The Week Ahead
This week brings a full schedule of data releases.
The “A List” includes the following:
- New home sales (W). Housing remains crucial to the recovery. Will higher mortgage rates matter?
- Initial jobless claims (Th). This is the most responsive and also the most encourage of the employment indicators.
- Personal income and spending (F). Important concurrent measure of economic health.
- Michigan sentiment (F). A good concurrent read on employment and spending. The preliminary reading for September was very weak.
- Consumer confidence (T). Usually correlates with the Michigan survey. Will the political shenanigans matter?
The “B List” includes the following:
- Durable goods (W). Rebound from weak prior month?
- PCE prices (F). The Fed’s favorite inflation gauge. Expected to be stable.
- Case-Shiller home prices (T). Slower moving than other sources, but confirming strong increases.
I am not very interested in the final GDP report for Q2.
The official announcement of the Yellen nomination as Fed Chair could come any day. German Chancellor Angela Merkel is expected to win reelection on Sunday.
Expect plenty of rhetoric from politicians and the omnipresent “countdown clock.”
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 shifted back into stocks as several sectors emerged from the penalty box. Like many human traders, Felix was caught leaning the wrong way on the changes in Syria and was neutral during the Fed surprise. We are now fully invested for trading accounts in positions ranging from emerging markets, to interest-sensitive names, and energy themes.
Insight for Investors
A big challenge for investors is to make the best use of available information. The problem is too much data with no clear method for finding real experts. This was one of the reasons I started my blog, and it guides my selection of sources.
It is blindingly obvious when you think about it, but why not consider the financial incentives of your source? When a salesman calls or comes to your door, you know what to expect. Why not use the same level of skepticism online?
I look for sources who are completely aligned with their clients or readers. This explains why I have frequently highlighted the work of Barry Ritholtz and Josh Brown. This week they announced the formation of a new investment firm based upon these client-oriented principles.
Here are two current examples from their blogs.
Barry has a powerful and counter-intuitive post, explaining why most investors ask the wrong questions. He explains that process is more important than outcome:
“Wall Street appears to be selling outcome, but that’s illusory. What they are really selling is potential results. They are luring investors in by selling the possibility of out-performance, and not the actual out-performance itself…. When you consider the alternative — evaluating process — most investors (including many pros) simply lack the skill set to proceed. It has a degree of subjectivity; it relies on statistical analysis that is often counter-intuitive. And perhaps most difficult of all, it requires the abdication of traditional investing myths.”
I urge everyone to read the entire post, but here is a thought: What if you chased what worked last year? You would own bonds and gold…. It is stronger and more successful to find methods that work in the long run and then remain loyal.
Josh writes about one of the major mistakes of the individual investor – “all-in or all-out” market timing. He has a great list of 20 reasons for going to cash. You have to read the entire post, but my favorites are the Hindenburg Omen (of course), Portuguese bond auctions, Marc Faber, and HFT. Find your own favorites and add more in the comments, as Josh invites.
These two experts have helped many investors to avoid traps and market mistakes. I wish them the best of luck with their new firm.
My own advice for long-term investors is similar. (See last week). I highlighted it in my “After the Fed” post, which included some specific recommendations. I was surprised to note that it was among my top four posts used by Seeking Alpha. This suggests the desire for many individual investors to find a clear path in a confusing world.
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
The gridlock scenario continues the theme I have highlighted over the last month – uncertainty and perceived risk. The market hates uncertainty. No sooner is one subject clarified – Syria, Fed Chair, QE – than another appears. When will it end?
My framework is to consider important issues in two ways – the likely actual outcome and the public perceptions and expectations. In this way I can remain grounded in the eventual reality while considering the important short-term reactions. While I am better at analyzing the former, the market often reacts more to the news flow.
Here are my current working hypotheses:
- The US will (once again) avert a default on debt, perhaps through a combination of extraordinary measures to buy a little more time, and pressure from business interests on Republicans.
- There may well be a shutdown. Since most people do not think much about government services until they need them, this seems harmless enough — in the abstract.
- A shutdown will not last long, especially in the modern social networking era. A few missed checks and delayed passports will stimulate the will to compromise.
- Participants can reach agreement after proving that they have done everything possible to fight for their constituent interests.
The big question for the markets relates to the effect on confidence. This was devastating in 2011, even when default was averted. Will investors look at a government shutdown as a precursor to defaulting on the debt? The linkage of these issues, the complexity of the process, and the unusual tactics may create a dangerous situation where perception becomes reality.
Or will investors learn from 2011, seeing a familiar pattern?
No one can answer this question in advance. Agile traders can use this outline as a guide. Investors may choose to ignore the entire process.
If it were not so sad and dangerous, it would be funny. In the words of Will Rogers,
“I don’t make jokes. I just watch the government and report the facts.”