Weighing the Week Ahead: Learning from Swiss Cheese

We have a normal economic calendar, and the earnings season is winding down. There is interesting data on housing and retail sales – the strong parts of the current economy. Jobless claims remain important as does industrial production.

The economic calendar remains less interesting than politics, market gyrations, and the coronavirus. Those will be the media topics. A bigger challenge is finding a way to identify what is important and to determine the causal relationships.

It is time to innovate. We should all be asking:

What can we learn from Swiss Cheese?

Last Week Summary

In my last installment of WTWA, I warned about following the emotional tantrums of Mr. Market. This was good preparation for Monday’s stock market action. Before the opening Pfizer released news about its COVID-19 vaccine trial – 90% effective in creating immunity for the large test group. This is great news, of course, and the market reaction was swift.

This did not capture the cruise line moves – up 30%!

Here is a look at sector effects.

Mr. Market changed his mind on Tuesday, and some of the effect was reversed. Cruise lines were down 10%. It was exciting but not predictable.

Key Charts

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.

Market Story

This week I am featuring Jill Mislinski’s chart of the market week. Her approach combines several key variables in a single readable format.


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Sector Trends

Sector movement is another important clue to market trends.

Once again, Juan Luque provides us with some words of wisdom from the Incline trading desk:

The Utilities sector continues moving strongly towards the Leading sector with a 2.77% return for the week. For a change this week the Energy sector moved upwards amid news of a Covid vaccine, posting a surprising 16.46% return for the week. All sectors in the S&P were up, except the Consumer Discretionary and Information Technology, both moving downwards showing weakening momentum strength. The financials sector moved along the Improving quadrant with an 8.28% for the week and industrials moved closer to the leading quadrant with almost a 6% return. The long term trends remain, while the market responds to positive vaccine tests as infection numbers continue to rise globally.

This seems different from prior charts in this series. It is sector rotation in a graphic depiction.


The market gained another 2.2% for the week with a trading range (not counting Monday’s gap opening) of only 1.2%. The gain for the week was established at the opening on Monday. The rest of the week attracted attention but was a relatively modest range. You can monitor volatility in my Indicator Snapshot, featured in the Quant Corner.


Dr. Ed Yardeni has embarked on research for a new book. He is drawing upon a newly constructed Fed database that provides more comprehensive and more detailed data on the distribution of financial assets in the U.S.

This initial post has many interesting facts and observations. I am sure that the book will have much more. Here is just one intriguing analysis on a much-discussed topic, wealth inequality.

The DFA shows that corporate equities and mutual fund shares held by households was down slightly to $26.8 trillion during Q2-2020, with the following ownership and percentage shares of the total among wealth percentile groups: top 1% ($14.1 trillion, 52.4%), 90%-99% ($9.5 trillion, 35.8%), 50%-90% ($3.0 trillion, 11.2%), and bottom 50% ($0.2 trillion, 0.6%) (Fig. 11 and Fig. 12).

The bottom 50% never owned more than 1.6% of this asset category. The 50%-90% crowd’s share peaked at 21.4% during Q3-2002 and since has fallen to 11.2% currently. The 90%-99% group has held a fairly steady share around 35% since the early 1990s. The top 1% has ranged between a low of 40.2% and a high of 52.8%.

The widespread notion that the very rich own a disproportionate share of corporate equities is true, but their collective share is more like 50% of the total held by households than the urban legend of 80%-90%.

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!

My continuing assessment is that many of the normal economic indicators are not helpful in the wake of the COVID lockdown decline. Too many sources are focused on a change in direction, even if very modest, which has painted an overly optimistic picture. As the economy stalls, expect to see a rapid switch.

The recession has not ended nor is there an end in sight.


Corporate Earnings

  • Q3 Earnings reports remain a bright spot for the markets. John Butters (FactSet) reports that 84% of companies have notched positive EPS surprises and 78% beat revenue expectations. This is a record level in the FactSet history, which begins in 2008. He also notes an interesting pattern. Positive surprises did not generate stock price increases before the election but did so afterwards, -0.6% to 5.7%.
  • Profit margins are holding steady and even rebounding in some sectors.

  • Management guidance ratio has spiked.

The results continue to influence forward estimates, faithfully reported by Brian Gilmartin who provides both data on the changes as well as his analysis. FactSet breaks down the forward earnings estimates by sector.


I am scoring this as “good” although claims remain at levels consistent with past recessions. Eddy Elfenbein, as usual, has it just right with his comment:

The initial jobless claims report fell to 709,000. We’re finally not that far from the highest readings of the financial crisis. Last week’s report was revised up to 757,000. This report is another eight-month low. We’re moving in the right direction, but very slowly.

