A Dash of Insight

Recession Forecasting: News from the ECRI

Today we got the "official" recession forecast from the ECRI.  As regular readers know, I have been a long-time fan of the ECRI methods, but more recently raised questions.

Last week's WTWA column, was right on target, since I emphasized recession forecasts and methodology. A crucial idea is what we can and should believe.  Here are key questions:

•  Is it enough that there is a good track record, even though we do not know anything about methodology?

• If we can see the methods, how much do we  dismiss the results because "this time is different?"

In the case of the ECRI, I admire their record of forecasts, especially that there have been no false positives.

Meanwhile, there are concerns-- issues which I have been questioning for several months -- the lack of transparency, the secret stuff for paying clients, and the apparent irrelevance of the public data.

Since I observed this several months ago I have  been looking for indicators that meet Jeff's acid test for relevance:

• Openness -- with the potential for peer review
• Small number of input variables.  Most people do not understand that "small is good."  If you have a lot of variables, it is easy to do back-fitting on a few cases.  Beware.
• Real-time performance.  This means that you do not go back in history doing any data-mining.  You create an indicator and live with it through time.  (While the ECRI predictions are a matter of record, no one knows what changes they have made in their indicators).

A Candidate for Review

I have been considering several candidates using the acid test criteria.  What do you think of this chart?

I am going to assume that you agree with me that this is a pretty good fit.

What if I now told you that the chart was advanced by nine months?

You should be impressed, as I was when I first saw the data.  The implication is that we are not at a cycle peak, and such a peak is more than nine months in our future.

Conclusion

How should we evaluate this?  The background is that everyone knows economic performance is below trend and something better is needed.

Despite this common-sense knowledge, people wonder about the official recession definition.  I encourage readers to consider the candidate I have nominated in this article, and feel free to offer your own suggestions.

I'll take a deeper look in the regular WTWA column.

How to Profit from Extreme Volatility

The right move is so often the most difficult.

On a theoretical basis, everyone knows to buy when others are fearful, to be contrarian, to avoid panic.

On a practical basis, hardly anyone has the discipline and courage to act.

Here are three ways that the individual investor can profit from the current volatility.  [Please note that I try very carefully to distinguish time frames.  My regular weekly outlook was bearish last week, and it will probably remain so, on a short-term trading basis.  I am still shopping aggressively for long-term investors, who should often take the opposite side from traders].

Method One -- Go Shopping

The most direct method for profit is to rely on fundamental analysis to determine value.  Market fluctuations are opportunities.  If the market is dominated by fear, so much the better!

Earlier this year I participated in the Abnormal Returns "vacation survey," a nice concept that allowed Tadas to have a few days off and still stimulate content that would not otherwise have been available.  (There should be a term for that).  My recommendation for the best book in the last five years?

Joel Greenblatt's The Little Book that (Still) Beats the Market is a great choice for investors.  It is both educational and practical.  It is short and easy to read, but difficult to follow in practice.  Why?  Most will not have the patience to stick with the system for the time required.

The author was featured on CNBC yesterday.  He noted that trailing free cash flows were in the best 5% of any time in history.  When this has happened in the past, the market has rallied by 15% in the next year and "value stocks" have rallied 30%.  Check out the entire interview:

 

 

For long-term investors, I noted on Monday that there would soon be an attack on the promising news from Europe.  Traders and pundits expect comprehensive and perfect solutions.  This will play out gradually and with compromises.

Most of the so-called experts will hate it every step of the way --  until it is too late to see.  So far, it is exactly as I expected.

This afternoon we bought stocks with the following characteristics:

• A ten-year history of earnings growth, including 2008, 20% growth rate, 15 P/E
• A company with over 30 years of consistent revenue growth
• A company with a great balance sheet, solid dividend, and a P/E under 10

While I like to think we are finding the cream of the crop, there are so many candidates that any individual investor willing to do some homework can beat the market right now.

Method Two -- Sell Puts

Put selling has a bad rep!  When I started in the business, leaving the quiet confines of Wisconsin academia in October of 1987, the market was charging higher.  Selling puts (an option where you agree to buy the underlying stock at a set price during a set period of time) was being offered as a way of printing money.  Since stocks always went higher (shades of the real estate market) you could sell puts with impunity.  The stock would move higher, and you pocketed the premium!  Easy money.  I have a souvenier copy of Barron's from that week.  On the day of the '87 crash, Barron's hit the newstand with many ads for these bogus trading systems.

The rules changed, making put-selling more difficult for everyone, including the individual investor.  You really need to know what you are doing.

