Weighing the Week Ahead: The Costly Quest for Fresh Fears

The economic calendar is normal, with an emphasis on housing and sentiment data. Earnings season is in full swing and expectations remain high. We have witnessed improvement on several fronts. Since that is not very newsworthy, the punditry will be asking:

Where can we find some fresh fears?

Last Week Recap

In my last edition of WTWA I asked whether strong earnings were already reflected in stock prices. That was a good guess, as each good earnings report was explained as “strong” or “anticipated,” depending upon whether the stock subsequently moved higher or lower.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I especially like the version updated each week by Jill Mislinski. She includes a lot of valuable information in a single visual. The full post has even more charts and analysis, so check it out.

The gain for the week was about 0.5%, and the trading range was only about 2%. I summarize actual and implied volatility each week in our Indicator Snapshot section below.


Amazon has over 100 million subscribers to their “Prime” service, including 55% of the households in the US. (Barron’s)

Nearly half of crypto traders do not pay taxes. (MarketWatch).

Google’s web presence dominates everyone else put together. (Visual Capitalist)

The News

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!

Feel free to add items that I have missed. Please keep in mind that we are looking for current news, especially from the last week or so. WTWA is not about long-term concerns like debt. These are important, of course, but not our weekly subject unless there has been some major change.

The Good

  • High frequency indicators remain positive (New Deal Democrat).
  • Industrial production increased 0.5%, down from 1.0% in February, but beating expectations of 0.3%. (Jill Mislinski, and see the Big Four update below)
  • Hotel occupancy broke records in Q1. Some astute readers pointed out that a past analysis was wrong because of holiday timing. Mrs. OldProf, who reads both the posts and the comments each week, jumped on this. “See, your readers agree with me!” Thirty-eight years and as mistake-prone as ever. Calculated Risk provides analysis and this chart.

  • Retail sales increased 0.6%, beating expectations of a 0.4% bump.
  • Mortgage delinquency rates are lower. Those thirty days past due – 3.73%. In foreclosure – 0.63%. (Calculated Risk).
  • Corporate earnings are strong, regardless of the chosen metric – beat rate, size of earnings and revenue beats. John Butters reports:

    To date, 17% of the companies in the S&P 500 have reported actual results for Q1 2018. In terms of earnings, more companies are reporting actual EPS above estimates (80%) compared to the 5-year average. In aggregate, companies are reporting earnings that are 5.9% above the estimates, which is also above the five-year average. In terms of sales, more companies (72%) are reporting actual sales above estimates compared to the five-year average. In aggregate, companies are reporting sales that are 1.6% above estimates, which is also above the five-year average.

    Brian Gilmartin agrees, but is more concerned about the effect of higher interest rates.

  • Corporate cash is increasing (WSJ) suggesting room for higher dividends and more stock buybacks. David Templeton (HORAN) explains, illustrating with this chart.

  • Housing starts for March hit a seasonally adjusted annual rate of 1319K, beating expectations by 4%. Building permits of 1354K also beat expectations. Calculated Risk comments on the data (mostly due to multi-family starts) and also on Homebuilder Confidence – down one point at 69, but still on “firm ground.”

The Bad

  • Jobless claims were almost unchanged from last week at 232K, but this was 5K worse than expectations. (Bespoke)
  • The Beige Book supported the current Fed picture of modest growth, but also had some warnings about the impact of current policies. Companies mentioned spikes in aluminum and steel prices. (Business Insider).
  • Leading indicators increased only 0.3%. This is a gain, of course, but smaller than the February pace of 0.7% and slightly below expectations of 0.4%. Jill Mislinski provides analysis and charts.

The Ugly

How about something that is responsible for 2.3 million annual deaths? From the International Energy Agency:

Today around 2.8 billion people – 38% of the global population and almost 50% of the population in developing countries – lack access to clean cooking. Most of them cook their daily meals using solid biomass in traditional stoves. In 25 countries, mostly in sub-Saharan Africa, more than 90% of households rely on wood, charcoal and waste for cooking. Collecting this fuel requires hundreds of billions of hours each year, disproportionately affecting women and children. Burning it creates noxious fumes linked to 2.8 million premature deaths annually.

Timothy Taylor explains:

The report estimates that an investment of an additional $42 billion, above and beyond what is already happening, would be needed by 2030 to provide access to clean cooking for the 2.3 billion people who otherwise will not have access to clean cooking by that time. At one level, $42 billion is a lot of money: at another level, it’s almost an absurdly cheap price to pay for the potential benefits.

