Weighing the Week Ahead: A Letter from Mr. Market!
We have a big week for data and only four days to digest it. Retail sales and housing data will be most important. Industrial production will provide evidence about the strength of the recovery.
Some of the punditry will get lost in the data while others continue the fruitless effort to reconcile market prices with economic fundamentals. (Schwab, Paul Schatz).
I normally join in these efforts, but something special happened last week. My key questions have been answered by:
A letter from Mr. Market.
His explanation, intended as friendly advice for me, is so important that I must share it.
Last Week Summary
In my last installment of WTWA, I discussed the Reddit Rebellion with an emphasis on whether it represented a threat to the average investor. I warned to avoid the drama, which is proving to be good advice. This exciting action must be important because CNBC reports action in the key stocks in the featured ticker, right along with the major averages.
The heroes and villains have changed a bit, but the story certainly has legs.
I always start my personal review of the week by looking at some great charts. This provides a foundation for considering news and events. Whether or not we agree with Mr. Market, it is wise to know his current mood.
I am featuring Jill Mislinski’s chart of the market week. Her approach combines several key variables in a simple readable format.
Sector movement is another important clue to market trends.
The market gained 1.2% on the week with a trading range of only 1.3%. You can monitor the actual volatility versus the VIX over several time periods in my Indicator Snapshot, featured in the Quant Corner below.
One of my regular reads is Victor Niederhoffer’s Daily Speculations. The typical format is a brief comment from a contributor followed by some interesting reactions. Readers interested in BitCoin may find the discussion especially interesting. Here is the opening comment:
Alex Castaldo writes:
what does dr burry mean by his btc mining tweet today
(20) Cassandra on Twitter: “70% of $BTC is mined in sanctioned countries, China, Iran, Russia. Crypto is in a race – add enough reputable agents of commerce to counter and overcome the inevitable coordinated actions of the ECB/BoJ/Fed/IMF/WorldBank-level powers-that-be to crush it. https://t.co/glYdmeTJ4g.” / Twitter
70% of $BTC is mined in sanctioned countries, China, Iran, Russia. Crypto is in a race – add enough reputable agents of commerce to counter and overcome the inevitable coordinated actions of the ECB/BoJ/Fed/IMF/WorldBank-level powers-that-be to crush it.
The News Overview
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
- With 74% of the S&P 500 reports in, 80% have beaten estimates. The size of the beats, at 15.1%, is the third highest level in more than a decade. (John Butters, FactSet).
- The adjusted growth rate for Q420 is now 2.9%, the first positive reading for 2020.
- Revenues are beating estimates by 78%, also a near-record level.
- Brian Gilmartin tracks the continuing upward revisions in forward earnings.
Coronavirus and Vaccine Distribution
I am delighted to include this topic in the “good news” section. May of my regular data sources reflect the reduction in new cases. For the U.S. as a whole, new cases are now below 100K on a moving average basis, the lowest level in more than three months.
My own favorite indicator is the percentage of positive tests. I calculate this from other sources and maintained my data since June. The rate for the last month was 7.5%, down from 13.5% in my last report. We are not back to the best levels from six months ago, but it is a definite improvement.
The housing news remains positive on several fronts.
- The number of homeowners in forbearance plans has decreased. As has the number of delinquencies. (Calculated Risk).
- New purchase loans have made a fast start to 2021.
- Initial jobless claims declined to 793K missing expectations of 750K but down from last week’s 812K (revised up from 779K). Here is a chart to help with perspective.
Sentiment is important for business investment and hiring. Consumer sentiment is important as a driver of retail sales. Both are faltering.
- NFIB small business optimism for January continued to decline, to 95 in January from December’s 95.9. David Templeton (HORAN) has the story and these revealing charts.
- Consumer sentiment from the University of Michigan declined significantly to 76.2, missing expectations of 80.8 and the prior reading of 79.0. Jill Mislinski’s terrific chart of the sentiment series shows the history and the important relationships.
Now we must be careful about parking cars outside.
