My "Week Ahead" series is all about focus. There is so much information, so much data, and so much to read. There is also temptation -- the challenge for next week.
An interesting feature of the American democracy, perhaps better understood by my foreign readers than by those in the USA, is the willingness to opine on nearly any subject. It is difficult to write something that makes sense 175 years later, especially on a subject like political culture. For this reason, political science students still read Alexis de Toqueville:
In the United States, the majority undertakes to supply a multitude of ready-made opinions for the use of individuals, who are thus relieved from the necessity of forming opinions of their own.
In my classes I gave it a modern twist. Voters did not want to learn about and discuss the intricacies of policy issues. In those days (about 35 years ago) the big issues were war, the economy, nuclear weapons, the trade deficit, the looming shortage of energy, pollution, and the shortage of doctors. If the list seems familiar, you might look for a lesson there!
Voters were hopelessly ill-informed about any of these subjects. What moved them to action? There was nothing like a good sex scandal! Powerful members of Congress lost power not because of any policy decisions, but because they hired secretaries who could not type. Presidential candidates, otherwise qualified, should not be caught misbehaving, especially on private yachts called "Monkey Business."
This is another eternal truth. Just look at the top ten Google searches or the most popular websites -- all gossip, all the time.
Everyone is focused on the sideshow rather than the main event. It has all of the key attributes:
- Anyone can play -- no advance training required.
- There are clear heroes and villains.
- There is plenty of room for speculation and guessing about motives.
- It is much easier to understand than stock valuation.
There are many good services that do a complete list of every event for the upcoming week, so that is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios. So far, my focus has been pretty good. Last week my emphasis on earnings was correct until nearly mid-day on Friday (heh heh).
Reviewing Last Week
The news last week was pretty good.
- Intel earnings were great! Forrester Research says that the tech downturn is over. This is yet another piece of support for my 2010 forecast of a Windows 7 upgrade cycle.
- Barron's articles cite (two articles, check both) a Windows 7 upgrade cycle!
- David Rosenberg says not to worry about Fed rate increases. He emphasizes the policy relevance of core CPI -- recommended reading for those trying to school the Fed on inflation. (Rosenberg is worried about deflation).
- Building permits were excellent. I like this indicator better than some of the other housing data. Permits are costly and involve a real commitment.
- Interest rates moved lower.
- Brian Wesbury, one of the most bullish economists on the rebound, summarizes data with the conclusion that there is plenty of time for investors to profit. He is no fan of the Obama Administration policies, so his forecast includes this a discount for this popular bearish "headwind."
- Initial jobless claims were bearish (484K instead of the expected 425K). This is a continuing negative indicator for employment prospects, since we need to reduce job losses.
- Consumer sentiment remains weak. The University of Michigan consumer sentiment series is important because it is a way of capturing new job creation and the overall picture. It dropped to 69.5 from 73.6 last month.
- The negative data came in the survey week for the monthly jobs report -- a bad sign.
- Some earnings reports did not match elevated expectations (Google). I still see earnings as very positive on balance, but it is early in the season. We need data, not a few anecdotes.
Friday's sharp selling wiped out the gains for the week. The financial stocks took the brunt of the hit, although materials sectors and some commodities were also hit.
Breaking news always has a bigger effect on the day of options expiration, and this was no exception.
The news is surely important to the analysis of the causes of the financial crisis and to further policy formation. It will be a subject of discussion for many months.
Our Trading Forecast
Our own indicators present an unusual picture. We switched to neutral for our vote in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:
- 95% (93% last week) of our ETF's have positive ratings. This is very strong.
- The median strength is +30 (down from +41 last week).
- 99% (up from 92%) of the sectors are in the "penalty box," showing a continued high level of uncertainty and risk.
- Our Index Package now has a solid, positive rating, consistent with a gain in the market over the next three weeks.
For short-term traders the picture is neutral. Our "penalty box" concept has a useful meaning. It is a recognition that there is a lot of uncertainty. We have little confidence in a prediction for the next three weeks, so we have moved to "neutral."
For investors with a longer time horizon it is a different story. The earnings prognosis has improved dramatically. Short-term fluctuations may create an entry point.
Analyst estimates of earnings have been consistently too low, but if the S&P 500 earns around $80 in 2010, as predicted, then the current price earnings multiple for the index is just 15, dramatically below normal for a period associated with low interest rates and low inflation. Companies are estimated to be sitting on more than $1 trillion in cash. A larger fraction of total market value is made up of cash than ever before. As companies put some of that cash to work, they will raise dividends, invest in themselves, buy back shares, or try to buyout their competitors. M&A activity has already picked up quite noticeably. Companies would hold their cash if they thought the stock prices of their competitors were too high.
The market rally off the lows has garnered very little respect. The dramatic decline in stock prices in 2008 reflected the prospect of a meltdown of the financial system and the economy. There was panic. So the simple fact that the system didn't disintegrate justified a sharp recovery in prices. Even now, stocks have room for yet more gains.
The improving earnings story is more important than the sideshow. The housing data at week's end will be interesting, but it is still all about earnings.
Long Intel (INTC)