The Week Ahead
There is a busier calendar for data this week. As noted above, my grading of the reports relates to what I see as important.
The “A List” includes the following:
- Consumer Confidence (Conf Board) (T) as an important confirming concurrent indicator
- Initial claims (Th) which continue to provide the most up-to-date read on jobs and the economy.
The “B List” includes several reports:
- Michigan Sentiment (F) is as important as the Conference Board, but we already have the preliminary read for the month.
- Chicago PMI — once again more significant because of the weekend before the national PMI. This is the most reliable of the regional indicators.
- Personal income and spending for August (F). Other indicators may seem fresher, but this is important confirmation and could move the market.
- Durable goods (TH) has the same significance and interpretation as Personal Income.
There will be assorted speeches by central bankers, but the key discussion will be about Spain. The market wants Spain to agree to a bit more austerity and request an official bailout. This news will be greeted as bullish, sending Spanish yields lower, the Euro higher, and US stocks higher as well.
This may seem counter-intuitive to some, but that will be the take. Watch for it.
Trading Time Frame
Felix has moved back into a marginally bullish posture over the last two weeks, but it has been a close call. In practice, the official forecast has mattered little to our trading positions. 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
Many long-term investors have simply lost touch with reality. Here is an astounding research finding:
“One surprising finding shows that investors are likely so consumed by the negative economic news, including high unemployment and the weak housing market, that they haven’t even noticed the strength of the stock market.
For example, when 1,000 investors were asked whether they thought the S&P was up or down during each of the past three years, 66% thought it was down in 2009, 48% thought it was down in 2010, and 53% thought it was down last year.
In fact, the S&P gained 26.5% in 2009, 15.1% in 2010, and 2.1% last year.”
Those worried that it is “too late” to invest should read Eddy Elfenbein’s nice post, The Market’s P/E Ratio Is Lower Now Than It Was Most of the Time from 1991 to 2010, including this chart:
Understanding the attractive fundamental conditions is the first step for the long-term investor, but it does not mean that you should be going “all in.”
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 Confidence
There are some glimmers of improvement. The latest WSJ/NBC poll includes these two results (via Washington Post, where you can see their other six key takeaways):
- A burst of “right direction” optimism: Nearly four in 10 people said that the country is “headed in the right direction” — the highest that number has been in NBC-WSJ polling since January 2009. By way of comparison, in NBC-WSJ polling in August, July and June the “right direction” number never rose above 32 percent. Important piece of context: A majority of people — 55 percent — still say that things are off on the “wrong track”.
- Economy improving?: In a bounce similar to the “right direction” improvement noted above, 42 percent of people now believe the economy will get better over the next year, an improvement from the 36 percent who said the same just a month ago. That burst of optimism comes not from those who had previously been pessimistic — 18 percent in both the August and September NBC-WSJ poll said the economy would get worse — but rather from movement among those who had previously predicted the status quo (38 percent in August) and now feel more optimistic (32 percent in September).
This is only a start, but most readers probably are not seeing these indicators in their regular reading.
Tracking confidence measures of all sorts is important for investors. This is how we will discover that prospects are improving — or not!
This week’s upcoming data will provide updated information on consumer sentiment. We will see more on the candidates and general economic sentiment as well.
The Payoff — If Confidence Returns to Normal
Some astute observers see plenty of upside. JP Morgan’s Thomas Lee notes that if the S&P earnings yield merely equaled the high yield bond (a frequent past metric), the S&P 500 would be at 1600. Check out the entire article to see what else might happen before election day.
It is going to take heightened confidence before we see this, but it certainly could happen.
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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.