We have a big calendar featuring key reports on housing and retail sales. We continue through the peak of earnings season. And finally, eyes will be on Washington as the proposed pandemic relief package works its way through the legislative process. Or not.
Briefing.com has an excellent weekly calendar and many other useful features for subscribers.
Theme and comment
Despite the big calendar in a holiday-shortened week, I expect little attention to the economic data. The economic reports have been little help to investors, so they are turning to other sources.
What better source than Mr. Market himself? To my surprise I received a friendly letter from him last week. There is no better time for this:
My letter from Mr. Market.
We have been friends and trading partners for over thirty years. We have often disagreed, with me saying “goodbye” while you said “hello.” Now it seems to be the opposite. You even sound a bit like those “reliably bearish” pundits on your Twitter list. You have always paid too much attention to that Graham-Buffett-Munger crowd. They question my wisdom, treating many of my conclusions as emotional. In this letter I will open your eyes, taking up many of the topics that seem to be bothering you. I know you like headers and bullet points, so I’ll try to make this attractive for you.
The outbreak of COVID-19 created a near-panic situation. Many governments over-reacted to this through drastic steps to limit the spread of the virus. This sent the world economy into a tailspin. Your analysis has relied too much on scientists and epidemiologists. You should pay more attention to the economists who have turned their formidable skills to this problem. (First Trust also reminds us to count those who have already recovered from the virus.)
The key, of course, is a vaccine. That goal has been accomplished much faster than the scientists thought possible. The wrinkles in distribution will swiftly be ironed out. I expect nearly everyone to be vaccinated within a few months, including those in your corner of Arizona. I sympathize with the delay there.
This may permit us to reach that elusive goal of “herd immunity” by the end of the summer if Dr. Fauci quits moving the goal post in his definition.
Some are worried about mutation in the virus, with newer, faster-spreading strains. You will soon learn that the existing vaccines will work or can be readily modified. The concern that COVID-19 will become endemic, never really cured, does not bother me. We can all just get an annual booster shot the way we do for the flu.
You worry too much about the large percentage of US residents who do not plan to be vaccinated. Their minds will change when they see so many others joining in. And by the way, they are smart enough to ignore the stories that pop up highlighting deaths after vaccination. People understand probability well enough to know that these cases are bound to happen.
Herd immunity, here we come!
The Government Role
You are a non-partisan worrier! First you questioned Trump policies and now you show skepticism about the path of the new administration. Let me set you straight!
The Biden plan will provide major stimulus as the economy gets back to full strength. You worry to much about the need for minimal winning coalitions and compromise. While the Democrats have no margin for lost votes in the Senate, the few who are worried about the cost or the size of the program will come along. They understand economics well enough to know that waiting to see the effect of the last stimulus bill means waiting too long. Course corrections are needed in anticipation not just as a reaction.
You were right about one thing. The Democrats are taking the budget reconciliation process rather than the regular order. This means they only need fifty votes in the Senate as long as the policy can be cloaked as a budget matter. This also means that the impeachment distraction and polarization will not deflect the economic plan.
Supporting this plan is Treasury Secretary Yellen. She sees the full $1.9 trillion program as leading to pre-pandemic levels of employment, perhaps within the next eighteen months. Those who are skeptical should realize that she can work with her old friends at the Fed to maintain high levels of liquidity.
Which reminds me. You are sometimes skeptical about the specific processes through which an increased Fed balance sheet supports higher stock prices. You are over-thinking this. Everyone knows the liquidity explanation and has learned not to fight the Fed. Even if the technical explanation might seem a bit lacking, there is a self-fulfilling prophecy at work here. Quit questioning the obvious!
With all the positive news, the economic rebound will charge ahead. Millions are waiting for the chance to fly, cruise, attend business gatherings, see concerts and sporting events, and dine in restaurants. While some of these businesses might not make it, others will fill the gap. These parts of the economy will be back at full strength as soon as government officials wise up and loosen restrictions.
