A Dash of Insight

Monitoring the Economy

Nearly all of us are consumers of economic information and data.  We are interested because economic strength leads to corporate profits and higher stock prices.  We need to know!

The key issue is pretty simple.  Many question the "second derivative" rally in stocks.  Their point is that economic data are bad, very bad.  Evidence showing that conditions are now showing  "less weakness" -- well -- that is not really bullish.  The economy, consumers, credit, and housing are all still very bad.

A Review of Key Sources

 The advance data on 1st Quarter GDP came in worse than expected.  A big decline in GDP is not good.  Some noted a few positives:

• Richard Hamilton at Econbrowser, one of our featured sources,  is a realist with his own recession method.  His rating is negative, but he notes the increase in consumption and cautiously observes that growth could be positive by year end.
• Joe Wiesenthal, citing economist Richard Moody, also suggests Positive GDP as Soon as Next Quarter.  He notes (emphasis from original), "Thus, through the process of what we call addition by less subtraction, the deductions from real GDP figure to be significantly smaller in Q2 than was the case in Q1. As such, a modest increase in real GDP during Q2 is not out of the question."
• Calculated Risk (another featured source) emphasizes that GDP is a lagging indicator, although he is cautious on the strength of the recovery.  Readers should click through to see the excellent charts.

There are other miscellaneous indicators.  Ed Yardeni, one of our favorite economists, sees twelve positive factors drawn from economic data and earnings.

Looking Forward

Most data sources provide analysis of coincident or lagging data.  We all hope to look ahead, but few provide such insight.

The ECRI (Economic Cycle Research Institute) has a strong record of forecasting recessions and recovery.

My RealMoney Colleague Anirvan Banerji does a careful explanation and defense of the ECRI indicators, which were excellent in predicting the recession.  (Subscription required and worth it.  Regular readers know that we subscribed to RealMoney for years before joining as a contributor.  Consider a trial subscription.)  The key quote is as follows:

The "giant error of pessimism" is now rampant. This is why many will be blind to the light at the end of the tunnel that marks the exit from this recession. But to ECRI's array of objective leading indices, designed specifically to spot recessions and recoveries, the end of the recession is now in clear sight.

The indicators show that the economy is "on the cusp of a growth rate cycle."

Our Take

We expect pre-occupation with the stress test results, due for release on Monday.  Many are suggesting that the assumptions in the test are too soft.  Meanwhile, there are strong indications that the assumptions might be acceptable.

We expect another bad payroll employment report next week (a lagging indicator) and continuing skepticism about the economy.  It all fits our explanation for why the market has defied the lagging economic news.  Current equity prices started building in depression scenarios after the fall of Lehman and the first TARP debate.  The market is now climbing the wall of worry.

Successful Financial Blogging

Let us suppose that one wants to start a successful financial blog.  The start up costs are low, so many will take a shot at this. What defines success?

Part of our experience is advising early-stage companies.  It is a good model for a blog.  What should one do?

• Learn the market.  The blogger needs to understand the readers -- who they are, their viewpoints, and what they want to hear.
• Understanding behavioral finance.  Most readers track on what worked most recently.  That is how the heroes are found.
• Go for the rankings.  The various ranking services start -- and mostly end -- with traffic.  If you write something that appeals to the online audience, you have a better chance of success.  Most of those doing rankings are not qualified to evaluate the content, so ratings dominate.
• Post frequently.  The more you write, the more people visit your blog.  Many raters use frequency of posting as a filter.
• Exchange links.  Be willing to trade links with nearly anyone.  Offers abound.

Identifying the Online Audience

Here is a dramatic example of what works online.  The best example is the recent online poll by Time.com.

In a stunning result, the winner of the third annual TIME 100 poll and new owner of the title World's Most Influential Person is moot. The 21-year-old college student and founder of the online community 4chan.org, whose real name is Christopher Poole, received 16,794,368 votes and an average influence rating of 90 (out of a possible 100) to handily beat the likes of Barack Obama, Vladimir Putin and Oprah Winfrey. To put the magnitude of the upset in perspective, it's worth noting that everyone moot beat out actually has a job.

