Weighing the Week Ahead: A Parade of
Pontificating Pundits!
December 21, 2015
by Jeff Miller
of NewArc Investments, Inc.
Last week’s stock market had a Jekyll and Hyde feeling, setting the background for the two weeks
ahead. We will have lighter volume and plenty of people taking vacation during the holiday-shortened
weeks. With plenty of explaining to do and a new year ahead, we can expect:
A Parade of Pontificating Pundits!
Prior Theme Recap
In my last WTWA I predicted that the market stories for the week would consider the possibility of a
Santa Claus rally. That was the right question, since it got plenty of buzz from the media, but my
suggested answer – “Yes” – looked good for only part of the week. While it is still technically possible
to see Santa (last five trading days and first two of the New Year is the “official” definition) it is not
looking good. For the full story, let us look at Doug Short’s weekly chart. Doug’s full post quashes the
Santa Rally idea and shows the various relevant moving averages in another very negative week for
stocks. (With the ever-increasing effects from foreign markets, you should also add Doug’s World
Markets Weekend Update to your reading list).
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Doug’s update also provides multi-year context. See his full post for more excellent charts and
analysis.
We would all like to know the direction of the market in advance. Good luck with that! Second best is
planning what to look for and how to react. That is the purpose of considering possible themes for the
week ahead. You can make your own predictions in the comments.
This Week’s Theme
The long-awaited change in Fed policy had a dramatic effect on Wednesday—all good. Everything –
stocks, the dollar, interest rates, commodities – all changed course on Thursday. This provides plenty
of grist for pundits to explain the Jekyll and Hyde market mentality of the week just passed. Since it is
also time for end-of-year explanations and predictions, we can expect —
A Parade of Pontificating Pundits!
There will be a wide range of viewpoints projecting a few days of trading into the year ahead:
1. The U.S. is on the cusp of a recession, dragged down by the rest of the world. (This is drawing a
lot of supporters already).
2. This is the start of the reaction to over-valuation and declining profit margins.
3. The Fed emphasis has now shifted to the pace of increases.
4. Last week was more of what we have recently seen – reaction to energy trading – but
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exaggerated by options expiration.
5. More tax loss selling. Time for a rally.
As always, I have my own opinion in the conclusion. But first, let us do our regular update of the last
week’s news and data. Readers, especially those new to this series, will benefit from reading the
background information.
Last Week’s Data
Each week I break down events into good and bad. Often there is “ugly” and on rare occasion
something really good. My working definition of “good” has two components:
1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And
especially – no politics.
2. It is better than expectations.
The Good
Despite the negative result for stocks, there was plenty of good news last week.
The Omnibus Spending Bill easily passed through the House and Senate this week. It will rule
out any fears of a government shutdown until September. It’s a refreshing change to see
bipartisan compromise in Washington, and should help to stimulate the economy well into next
year.
L.A. Port Traffic is strong, with a November gain of 6.6% year-over-year. Calculated Risk (great
comprehensive coverage this week) has the story, analysis, and charts.
Leading economic indicators from the Conference Board solidly beat expectations, 0.4%
versus 0.1%.
Bullish sentiment at a three-year low. Bespoke via Brian Gilmartin.
Housing news was strong. Building permits and housing starts both beat expectations.
Calculated Risk notes the relatively warm November weather, but also highlights the strong
(double digit increase) comparisons with this time in 2014. It has been a good year for housing.
(See also New Deal Democrat’s analysis).
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Initial jobless claims edged lower to 271K, beating expectations by more than 10K.
Mortgage equity withdrawal was the best since 2008. Calculated Risk has the full story,
explaining how rising home prices have helped spendable income, even though debt has
declined.
The Bad
Some of the economic data was disappointing.
FedSpeak (post Yellen press conference) was negative. The Friday comments from
Richmond Fed President Jeff Lacker – four increases is what the Fed means by gradual – was
inconsistent with market expectations of two or maybe three rate hikes. There is still a significant
disparity between Fed and market perceptions about the overall strength of the economy as well
as the probably pace of rate hikes.
Industrial production was weak, declining by 0.6%.
Rail data weakened again. Steven Hansen at GEI has the story.
The Ugly
The checkered past of Martin Shkreli, the wildly unpopular person who bought a company so that he
could jack up the price of one of its life-saving drugs. He was arrested this week on the unrelated case
of Ponzi-type securities fraud. Matt Levine at Bloomberg View (Martin Shkreli Accused of Being
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Surprisingly Good at Fraud) has a good description of his past misdeeds and some interesting
questions, e.g., What if he shorted biotech stocks before going public with the 5000% price increase
story? Andy Borowitz has a more humorous take.
