The Week Ahead
This week’s schedule might be affected by a government shutdown. Private data from sources like the ISM and ADP will be announced as usual. Government data depends both on significance and whether the reports are mostly assembled already. This means that there is some risk of disclosure during a delay. The BLS may go ahead with jobless claims and the employment report, arguing that these are “principal federal economic indicators.” There is some precedent for allowing a small team to release reports that are mostly complete. The Commerce department has no plans to release data during a shutdown. This affects most other reports. If the shutdown lasts longer than a week, we probably will also lose upcoming employment data. (See this good WSJ article for more).
The “A List” includes the following:
- Employment report (F). Despite the noise in the series and the many revisions, this remains the most important single indicator both for government policy and the markets.
- Initial jobless claims (Th). This is the most frequent and responsive employment indicator, but it tells only part of the story.
- ISM Index (T). An important concurrent economic indicator with some leading components.
- ADP employment (W). This measure of private employment is always judged as a predictor of the “official” report, but it actually contains important independent data via a different approach.
The “B List” includes the following:
- ISM Services index (Th). The service sector is bigger than manufacturing, but the latter index gets more attention.
- Light vehicle sales (T). More widely followed recently as a part of the economic rebound.
- Construction spending (T). August data, but important because of the role of construction.
- Chicago PMI (M). Mostly important as a sneak peek for the national ISM data.
We’ll get some FedSpeak, principally Chairman Bernanke on Wednesday. Whatever the topic, questioners will try to draw him into a discussion of current policy and the Fed Chair succession. ECB Chief Draghi will announce the interest rate decision of their governing council on Wednesday.
And of course, we’ll have non-stop finger pointing and punditry with a countdown clock in the background.
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 bullish posture, fully reflected in trading accounts. The emphasis has been on foreign ETFs, although the broad market ETFs have positive ratings. Felix’s ratings have been in a fairly narrow range for several months. The rapid news-driven shifts are not the ideal conditions for Felix’s three-week horizon. The high penalty box rating continues to underscore the uncertainty.
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.
This past week I wrote further on how investors can manage risk, specifically considering the role of bonds and the risk of bond mutual funds. As I emphasized, “You need to choose the right level of risk!” Right now, it is the most important question for investors. There is plenty of “headline risk” that may not really translate into prospects for stocks.
Last week I highlighted a great piece from Josh Brown. In case you missed it or did not click through to the link, it is still very relevant. 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.
This week Scott Grannis underscores the error of undue focus on headlines rather than data. He writes as follows:
“Pessimism has its place, and there is no shortage of things that could be improved. To name just a few: the federal deficit is still relatively large; the unemployment rate is still relatively high; the labor force participation rate is miserably low; owner’s equity should be at least 60% of real estate holdings; regulatory burdens are a huge, deadweight burden on almost everyone; entitlement spending is on an unsustainable path; and Obamacare promises to self-destruct.
Yes, there are many things wrong out there, but at the same time there has been a whole lot of improvement. Those who have viewed the glass as half empty, and who have thus avoided taking on risk, have passed up tens of trillions of dollars of gains. Those optimists who have viewed the glass as half full have been richly rewarded. If things continue to improve, and if we can simply avoid a recession, there are more gains to be had by taking on risk and avoiding cash.”
This explains why I emphasize recession forecasting – and data — in these weekly posts.
Here are the key concepts for investors:
- 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. PIMCO has lost 14% of its assets (through redemptions and losses).
- 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
When the crystal ball is cloudy, it is wise to have a flexible plan.
If the circumstances improve, it will be similar to the fiscal cliff issue at the start of this year. When the widely-predicted disaster was averted, there was a quick pop in stocks of 7% after which pundits said that we should all wait for a correction. It is challenging to time the market based upon these news events.
Here is my current working hypothesis:
- The shutdown will occur, with most scoffing at the effects;
- Complaints will start to build;
- Regardless of who wins the blame game, a continuing resolution will be passed;
- The timing may stretch into the anticipation of a default on debt;
- Consumers, foreigners, and markets may lose confidence if the debt ceiling deadline is approached; (See the FT’s Take)
- There is little incentive for politicians to resolve this issue early, and some incentive (posturing for constituent groups) to wait until the last minute;
- The government shutdown may actually encourage an earlier resolution to the debt ceiling issue; (See Ezra Klein’s take)
- Investors have seen the story before, and might not react as violently; and finally
- The U.S. will not default on its debt. This mainly rests on the understanding of the consequences by business leaders, who will lean on mainstream Republicans if the issue gets close. See this summary.
There are many points in this chain, and each one is open to debate. I emphasize the importance of understanding the limits of forecasts, so we must all realize that this is a fluid situation.
I am monitoring events closely through a variety of sources, including many that I regularly cite, but which are not often monitored by most investment pundits. You should be, too! My guess is that we will be revisiting many of these same topics next week.
To help in this, my colleague Cody Willard, a leader in identifying important technology trends, is excited about Scutify.com, a new investment resource that is one of the top five iPhone apps. I am joining in some good discussions there, and you can check it out at no cost.