This tells us very little about who is most influential, but a lot about those taking the poll.

The frequent polls on CNBC and other sites tell us a great deal about the trading audience -- what they believe, their positions, and what they expect.  These polls are mostly skeptical of any government program, the future of our country, and the prospects for the economy.  They are widely divergent from polls that use a scientifically selected group.   These polls show a wide acceptance of Obama and his policies.  This is not a political statement, but merely a look at some facts.

It pays to cater to the online audience.  Andrew Leonard's Prophets of Doom list is also a list of the most popular blogs and commentators (with a few prominent omissions).

Popularity Pays -- for Someone....

Popularity clearly pays for the bloggers.  They are wisely following a successful model for an early-stage effort.

Our mission is quite different.  We attempt an objective interpretation of data, an effort to find the best sources, and a willingness to alter short-term perspective.  In particular, we are skeptical of sources swinging outside of their "happy zone" (hat tip to Ted Williams -- click through to see the famous strike zone picture).

For the individual investor trying to find help from the Internet, this is a minefield.  The information from the popular sources is unrelentingly negative.  Meanwhile, the real story is not so clear.

Investors should pay attention to data, not opinions -- and especially not political opinions.  There is a time lag in the impact of government policies.  It is time to start monitoring the lagged effects of lower interest rates, innovative Fed policies, and the stimulus package.

Does Blogging Enable Market Manipulation?

The greatest strength of financial blogs is also a potential weakness.  There is so much information that readers frequently rely upon the interpretation of the writer.  Most people do not click through to the supporting links.  They go to their favorite sources for information, and generally rely upon the interpretation of the writer.

We know this is true from our own stats, even when we strongly encourage readers to check out an entire article.  Readers rely upon us to make accurate representations of source material.  We are expected to provide a fair summary and accurate illustrative quotations.

Fair enough.  No one has time to check out all of the sources, no matter how carefully we try to document.

This is in sharp contrast with mainstream print sources, where editorial procedures review material before it is published.  Not so in the blogosphere.

The issue can be simply stated:

Blogs with a wide following have a special responsibility to check and re-check accuracy before posting.  If the authors do not do so, there is an easy means of manipulation.

Step one:  Get a dubious story out there somewhere -- anywhere.

Step two:  Get a noted blogger or pundit to mention the story.

Step three:  Mainstream media sources race each other to be first with this news.

Trust in link sources is vital.

Strong Sources

We feature several blogs where the authors provide plenty of links and summaries.  Some of the sources are anonymous bloggers.  We believe this conveys a special responsibility, since the reader does not know the background or skill of the writer.  It takes more evidence to be convinced of these sources, but the proof is evident in the work.  If one checks out the links, the accuracy proves out.

Here are examples of sources where the links are fairly interpreted with very high reliability:

• Abnormal Returns.  The summary tells you what you will see.  You can choose whether to read it.
• Charles Kirk.  Always interesting, always accurate.  Many interesting links.
• Alea.  Anonymous, but with special insight on credit markets.
• Calculated Risk.  Respected by everyone -- earned through accuracy.
• Paul Kedrosky.  Especially useful in finding interesting academic papers.
• The Big Picture.  Barry has a viewpoint, but his sources are always carefully documented and accurate.
• Muckdog.  We like the "everyman" viewpoint, which often captures the spirit of the market.  The links support his statements.
• Dr. Brett.  Unchallenged authenticity, with widely varying interests.
• David Merkel.  What you see is what you get in links at The Aleph Blog.
• Adam Warner.  The quotes are always representative.

We are leaving out many, of course, but this is designed to illustrate.  The WSJ blogs, for example, are carefully sourced.

