The Week Ahead
This week brings an interesting mixture of news and important policy decisions. The economic data will be less important than usual.
The “A List” includes the following:
- Senate vote on Syria (W). The date might drift. This could stop the plan for military action, but will not enable it without House support as well.
- Obama speech (Tu evening). The speech and the public reaction will be important influences on Congressional action.
- Initial jobless claims (Th). Employment is the focal point in evaluating the economy – both for us and for the Fed. This is the most responsive indicator.
- Michigan sentiment index (F). This remains a good concurrent indicator for employment and spending – after removing the noise of fluctuations in gas prices as political news.
The “B List” includes the following:
- Retail sales (F). Especially interesting given the relatively weak earnings for retailers and slack in consumer spending.
- Business inventories (F). Noteworthy for the impact on GDP.
- PPI (F). Inflation remains a back-burner concern, but some will watch producer prices for the first signs.
Fed officials will not be speechifying in advance of next week’s FOMC meeting. We can expect plenty of international commentary on the Syrian situation.
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 moved to a bearish posture, now fully reflected in trading accounts which are 2/3 short via inverse ETFs. While it is a three-week forecast, we update the model every day and trade accordingly. It is fair to say that Felix is cautiously bearish about the next few weeks.
Insight for Investors
The challenge for investors is to distinguish between the major trends and the short-term uncertainty. The main themes are not related to headlines news, even though sentiment may drive market fluctuations. 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.
Josh Brown has a great new post drawing on the work of George Goodman, who wrote The Money Game under the pseudonym of Adam Smith. “Smith” explains that the successful decision of good money managers use new pieces of information as incremental information, adding to everything they already know. Most investors seriously over-estimate their feel for the market and their ability to use news. Josh highlights another Smith conclusion: “If you do not know who you are, this [the market] is an expensive place to find out.”
Here are the current key concepts.
- 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.
- 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).
- 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
Until the question of military action in Syria is resolved, that will be the principal market focus. Continuing news stories will lead to significant daily volatility. So far this has not shown up in our quantitative risk measures. Some events require additional scrutiny, so this is worth watching closely. I am monitoring all of the risk factors listed in the introduction, but I expect that there will be time to adjust positions if necessary.
President Obama has a tough job in convincing the public on Tuesday night. If he fails, the prospect for military action might die in the Senate on Wednesday. I doubt that Obama will act without Congress, now that he has sought approval.
Interest rates are another important issue – the #1 threat, according to Josh Brown. Josh is concerned about how rapidly rates increase, not just the level. I agree. Scott Grannis emphasizes that increased rates continue to reflect a better economy. Most of the data seem to support this viewpoint.
Stocks have digested the increase in rates pretty well. It fits the scenario I have described as a likely destination for the economy and financial markets. This is helpful in avoiding excessive focus on any single variable in a world where so many things are correlated. I expect the economy to improve, interest rates to move higher (starting with the long end), PE ratios to increase (as is usually the case when rates go to 4% or so), profit margins to decrease somewhat, and the U.S. deficit to decrease. This climate will be very negative for some stocks and sectors and very positive for others. (I provide more detail here.)
