Weighing the Week Ahead: A Tall Wall of Worry

The stock market continues to grind higher in the face of skepticism.  It is a familiar story.  Nearly a year ago we highlighted the “wall of worry” concept.  I wrote as follows:

Our Take

We have no illusion that every story
will turn out to be wonderful.  Our own position has varied both with
economic events and the tape.  Over the last several weeks there have
been many positive signs and we have identified many profitable sectors.

The media and the
blogosphere remain skeptical of any positive news.  This is the
definition of the Wall of Worry.  The average front page at Seeking
Alpha has a rash of featured bearish bloggers.  The links from Abnormal
Returns now include many sassy skeptics.  The comments everywhere tilt
heavily bearish.

We now know that this advice was very accurate.  It is time to revisit the concept.

Everyone Knows the Negatives

The economic worries are widely understood.  It was a focus for me in the last few days.

Having just returned from the Kauffman Foundation’s Economic Blogger’s Forum. I am inspired and invigorated.  The organizer and moving force was Tim Kane, who did a fine job in every respect.  I should also acknowledge Kauffman CEO Carl Schramm.  He had a scheduling conflict, so we only got to hear his closing remarks, but his support for this endeavor is crucial.  The conference  brought together economic  bloggers from widely differing perspectives and provided ample opportunity for interaction.  I love the format.  You had a chance for one-on-one discussions, small groups, breakout sessions, and a webcast.

I plan to write several articles drawn from my experience, but let me start with an overall perspective.  This group has plenty of worries.  The final panel was a gloomy approach to dealing with the budget deficit.  You can see the webcast here, including my friendly employment bet with Mish.  More on that later.

This conference represents a pinnacle — the best summary —  of the economic blogosphere.  What should we conclude?  Let’s take it a piece at a time.

Last Week’s Action

Here is my take on the key data from last week.  I am not trying to
be comprehensive, nor am I taking a viewpoint.  I will highlight what I
found significant, trying to be objective.

The Good

The best news of the week was the stock market action — a slow grind higher.  A number of indicators were solid — inflation reads, Fed actions, etc. — but these were all expected as I noted in last week’s forecast.

There were no striking positives in the economic data.  The modest recovery is the accepted norm, with plenty of threats.  Michael Santolli, writing in Barron’s, does a nice job of capturing the story.

Turning the page at Barron’s we find a nice article from Gene Epstein.  He explains why most of the economists who are betting their careers on their predictions have a positive outlook.

The Bad

None of last week’s data were very important.  The inflation numbers were as expected and the Fed decision and statement were also in line.  Jobless claims were down a touch, but still bad.  This was all as I predicted.

There is a nice cottage industry for researchers.  The  requirement is that you have to find a new indicator that is bearish.  Or maybe you can find a new slant on an old indicator — one that is in extreme bullish territory but off of the absolute highs.

If you want your dose of bad news, Alan Abelson is your man.  He cites a number of the regular bearish sources to provide confirmation bias for his followers.

From my perspective, I saw nothing bearish in the weekly data.  It would be nice to see jobless claims declining faster.

The Reality

I wrote about health care and the legislative prospects.  This is playing out exactly as I forecast, but many still disagree.  As I write this on Saturday night, we are facing an imminent vote.  I still expect the legislation to pass.  My viewpoint was widely contested last week, and challenged yesterday by colleagues at the Kauffman event.  We will see the outcome tomorrow.

I understand that many also disagree with the financial forecasts. Congress relies upon analysis from the nonpartisan CBO.  To check that out we need to find the best sources.  Don Marron was one of the Kauffman forum participants.  We were lucky to have someone with his background — a Georgetown prof who is  a former Director of the CBO, former Council of Economic Advisors member, and veteran of the Joint Economic Committee Staff.  I enjoyed talking with him and regard him as  a strong  “outside” source on the CBO forecasts.  He parses the methodology, the assumptions, and explains the conclusions in this nice article.  This is the basis for the Congressional decision.  Check out the entire article.  There are many nuances to measuring the savings in health expenditures.

The Week Ahead

 

This week may have a few different themes.  Housing is important to the economic recovery, so existing home sales will be important.  Data on home prices are also of interest, since this relates to consumer confidence and consumption.

In practice, this rates to be a slow week for data, with plenty of opportunity for the technical analysis types and econ-spinners to do their thing.

Our Trading Forecast

Our own indicators (see our regular ETF updates for an explanation) are now
neutral, and that was our vote in the weekly Ticker
Sense Blogger Sentiment Poll. Here is what we see:

• 58% (up from 27% last week) of our ETF’s have positive ratings.
  This is improving nicely.
• The median strength is -7.5  (up slightly from -15), still
  negative, but improving.
• 100%  of the sectors are in
  the “penalty box,” showing an extremely high level of risk and uncertainty.
• Our Index Package has moved to neutral territory.

Investment Implications

Our investment angle still has a health care focus.  Our forecast last week played out pretty accurately.  The health care legislation is moving forward and figures to pass tomorrow.  Here is the chart of the trading market from InTrade:

 

I  have been accurate in predicting the outcome of the health care debate and most have disagreed.  Meanwhile, the stocks have not given us the pull back that we might expect from the passage of the legislation.  I have some health stocks in my basket, but I am still shopping.

Anyone who has been looking for an entry point has found the last few weeks to be quite frustrating.