The Jury is Out for Some

Like many others we follow the work of the anonymous blogger "Tyler Durden."  Seeking Alpha assures us that this person is an authority. He has rocketed to a high level in the new Seeking Alpha rankings -- a position of influence and responsibility.   Many of the articles display interesting and informative insight concerning the inner workings of big firms and hedge funds.

Since there does seem to be a viewpoint in the Durden work, we have great interest in the sourcing and evidence.  Let us look at an example of links from the prolific Durden.

Must read on CNBC propaganda: "Immelt and NBC Uni CEO Jeff Zucker supposedly told top CNBC executives and talent to be less critical of President Obama and his policies" This explains why nobody with half a brain watches CNBC anymore (THR hat tip Guest)

Since we have opined on CNBC politics, this was of great interest.  Our viewpoint is that opinion shows like Kudlow's in the evening are interesting and informative.  Viewers know what they are getting, and it is a lively debate.  We do not like the intermingling of politics and journalism during the business day, when CNBC anchors get to interview authoritative guests.  We are not very interested in the opinions of the journalists, and viewers should not be either.

If one reads the link, one can readily see that the quoted section does not accurately represent the article.

First up was a woman asking about a reported meeting in which Immelt and NBC Uni CEO Jeff Zucker supposedly told top CNBC executives and talent to be less critical of President Obama and his policies.

Immelt acknowledged a meeting took place but said no one at CNBC was told what to say or not say about politics.

During the woman's follow-up question, her microphone was cut off.

The key point is that Immelt denied the charge in the Durden quote.  Perhaps he suggested that journalists should be journalists in non-opinion shows.  We do not know, of course, but that would be a good thing.  Helping investors to separate political decisions from their finances is good advice, as we have frequently suggested.

Even more telling is this section from the rest of the article:

Later, during the umpteenth question about MSNBC, another shareholder's microphone was cut, according to multiple attendees.

"The crowd was very upset with MSNBC because of its leftward tilt," one attendee said. "Some former employees said they were embarrassed by it."

One specific complaint about MSNBC concerned Keith Olbermann's interview of actress Janeane Garofalo, who likened conservatives to racists and spoke of "the limbic brain inside a right-winger."

We spend very little time on MSNBC, but from what we have seen, we can understand the criticism.  Once again, the key is whether the program purports to be journalism or opinion.  This part of the article is exactly the opposite of the theme of the Durden quote.

Briefly put, we do not think that the Durden summary of the link is a fair and accurate representation of the article.

Another recent  example is the unsourced claim that SPY is hard to borrow.  This was challenged by Doug Kass (full disclosure -- Kass is a valued colleague at TheStreet.com).  Kass checked this out and found no problem with a borrow.  Here is the Durden response:

Update 4: Doug Kass disagrees:

I have received emails from several trading sources, stating that the market is rising because the SPDRs (SPY) are hard to borrow now and arbs are being squeezed.

This story is hogwash, as I just tried to borrow 500,000 SPDRs and had no problem doing so!

Position: Long SPY; short SPY puts and short SPY calls

Maybe Doug can disclose at what term and rate he got the borrow. Doug - I am dead serious - can I borrow 5 million SPY right now at 0% from you? Hell, will give you 1%

We expect to hear more about this dispute.  Meanwhile, anyone wanting to short the market can do so through a futures account.  There is no problem in "borrowing" e-mini's to go short, the method favored by those of us in Chicago.  There is an arbitrage opportunity with SPY.  The claim of a problem in shorting does not have face validity, so we look forward to some evidence.

Our Take

It is easy for investment readers to be swept up by apparent authenticity, especially from a source that everyone seems to follow.

We hope that "Tyler Durden" will balance frequency of posting with accuracy in representing links.

We have a continuing concern about the "leaked stress test" story, where he is a supporter of a dubious source.  That is a question for another day.

ETF Update: What is Working?

At "A Dash" we combine fundamental analysis with system trading.  We monitor and report economic information, with a special emphasis on implications for corporate earnings.  Our trading system provides a reality check on the markets.