The Week Ahead

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.

The Calendar

We have a normal economic calendar, featuring housing data, Consumer confidence and sentiment, and the first look at Q1 GDP. Corporate earnings reports will again be the most important real news.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

The economic calendar emphasizes housing data and sentiment polls. The focus, barring important tweets to the contrary will continue to be corporate earnings reports.

The quest to find an explanation for every market move reached a new peak last week. With evidence of good earnings, a stronger economy, and positive sentiment, an explanation was needed for the volatile market. Why is it flat at lower levels? I expect pundits and financial writers to be asking:

Where can we find some fresh fears?

One of the better CNBC anchors gave us a taste of what to expect. Chip stocks had moved lower, mostly because of events related to a single stock. With the ETF connections and algorithmic trading, the entire sector got hit and dragged the market down as well. (That’s the best I can do here, but I promise more in a special post. Meanwhile, I love most chip stocks, especially Lam Research (LRCX)).

The anchor asked her guest. Aren’t semiconductor stocks cyclical? If this is the top of the cycle, what does it say about the overall economy?

That question could be a litmus test for traders versus investors.

There is plenty of reaching to find something wrong, and that was just one example. Here are some currently-raised concerns:

  • Yield curve inversion. So many who are rookies at recession forecasting are jumping on the yield curve inversion. Dr. Robert Dieli, the top expert on this topic, repeatedly warns not to forecast this signal. When it occurs, it will still provide lead time of about nine months. And it is more than just the yield curve. One must also consider the economic background and confirming indicators. Despite this, many are reaching far into the future.
    • Hale Stewart – a real possibility in the next 18 months. I frequently cite Hale on various topics, but economic forecasting is not his happy zone. Speculating on this topic is not helpful to investors.
    • Another favorite source, Pension Partners, seems to be reaching on this topic.
    • Barron’s notes, citing Dan Clifton (a good source), “My take from discussing the issue with clients is that the headwinds from a possible trade war are colliding with the tailwinds from $300 billion of additional stimulus from spending on top of the recently enacted tax cuts.”
  • The Fed. A knee-jerk reaction to the direction of Fed moves and old slogans. Those citing this fear pay little attention to the starting level of rates, the pace of change, or the criteria for increases (stronger economic data). Throw in the changes in Fed membership and leadership, and it is open season. (Barron’s).
  • The end of QE. Those who were wrong about QE effects (hyperinflation) and attributed stronger equity markets to Fed policy are now taking the other side. This gives them a chance to be wrong in both directions!
  • Debt.
    • Global.     Now at $164 trillion, 225% of global GDP. (Timothy Taylor)

    • US government debt. It is growing rapidly, and the pace cannot be sustained.
    • The pension time bomb. $400 trillion by 2050. (Visual Capitalist).
  • Trump Administration policies, especially regarding trade.

And here are some sensible refutations.

  • Yield curve.
    • Flat or inverted yield curves tell us something about:

      Recessions – Inverted yield curves precede recessions although flat curves can last for a long time before becoming inverted or showing a recession signal. All recessions are preceded by inversions but not all inversions lead to recessions.

      Fed behavior – Flattening and inverted yield curve are associated with tightening of Fed policy, but tightening does not mean that a market sell-off or recession is around the corner. The link between the beginning of the tightening cycle and the impact on financial markets is loose. 

      Term premium risk – Flat yield curves tell investors there is no compensation for taking duration risk. There is limited reason to take marginal duration risk. We find that flat curves signal future increases in yield. It is a negative signal for bonds.

      Equity markets – Flatter yield curve do not mean lower stock returns. Flattening curves are not associated with market sell-offs.

      If you do not understand the chart below, you should be especially careful about reading scary stories about the yield curve. It is more than the slope of the curve; it depends upon how it happens.

    • Briefing.com emphasizes that the inversion is a leading indicator, and the lead time may be significant.

    • Brian Gilmartin takes a balanced approach, citing some (ahem) other good sources.
    • Bob Dieli continues to deliver the best analysis of the business cycle. His monthly report is chock-full of data, analysis, and even some humor – if you are willing to go with economist jokes. Here is his current business cycle rating. You will not agree. Please note that he has been correct while almost everyone else has been wrong. The current expansion could have years to run.