The Silver Bullet
I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause,
doing the real work to demonstrate the facts. Think of The Lone Ranger. No award this week, but
nominations are always welcome.
Quant Corner
Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and
highlight the best methods in this weekly update. Beginning last week I made some changes in our
regular table, separating three different ways of considering risk. For valuation I report the equity risk
premium. This is the difference between what we expect stocks to earn in the next twelve months and
the return from the ten-year Treasury note. I have found this approach to be an effective method for
measuring market perception of stock risk. This is now easier to monitor because of the excellent work
of Brian Gilmartin, whose analysis of the Thomson-Reuters data is our principal source for forward
earnings.
Our economic risk indicators have not changed.
In our monitoring of market technical risk, I am using our “new” Oscar model. I put “new” in quotes
because Oscar is in the same tradition as Felix and the product of extensive testing. We have found
that the overall market indication is more helpful for those investing or trading individual stocks. The
score ranges from 1 to 5, with 5 representing a high warning level. The 2-4 range is acceptable for
stock trading, with various levels of caution.
Oscar improves trading results by taking some profits during good times and getting out of the market
when technical risk is high. This is not market timing as we normally think of it, since it is not an effort
to pick tops and bottoms and it does not go short. Instead, Oscar identifies and limits risk. (More to
come about Oscar).
I considered continuing to report the Felix updates, but I already have a distinction between long and
short-term methods. I want to minimize confusion. Those who want this information can subscribe to
our weekly Felix updates.
In my continuing effort to provide an effective investor summary of the most important economic data I
have added Georg Vrba’s Business Cycle Index, which we have frequently cited in this space. In
contrast to the ECRI “black box” approach, Georg provides a full description of the model and the
components.
For more information on each source, check here.
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Recent Expert Commentary on Recession Odds and Market Trends
Bob Dieli does a monthly update (subscription required) after the employment report and also a
monthly overview analysis. He follows many concurrent indicators to supplement our featured “C
Score.”
Georg Vrba: provides an array of interesting systems. Check out his site for the full story. We
especially like his unemployment rate recession indicator, confirming that there is no recession
signal. He gets a similar result with the twenty-week forward look from the Business Cycle Indicator,
updated weekly and now part of our featured indicators.
Doug Short: Provides an array of important economic updates including the best charts around. One
of these is monitoring the ECRI’s business cycle analysis, as his associate Jill Mislinski does in this
week’s update. His Big Four update is the single best visual update of the indicators used in official
recession dating. You can see each element and the aggregate, along with a table of the data. The full
article is loaded with charts and analysis.
RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis.
While we feature the recession analysis, Dwaine also has a number of interesting systems. These
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include approaches helpful in both economic and market timing. He has been very accurate in helping
people to stay on the right side of the market.
The Week Ahead
This is a relatively light week for economic data. While I highlight the most important items, you can get
an excellent comprehensive listing at Investing.com. You can filter for country, type of report, and
other factors.
The “A List” includes the following:
New Home Sales (W). An important proxy for growth in construction.
Personal Income and Spending (W). Both are important for consumption as an economic driver.
Recent gains suggest robust holiday spending.
Michigan Sentiment (W). A good concurrent indicator of job growth and spending.
Initial claims (Th). Fastest and most accurate update on job losses.
The “B List” includes the following:
Existing Home Sales (T). Not as important as new home sales, but shows the state of the
market.
Durable Goods (W). Volatile but interesting.
PCE prices (W). The favorite Fed indicator, edging above the 2% target.
GDP – Third Estimate (T). Backward looking, revised slightly lower?
Crude oil inventories (W). Continued focus on oil prices keeps this report in the spotlight.
It will be a quiet week for official speechifying.
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
Oscar continues Felix’s neutral market forecast, but we have a bearish lean. He started selling on
Tuesday and is now about 20% invested. There are often plenty of good investments, even in an
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expected flat market. For more information, I have posted a further description — Meet Felix and
Oscar. You can sign up for Felix and Oscar’s weekly ratings updates via email to etf at newarc dot
com. They appear almost every day at Scutify.
How to learn by analyzing your best trades (SMB). A refreshing change from analyzing just your
mistakes!
Look over Brett Steenbarger’s shoulder via his trading log for last week’s exciting action.