With that warning in mind -- this is a strategy that can work.  Here are the rules:

• Pick a stock that you want to own based upon earnings, price, balance sheet, cash flow, and dividends.
• Pick a price where you would love to buy the stock.
• Sell a put at that price.  You will collect the premium.  If the stock trades below your price on expiration, you might get "assigned" on the stock -- which means you will buy at the price you set.
• Prepare to be disappointed if the stock does not trade lower.  You will still collect the premium.

This is a great way to play high-volatility opportunities.

Method Three -- Covered Calls

This is a great method to exploit volatility, but it starts with fundamental analysis:

1. Find an attractive stock -- all of the value metrics described above.
2. Look for a support level, either via a chart or your favorite technical analyst.
3. Consider yield via dividends.
4. Find an out-of-the money call that you can sell.

At a minimum you collect dividends, stock appreciation, and the call premium.

You have limited upside in a big rally.  If the stock sells off, you have some protection from the call sale and the dividend.

This is the most conservative of the three approaches.

Investment Conclusion

Most individual investors read the headline news and panic.  They do not see when to seize opportunity nor the best methods for doing so.

My snail mail today had (yet another) offer to buy some gold company that had a field next to one that had already hit.  This is only one example.  We all know that these ads could not be paid for unless the companies involved were making big money.

I also have my "fear monger" spam filter.  It is overstuffed with unsupported rumors, bad data, and politically charged messages.  Maybe I'll do a post with some headlines.

This is a minefield for the individual investor -- even the most intelligent people who try to reason and interpret data.

It has never been more challenging to stay focused on the goal line.

Investors: Prepare to be deceived on the Europe Story

Here is the question for individual investors:  Do you want confirmation of your biases, or do you want profits?

This is a simple question, but investors have taken the wrong path for decades.

Background

The bearish case is so easy to make.  Problems are obvious, solutions are obscure.

If your objective is to sound smart to your audience, just tell them what they want to hear.

Consider the example of the recent Fed statement.  I have never seen so many top-ranked pundits who are so wrong.  Instead of carefully considering the many events taking place at the same time as the Fed statement, they have jumped to an easy conclusion that will play with the crowd.

They think that the Fed is really, really worried.  They arrive at this conclusion by comparing these two statements:

Prior, August, 2011.  "Moreover, downside risks to the economic outlook have increased."

Current.  "Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets."

Let us think about this.  The Fed, updating every six weeks, acknowledges that economic data continued the Japan earthquake induced soft patch, exacerbated by the debt limit pseudo-crisis, and now augmented by the latest story from Europe.  They observe that things are worse.

Suppose that the Fed had issued a statement that did not acknowledge downside risks.  What would have happened?

If you want to make Bernanke sound dumb, you can do so regardless of the statement.  You could claim that the Fed was completely out of touch.

To sharpen the point, pretend that you were a member of the FOMC.  What would you have said?

Back to Europe

As I read the news from Europe I am basically pleased.  The ultimate solution will be something that includes many parts -- ECB, ESEF, IMF, BRIC investment, bank recapitalization, and maybe some USA action.

I do not claim to know whether today's rumor is the "ultimate solution." It represents progress.  If you do not see this, you are not paying attention.  It will be a complex story that involves delay while the relevant parties are brought on board.

Most celebrated experts are looking for a magic bullet.  A highly touted pundit tonight said that the plan was Byzantine and complex.  He had just written a negative op-ed in a major paper.  If the plan had been simple, he would have said that it would not work since it did not cover all possibilities.  His mind was made up in advance, as will be most of those you read.

I want to emphasize one of my most important themes -- traders and TV interview types grasp for simple solutions.  Most of those commenting have no relevant expertise.  They are traders, who fantasize about a world where there is a dictator with instant decisions.

Democratic governments do not work that way.  The results come from painful negotiations and compromise, one step at a time.  If you do not understand this, you will never see progress, even when it slaps you in the face.

Investment Conclusion

I do not pretend that the European news is an instant winner.  It is positive, interesting, encouraging, and much better than you might think.

Meanwhile, many investors were frightened out of the market last week.  I am shopping like a kid in a candy store.

 

Weighing the Week Ahead: How Likely is a Recession?

A basic lesson on getting attention is how to frame the question.  If you are interviewing a corporate executive you can ask either:

A)  How is your business doing?  Do you see any need to expand?  Are you changing the size of your work force?

B)  Do you think we are in a recession?