  • Initial jobless claims were 709K, better than the expected 740K and the prior week’s 757K.

  • Continuing claims were 6.786M down from the prior week’s 7.222M. This report lags the initial claims data by one week.
  • Loss of unemployment benefits. Calculated Risk explains the conditions for the end of the program in December and provides data about the many millions of people affected.
  • JOLTS showed a higher number of job openings than expected at the end of September. Most report the number of job openings and attempt to tie changes to employment growth. This can be estimated under most circumstances by going through a four-step procedure reported in the JOLTS Technical note:

Alignment. The JOLTS figure for hires minus separations can be used to derive a measure of net employment change. This change should be comparable to the net employment change from the much larger CES survey. However, definitional differences as well as sampling and non- sampling errors between the two surveys historically caused JOLTS to diverge from CES over time. To limit the divergence, and improve the quality of the JOLTS hires and separations series, BLS implemented the monthly alignment method. There are four steps to this method: seasonally adjust, align, back out the seasonal adjustment factors, and re-seasonally adjust.

The alignment process has been temporarily suspended because the pandemic had introduced a significant different in the two reporting periods. The payroll report uses data from the 12th of the month while JOLTs uses the entire month.

Both processes depend upon an accurate read on business births and deaths, which is lacking in current data.

Two JOLTs elements remain interesting – the quit rate (showing voluntary departures) and the ratio of unemployed to job openings.


Fiscal Stimulus

Hopes for speedy post-election action on another stimulus bill have faded. I am watching closely, but have yet to see solid signs that the two houses of Congress can agree and that such a bill would be signed by President Trump.

Making this worse is the December 11th government shutdown deadline. This was temporarily forestalled until after the election, but the time is once again upon us.

On one side, there is great concern about expiring benefits and a looming fiscal contraction.

Other legislators are much more concerned about mounting federal debt.

ew or re


  • NFIB Sentiment sounds a warning. The overall score of 104 equaled the October reading, but there were some troublesome signs in the subgroups.
  • The rebound in hiring plans has taken a sharp turn for the worse.

  • Uncertainty about business prospects has spiked.

  • Commercial loan demand has softened.

  • Michigan consumer sentiment registered 77.0 for the November preliminary reading, missing expectations of 79.0 and lower than October’s 81.8. Jill Mislinski has both analysis and a great chart.

  • Individual investor sentiment (a contrary indicator) is higher. David Templeton (HORAN) reports.

Based on this week’s AAII Sentiment Survey, over the course of one week individual investors are now super bullish. The survey notes bullish investor sentiment jumped 17.9 percentage points to 55.8%. The below chart shows bullish sentiment is above the plus one standard deviation level.

Coronavirus wave

  • The number of cases is increasing dramatically. (Statista)

  • Hospitalizations also surge. (Statista)

  • States are implementing new or renewed restrictions, including lockdowns. Doctors are urging the public to “take precautions more carefully.”
  • The surge in cases includes nearly every state.


States Face Daunting Budget Gaps. What Can Be Done?

State revenues drop dramatically during recessions. The “rainy day funds” are nowhere close to sufficiency in the face of the current challenge. Econofact’s summary provides excellent detail and possible policy solutions.


We have a normal week for economic data. Housing starts and building permits are important to the economic sector that is performing the best. Retail sales, expected to decline, represent the other main economic engine. Industrial production is a key aspect of GDP, and the unemployment data continues to represent our best information about employment.

The rest of the calendar does not tell us much and it unlikely to move the markets.

Briefing.com has an excellent weekly calendar and many other useful features for subscribers.


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Theme and comment

There are some important economic reports this week, especially concerning housing and retail sales. Since there is not much fun in writing about the dismal science, I expect attention to be divided among three subjects:

  1. The election saga and the transition of power;
  2. The seemingly large market moves or possible lack thereof; and
  3. The coronavirus surge.

There is a more important question for investors – the factors affecting economic growth and corporate earnings. Getting ahead of the pandemic is the foundation for the economy, corporate earnings, and stock prices. The most important question is:

How can an understanding of Swiss Cheese improve our investments?

Perhaps. My work since the beginning of the recession has emphasized the relationship between the pandemic and the economic consequences. In May I suggested the need for balance as part of the Great Reopening, including protective measures and social distancing. I face a constant challenge to help investors by improving this message, which is discouraging to those who want a fast and simple market “V.”


