by Jeff Miller
In a dramatic week for stocks concern abated over the Greek situation. The over-hyped and misleading “end” of QE II came and went. The economic news was surprisingly positive. Stocks rose 5.4%, the best week in two years.
Mark Thoma has an excellent summary of the QE II issue, concluding as follows:
The asset purchases made under QE2 expanded the Fed’s balance sheet considerably. However, once the program ends the Fed plans to hold the balance sheet at its present size (e.g. by reinvesting the proceeds of any securities that mature while in their possession).
The effects of QE2 described above depend mostly upon the size of the Fed’s balance sheet, and since the balance sheet is not expected to change until the economy shows signs of improvement, the end of QE2 will not bring about any big changes.
No one really expects the passage of the Greek austerity program to be a permanent solution. In this article I tried to explain how it can be constructive for governments to make progress, even if temporary. The progress helps to avoid a Lehman-style systemic impact. I wonder when someone will get around to investigating how the progress might have been changed had the Strauss-Kahn incident not occurred.
Last week’s action illustrates why markets thrive when there is a highly-publicized, well-identified list of worries.
It must be time for something new to worry about!
For most, the debt crisis will take this role.
I’ll comment on the current worries and the upcoming week, but first let us do our regular review of last week’s high points.
Background on “Weighing the Week Ahead”
There are many good services that do a complete list of every event. That is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
Readers often disagree with my conclusions. That is fine! Join in and comment. In most of my articles I build a careful case for each point. My purpose here is different. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but some will disagree. That is what makes a market!
Last Week’s Data
The economic news was surprisingly encouraging.
There was good news in important indicators.
- The ISM manufacturing index surprised the market with a nice bounce to 55.3. If annualized, this corresponds to a 4.5% increase in real GDP. The Chicago Index showed similar strength.
- A default of Greek debt was avoided — at least for now.
- US home prices were up for the first time in eight months, according to the Case-Shiller measure. Global Economic Intersection has a nice analysis of this and other measures. The Bonddad Blog also has an interesting new source to consider.
The pattern of weak economic data continues to show in some indicators.
- Initial jobless claims of 428,000 — still too high to expect solid job growth. If this is a temporary story from the auto parts supply shortage, we should soon be seeing some improvement.
- Gasoline prices fell further, but oil prices rebounded. This is a continuing economic challenge.
- Auto sales were weak, but there is still some feeling that May and June will represent the low point for the year. Check out Calculated Risk for the full analysis.
- Lesser indicators are also very weak. Personal spending, rail shipments, trucking — you name it — the soft patch is continuing on several fronts.
Watching the making of the debt ceiling sausage gets the ugly award, especially for those unfamililar with the process. To all appearances the process seems out of control, careening toward a disastrous default on US debt. Many observers have been increasing their odds of default.
My perspective? Everything is playing out as expected. Each participant is attempting to maximize rewards for his own constituency. Each is also maximizing the perceived rewards, proving that any ground was given in a grudging fashion. While it would be good for the nation as a whole to achieve an early solution, there is no benefit for any individual party to the process.
The result will be a compromise on the eve of July 22nd, currently regarded as the last day possible. There will be concessions to various parties until a minimal winning coalition is achieved.
Explaining the entire rational is beyond the scope of this weekly survey article, so I’ll try to go into more detail in a separate piece. Briefly put, there is too much at stake, especially for constituencies important to Republicans. If there is a default, neither party will escape blame. The deal will get done.
The Indicator Snapshot
It is important to keep the weekly news in perspective. My weekly indicator snapshot includes important summary indicators:
- The ECRI Weekly Leading Index and the derivative Growth Index
- The St. Louis Fed Stress Index
- The key measures from our “Felix” ETF model.
There will soon be at least one new indicator, and the current choices are under review.
The indicators show continuing modest growth at a slowing pace, with little indication of economic risk. The market fears, as is often the case, are greater than one might expect from the data.
Felix is the basis for our “official” vote in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. We have a long public record for these positions.
[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
The important economic news for the week will be all about jobs. The most significant will be Friday’s employment situation report. Thursday brings some preliminary employment news from the ADP estimate and the initial claims report (not a part of the payroll report survey period, but still interesting).
The ISM Service index will be studied for confirmation of the message from the manufacturing report.
I expect the political news to grab attention, with a continuing crossfire of zingers.
In trading accounts last week we closed our inverse ETF positions, so we are completely neutral. To my continuing surprise, we do not yet have any signals for new holdings. There are a number of ETFs with good ratings, but everything is still in the penalty box. Felix is cautious at turning points.
For investment accounts we were more aggressive last week in establishing new positions, and shifting holdings to those with more economic exposure. As I have noted in recent weeks, the investment time frame requires looking for opportunity when traders are scrambling.
Investors should focus on tangible and objective measures of risk. These are all in normal ranges, historically profitable for investments, despite the debt ceiling controversy.
U.S. Investment Outlook by MacroTides
The Week Ahead: Another Bernanke Press Conference by Jeff Miller
Weak Defense by Chris Kimble
Comparing World Markets by Doug Short
Stock market Cycle Analysis by Erik McCurdy
Why the $VIX Isn’t Surging by Albertarocks
About the Author
Jeff Miller has been a partner in New Arc Investments since 1997, managing investment partnerships and individual accounts. He has worked for market makers at the Chicago Board Options Exchange, where found anomalies in the standard option pricing models and developed new forecasting techniques. Jeff is a Public Policy analyst and formerly taught advanced research methods at the University of Wisconsin. He analyzed many issues related to state tax policy and provided quantitative modeling which helped inform state and local officials in Wisconsin for more than a decade. Jeff writes at his blog, A Dash of Insight.