We have found that looking at the charts of many different sectors is a great way to get a feel for the overall market, as well as how specific sectors are performing.  Our system includes Trend, since that is the most important technical consideration.  We also attempt to include a Cycle for specific sectors, and we add a touch of Anticipation.  Putting these together is the basis for our TCA-ETF method.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

The Current Picture

We provide the ratings not as specific trading advice, but more as a basis for checking your own analysis against a scientific method.  To illustrate, let us look at this week's ratings.

• ICF, our featured sector last week, took a big hit on Monday.  We noted that it was a key point for technical analysts.  There was plenty of negative commentary from reports about stress tests.  The model filters drove through this reaction and ICF remains our top-rated sector.  It bounced back nicely from Monday's selling.
• The overall market analysis remains bullish, although more sectors have dropped into the "penalty box", where we do not recommend buys.
• The Home Builders, ITB, have bounced back into the top group.

It is a complex story.  Those who watch the individual sectors have a better overall market feel, and a better sense of what is working, and what is likely to work over the next thirty days.

Here is the chart showing the ICF bounce from the Monday "news."

 

And here is the chart on the home builders, ITB.

Other ETF Comments

John C. Ogg notes the reaction to home builders from the recent housing data.

Trends I'm Watching  also notes this pop.

Zero Hedge sees the same data, but offers a note of skepticism.

Our Take

The story about financial sectors is complicated because of the debate over the "stress tests."  This bears watching, and it is our main current focus.

There has been plenty of misinformation, with speculation about the stress test results.  Many traders are very skeptical.  We maintain that  the "leaks" about this story are incorrect.  The mainstream media stories have looked at the methodology and speculated about the results.  We expect the actual announcement to be a positive for the market, supporting the model recommendations.

Weekly TCA-ETF Rankings

41 of our 57 sectors are in the "buy" range.  Many sectors still have extremely strong ratings, although some  ETF's have moved into our "penalty box".  This designation means that the sector cannot qualify as  "buy" on technical grounds.  You can think of it like a sell stop, only with a more complicated basis.

It was another good week for the system, gaining over one percent while the S&P 500 declined a bit.

Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Recognizing an Expert: The Stress Test Issue

Many years ago the old prof was an aspiring prof, traveling back from a bridge tournament with the team.  There was an appealing place to stop -- a truck stop, in fact -- so we entered and sat down at a table.  A waitress (and in those days that was the politically correct term) came over instantly and took our order.

A minute later another person entered, looked around, and sat down at our table!  We were very surprised, but unsure about what to say.  The new party to our table starting talking  immediately -- smokey's, crazy drivers, how the wind was whipping the rig around, etc.  He was using terms unfamiliar to us.

At this point one of us noticed the sign over our table:  Truckers Only!  It was a table for truckers to meet and talk.  We were out of place.  Our conversation would have been instantly identified by a real trucker as that of a regular motorist.

Meanwhile, the trucker could not have discussed limit raises or double squeezes, but it was not a table for bridge players.

There is a simple point.  Experts can identify experts and also impostors.

The Stress Test

With this illustration in mind, let us consider Monday's highly-publicized "leak" of the stress test results.

While the source did not provide exact quotes, it is obvious to anyone familiar with government documents that this is not a real report.

• The breathless tone.
• The inclusion of a non-US bank.
• The emphasis on current insolvency.
• The inclusion of other topics, like overall debt.

The stress tests involve a number of different scenarios, examining how a given bank portfolio might do under difficult circumstances, mostly drawn from economic projections.  It is not expected to reveal "insolvency" but to identify problems and lead to solutions.  Banks that might need additional capital will be identified.  The government will work with them to explore various options.  It is not intended as an overall verdict on the banking system.

The examination is bank-by-bank, with the emphasis on dealing with potential problems.

Briefly put, the summary of the report does not "ring true" for anyone with experience in reading government documents.

What Happened?