If you are interviewing one of the ubiquitous parrots of Wall Street -- who might have the title of "investment strategist" or even "chief economist" -- you also have a choice of questions.  [If you read the biographical information for these sources, you will often find an array of non-economists whose chief credential is that they are interviewed a lot on TV.]

A)  What is your current investment allocation?  How have you done through the last business cycle?  What is your best idea?

B)  Do you think we are in a recession?

I'm sure you get the idea.  While some journalists ask questions where they can get an informed answer,  those topics are not very exciting for headlines and ratings.  It is more seductive to ask about the R word!!

This is even better when there is no definition for what is meant by a recession.  For the average citizen, we never emerged from the last recession, since employment and growth have not returned to normal levels.  I completely understand.  This is a fine common-sense definition, but it is a bit imprecise for official purposes.

Recession "forecasters" can pontificate about the odds without specifying either a time frame or an exact definition.  They can further insist that corporate earnings will be crushed and a lower P/E multiple will surely follow.  Is this a great country, or what?  Freedom of speech!

The recession question deserves more detail than I can do in the weekly market preview.  Since it is at the forefront of concern, we must keep it in mind.  Those who like charts should consider this analysis from Eddy Elfenbein:

 

This does not have the look of a recession.  It looks like the 2/10 spread would need to go much, much lower to signal a recession.

Last week I warned not to expect any magic from the Fed or European leaders.  That was pretty accurate.  I will try to do as well for this week, but first --- our regular review of the past week's events.

 Background on "Weighing the Week Ahead"

There are many good sources for a comprehensive weekly review.  My mission is different. I single out what will be most important in the coming week.  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.

Unlike my other articles at "A Dash" I am not trying to develop a focused, logical argument with supporting data on a single theme.  I am sharing conclusions.  Sometimes these are topics that I have already written about, and others are on my agenda.  I am trying to put the news in context.

Readers often disagree with my conclusions.  (A commenter recently suggested that was proof that I was wrong -- an amazing interpretation!)  Do not be bashful.  Join in and comment about what we should expect.  This weekly piece emphasizes my opinions about what is really important and how to put the news in context.  I have had great success with my approach, but feel free to disagree.  That is what makes a market!

Last Week's Data

While the stock market had a great week, the news was really not very good.  Most observers attributed this to oversold conditions and short-covering during expiration week.

The Good

Despite the stock market results, there was actually some good news.

• Building permits popped nicely, up 3.2 %.  This is a leading indicator.  I do not pay much attention to the increased sales and price data, because of foreclosure effects.
• Greece is cooperating.  So far the austerity and tax increase moves are in place.  I understand that nearly everyone has written off Greece and started playing dominoes, a simplistic viewpoint.  Whatever solution emerges in europe will be incremental, fragmented, and delayed.  Buying time is helpful when you need many different actors to coordinate.  I expect a Greek restructuring, but the domino analysis goes too far.
• Europe is (finally) acting  faster.  Will it be fast enough?  This is why delays in the Greek scenario are good.  There is a race against time.  The knee-jerk article you read (see anything by Mauldin) totals up every conceivable liability and concludes that disaster impends.  For a refreshing contrast, take a look (noting the leverage potential) at this Bloomberg piece:

EFSF Firepower

“It is very important that we look at the possibility of leveraging the EFSF resources and funding to have a stronger impact and make it more effective,” European Union Monetary Affairs Commissioner Olli Rehn said in Washington yesterday. French Finance Minister Francois Baroin said separately that policy makers “need the right firewall to prevent contagion” and can discuss giving the fund “the necessary strength.”

Weidmann has said he opposes turning the EFSF into a bank that can refinance itself at the ECB as it would amount to “monetizing state debt.” Coene also said he’s “not sure that will be a good idea.”

Coene signaled reluctance to step up the central bank’s government bond purchase program even after the IMF said Sept. 20 the ECB “must continue to intervene strongly” in European debt markets to “maintain orderly conditions.”

“I think it has been a helpful element in the beginning but of course it cannot be a structural element of the system,” the Belgian central banker said. “The main reason was that we wanted to keep the transmission of monetary policy as good as possible until the moment that the EFSF will be able to take over” the bond buying, he said.

• Actual earnings are still good.  Companies like Oracle are also downplaying European worries.
• Fed Williams Hails Unconventional Tools (via WSJ).

The Bad

There were also some negative events.

