Our “Felix” model is the basis for our “official” vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions. This week we switched back to bullish after a brief stint at “neutral.” These are one-month forecasts for the poll, but Felix has a three-week horizon. The ratings have moved a little higher, and the confidence has improved from last week. It has been a close call over the last few weeks.
[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
There is a relatively moderate calendar for data this week.
The “A List” includes the following:
- Building permits (W) which provide the best leading indicator on housing.
- Initial claims (Th) which continue to provide the most up-to-date read on jobs and the economy.
The “B List” includes several reports:
- Housing starts (W).
- Leading economic indicators (Th) which while frequently tweaked to improve the fit, are interesting to many.
There are also the regional Fed indexes from NY and Philly. I do not regard these as very important, especially in the wake of last week’s Fed decision. The market reacts when there is a big move. We also will have the Markit flash PMI reports, which are starting to earn a following.
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 stronger, so we maintain the profitable trades.
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 investors face a challenge this week. They will be bombarded with comments from Fed critics, gold buffs, recessionistas, and hyper-inflation zealots. These people have all been completely wrong for years, but they are still featured as experts.
Long-term investing is an objective for many of my clients, so I give it a lot of thought. Each week I use this space to share (right or wrong) my best long-term thoughts. Sometimes this means emphasizing themes that I have written about more comprehensively.
Here are two such thoughts.
How much risk should you 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. The answer is not going “all in” since most of us have to pay more attention to short-term risk than does Mr. Buffett!
Should you worry about the “fiscal cliff?” The basic answer is “not yet.” I explain why in two articles. The first reveals my one-word solution. The second offers my current expectations, and how I am investing for the long-term program.
If you have been following our regular advice, you have done the following:
- Replaced your bond mutual funds with individual bonds (bond funds are very risky!);
- 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 getting yield and call premiums, even if stocks move sideways.
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 and suggestions welcome!)
Final Thoughts on Housing
Most market followers are missing the inflection point in housing. The Fed has acted aggressively. To understand the significance of the new Fed policy would require a lot of reading. I cannot review it all in the weekly summary post, so let me suggest another key source, James Hamilton.
“I think the correct interpretation of QE3 is that the Fed has unambiguously signaled that it’s not going to re-run the Japanese experiment to see what happens when the central bank stands by and watches wages and prices fall even while unemployment remains very high. The Fed can and will keep U.S. inflation from falling much below 2%, and that may help a little. Investors should expect that, and not a whole lot more.”
The mistake that most are making is the typical one for non-economists: black and white, all or nothing.
Suppose that QE3 reduces mortgage rates by 0.125%. This translates into a purchasing power increase of about 1.5%. You cannot just tack that onto home prices, since the benefit is split. What happens is that the demand curve is shifted a little.
So ignore the clueless bozos who say things like the following:
- No new buyers will qualify.
- When did you last hear about someone who didn’t buy because interest rates were too high?
These pontificating pundits do not understand economics, and they are probably on a mission related to their own pocketbook.
We need to think about marginal effects. A few more buyers will qualify. Those that do qualify can afford a little more house.
The subjects are so complicated, that I cannot treat them properly in the weekly summary article. I can only share my own conclusions, as always, and point you to the best sources.
(Note to readers: I took a little time off this weekend, but the topics are so important that I want to maintain continuity in the series. This is one of the most difficult articles in the entire series).
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.