The Week Ahead: A Tipping Point?

by Jeff Miller, A Dash of Insight

Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine. My record is pretty good, with recent topics including Fedspeak, increased volatility, and a focus on interest rates – all very accurate.

Sometimes there is no clear theme, and I try to be honest about that. In the past I have described it as a “lull before the storm” and as “waiting for evidence.” This week I see an absence of major new data. At the same time the markets are at a crucial point for both technicians and traders. That is the main reason for the recent volatility.

I see the following key questions?

• Is this a potential tipping point for markets – both bonds and stocks?
• What is the real “new normal?”

PIMCO invented and popularized “new normal” and every word by their public spokesmen gets plenty of media attention. I want to highlight an alternative “normalization” viewpoint from Brad DeLong, a Berkeley econ prof. His positions means both that he has the highest qualifications possible and that he will be ignored by most of my market colleagues because of their own biases. This is foolish. Here at “A Dash” I highlight great sources from various persuasions, ranging from the very liberal to rock-ribbed conservatives and libertarians. I do leave out extremists from the conspiracy wings.

Prof. DeLong also did a great job as organizer of the recent Kauffman Conference – helpful both to me and to many others. (More on that to come). This week he wrote an excellent post that is very important for investors. Since it is long and wonkish, it will not get read by those who need the information the most—investors! What if I said that it was the most important post I saw this week –out of the hundreds that I review each week?

My job is to summarize such information, but it is a challenge with this piece. It includes a survey of what is unusual and an analysis of paths to normalization.

So here is the summary: This is not simple! The media buzz you are getting is not just uninformative, it is wrong. The various discrepancies in labor force participation, government debt, and regulation will be resolved, but the path is not clear.

I have my own thoughts on the real “new normal” which I’ll report in the conclusion. First, let us do our regular update of last week’s news and data.

Background on “Weighing the Week Ahead”

There are many good lists of upcoming events. One source I regularly follow is the weekly calendar from Investing.com. For best results you need to select the date range from the calendar displayed on the site. You will be rewarded with a comprehensive list of data and events from all over the world. It takes a little practice, but it is worth it.

In contrast, I highlight a smaller group of events. My theme is an expert guess about 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.

This is unlike my other articles at “A Dash” where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.

Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. 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 feel free to disagree. That is what makes a market!

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
2. It is better than expectations.

The Good

This was a mixed week for economic data, but the most important reports were positive.

• The employment report beat expectations. Job gains did not run high enough to stimulate Fed Fear. The market celebrated the news, but those paying attention understand the shortcomings:
  • Gene Epstein, writing in Barron’s, sees a recovery as at least a year away. That merely extrapolates the current growth rate without adjusting for changes in the work force.
  • The pace of net job gains is not fast enough (although a recent study suggests that anything over 80K cuts unemployment (via GEI).
  • Other employment indicators were not as strong. Regular readers know that I like to view the BLS as one of several sources. I am delighted to read Goldman Sachs economist Jan Hatzius says the same. See the helpful article from Cardiff Garcia.
  • The wage increases are lagging job gains (See Martin Hutchinson at Breakingviews).

• Mortgage debt is down and household net worth is higher. Calculated Risk analyzes the latest Federal Reserve Flow of Funds report. We should note, however, that the gains are skewed to the upper end of the wealth and income ranges.
• CFOs are optimistic about the U.S. economy according to the quarterly Duke survey. The Optimism Index rating of 61 is a rebound from last quarter’s 55 and above the long-term average of 59. Latin American and Asian CFOs are even more positive. Despite this, spending plans are only modestly higher. There are a number of interesting findings here, so it is well worth checking out.
• The IMF recognizes excessive austerity in Europe. More economic growth in Europe would help everyone.
• Home prices show strong gains from the CoreLogic NSA series. Calculated Risk is the place to monitor the housing rebound, where Bill McBride writes as follows:
  

  “The year-over-year comparison has been positive for fourteen consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).

  This is the largest year-over-year increase since 2006.”

• The dollar is getting stronger on a trade-weighted basis. Dr. Ed has the story and this chart:

• And the inverse correlation of stocks with the dollar has reversed quite sharply (via Bespoke). Here is the key chart, but check out the article for discussion and analysis. This change has been a major surprise for many, especially those who love to overuse the word, “debase.”