up yet another important topic - diversification and what is added by ETFs. He cites contributor Roger Nussbaum, who provides a balanced discussion of diversification, stock picking, concentrated portfolios, and recent strong opinions. A timely point for discussion.
Watch out for…
Costly but natural mistakes. Josh Brown cites data showing that investors significantly underperform market averages. Mostly this comes from psychological reactions, but some is also stock selection. The key chart is below. If you are lagging on your investment performance, please request (main at newarc dot com) my free report on the 12 Pitfalls for Individual Investors. It is a quick and easy test to see if you can profitably “fly solo." Here is Josh’s chart:
Good companies that are bad investments. Aswath Damodaran explains how to tell this difference. Here is the summary, which I strongly endorse!
A major change in leadership has everyone thirsting for information about possible policy changes. Stated positions from a candidate are not dependable. Those ideas might change once in office, or might prove infeasible. In the case of foreign policy, the range of possible results is especially wide. The President has a lot of flexibility, and many of the relationships have a personal quality.
This highlights the importance of this week’s Trump-Xi meeting. Like a top poker player, you should be looking for “tells" about true intentions, future policies, and the economic implications.
As is often the case, it is foolish to predict the specific outcome of these meetings. Readers sometimes expect a definitive answer to the week’s question in my “final thought." That is not the mission of WTWA. I try to do two things:
It is important to recognize what you do not know, what is unknowable, and what is pure speculation. Pretending that you know a specific answer can be costly.
Given that setting, how can we prepare for this event? Most observers will be focused on specific policy implications. That is a mistake. I am interested in the following:
The most important consequence will be the implications for trade policy. One major viewpoint is that President Trump has engaged in tough talk to facilitate bargaining. The other is that he will instigate a trade war. Which is closer to the truth?
This week will provide the first hints. Stay tuned!
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