The most likely explanation is that someone provided a fake document, for motives that can only be guessed.

The amazing result is that so many are willing to accept such information at face value, in the face of explicit denials from the Treasury Department.  It shows the willingness of traders and bloggers to believe in leaks and conspiracies.

The original source now has "corrections and additions" which correct some of the original problems.  The most important of these is the assertion that there is already official acknowledgment that the results are known.  Let us examine this "evidence."

This morning, the United States Treasury issued a statement (HERE) claiming they do not yet have the results of the Stress Tests, rebuking our report

How do we know its a lie?

Because of this from April 10th:

April 10 (Bloomberg) -- The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, people familiar with the matter said.

The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.

How can you be ordered not to release something you don't have?

This is pretty easy to answer.  The Fed made it clear -- in anticipation of specific results -- that they did not want banks claiming that they had "passed the test."  It would call into question any institution that did not make such a claim.

Think about it.  There is nothing in the statement from the Fed that suggests that results were already known.  It was made before the tests were completed.  In no way does it suggest that there is "a lie" about reports.

Investment Conclusion

From the always reliable Abnormal Returns we know that this was still an issue today.  So many want to believe in the failure of the banking system.

Several pundits have argued that if the stress test shows that banks are OK, they will not believe the results.  If it shows problems, it will be time to sell the financial stocks.

Briefly put, many traders and investors are not very interested in the evidence.  In the long term, this is a contrarian opportunity.  Meanwhile, we should expect plenty of skepticism when there is an official report on May 4th.

ETF Update: Time for REITS?

Sometimes price action seems inconsistent with the fundamental story.  One of the ways we use our ETF rankings is to highlight developments that deserve further investigation.

While financial sectors in general earn continued strong ratings, the most noteworthy feature of the new ratings is the rapid rise of two Real Estate Investment Trust (REIT) ETF's.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

Surprising REIT Strength

Investors who choose REIT's general seek high yield and tax advantages.  The REIT must return 90% of income to unit holders to avoid taxation at the trust level.  Since certain non-cash expenses like depreciation reduce income, investors determine value as a multiple of adjusted funds from operations (AFFO) rather than a PE multiple.  The REIT provides smaller investors the opportunity to add real estate of various types to their portfolios without directly buying properties.  (Those interested in learning more about REIT's, valuation, and taxation can find a good start on the subject, including many specific articles by experts, at Investopedia.

The most obvious risk in REIT investing comes when there is reduced performance from the properties held in the trust.  The economic impact on commercial real estate has placed REIT shares among the worst performers performers  since last October's turning point.

More recently, there has been a rebound.  Sameer Bhatia of Dow Jones writes as follows:

REIT shares have rallied between 30% and 60% over the last month despite continued weak retail sales, rising vacancies, structural overcapacity in the sector, staggering debt loads and significant refinancing risk at some of these companies.

Why the current strength?  Is there an opportunity for the ETF investor or trader?

REIT ETF's

We evalute REIT's through the iShares Cohen & Steers Realty Majors Index Fund (ICF) and the iShares Dow Jones U.S. Real Estate Index Fund (IYR).  Both are currently in the top eight of our rankings, but we will focus on 2nd-ranked ICF, up from #29 last week.

ICF has reasonable diversity with 25% of the fund in five names and about 40% in the top ten.  Since the trusts are all very similar, this can be deceptive.  The beta for the group is about 1.6.

The chart below clearly shows the collapse last autumn, as well as the recent strength.

Reasons for the Rebound

The Dow Jones article cited above suggests an interesting reason for REIT strength, the potential for acquisitions.

Leading REITs such as Simon Property Group Inc. (SPG), Public Storage (PSA) and Vornado Realty Trust (VNO) can acquire the senior secured debt, or the mortgage notes securing assets, of their weaker competitors at their current discounted prices and then simply wait for these companies to sink under the weight of their own debt. This could prove a unique win-win strategy for well-capitalized companies looking to acquire others.

