by Jeff Miller
Last Week’s Data
The most important news was positive.
The Good
Most major economic indicators show that the US economy has returned to its normal state, self-sustaining growth. Many seem to have forgotten that economic growth is normal, including the use of slack resources to expand and to build new businesses.
- Economic growth forecasts improved. The ECRI Weekly Leading Index improved slightly, to 131.2. The growth index also moved higher to 6.7%. These continue to be good readings, but everyone is watching the indicator closely.
- Risk as measured by the St. Louis Fed Stress Index, remains very low. This measure tracks a lot of market data in the eighteen inputs. It is not a poll, nor opinions, nor a collection of anecdotes. We should all pay attention to some real data. The value moved to -.027, a bit lower than last week’s +.021. These are completely normal readings for a scale measured in standard deviations from the norm. For more interpretation, the St. Louis Fed published a short paper with a very nice chart that helps to interpret this index. The chart does not reflect the recent continued decline in stress, but it identifies the dates for important recent events. The paper also has a longer version of the chart, illustrating past stress periods. I am not going to run the chart each week, but I strongly recommend that readers look at the paper. In the 2008 decline there was plenty of warning from this index — no sign right now. The scale is in standard deviations, so anything short of 1.0 or so is neutral territory. I am doing more extensive research on this indicator.
- Jobless Claims moved lower. I am leaving this in the “good” category because of the small improvement, but I think The Bonddad Blog interpretation is correct: “The BLS reported that Initial jobless claims last week were 382,000. The 4 week average is 389,500. This is the seventh week in a row that this number has been initially reported below 400,000. On the other hand, this series has not made a new low in five weeks.”
- Businesses plan more hiring. Floyd Norris discusses the Business Roundtable data.
- The government shutdown was avoided. I have been predicting this with some confidence. I know it seemed like a close call from the media accounts, but issues that can be compromised with dollar changes are usually resolved. Obviously, we will all return to the underlying issues from this debate. For now, a market negative was avoided.
NB: The ECRI and SLFSI are actually readings from week-old data.
The Bad
The biggest negative was the continuing spike in energy prices.
- Energy prices move higher. This continues as the biggest threat to the economy.
- Housing, by any measure, remains very poor. A flat housing market would end the drag of more than 1% on GDP. A real turnaround would be better. Last week’s mortgage data continued the negative story.
The Ugly
The ugliest news this week was the story about the world of foreign exchange trading. Would it surprise you to learn that most of the little guys use excessive leverage and lose all of their money? That the firms that facilitate their trades have a real mission — to replace customers they know will blow out.
I usually learn about these stories after it is too late. Investors who lost money in stocks in 2000, then stampeded into real estate and lost there, are now looking for short cuts to riches.
Abnormal Returns had a great screencast on this topic on Monday.
Josh Brown had two powerful pieces: Don’t do it and the boiler room.
Everyone should read these stories and help their clients, family, and friends avoid losses.
Our Own Forecast
We base our “official” weekly posture on ratings from our TCA-ETF “Felix” model. After a mostly bullish posture for several months, Felix has turned much more cautious. We shifted from our neutral posture to bullish in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. This is based on improved ratings in the various index ETFs, as well as the general trend. Here is what we see:
- 89% of our 56 ETF’s have a positive rating, up from 55% last week. This is very encouraging.
- 93% of our 56 sectors are in our “penalty box,” the same as 93% last week. This is an indication of very high short-term risk.
- Our universe has a median strength of +35, up nicely from +21 last week.
The overall picture improved last week. We maintained positions in trading accounts at 40%, holding only the two strongest sectors. We will add positions on Monday and Tuesday.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. You can also write personally to me with questions or comments, and I’ll do my best to answer.]
The Week Ahead
On the economic front we will see retail sales data, with everyone poised to see if higher gasoline prices have hit spending on other products. We get both PPI and CPI data. The expected difference between headline and core numbers will fuel the discussion about the Fed and profit margins. Michigan sentiment data may also show the gasoline price effect.
And, of course, we are ready to start a new earnings season. The earnings story is important, but I expect a skeptical reception. Any company without strong guidance may see a weaker stock price. Any company that talks about negative effects from energy costs will see a lot of publicity and plenty of selling. I hope to post more about the impact of earnings season announcements on stocks later this week.
Investment Implications
Earnings growth continues to be strong, but the data have attracted little respect. Most of the punditry is looking for a reduction in profit margins, which have continued at a record level. There is an interesting report from Goldman Sachs (via Charles Kirk’s excellent links) that explains why index margins continue to increase, even as some company margins fall. As is usually the case when an argument requires some study, those who disagree will merely scoff without reading it.
I expect mean-reverting behavior in profit margins at some point, but I think the forecasts of lower earnings are wrong. Employment and revenues are also reverting to the mean — and that is much higher than current levels.
For the moment, I am adding to long-term positions, but only cautiously.
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