The Week Ahead
This week brings little data and scheduled news, an artifact of the calendar and the holidays.
The “A List” includes the following:
- The FOMC decision (W). Followed by the Bernanke press conference.
- Initial jobless claims (Th). Employment is the focal point in evaluating the economy, and this is the most responsive indicator.
- Building permits and housing starts (W). Permits are the best leading indicator, but the market emphasizes housing starts. These are crucial factors in the current rebound since construction activity is implied.
The “B List” includes the following:
- Industrial production (M). Closely watched component of GDP.
- Existing home sales (Th). An indicator of the housing market, and economic health, but not as important as new homes.
- CPI (T). Inflation is still not a major concern, but eventually it will be important. Meanwhile, we watch closely.
- Leading indicators (Th). Still a favorite for some economic observers, despite some controversy about the index.
I am not very interested in the Philly Fed, although it sometimes moves the market if it makes a major move. I am even less interested in the Empire State index. There will be more speeches and news about Syria, but it will remain in the background unless there is another chemical weapons incident.
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 went wrong last week. World events sparked a dramatic change in sentiment and market direction. Felix correctly identified a dangerous situation, and our trading accounts were poised to profit from a market decline. This type of trading is an appropriate choice for some investors, often as a complement to their regular long holdings in stocks.
When such a prediction goes wrong, most people forget that risk was avoided or hedged. When the fire does not happen, why did we have insurance?
This is why I emphasize each week the short-term nature of the trading program.
Felix frequently identifies concepts recommended by the leading experts. Jim Grant was on CNBC Friday afternoon, recommending that you buy assorted Russian energy stocks on the London exchange. He noted the risks and extolled the valuation, responding to Maria’s questions. For those who do not have an account that readily works for London, you could follow our ETF updates. We show an easy way to accomplish the same thing. I posted as follows on WSAS:
“If anyone is interested in Russian energy, RSX (the Van Eck Russian fund) has all of the names Grant mentioned in pretty high concentration. I trade it occasionally via Felix, and it is highly correlated with oil. It is top-ranked Felix ETF at the moment, but in the penalty box. http://www.vaneck.com/funds/RSX.aspx“
We do not yet own RSX, but we might buy it soon. During the week we sold our holdings in the inverse ETFs, accepting a modest loss on our 2/3 position. Trading accounts are now completely out of the market, but there are several attractive sectors. My guess is that Felix will have fresh buys for us in a couple of days.
Insight for Investors
One of the most frequent questions for me is why I separate the time frames in these posts. I frequently suggest that investors use periods of selling to add to positions. At the same time, traders might be taking short positions. Those following the enhanced yield approach should be adding new covered call positions on dips, and selling calls against existing stock positions on rallies.
It is all about the time frame!
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.
Take last week as an example. Few traders can be sufficiently agile to make major position adjustments. Even if they try, the news – always difficult to interpret – can throw a curve ball. It is much better to discover a winning method and stick with it.
Here are the most important current themes.
- 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 continuing. Most investorsare 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. There is a continuing move to cyclical stocks (which I currently favor).
- 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).
Two weeks ago you had chances to set new positions on down days and also to sell calls against existing energy positions on the Syria news. This week we cashed in on the rally from the Intel developers’ forum (which we have been discussing at Wall Street All Stars). By holding the stock from the last expiration and waiting to sell calls (I did the OCT 24’s for clients). Take what is offered each day.
- Avoid the paralysis from 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. I have a good transition plan for those with a fixation and fear and gold.
- Become an Insightful Investor! My current series about the eight traits of the insightful investor will help to point the way. The most recent installment shows a chart that has been expensive for many. The chart has gotten about a zillion page views. My reply is known only to a group equivalent to the population of a small town. Astute investors take advantage of disparities like this!
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
I suggest several key conclusions from recent data. Each is important, and collectively they provide a good foundation for long-term investors.
- Many failed pundits excuse themselves by pointing to the Fed. (See The Fed as a Fig Leaf). In fact, the Fed policy has had a positive but small impact. Stocks have done well in spite of an increase in interest rates. Scott Grannis sees the rise in yields as reflective of the economy – a failure of QE. His chart shows that dramatic “non-correlation.”
- The Fed will probably announce a policy change. This reflects a shift in the center of FOMC opinion – more confidence in the economy, more concern about unpredictable side-effects, and more emphasis on a shift to forward guidance.
- The Fed policy will remain stimulative for about two more years. Despite this, expect another round of the debate about whether easing up on the gas pedal is the same as hitting the brake.
- The “taper equals tightening” camp is wrong on the facts, but enjoys a large audience.
- Some claim that the first Fed move is immediately projected to the final result, because markets anticipate.
- I recommend attention to the actual facts. Those who have been wrong for the last several years will be wrong again.
- There will be some negative market reaction. Not everyone expects a change, and some do not agree that it is mostly anticipated. This means there will be sellers. I expect this to be relatively modest and short-lived, given the multi-month build up.
- The Bernanke press conference will be important. I have not been a fan of the press conferences. They seem helpful, but it has not been a good venue for explanations by this particular Fed Chair. The press conference could lead to some stock market weakness, which I expect to be temporary.
It always helps to start the week with a plan. An old military maxim says that “no plan survives the first shot.” It still helps you to prepare and to react quickly.