The Week Ahead
This week is a slow one for scheduled data and news.
The “A List” includes the following:
- Initial jobless claims (Th). Employment will continue as the focal point in evaluating the economy, and this is the most responsive indicator.
- Personal income and consumption (F). A key measure of the pace of the economic rebound (July data).
- Michigan sentiment index (F). This remains a good concurrent indicator for employment and spending. Will there be a rebound from the lower weak preliminary readings.
- Conference Board sentiment (T). While I prefer the Michigan approach, the Conference Board method usually has a very similar results.
The “B List” includes the following:
- Durable goods (M). Another read on GDP changes.
- Case-Shiller home prices (T). Widely followed, but slow to change and only 20 cities.
- Chicago PMI (F). This always has a special interest when the trading month ends on a Friday. It is the single best indicator for the national ISM index.
- GDP second estimate (Th). This is backward-looking, but it does show the current base.
I am not very interested in the regional Fed reports.
Talking Fed heads include Richmond Pres. Lacker (dove) who is speaking on the history of the Fed, but might say something in Q and A and St. Louis Pres. Bullard (hawk) who will address the economy. These both occur on Thursday. In a low-volume summer environment, with many already leaving for a long weekend, any piece of news might have an effect, so I’ll be watching.
How to Use the Weekly Data Updates
In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.
To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?
My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.
Insight for Traders
Felix has continued a neutral posture, now better reflected in trading accounts which are 1/3 invested in a foreign ETF. The overall ratings are slightly negative, so we are close to an outright bearish call. This could easily be the case by the end of next week. While it is a three-week forecast, we update the model every day and trade accordingly. It is fair to say that Felix is cautious about the next few weeks. Felix did well to avoid the premature correction calls that have been prevalent since the first few days of 2013, accompanied by various slogans and omens.
Insight for Investors
The most helpful recent article comes from Abnormal Returns. (We all benefit when Tadas takes the time to write on a general theme, in addition to his regular citation of the best links).
The concept is that market timing easily leads investors out of the market, but there is no good signal for re-entry. Cash becomes an addiction! This is animportant post, which should be a jarring dose of reality for many investors who have mistimed the market. Tadas writes, “I think that “cash is a drug” for most investors. Easy to start, difficult to kick. Always a reason to NOT get back in.”
This is also the message I have emphasized. Do not be seduced by the idea that you can time the market, calling every 10% correction. Many claim this ability, but few have a documented record to prove it. Most who claim past success are using a back-tested model. Please see The Seduction of Market Timing.
This is an opportunity for reflection. Think of it as a mid-year checkup.
- Beware of yield plays. For several months, I have accurately emphasized the danger of yield-based investments – yesterday’s source of safety. The popular name for this is “The Great Rotation.” It is still in the early innings, since bond fund investors are only getting the bad news from their statements. Even the best bond managers (like Gross and Gundlach) cannot win when interest rates are rising. The exodus from their funds is starting. Most investors are emphasizing cash, real estate, and gold. .333 is good in the major leagues, but not for your investments!
It may be a “generational selling opportunity” for bonds. I locked in some positions after the recent big move, but this story is not over.
- Find a safer source of yield: Take what the market is giving you!
For the conservative investor, you can buy stocks with a reasonable yield, attractive valuation, and a strong balance sheet. You can then sell near-term calls against your position and target returns close to 10%. The risk is far lower than for a general stock portfolio. This strategy has worked well for over two years and continues to do so. (I freely share how we do it and you can try it yourself. Follow here).
Chuck Carnevale sees some remaining opportunity in utilities. I see most of the group as over-valued and exposed to rising rates, but I always respect Chuck’s analysis. Some of these might be candidates for the enhanced yield strategy.
- Lose the focus on fear! Many are rewarded for making sure that you are “scared witless” (TM OldProf euphemism). If you are addicted to gold and allegedly safe yield stocks, you need a checkup. Gold works in times of hyperinflation or deflation/crisis. When neither happens, the ball is going between these Golden Goalposts. There is a good transition plan for those with a fixation and fear and gold.
And finally, 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. I am trying to be helpful and I love feedback).
Final Thought
There is a major imbalance in market commentary.
On one side we have the following:
- Hedge funds and investment managers who are seriously trailing the market and need a decline;
- Those with a political stake in a weaker economy and a lower stock market;
- Websites that cash in on advertising page views or payments from hedge funds;
- Bond funds and the research firms that closely support them;
- TV and mass media sources that need exciting grist for page views; and
- Pundits who seek the limelight.
In sharp contrast there are sources whose own financial incentives are closely aligned with their clients. While anyone can be mistaken, Josh Brown recently explained why it can pay to be spectacularly wrong. He posted a helpful analytical matrix:
Here is a good example – and there were many from which to choose. CNBC features frequent guest Harry Dent and his prediction of a market crash to Dow 6,000.
How about equal time for this analysis from Larry Swedroe at CBS MoneyWatch. After a careful analysis of Dent’s horrible record, he explains as follows:
“Why do people listen to Harry Dent in light of his obvious inability to accurately predict the future? I believe it is because most of us want certainty, even when we know, logically, that it doesn’t exist. With investing it is a desire to believe that there’s someone who can protect us from bear markets and the devastating losses that can result. That leads to what we can call the “Wizard of Oz” effect. We come under the spell of wizards, authoritative voices who we are “trained” to take their words as truths. We want to believe that we can control things because as Woody Allen put it, otherwise “life is scarier.” Yet, political scientist Philip Tetlock demonstrated in his outstanding book, “Expert Political Judgment: How Good Is It? How Can We Know?” that even professional economic forecasters don’t make accurate forecasts with any persistence. In fact, the only predictor of accuracy was fame, which was negatively correlated with accuracy. In fact, those more likely feted by the media made the worst forecasts. That explains a great deal about Dent.”
Sticking to the data is less exciting, but more profitable. Meanwhile, the week ahead will feature pundits trying to make much out of little.