    This analysis has helped me stay on the right side of the market for eight years. Serious investors and institutions should subscribe to his service. It is information and analysis you cannot get elsewhere. Those on a low budget get the benefit of the basic conclusion via the “C-Score” in the weekly indicator snapshot.

  • Current conditions remain solid.
    • The Capital Spectator analyzes the current state of the business cycle, replete with data and charts, suggesting “that the economy will continue to expand.”
    • The Big Four update via Jill Mislinski is a great method to see the most important indicators at a glance.

As usual, I’ll save my personal conclusions and suggestions for today’s Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

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.

The Indicator Snapshot

Short-term trading conditions improved significantly this week. In mildly bearish conditions our trading approaches can still be profitable, but that might not be true for everyone. We continue to monitor the technical health measures on a daily basis. The indicator did not drop low enough to take us out of the market in trading programs, but it was close.

The long-term fundamentals and outlook are little changed. The long-term technical health is back to strongly bullish.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession.

Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis.


David Merkel explains why we should watch the thirty-year bond.

Dr. Ed Yardeni updates the forward earnings outlook.

JP Morgan demonstrate how this translates into stock prospects for next year, and the next five years.

Insight for Traders

Check out our weekly Stock Exchange post. We combine links to important posts about trading, themes of current interest, and ideas from our trading models. This week we asked, “How do you filter out noisy trading signals?” As usual, we discussed some stock ideas and updated the ratings lists for Felix and Oscar, this week featuring the Russell 1000 stocks. Blue Harbinger has taken the lead role on this post, using information both from me and from the models. He is doing a great job, presenting a wealth of new ideas and information each week.

This week’s theme was inspired by yet another great post from Dr. Brett Steenbarger. He explains that traders need to start each day with an open mind and focus on the job at hand. This is also excellent advice for investors, who spend waste too much of their time on bombast and sensationalism. We all want to be informed and to make intelligent decisions, so picking our sources and focus is crucial.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility! I remind investors of this each week, but now is the time to pay attention.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be J.P. Morgan Asset Management’s quarterly Guide to the Markets. All facts, all charts, and no argument. It is professionally prepared — a valuable resource which you can get for free. Anyone spending some time with this will learn something valuable. Here is one example.

I hope readers will use the comments to suggest other examples.

Runner-up for BOTW is Alan Steel’s tirade. He captures what I am trying to say here in fewer words, and much more colorfully.

He recounts the failed predictions about QE, the PIIGS, Japan, US budget decisions, the fiscal cliff and the Mayan Calendar.

They’re all gone.

Lest we forget all of those presumed Armageddons; spat out by experts and their gimp-like algorithms boasting ninetieth percentile (plus) accuracy, that resulted in zero-sum truths.

Did oil ever get to $250 a barrel, Gold go to $5000 an oz, the FTSE drop down to 500, or the Dow Jones Index fall to 1000?

Now move a bit further backward and remember the global consensus of experts telling us planes would fall out the sky thanks to the Millennium Bug…

Floating Sideways

The truth about these things isn’t inconvenient to anyone other than the “experts” who predicted them, and of course those who fretted their arrival, or worse, lost out financially because they listened.

Those offenders experts expect our memories to remain as silent as their missing apologies for all that gloom and doom that’s now floating sideways on the other side of the global economic goldfish bowl.

Stock Ideas

Chuck Carnevale identifies 10 fairly valued dividend growth stocks, with an emphasis on total return. It is his usual combination of great ideas and a lesson in stock selection.

Blue Harbinger suggests ten investment ideas that compare favorably with the FAANG stocks, which have plenty of volatility and risk. Which reminds me. Diane Freeman (Investing.com) had an excellent roundtable on this topic more than a week earlier. She asked about FAANG versus the tech stocks. I tried to inject a touch of humor in the first part of my answer:

My approach separates the two parts of your question. I like tech in general but see the FAANG run as over-extended. Those who love emphasizing the high-flying leaders may keep the run going by changing the membership. They have already added an “A” to the original lineup and may be about to lose a consonant. Vanna can’t help with that one.

And then….. CNBC takes up this topic on Fast Money, even simulating Wheel of Fortune. I suppose that GMTA is always possible, but I note that the mainstream media never cites sources for these ideas. It seems to happen often when I coin a new term. (Mrs. OldProf thinks they ripped me off, it is funny, but I should chill out. So, I will).