Sitting at breakfast, I exclaimed “Eureka!” Mrs. OldProf paused her futile quest to find information about her Packers in the Arizona paper and politely asked, “What brings you to quote Archimedes so early in the day?” “My theme for today. (She knows that this is always the most challenging aspect of writing WTWA). I am writing about Swiss Cheese.”

She thought the topic was a bit off my regular beat but might be a good change of pace for my readers. How could someone who grew up in Wisconsin object?

My inspiration was an essay in today’s Wall Street Journal.

How the Swiss Cheese Model Can Help Us Beat Covid-19

No single solution will stop the virus’s spread, but combining different layers of public measures and personal actions can make a big difference.

The Problem

Nicholas Christakis writes:

It’s important to understand that a vaccine, on its own, won’t be enough to rapidly extinguish a pandemic as pernicious as Covid-19. The pandemic cannot be stopped through just one intervention, because even vaccines are imperfect. Once introduced into the human population, viruses continue to circulate among us for a long time. Furthermore, it’s likely to be as long as a year before a Covid-19 vaccine is in widespread use, given inevitable difficulties with manufacturing, distribution and public acceptance.

The Solution

Christakis continues:

Controlling Covid-19 will take a good deal more than a vaccine. For at least another year, the U.S. will have to rely on a multipronged approach, one that goes beyond simplistic bromides and all-or-nothing responses. Individuals, workplaces and governments will need to consider a diverse and sometimes disruptive range of interventions. It helps to think of these in terms of layers of defense, with each layer providing a barrier that isn’t fully impervious, like slices of Swiss cheese in a stack.

He goes on to explain James Reason’s thirty-year old model, often used to discuss failures in complex systems. If you think of the protective responses as layers of cheese, you will soon get the picture. You need slices where the holes do not line up. If only I had offered this explanation in May!

Source: Patient Safety Learning: the hub

The limits of vaccines

The news about the Pfizer vaccine is welcome and exciting. We all hope it will lead to a speedy solution. As realistic investors we must be cognizant of the many hurdles.

  • FDA approval for expedited distribution. It will happen, but not without some time.
  • It has not been shown to be effective in older adults.
  • Production of enough doses. Apparently, there will be about 50 million by the start of the year, or enough for 25 million people. Projections for the rest of the year remain uncertain.
  • Transporting the vaccine requires temperatures of -70 degrees F. This is a logistics challenge.
  • The Administration is claiming a fast distribution process, but Pfizer claims authority over that.
  • There is still resistance to taking vaccines. Will the public acceptance be high enough to reach the herd immunity target?

The Pfizer approach is similar to those of competitors. We can expect several more possibilities early next year.

Current obsessions

The most common media message is that investors need to do something and do it right now! There is a natural reason. The easiest way to fill assigned space is through a list of recommendations. “Ten stocks to buy post-election” or “How to play the resurgence in value” provide a psychological motivation. Something important has happened. These stocks are on sale, but it is a limited time offer. Don’t miss out.

An exception to this approach, although the headline is similar, is this broad post-election look at coming changes from Michael Brush (MarketWatch). The six themes he cites are all quite probable and he is realistic about the time frame for the stocks he mentions.

Fool’s gold


If I had to pick one article for investors this week it would be Timothy Taylor’s Revisiting March 2020: What Was Wrong With the Very High Early Death Estimates? He begins with the “curse of knowledge” and how it applies to our knowledge of the COVID-19 pandemic.

He reviews the March 16th report from epidemiologists at Imperial College in London. Readers have probably seen this widely circulated chart showing the potential death tolls in Great Britain and the United States.

This particular forecast took on particular force. It was often criticized for being a naive estimate, because it assumed no public or individual response. The deeper meaning is that those who made this criticism had not apparently looked at the report. Most of the report is a discussion of strategies for suppression or mitigation of the virus, with a detailed look at the possible effects of “non-pharmaceutical interventions” including case isolation, voluntary quarantine, social distancing of those 70 and older, social distancing of the entire population, and closure of schools and universities. There are charts showing the effects of different combinations of these strategies: for example, one chart suggests that with these kinds of measures in place, the overall death toll could be reduced 50-fold, from over 500,000 in the UK to less than 10,000, with similar estimates for the US.

In short, the Imperial College study from back in March 2020 was often dramatically mischaracterized. Yes, their model suggests 2.2 million US deaths and 510,000 UK deaths is in the report if there was zero response by the public sector or by individuals. But the report was not expecting or predicting a response of zero! Instead, the report was trying to show how a variety of interventions could affect the death toll. To put it another way, the report was trying to show the dangers of inaction and the benefits of action.