Insight for Investors
I review the themes here each week and refresh when needed. For investors, as we would expect, the
key ideas may stay on the list longer than the updates for traders. Major market declines occur after
business cycle peaks, sparked by severely declining earnings. Our methods are focused on limiting
this risk. Start with our Tips for Individual Investors and follow the links.
We also have a page (just updated!) summarizing many of the current investor fears. If you read
something scary, this is a good place to do some fact checking. Pick a topic and give it a try.
Other Advice
Here is our collection of great investor advice for this week.
If I had to pick a single most important source, it would be the CNBC interview with Leon Cooperman.
He has an excellent take on the current economy (solid), the long-term implications of low energy
prices (positive), the trailing performance of value stocks (temporary and short-term), and the likely
winners for next year. Take some time and watch as much of this as you can.
Stock and Fund Ideas
Eddy Elfenbein has announced his buy list for 2016. He has a great record with these picks, even
though he sticks with them throughout the year. This is always a source for great ideas.
ADP? Or cloud competitors? Blue Harbinger does a careful fundamental analysis and provides
specific advice.
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Apple – Have iPhone sales peaked? (Felix Richter via GEI). 2016 is projected in this chart. Hmm…
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Investment Time Horizon
Cullen Roche explains the futility of tracking the annual forecasts: You need to think in a longer term.
Cliff Asness (via Alpha Architect) explains that active investing is “easy, but not simple.” In particular,
it requires a lot of patience. He shares this chart showing the timing of the launch of his own fund.
And the things that did NOT happen last year, but might have taken your eye off of the ball. (Barry
Ritholtz)
Economic Reactions
Suppose you could have your own “Beige Book”. The FOMC likes to have a report from each District
providing some anecdotal evidence to supplement the data. Avondale Asset management does
something similar by tracking the news and corporate conference calls. This week it emphasizes
CEO’s and the Fed.
Watch out for….
Junk bonds. It is often better reward versus risk to buy the underlying stocks – greater upside, same
downside. Matthew C. Klein (FT Alphaville) has a good post on this topic.
Private lending stocks. FT Alphaville has an update with analysis of specific names.
High dividend stocks. Perhaps riskier than you think! (Larry Swedroe).
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Personal Finance
Professional investors and traders have been making Abnormal Returns a daily stop for over ten years.
The average investor should make time (even if not able to read every day as I do) for a weekly trip on
Wednesday. Tadas always has first-rate links for investors in this special edition. There are several
great links, but I especially liked Vanguard’s advice to young investors. My favorite Millennial
explained that the author took some liberties with YOCO, a take on YOLO. Glad to know that!
Final Thoughts
Last week. I have frequently noted that I do not believe in delayed reactions to events, particularly
when the events are widely followed and anticipated. The Fed decision was well-received and
well-communicated. On Thursday the correlation with oil prices resumed. Big moves are often
exaggerated during options expiration week. Options thought to be dead come back to life,
stimulating last-minute covering, hedging, and profit-taking.
Expertise is specialized. Being a bond king or billionaire is certainly evidence that you have done
something really well. It does not make you an expert on everything. You would not go to one of
these people for brain surgery. What makes you think they know more about recession
forecasting? Each may have some interesting information and be helpful on a piece of the
economic puzzle. None of them have impressive track records. (See Barry Ritholtz for more on
this theme; and, Ben Carlson adds an interesting list of widely-held beliefs from not that long
ago).
The fixation on oil prices continues. This is not a solid economic indicator since it reflects both
demand (which has been solid) and supply (which has been excessive). The energy sector
continues to lead the entire market, including many stocks that are obviously not related. This
disparity represents a big opportunity for long-term value investors. The chart below illustrates
two points:
Oil prices reflect over-supply, not lagging growth in demand
The current “glut” would be absorbed with a consumption increase of 1 – 2%, probably not
what is suggested by the term.
Here is the current chart of supply and demand
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Personal Note
Some readers have suggested that I am also a pundit. Indeed! I try to take the role of a friend
attempting to help readers navigate a confusing mass of information. If I get on a soap box, I try to
confine it to the final section of each WTWA. In short, I show many viewpoints as well as offering my
own opinion. I especially aim to highlight some of the best things from my own research.
I am delighted that so many people have commented or written to say that they find WTWA to be
useful. I wish all of my readers a Merry Christmas, Happy Holidays, and success in the Year Ahead. I
will probably not write next weekend while I spend some time with family and work on my annual
preview article. In the meantime, we will have some of our year-end awards.
© NewArc Investments, Inc.
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