• The ECRI growth index dropped further into negative territory.  The official ECRI interpretation is a heightened recession risk.  The ECRI warns against over-reacting without a persistent change in this indicator, but we are watching with interest.  The WLI is still at the average level for the last year, but there is a decline as measured by the growth index.  This is a smoothed growth factor, but the exact time frame and smoothing are not specified.  They have not yet suggested an official recession forecast, sticking with the story of the lower global growth that they first talked about in May.  They have also revised some past data.  I will take this up further below, in my weekly forecast.
• Initial jobless claims declined slightly to 423K.  This is an unacceptable level, and the trend is still in the wrong direction.
• Top Fed Official John Williams "Raises Questions on Fed's Latest Move"  (via Reuters).

• The money supply rebound  stalls.  This is a major forward-looking indicator that is widely ignored.  It is a leading indicator, giving it extra significance.  I think that the money growth in the system is bullish, but I want to be fair.  The Bonddad Blog covers this and other high-frequency indicators, and they are getting more worried.
• Congress might shut down the government!  Well -- this is not going to happen, but we have a replay of July.  Outside observers of our political process do not understand.  These repeated crises make US policymaking look like the Keystone Cops.

The Ugly

The ugliest story of the week was the stock market reaction.  There was a complex news story from various fronts.  The facile and incorrect take was to blame everything on the Fed.  I showed why this was wrong . In addition to the sources I cited, my Kauffman blogging colleague Felix Salmon agrees. I saw a lot of stories blaming the Fed for the market decline.  Most of these had a political agenda.  Beware.

The Indicator Snapshot

It is important to keep the weekly news in perspective.  My weekly indicator snapshot includes important summary indicators:

• The ECRI Weekly Leading Index and the derivative Growth Index
• The St. Louis Fed Stress Index
• The key measures from our "Felix" ETF model.

As I have often noted in the past, the ECRI and the SLFSI report with a one-week lag.  This means that the reported values do not include last week's market action.  In my research, I take account of this lag.  In my daily monitoring of the market I look at the underlying elements in the SLFSI.  I cannot do this with reliability for the ECRI since the indicators are secret.  The SLFSI will increase next week, but not to the level that would trigger the "risk alarm."

There will soon be at least one new indicator, and the current choices are under review.  Meanwhile, the ECRI has a "long leading" series that is available only to subscribers, which they refer to in media appearances.

 

The indicators show continuing sluggish economic growth, and the rate of growth continues to get weaker.  Six weeks ago there was an increase in the SLFSI, generated by a slight increase in LIBOR rates and a big jump in the VIX.  The SLFSI has been stable since then.  I have been doing extensive research on this indicator.  It was not designed to predict the stock market.  It is a reflection of financial risk, based upon what happened in past crises.  I believe that it will prove valuable as a tool for investors who prefer data to story telling.  My interpretation is that it shows that European concerns should not yet be a warning to US equity investors.  This article helps to explain how to interpret the values and also provides historical context.

The ECRI WLI is still at about its average for the last year and significantly higher than in 2009.  The growth index uses an unspecified formula to smooth the changes in the index over an unspecified time.  The ECRI warns against making too much out of declines in this indicator alone unless it is persistent.  Their most recent public announcements repeat a multi-month theme:  Sluggish growth increases the risk of recession.  This makes sense to me.

My favorite source on the ECRI, carefully comparing it to other sources, comes from Doug Short.  His masterful charts capture a lot of information in a helpful way.  Here is his latest take on the ECRI:

 

This is very interesting, but none of us likes a black box where the reported series is not the best source and we need an official interpretation from the actual "long leading indicators."  We also had a number of backward revisions this month.  I am exploring alternatives, and I hope to interest Doug in the quest.

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. We have a long public record for these positions.

We voted "Bearish" this week, reflecting the terrible overall ratings and our long position in one of the inverse ETFs.

[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 ETF email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

There is nothing much on the economic front until Friday.  There will be some housing data, but it is not very timely.

Various Fed speeches are on the docket, including one by Bernanke.  Fresh news from anyone would be a big surprise.

I am also not too interested in the various regional Fed surveys.  The initial claims report on Thursday will be important,  Personal consumption expenditures and the Chicago Purchasing managers (both on Friday) are also of interest.

Trading Time Frame

In trading accounts we were 40% short the market at the start of the week and covered half of that position on Thursday afternoon.  We still have a bearish vote on the market with a three-week time horizon.  Nearly all of our ETF positions are in the Penalty Box, meaning that confidence in forecasts is low for us.  It should be for you as well!

Investor Time Frame

In our ETF-based Dynamic Asset Allocation program, the portfolio remains very conservative.  This cautionary posture includes bonds, gold ETFs, and utilities.  It is conservative, but has no short positions at this time.