If the target company does default, it would give the acquirer a strong negotiating position and make it the leading contender to take possession of the assets of the defaulting company

We note that the leaders named in the article are also the top holdings in ICF.

Mark Jewell of the Associated Press, has a different slant.  His story, Opportunity abounds in battered REIT market, highlights the attractive yields after the collapse in prices.

Some see the REIT rally as just a part of the general market rebound.

Traders Drawing a Line

Two noted trading authorities are skeptical about IYR.

David Fry (not mentioning closely-related ICF) sees "clear resistance" for IYR.  Be sure to check out his charts with notes.

Maoxian sees a return to the March lows as part of a textbook setup with broader market implications.  Check out his chart.

Our Take

This is a very interesting question.  While we trade by following our model, it is wise to be aware of all viewpoints.  It is part of the process of improving methods.

Weekly TCA-ETF Rankings

47 of our 57 sectors are in the "buy" range.  Many sectors still have extremely strong ratings, although some energy and health care ETF's have moved into our "penalty box".  This designation means that the sector cannot qualify as  "buy" on technical grounds.  You can think of it like a sell stop, only with a more complicated basis.

It was another excellent week for the system, gaining over 4 percent and beating the S&P by more than 2.5%.

Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Jim Abbott and the Wall of Worry

Regular readers of "A Dash" are familiar with our loyalty to the University of Michigan and also our notion that sports can provide valuable insights for investments.  Here is a good example.

Jim Abbott

Truth is stranger than fiction.  Who would think that a person missing the fingers on one hand could be a successful big-league pitcher?

Jim Abbott is the implausible hero.  This weekend his number "31" will be retired by the Wolverines.

When Abbott was still in grade school, one opposing coach ordered his batter to bunt, forcing Abbott to field the ball. Abbott pitched with his glove resting on his right hand. After he released the ball, he slipped his left hand into the glove, fielded the ball, then performed a nifty maneuver where he'd stick the glove under his right arm, let the ball fall into his left hand, and throw it to first base.

"I don't ever remember it being something I had to master," he says. "It was just something I did." He made the play as smoothly as a magician pulling a nickel out of your ear. One down.

Thinking it was a fluke, the coach ordered the next batter to bunt—and the next. Finally, after six batters had bunted, and Abbott threw all six out and the coach called off the experiment—making the coach the only embarrassed person in the park.

Abbott's career included the following highlights:

• Winning the 1988 Gold Medal Olympic game against heavily-favored Japan.
• Vaulting directly to the major leagues, one of a handful of players to skip the minors.
• An 18-11 record and a 2.89 ERA in his third year in the majors.
• A no-hitter in 1993.
• Providing an inspiration to handicapped kids everywhere.

Investment Implications?

We see Abbott as a symbol of the Wall of Worry -- the current market condition.  In January we wrote the following:

We expect that market skepticism will be a "wall of worry" and that market gains will require actual evidence of improvement in housing, the economy, and corporate earnings.  The market will anticipate improvement, but some evidence is needed.

There are many economic problems -- all well noted and discussed by many (including us).  Most observers seem to believe that this means that markets should always move lower, with no particular destination in sight.  The skeptics tell us to ignore any evidence to the contrary.  Consider some examples.

• Wells Fargo pre-announces good earnings.  The punditry rushes to tell us how wrong this is.  Check out Tom Brown for some detailed analysis of the critics.
• Goldman pre-announces good earnings.  The punditry rushes to tell us about the "hidden month" as they shifted, as expected for their new role as a bank holding company, to a calendar year.  Writing about this shift generated a lot of page views, but those looking ahead might have a better grasp of the earnings potential.
• Intel announced good revenues and earnings, and suggested that there was a bottom in the PC market.  Pundits complained and the market weighed to the sell side.  Why?  The company did not give "hot" guidance.  Is this a surprise?  Companies will remain cautious in guidance until well beyond the economic turn.
• The stimulus will not work, say the political critics.  They are confident about this even before they see any data.
• The PPIP will not work, say the pundits.  They are confident before the participants are even announced.
• Anyone who booked the 20% gain in the last month has enjoyed a "sucker's rally."  If you Google this term you will see 500,000 hits, all telling you how stupid you were.

