Economic data continues to show gradual improvement. While the direction is encouraging, the pace of growth is frustrating.
Two weeks ago I pointed out that we were starting to get some clarity, with improvements on many different fronts. The market responded, but with the current pause it is reasonable to ask, "What's next?"
I will have my regular review and predictions, but first, a little background.
Background on "Weighing the Week Ahead"
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 we 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.
In most of my articles I build a careful case for each point. My purpose here is different. This weekly piece emphasizes my opinions about what is really important and how to put the news in context.
Last Week's Data
Since I did not have a chance to write up last week's observations, I am going to include some highlights from the two-week period. The story is still encouraging.
The Good
Economic news is mostly beating expectations. This is particularly true for indicators that I think are the most important.
- Initial jobless claims have made another move lower, to the range of 435K to 440K per week. This is still not good, but it is progress -- much better than the five-handle we saw only a few weeks ago. Improving employment requires reducing job losses and improving job creation, so I watch both very carefully.
- The ECRI weekly leading index is at a 25-week high. The growth index is still negative, but at the best levels since June. The ECRI said two weeks ago that a near-term recession was off of the table. It is apparent that those who made dubious interpretations of the ECRI indicator were wrong. I tried to demonstrate their error back when readers could still profit from the knowledge. Instead of admitting that they got this one wrong, the permabear economists and chartists have simply moved on to new measures.
- The Philly Fed Index made a huge move. I do not place a lot of emphasis on the regional surveys, especially when the moves are small. These are surveys with an unreported margin of error. Last month some observers, led by Rick Santelli (who has been finding a bearish spin on everything for as long as I can remember), were emphasizing that it was a negative number (-0.7). I doubt that small changes are very important, but this month's 22.5 was an encouraging read on business conditions in the area. (I know that the Empire State index --not a Fed survey-- was a bit below expectations. The market pays much less attention to that one, since it is not a key manufacturing area).
The Bad
There was also some discouraging news.
- The Obama trip to the G20 meetings and the various trade initiatives fell flat. Improving trade and exports is important, so this is certainly bad news.
- Building permits were slightly disappointing. Much of the housing data is confused by the varying pace of foreclosures. I like building permits since they cost money to file and represent a serious commitment. The permit rate was 550K instead of the expected 570K.
- Mortgage rates moved higher to 4.39%, the highest rate since August.
The Dumb Bunnies
A frequent theme at "A Dash" is the dumbing down of discussion about the economy. It is always popular to write an article that reinforces prevailing viewpoints. Educating is more of a challenge. Slogans and fear sell.
The result? A couple of dumb bunnies are teaching economics!
The popular youtube piece on quantitative easing takes misinformation and some simplistic slogans and dumbs it down even more. It is sassy, sarcastic and irreverent--everything needed to go viral. The inaccurate story has over one million views.
Meeting the challenge is Prof. James Hamilton of Econbrowser, one of our featured sources. Dr. Hamilton creates a dialogue where he is part of the conversation with the "didactic icons" that seem to be bunnies. Close enough!
Anyone who wants to understand quantitative easing should take five minutes to read the Hamilton article. If you are really ambitious, read the comments and replies as well. There are several key points:
- QE does not really add to the money supply unless banks lend. The Fed is poised to reduce it's balance sheet. Call it "unprinting money." You heard that term here first!
- The Fed has not "always been wrong" as the simplistic video suggests. Prof. Hamilton cites evidence that the Fed forecasts have beaten various private sources.
- The Fed cannot buy directly from the Treasury, as the bunnies recommend. It would be illegal. They also do not buy just from "The Goldman Sachs," but from sixteen private dealers.
Someone tried to help out by creating a competing video. If you watch this version you will immediately see the difficulty of trying to explain economics in the video format. Despite the addition of a few sassy comments, you can still recognize a professor in action.
Our Own Forecast
We base our "official" weekly posture on ratings from our TCA-ETF "Felix" model. Felix caught most of the recent rally, and we are shifting to neutral this week. The number of sectors in the penalty box, a sign of near-term risk, has increased dramatically. While there are still a few sectors to buy, we are shifting our multi-week bullish posture to neutral in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:
- 64% of our 55 ETF's have a positive rating, down from 75% two weeks ago.
- 71% of our 55 sectors are in our "penalty box," up sharply from 27% two weeks ago.
- Our universe has a median strength of only +5, down from +12 two weeks ago.
The picture is significantly more cautious than it has been in recent weeks. For trading accounts, we had full exposure during the past week, but cut back to a 60% position on Friday.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly email list. You can also write personally to me with questions or comments, and I'll do my best to answer.]
The Week Ahead
Trying to predict the market move in a low volume, holiday-shortened week is very difficult. It may take little to generate a big move in the market. There will be fresh data on home sales, but this will tell us little until the foreclosure picture is resolved. Personal income and spending could be interesting. Continuing the recent trend in initial jobless claims is also important.
I do not expect much on the political front.
I continue to see trading versus the dollar as a key factor. It will be a very positive sign when the inverse dollar/stock correlation breaks down, as we know it eventually will.
Investment Posture
I respect the neutral model reading, so I am cautiously looking for dips to buy in new accounts. I expect some very good news out of the lame-duck Congress, but that will not be a factor this week.
Most importantly, investors can ignore the distraction of quantitative easing and the dumb bunnies, as I suggested here, and focus on fundamentals.
Fearless Forecast
I confidently predict that there will be a news story about President Obama pardoning a turkey!