Long-term investors should buy and maintain core holdings of an appropriate size.  This does not mean "buy and hold."  I recommend an actively managed portfolio, adjusted with conditions, but one that includes stocks.  The mid-year selling has tested the resolve of many investors.  It is one thing to state a risk tolerance and another matter to watch it in action.  Investors who are staying the course have "right-sized" their positions and maintained confidence in their methods.  There are many stocks that are attractive on an earnings or dividend basis, despite all of the fear.

Final Notes

I am still doing a careful analysis of recession forecasting methods.  What if we had a method that had multi-decade accuracy in real time?  Not something that someone conjoured up later, but  a method that was in the public domain and actually used.

The fascination with the ECRI data series is interesting.  Big-time economists make forecasts based on this series with no knowledge of the composition --- even when warned that the "better series" is not published.

Suppose that we had access to a method that was just as good or better as the ECRI on past data, but we also knew the components. 

The advantage would be transparency.  That is also the disadvantage, since whichever spinmeisters did not like the outcome could criticize the indicators, something that no one can do with the ECRI.

Do we really want good indicators?  Transparency?  Information at a small cost -- or free?

I do -- and you should, too.

Check out my 2008 versus 2009 analysis.

[And yes, the Williams good/bad is a joke.]

Recession Odds Challenge

My highest-rated sources see a recession as no more likely than in an average year -- 15-20%.  A number of Street economists have nudged their odds up to 30%, without any real explanation.

I understand that there are many current sources who now think that a recession is a certainty.  Can interested readers provide pointers to any of these sources who had an effective real-time method for past recessions.  Every time I read one of these stories it is from someone who either expects a recession every year or who did some data mining to analyze history and back-fit their forecasting variables.

What is the right analogy: 2008 or 2009?

Last night I noted that PBS did not even lead with the Fed decision.  I was attempting to help people regain focus.  So much for that idea!  Tonight, even PBS led the news with a story on the stock market and the Fed.

A good way to focus on the problem is Ginger or Mary Ann 2008 or 2009?

The 2008 Analogy

Nearly everyone is committed to warning that this is another 2008, that Europe faces a "Lehman situation," that a recession is imminent, and woe is us.  The argument is that the market knows all, so everyone should ignore the economic data or actual information about banks.  Investors are told that no source of information is accurate or honest.

Does this make any sense?  My friends at Global Economic Intersection are no softies when it comes to economic worries.  They have a tough set of recession indicators.  Wisely or not, Steven Hansen (one of my favorite sources) has chosen to include the stock market as a recession signal.  Here is his take:

Although hard to believe, there have only been five groupings of penetrations below zero growth of the S&P 500 year-over-year since 1990.  Score = 3 recessions, 2 false alarms, and one “wait-and-see”. 

I hope that my astute readership will be unimpressed by this marginal indicator on a handful of cases.  For your consideration, here is the chart:

 

To emphasize, if the market was always right, you could never gain an advantage.  Making strong returns involves stepping up when the market is wrong.  The greater the irrational fear, the more difficult it is.

The 2009 Analogy

I think that the Spring of 2009 is a better comparison.  There was a similar aura of gloom that did not fit reality.  Here is what we see --actual data on earnings (excellent), earnings expectations (more than excellent), actual economic data (in line with GDP growth of about 2%, (not recessionary).

In March, 2009 I expressed some frustration in what began as a three-part series explaining the following:

• Why people do not believe economic and earnings forecasts.
• Why politics interferes with investment decisions.

Before I could write the third part of the trilogy, the market had rallied.  Doug Kass was the guru who really nailed this, calling a "generational bottom."  Here is what I wrote on the Kass call and market valuation.

Doug had a very sensible approach to valuing individual stocks and the market -- level-headed and based on data.

Here is the challenge for investors:  If you are going to buy when others are fearful and sell when they are greedy, how do you know when to act?

Doug advised using data, and I agree.  What is his current advice?

In an interview segment on CNBC's Fast Money he tries to focus on the numbers -- earnings, the current GDP growth rate, the huge risk premium indicating that stocks are cheap by historical measures.  He even harkens back to the 2009 time frame and emphasizes that the "bottom is in" and is year-end target of 1200 on the S&P.  Stocks are as cheap as at the time of the "generational bottom."  Take a look at the whole video.

 

Investment Takeaway

There are many long-term investors who have been sorely tested by the recent market action.  Everyone in the media tells them that they are wrong and stupid.