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.

It is like Jim Abbott's opposing coach in Little League.  It seems implausible.  It is how sustained market advances occur  -- one step at a time, with setbacks.  Each new piece of evidence is greeted with skepticism.  It may take several good plays in a row before the many skeptics get on board.

(Full Disclosure:  Long INTC and GS)

The Wide-Ranging Thoughts of Dan Niles

We always turn up the sound and back up the TIVO when we see  Dan Niles on financial television.   He has a well-deserved reputation for great knowledge of what is happening in technology, especially semiconductors. He combines this information with superior analytical skills.

We were treated to several of these conclusions in his CNBC interview today with Maria Bartiromo.  Niles continues his bullish stance on technology for the remainder of 2009, while allowing for some pullbacks.  In particular, he suggests that we look for companies that have already guided down significantly on revenues -- 50% or so -- since these are the firms that will now be guiding higher.  Watch out for those that did not reduce earnings forecasts enough.

The interview then continued with a list of his biggest concerns. He offered opinions about how much further home prices would decline, the amount of "toxic assets" remaining to written down and long-term debt issues.

Everyone is  familiar with these issues, but there was nothing special in the analysis.  It is a story that one can read anywhere.  Does it make a difference that Dan Niles believes this everyday story?

Perhaps.  To the average listener he sounded just as much an expert on housing as he did on technology.

Six months ago we had an article featuring the famous picture of Ted Williams and a strike zone filled with baseballs. It showed his batting average when he stayed in what he called his "happy zone" and what happened when he did not.

(Full disclosure -- we are long INTC in personal and client accounts).

With the start of the baseball season, fans might enjoy a look at this, but the article is more about how to parse information. Everyone is entitled to an opinion, but why listen if the expert is reaching for a pitch in the dirt?

ETF Update: Let's Network!

Each week we write about the market from the perspective of an ETF buyer.  In order to do this, we examine the weekly ratings from one of our trading models.  This particular method looks not at the overall market nor at individual stocks. The focus is on market sectors, as represented by ETF''s.  Since it considers both Trend and sector Cycle, with a touch of Anticipation, we call it the TCA-ETF model.  Around our office, it is often called the "Vince" model, after its creator.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

This is a healthy exercise for many reasons.  In our weekly update, we try to highlight something that the average investor can use, even if he/she is not an investor in our program.  Here are a few themes that we have covered during this series.

• System Traders.  This is for you.  We often highlight the issues involved in building and following a system, even when things seem to be going wrong.
• Sector Investors.  Our update is where you can compare your own conclusions with those from a professional model.  Since we do a lot of fundamental analysis of stocks and sectors, we do this ourselves.
• Stock Pickers.  It always helps to start with a stock in a favored sector.
• Current Trends.  We try to compare our ETF choices with market fundamentals and current trends.

Each week we identify a featured sector and examine one of the themes.

Networking Stocks Break Out

In a dramatic move last week, the S&P North American Technology-Multimedia Networking Index Fund (IGN), moved from the 10th spot in our rankings to #1.  The move triggered the model last Friday (April 3rd).  This iShares Fund has the following characteristics:

• The P/E ratio is about 21.  This is pretty high if one expects no growth, or pretty low if one sees an earnings rebound.
• The top five holdings (GLW, RIMM, QCOM, CSCO, MOT) constitute 41% of the holdings and the top ten make up 63%.  This is pretty high concentration, making it important to look at the top stocks.
• The beta for IGN is 1.33, showing volatility when compared with the overall market.
• Some of the top holdings have been rallying on strong fundamental news, as noted here.