Time for Walmart (WMT)? Hale Stewart continues his series on “Bottom Fishing the Aristocrats” with an interesting blend of fundamentals and technical analysis. I always like to illustrate both ideas and methods. Hale begins with support from the consumer staples sector, as shown here:

Great portfolio and side moat? Medtronic (MDT) fits the bill. (Morningstar).

Eddy Elfenbein’s holdings are always a source of ideas. He provides regular updates on the stocks in his holdings. His method has a proven edge over the market. Or you can get the entire package easily and inexpensively by buying Eddy’s ETF (CWS).

A battle for the lead in AI chips, says Barron’s. This is an important theme. Should we guess the winning companies or buy a basket?

How about some energy ideas? Kirk Spano suggests two stocks to play the oil bull market.

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich has expanded his excellent series for financial advisors (and serious individual investors) to include some podcasts. This week I especially enjoyed his discussion of how to cut retirement costs, with another great link to Prof. Laurence Kotlikoff. Read the entire post for several great ideas.

Abnormal Returns is always worth reading, with many links on an array of interesting topics. Wednesday the focus is on personal finance. From many good choices this week I especially liked the advice from Ben Carlson, 3 Ways to Make Up for a Retirement Savings Shortfall.

Watch out for…

Taking Social Security too soon. Michael Tove (Kiplinger) explains the math. “Once you reach your full retirement age, your monthly Social Security check gets 8% larger for every year you delay taking benefits through age 70 (technically, it’s 2/3% per month). Mathematically, the “crossover point” is about 12 years”. That is just the beginning, since there are other benefits as well.

Real estate investor mistakes. Pat Curry (Bankrate) lists ten “terrible mistakes.” I usually do not link to slideshows, but this one does not launch a new ad on each click. The information about real estate planning is valuable, both for first-time buyers and for downsizing baby boomers.

IBM, facing seasonal headwinds (Stone Fox Capital). [Jeff] Perhaps so, but that makes it a good platform for writing calls. It is currently on our watch list for that purpose.

Final Thoughts

Sources are important.

Since most people pay little attention to the background of those claiming authority, they might not notice that economists specializing in the business cycle are reaching a different conclusion from most others. These observers, new to the topic and eager to make a mark, use reasoning like the following:

  • The age of the business cycle – known to be irrelevant.
  • Guessing when an indicator like the yield curve will change – the “forecasting the forecast” error.
  • Speculating about the impact of proposed policies – even though we don’t know whether they will be adopted or what the effects might be.

I have a personal list of valuable sources. They are the very best contrarian indicators! They provide a regular listing of what is going wrong. Recently I have noted a change. As conditions have improved, these sources have shifted in focus. Here are a couple of examples.

  • No near-term worries? No problem! Just reach farther into the future. It is actually easier to spin a tale when there is plenty of time and uncertainty.
  • Be flexible. Take whatever side works at the moment. If earnings are low, discuss the weak consumer and the unfairness. If earnings are rising, then emphasize the inflation threat.

Their business model seems to be one of supporting the insatiable appetite for confirmation bias from investors who have misjudged the market. Unfortunately, many average investors stumble on these sources and take the material seriously. They do not know about past errors or track records.

You never see a retraction or admission of an error. The only clue is that these sources monetize their audience with a “solution” to fear – gold, annuities, a no-fail trading system, or some other seductive, high-commission product.

The popular concerns are often quite valid. That is what makes them dangerous noise for individual investors.

The level of government debt is an important social problem. So is the inadequate funding for government pensions. We should address these problems before it becomes too late. But they do not have much to do with the current choices offered to investors.

I’m more worried about:

  • A negative confidence scenario. Investment and spending decisions depend on positive expectations.
  • Deterioration in the tariff and trade talks. This is the most sensitive issue for the market, and it remains a rhetorical playground for world leaders.

I’m less worried about:

  • North Korea. There seems to be genuine potential for reducing the nuclear threat and moving closer to normal relations. (Washington Post on Pompeo trip)
  • Market volatility. It has receded to a range close to historic norms. There are plenty of excessive moves offering opportunity.

[Are you struggling to remain objective about risk? Scared out of the market and unable to get back in? Not doing well on your own? I have several free papers on these topics. Just write for our free information on these topics. While they describe what I am doing, the do-it-yourself investor can apply the same principles. Just email your request to main at newarc dot com. Because of the turbulent conditions, I have also set aside extra time to speak with individual investors during the first week in May. Just write for an appointment—no charge and no obligation].

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