While I do not offer specific investment advice at "A Dash" I am happy to suggest some general precepts:

• Fear is exaggerated.  This is not 2008.
• Recession fears are overstated.  Mainstream sources are at 30% odds, and the best sources are lower.
• Earnings are solid, even if the economy is weak.
• Earnings haircuts for a "normal" recession are already priced in.
• US companies have less European exposure than feared.
• And most importantly --- nearly every media source is politicizing the investment decision.  It is more important than ever to divorce your investments from your politicial ideology.

Investors need not and should not go "all in" but neither should they go "all out."

And for the record -- my vote is for Mary Ann.

 

More Causal Confusion: The FOMC Decision and the Market Reaction

Making sound investment decisions requires an understanding of what is going on.  Unless you are using a mechanical model, you need an intellectual framework for interpreting news events.

Many sources offer help.  There are scores of interpreters of the daily market action, but most of them are on a mission.  Whether the objective is political, gaining ratings, or demonstrating wisdom, my experience is that 90% of it is completely wrong.

Today is a good example.  The market sold off sharply, the biggest loss in many weeks.  The selling came shortly after the FOMC decision was announced.  Post hoc, ergo propter hoc.  There is an overwhelming temptation to link these two events.

As a preface, here is an interesting comparison.  Each night I record via TIVO and later watch Kudlow and the PBS NewsHour.  This prepares my investing decisions and sometimes provides the basis for these reports.  The perspectives from these two programs, as you might expect, are quite different!  PBS leads with Palestine and the UN.  The Fed is not mentioned in the first twenty minutes of the show.  My guess is that a few months from now we will all agree with the PBS emphasis.

With this background in mind, let us return to the obsessive market coverage.

Possible Explanations

Readers of "A Dash" have been challenged with some past problems concerning causal inference, and they have done very well!  Today's little test should be easy.  Here are the candidates:

1. The Fed consists of a group of clueless bozos (TM pending -- OldProf) who will inevitably do whatever is wrong.  Everyone else is smarter, better-informed, and has superior analytical skills.  This especially includes journalists, hedge fund managers, anyone who is interviewed on TV, and anyone with a blog.
2. The Fed policy, Operating Twist, disappointed the markets leading to the selling.
3. The Fed frightened markets by stating that economic conditions had weakened since the last meeting.
4. The three dissenters.  This shows that (choose one):  The Fed is adrift, there is impending stagflation, Bernanke will lose his consensus.
5. There was other news that bothered market participants -- the Moody's downgrade of some banks or news from early corporate earnings reports.  Those wishing to sell on this news waited until after the Fed announcement, just in case there was a surprise of some sort.
6. Short sellers had covered positions last week in front of the Fed meeting.  Traders have a fixation on the potential of QE-style moves, so they wanted to be flat until they knew what would happen.
7. When selling started in the final hour, some piled on and bids dried up.  The precise cause did not matter.  The short-term trend was clear.

There are plenty of options!  Make your own choice before reading on -------

My Take

As a background for this section I want to point out that my preview for the week said that nothing magical would come from the Fed.  Our trading posture was bearish for the week.  I manage several programs with different time frames.  In the long-term programs I do not believe that investors should be jumping in and out of stocks, trying to time the market.  There is a different mind set for the long-term investor.  You have to believe that the market will often be irrational, offering you good opportunities.

This explains why I was concerned about this week, while still believing that the market is over-reacting to the downside.

Let me review the candidates.

1. The Fed bashing is the single biggest threat to the individual investor.  The critics do not understand the issues and would look foolish if they had to make a presentation in an actual Fed meeting.  They seem OK on TV or their blogs because they have no opposition.  There is a concerted effort to make people feel that our country has no effective leadership.  As I have frequently made clear, I am happy to have a strong leader from either party.  We should all hope for economic improvement before the next election, and expect our elected leaders to cooperate.  I also note that Bernanke is a Republican, and would be pursuing the same policies if the 2008 election had been different.  Do not allow people with an overt political agenda to distort your investment decisions!
2. The actual Fed policy decision was widely anticipated.  If anything, it was a bit more market-friendly than expected since it did more in the 20-30 year range and also addressed housing.  It is difficult to see how the actual decision could be a market disappointment, although that will be the deceptive headline story in your morning paper.
3. The Fed scared the markets?  Really?  This argument is advanced mostly by the same people who sell fear on a daily basis.  Let us try for some objectivity.  The FOMC adjusts the outlook every six weeks.  In between these meetings we see the Beige Book.  Everyone paying attention knows that economic data has gotten a touch weaker.  In the business, this is what we quaintly call "old news."  Some will seize upon this for the familiar "Fed is behind the curve" refrain, but the update is actually timely.
4. The Fed dissenters disagree both on inflation concerns and on the underlying economic strength.  At least one of the three has stated support for more aggressive measures if the economy weakens.  Put another way, the interpretation of dissent differs sharply from what most pundits are saying.
5. I give some credence to the effect of the Moody's story.  The effect on financial stocks, both those downgraded and others, was clear throughout the day.
6. Short sellers waiting for the news.  Now we're talking!  The trading and short-selling community harbors an exaggerated fear about the QE policies.  Last week's rally seemed strange and had a short-covering flavor.  It is not surprising that those choosing to take short positions would wait until after the FOMC decision to act.
7. This also makes sense to me.  When the story is complicated, most average investors will have no clue about how to react.  Bids dry up.  Programs take hold.

