The Week Ahead
There is plenty of data coming this week, but two events loom large:
- The German Constitutional Court ruling (W, before US markets open). The feeling is that the Court will accept an increased German role — -perhaps 80%. If not, there will be a scramble to figure out what portion of current plans may still be feasible.
- The FOMC announcement and Bernanke’s press conference (Th afternoon)
The “A List” includes the following:
- Trade balance (T) with implications for GDP.
- Initial claims (Th) which continue to provide the most up-to-date read on jobs and the economy.
The “B List” includes several reports:
- Industrial production (F).
- Michigan consumer sentiment (F) which has implications for consumer spending and employment.
- PPI (Th) and CPI (F) are sometimes important, but only if we get a few scary reports. That would create a dilemma for the Fed.
The time from the market opening on Wednesday through the FOMC announcement on Thursday will be the most crucial hours of the week.
Trading Time Frame
Despite Felix’s overall “neutral” posture, our trading positions continued in fully invested mode last week. Felix became more aggressive in a timely fashion, near the start of the summer rally. Since we only require three buyable sectors, the trading accounts look for the “bull market somewhere” even when the overall picture is neutral. The ratings have been getting a little weaker, but the trade continues to be profitable.
Felix does not try to call tops and bottoms, but instead keeps us on the right side of major moves, either up or down.
Investor Time Frame
Long-term investing is an objective for many of my clients, so I give it a lot of thought. Each week I try to provide an idea or two that will be useful for those sharing this perspective. Here are two new ones.
How much risk to take. The right answer is different for everyone, but too many people choose “zero.” These investors do not follow the Buffett advice of buying when others are fearful. Then, when the market rallies, they are afraid that they are “too late.” I wrote a new article, Stock Prices and the Fundamentals: Don’t be Fooled, showing how to avoid this trap.
How to pick dividend stocks. Regular readers know that I am fussy about my choice of dividend stocks and I like to enhance yield by selling near-term calls against the position. Carla Pasternak explainswhy it is important to look beyond the yield, finding companies that also represent good value. This is a fine article, combining both a great approach with some specific ideas.
If you have been following our regular advice, you have done the following:
- Replaced your bond mutual funds with individual bonds;
- Sold some calls against your modest dividend stocks to enhance yield to the 10% range; and
- Added some octane with a reasonable allocation of good stocks.
There is nothing more satisfying than collecting good returns in a sideways market.
If you have not done so, it is certainly not too late. We have collected some of our recent recommendations in a new investor resource page — a starting point for the long-term investor. (Comments welcome!)
Final Thoughts on the Fed
Before this week I was not expecting an aggressive action by the Fed, but my own opinion changes with the data.
The mistake made by most is a collection of dangerous ideas — OK for politics, but risky for trading and investing. In the absence of a better term, I’m going to call it the Fed Skeptic Syndrome.
The Fed Skeptic has the following collection of beliefs:
- QE has no positive economic effect. It has not helped employment and has boosted stocks only because the Fed bond buys act like direct purchases of stocks and commodities — in addition to pushing conservative savers into tech stocks and soybeans. Fed action has artificially kept stock prices and the economy higher, but is ineffective. You can see this because things are worse than they were a few years ago. It is all a sugar high, and it will end badly either through deflation, or hyperinflation, or both. These forecasts are certified by an array of “chief investment strategists” whose credentials do not include economic education but do include frequent media appearances. The most popular are “self-taught in Austrian economics.”
The FOMC has the opposite viewpoint:
- QE has lowered interest rates by a few bps and generated a gain of about 2 million jobs over what otherwise would have happened. There was no direct effect on commodity prices. Misguided speculators drove these prices higher. Stock price increases reflected the improved economic prospects from the program, and also created a virtuous cycle of confidence and wealth effects. The proponents are all credentialed mainstream economists of both political parties.
As a voter, feel free to take whatever perspective you want.
As an investor, it is wise to understand those who actually have power, and predict what they will do. Most of those who are missing the rally do not have sufficient respect for the determination and power of government officials.
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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 he 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.