This is only one portion of this interesting post. He reviews mistake assumptions and conclusions by many of those reacting to the study (even including Ben Bernanke). Taylor explains how this sort of research can stimulate appropriate policy responses. It also shows how many can be misled by an inaccurate summary of the findings. (i.e., These guys predicted two million deaths and it didn’t happen.)

The runner up for the nugget award is from the same source and well worth reading.

Revisiting March 2020: What Were Epidemiologists Thinking about Masks?

Using the Swiss Cheese Model

Begin with the weakness of the short-sighted Mr. Market.

Mr. Market is not good at logic!

Do not expect to see sound causal reasoning in market moves. Any headline goes through a process:

  1. Algorithms find keywords and past relationships. When news is released, the HFT models use this information. It is based upon the recent past and applied in less than a second.
  2. Traders follow. They can’t beat the algos, but they can beat slow-footed retail clients.
  3. Pundits find deep meaning in these knee-jerk reactions, offering a comprehensive explanation of what just happened.
  4. The news seen by most people provides a thirty-second summary with the simplistic explanation.

Applying the Model

The key step is to realize that you cannot find great investments by racing against the news. Investors operate with a longer time frame allowing more careful analysis. Ask whether the holes in the cheese are still lined up.

Look for successful application of complementary methods. Do not over-react to a single piece of news.

Quant Corner

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 remain above resistance—now support. Technical analysts are more bullish.

My continued bearish posture for long-term investors is based upon both valuation and fears about the continuing recession. As always, I expect good times – but not yet.

Guest ideas

Market uncertainty and the election is dramatically apparent in this chart showing option implied volatility by week, before and after the election.

My colleague Todd Hurlbut shows how you can use radio waves to discover your best investment choices!

Calculated Risk shares the early 2021 housing forecasts.

Final Thought for Investors

Avoid FOMO (the fear of missing out). Do your own thinking.

My Portfolios

I continue to maintain higher than normal cash levels as a cushion against the continuing recession. It is possible to do this and still meet your goals provided you do not make extreme decisions. I am doing well in all stock portfolios, mostly by selecting less risky stocks.

My conclusions about the economy are high conviction decisions based on well-tested analytic methods.

Most important takeaway

Do not trade the news!

You will do much better if you analyze information before making big decisions.

Thinking about Risk – and Future Opportunities

With the election results known, investors can eliminate one element of risk. The wide market and sector swings last week are evidence that uncertainty still prevails.

Since this environment may continue for many months, I am turning attention to some stable and low risk income ideas. My approach is to apply our Great Reset principles to REITs. It is also time for a Wisdom of Crowds update survey, getting a handle on the timing for a return to economic normality. I urge you to join my Great Reset research group.

Consider how your portfolio did last week. It was a good test of shifting scenarios. My recent white paper on this topic provides a method for finding and measuring risk. It provides solid, practical information.

There is no charge and no obligation for either the Portfolio Risk paper or the Great Reset Group. Just make your request at my resource page.

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  • wkevinw November 15, 2020  

    I think you are much too kind about the Ferguson model. I re-read some of the original article, and it did mention that the results were assuming “no response” (will result in high death toll). However (!) the all-or-nothing mentality of the advice offered was “lock down”!

    The code has been examined by several experts and been found wanting. This author has a track record of alarmist communications. Resigning (after other personal problems related to Covid), does not allow for an inference of good performance of this guy or his models. These non-hard science model “experts” continue to stumble.

    Further: (internet search will give this and other references)

    “What went wrong? Shockingly, the code that generated Professor Ferguson’s doomsday prediction was neither public nor peer reviewed. He himself admitted the computer code has thousands of lines of “undocumented” code, which makes it impossible to verify. A senior software engineer from Google found the code has amateurish errors, including giving different answers depending on the number of CPUs in the specific computer running the model. This makes the results unverifiable, and therefore meaningless.(16)”

  • Bruce Robinson November 15, 2020  

    The Pfizer vaccine “has not been shown to be effective in older adults” ? That is the biggest gem in your article IMHO. To me, that means SELL this rally. What good is a vaccine that is not effective for the only population segment whose fatality rate is greater than (approx) 0.005% ?

  • Pingback: Looking at the Week Ahead - TradingGods.net November 16, 2020  
  • Lisa2020 November 18, 2020  


    It’ll be interesting to see how much variance there is by the end of 2020. And also over a few more years, perhaps 20 or so.