Investment Conclusion

At some point we will look back on today's trading as an especially interesting example of the climate of fear that defines 2011.  There was nothing really surprising or important from the Fed.  The market reaction should not be attributed to the Fed.

I especially like the careful interpretation from TheStreet.com's market reporter Chao Deng.  Her market interpretations are better than those of the pack and well worth reading.

Although the central bank refrained from additional quantitative easing and launched a "twist" as expected, investors were surprised by the Fed's wording that the economic outlook faced "significant downside risks," a slight change from its last statement that said that "downside risks" had increased. Some analysts say that the tweak in language was in part behind today's disappointing reaction

I also like the story highlighted by Barry Ritholtz, one of our favorite and featured sources. You need to read the whole story, which refutes a widespread notion that bank profitability is reduced by this move.  Quite the opposite!

I also urge readers to watch this video from Dick Bove.  Instead of just shooting from the hip, he cites solid numbers relating to bank stocks.  He discusses cash on hand, risk, European risk, capital ratios, and other key metrics.  This is much, much better than what you usually see about amorphous risks.  Bove especially addresses the Moody's opinion that the US is less likely to support major US banks.  If you listen to him with an open mind, and then read the Moody's report, you will be better prepared to make a solid investment decision in banks.  As regular readers know I like the best-of-breed JP Morgan Chase (JPM) despite recent declines in price.

 

Weighing the Week Ahead: Expecting Magic from the Fed?

Many are expecting the Fed meeting this week to produce something big.  Speculation abounds.

To get some perspective on this, please consider the following quotation from 2005.  The statement comes from someone who is obviously aware of potential asset bubbles, and thinks that the Fed should act in response:

...(A)s I have mentioned previously, something that has become very evident in recent years is that overall asset prices worldwide, both equity and debt, are rising a good deal faster than product prices. And they are picking up because of—indeed, the rise in asset prices is being engendered by—the fact that interest rates are getting ever lower. Interest rates in emerging-market economies are as low as one can remember. And aside from the surprisingly high equity premium in the United States, we have very significant upward momentum in asset values. ... (It) is clearly the potential for speculative activity—and its effect on asset prices—which is generating an assessment that we need to move, as far as evaluating the outlook for the overall economy.

 I'll give the citation for this early and accurate observation at the end of the article.

As we watch the news for this week, you should keep in mind that many (most?) of those pontificating about the Fed do not really have much information.  They have strange ideas about conspiracies, lying, open market operations, buying futures, propping up asset markets, and the like.  As a starting point in evaluating these ideas, we might well start with a picture of the FOMC in action.

 

 

 I trust that most will get the idea.  One feature of an open and democratic society is that the true story comes out.  In the case of the Fed, we get announcements, minutes, and eventually actual meeting transcripts.

As I will explain in my conclusion, I am not expecting anything exciting from this week's meeting.  But first, let us do our regular review of last week's events.

Background on "Weighing the Week Ahead"

There are many good sources for a comprehensive weekly review.  My mission is different. I single out what will be most important in the coming week.  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.

Unlike my other articles at "A Dash" I am not trying to develop a focused, logical argument with supporting data on a single theme.  I am sharing conclusions.  Sometimes these are topics that I have already written about, and others are on my agenda.  I am trying to put the news in context.

Readers often disagree with my conclusions.  (A commenter recently suggested that was proof that I was wrong -- an amazing interpretation!)  Do not be bashful.  Join in and comment about what we should expect.  This weekly piece emphasizes my opinions about what is really important and how to put the news in context.  I have had great success with my approach, but feel free to disagree.  That is what makes a market!

Last Week's Data

While the stock market had a great week, the news was really not very good.  Most observers attributed this to oversold conditions and short-covering during expiration week.