While we are waiting for this, the assistance programs help people meet expenses, avoid eviction, and defer mortgage payments. This keeps economic indicators like personal spending at a high level and supports retailers who have properly adjusted to the new normal. There could be a few hitches when the programs end, but we can worry about that later.
My Own Credibility
You need to think more carefully about my all-knowing actions. The analytical power of humans has been augmented by powerful computers. These analyze every news item, discovering what is naughty and what is nice. My reaction to this information is immediate. It is augmented by human traders and especially by financial news. The media veterans can take any of my market decisions and link it to some recent news event. They also can find some other time in history to use as an analogy, topped off with impressive charts and statistics. They have become so skillful in this process that even my smallest daily moves come with a complete explanation. The most daring even forecast my next move, trying to read my mind. Often this means expecting that my decisions tomorrow will be like those I made today.
There is no excuse for those who do not understand my message. I take immediate action when I see something important like a hashtag from the Elon Musk twitter feed, comments from that Reddit group, or an interview with a government official.
Jeff, I am writing this in the spirit of our long friendship. I hope to correct your obvious analytical mistakes and explain my current optimism. I hope you are persuaded in time.
This week’s nugget is must-read investor wisdom from Eddy Elfenbein. It is quite relevant for our key themes and Eddy pulls no punches.
The Rally in Crap
One of the interesting features of the current rally, and one of the least commented-upon, is that it’s been a “low-quality” rally. Let me explain what I mean by that.
Market analysts have many ways they can slice and dice the market. I often talk about the relative performance of value stocks or cyclical stocks. Those are well-known ones, but quality is another one, and it’s often overlooked.
By quality, we refer to a company’s overall financial strength. The problem with the quality factor is that no one can agree on the precise definition. Still, even without the exact definition, we have an idea where quality lies.
Read the full post for a good explanation of the moves in this measure over the last year.
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.
For a description of these sources, check here.
Technical measures have turned neutral in both short and long-term time frames.
My continued bearish posture for long-term investors is based upon both valuation and fears about the continuing recession. My own earnings analysis suggests that the recession is not reflected in current, bottoms-up estimates. As always, I expect good times – but not yet. This is going to take a lot longer than people expect.
With the addition of important data, it is time for a review of Jill Mislinski’s Big Four Indicators.
Eddy Elfenbein provides the long-term perspective on the 10-year breakeven rate, inflation expectations we publish each week.
Final Thought for Investors
One school holds that the market message conveys the information one needs. Understanding and following that message is the key to success.
Others, like me, have little confidence in the efficiency of markets. Rather than attempt to find an explanation for volatility, I prefer to take advantage of it. Doing so requires knowledge and analysis. Essentially, you need to know the value of your investments.
There are two problems with Mr. Market’s letter:
- It strings together several things that must go right to justify current prices, especially in some of the frothier names. Some call this “priced for perfection.” The odds on everything hitting on this parlay card are pretty low.
- Mr. Market’s mood swings are sudden and severe. In a month or so I might get a totally different message.
Do not try to match short-term market moves. Stick to your plan of carefully selected holdings as part of a suitable asset allocation.
Do you think I should reply to Mr. Market’s letter? Mrs. OldProf informs me that she has a few other ideas about what I should be doing.
I continue to maintain higher than normal cash levels as a cushion against the continuing recession, but I have replaced a few holdings. New positions are selected based on post-recession expectations as well as current prospects.
Several clients are now investors in my new bond substitute program based upon low-risk REITs. For those needing income, I mix this with the Enhanced Yield program, which is the “professional version” of what I do in the Yield Boosting Corner on Seeking Alpha.
Additional stock exposure varies with client needs and includes diversity of method.
I have been slow in publishing my latest Great Reset findings. I will only say that it is more important to get this right than it is to scramble to buy stocks. The report has reached the top of my list. It will help choose the stocks for the post-recession environment. It is too late to join the most recent Wisdom of Crowds survey, but you can be at the head of the line to get the report. There is no charge and no obligation for either my collection of White Papers or the Great Reset Group. Just make your request at my resource page.