The Model Perspective

Readers sometimes ask whether it is "too late" to enter a new position.  We shall write more about this soon.  The model interpretation is based upon many years of data.  Anything in the positive range shows better-than-expected future performance.  A rating of 100 is two standard deviations above the average for the next thirty days.  Finally, the model makes most  of its profit on big breakouts.  What about now?

It is always interesting to look at a stock chart, a snapshot of what the model sees.  Where would you set an upside target?

Others Viewpoints on IGN

Gary Gordon sees networking as a beneficiary of tech infrastructure spending under the Obama administration.  He liked IGN as far back as October, 2008, and still does.  He addresses the question of entry timing as follows:

The truth is... yes. You can probably get a more attractive entry point. That's a prediction, of course. In essence, I would expect that the 5-week bear rally might hit some hefty headwinds here in earnings season.

However, the basic premise is still quite sound; that is, the iShares Networking Fund (IGN) will benefit from the hundreds of billions being spent to increase broadband access for schools, healthcare professionals, libraries and hospitals. Moreover, President Obama strongly believes that America's success is tied to our country's leading internet players. And that translates into the helping hand of government in an era of seriously checked capitalism.

In his regular technical analysis, David Fry calls IGN a "leading subsector within tech."  (scroll down to see his multi-year monthly chart.)

Weekly TCA-ETF Rankings

All of our sectors except the inverse ETF's and gold stocks are now in the "buy" range.  Many sectors have extremely strong ratings, with a rotation from financial stocks to several other positions.  We really like this kind of action, with sector leadership changing each week.

It was another excellent week for the system, gaining about 2.6% (after a bad start) and beating the S&P by a point.

Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

JOLTS from the BLS

Understanding changes in employment is crucial for investors.  Employment is related to consumption, to consumer confidence, and to GDP.

The Bureau of Labor Statistics provides many reports.  In the Internet age, these are all backed up with online explanations -- extensive pieces on methodology.  There is plenty of opportunity for analysts to review the methods, to analyze the data, and to consider the conclusions.

Doing so requires some expertise in economics and research methods.  One problem is that many observers have a focus that is too narrow.

In particular, it is time to pay more attention to the dynamics of the labor market.

The JOLTS Report

Each month the BLS provides a report, the Job Openings and Labor Turnover Survey (JOLTS), that tells us much of what we want to know about the labor market.  We should consider this report in conjunction with the highly-publicized monthly employment situation report.

No one does.  Try a Google search and you will quickly see the neglect by both mainstream media and pundits.

Some Key Facts

The data lag by a month.  This may be one reason for the lack of attention.  There is still plenty to consider.

Here are some of the most important results from the most recent report, released this week:

• As of the last day of February, there were three million job openings in the US.
• This is 38% lower than the recent peak in June, 2007.
• The quit rate was 1.5%, the lowest in the eight-year history of the survey.
• In the prior twelve months there were 59.2 million separations.
• Hires were 55.3 million, yielding a job loss of nearly 4 million.

Implications

The facts are poorly understood.  You do not see them on CNBC, in the MSM, or on blogs.  Our guess is that few pundits could guess any of these numbers.  It is a neglected subject.

Our guess is that the leading pundits are essentially unware of any of these facts and could not guess the numbers within an order of magnitude.  People think that there are no jobs, that no one is quitting and that no one is getting hired.  They also vastly underestimate new job creation, which is significant, even in a recession.

The key point is the massive shift in employment -- something that is always going on.  If one thinks about this, the arguments about the bete noir of bloggers, the birth/death adjustment, is seen in a better perspective.

There are always millions of people quitting and getting fired.  Millions of others are getting hired.

The story is very negative.  If you consider the number of people losing jobs, and needing to search for new ones, it dwarfs the actual unemployment rate.  Many people are worried about their jobs, and rightly so.  No wonder sentiment is so negative!

There is much more focus on job losses than new jobs.  The former get the news stories.  The latter are basically unreported.

And most importantly ---

The market fixation on net job changes ignores the much larger picture of employment dynamics.