The Good

There was a little good news.

• Central banks co-ordinated actions to address dollar liquidity in Europe.  While this only addresses dollar liquidity -- not solvency -- it was helpful.
• European leaders  emphasized the Eurozone commitment and Greece increased some taxes.  There are various analyses that tote up assets and liabilities and conclude that falling dominoes are inevitable.  In fact, the most recent actions have moved Greek default out to October, at least.  I tried to explain this week why markets were too extreme when it came to interpreting news about Europe and also under-estimated the Chinese.  
  
• Industrial production was up 0.2%.  Good news, but this series is not on my "A" list and has also been downgraded by the National Bureau of Economic Research (NBER) in their recession dating.
• The money supply rebound continues.  This is a major forward-looking indicator that is widely ignored.  It is a leading indicator, giving it extra significance.  There is also evidence that commercial lending is increasing, one of the first effects we would expect from a policy that works with "long and variable lags."  The Bonddad Blog has been covering this effectively, including a discussion of whether M2 growth is artificially influenced by inflows from European banks.  It is well worth reading the entire piece.  To be accurate, Bonddad's overall view is getting pretty dark, but I want to emphasize the excellent weekly articles on high frequency data.
• Actual earnings from a company that has broad economic exposure -- Cummings (CMI).
• And finally, we can escape the Coppock Killer Wave!  There seems to be an inexhaustible supply of contrived disaster indicators.  We get omens, signatures, bad times to invest, death crosses, sinking ships, and other assorted scary notions.  The Coppock wave was originally supposed to be a buy signal based upon an economist helping Episcopals trying to go long.  Coppock identified a "period of mourning."  SocGen's perma-bear Albert Edwards figured out a way to contrive a sell signal from this -- the "Killer Wave."  Fortunately, Mark Gongloff highlighted the evidence to refute this silliness.  What a relief!  This sort of thing invokes all of our warnings about tweaking and back-fitting data to create a result.

The Bad

There was a very discouraging week for economic data.

• The CPI increased by 0.4% last month.  Year-over-year it is up 3.8%.  The core rate is up 2.0%, the stated Fed target.  I am more tolerant than most about the concept of the core rate.  I also think that the economy is best with a modest rate of inflation.  Having said this, we are now in a zone that deserves attention-- not a "stagflation" scare -- but worth watching.
• The ECRI growth index dropped further into negative territory.  The official ECRI interpretation is a heightened recession risk.  The ECRI warns against over-reacting without a persistent change in this indicator, but we are watching with interest.  The WLI is now at the average level for the last year, but there is a decline as measured by the growth index.  This is a smoothed growth factor, but the exact time frame and smoothing are not specified.  They have not yet suggested an official recession forecast, sticking with the story of the lower global growth that they first talked about in May.
• Initial jobless claims climbed to 428K.  This is an unacceptable level, and the trend is in the wrong direction.
• Retail sales showed no growth.  'Nuff said -- el stinko.
• The Philly Fed Survey was "less bad."  It was still terrible!  Check out Steven Hansen for the full story.
• The poverty rate hit 15.1% and median income fell to 1996 levels.

The Ugly

The ugliest news of the week is the continuing story about consumer confidence.  The Michigan preliminary numbers for September were stuck at recession levels.  As I noted last week, consumer confidence is absolutely vital to job growth and an improving economy.

A typical headline was "Consumer Sentiment Improves." What?  The coverage of the data is from the red planet!  These numbers are just terrible.

Sentiment remains terrible and is the biggest current market threat.  Doug Short provides the best look with this typically excellent chart.  You can see several variables with one look.

There are plenty of other great charts at Doug's new home (Congratulations!) at Advisor Perspectives, another of our favorite sources.

Consumer confidence remains a crucial factor for us to watch.

The Indicator Snapshot

It is important to keep the weekly news in perspective.  My weekly indicator snapshot includes important summary indicators:

• The ECRI Weekly Leading Index and the derivative Growth Index
• The St. Louis Fed Stress Index
• The key measures from our "Felix" ETF model.

As I have often noted in the past, the ECRI and the SLFSI report with a one-week lag.  This means that the reported values do not include last week's market action.  In my research, I take account of this lag.  In my daily monitoring of the market I look at the underlying elements in the SLFSI.  I cannot do this with reliability for the ECRI since the indicators are secret.  The SLFSI will increase next week, but not to the level that would trigger the "risk alarm."

There will soon be at least one new indicator, and the current choices are under review.  In particular, I am considering replacing the ECRI method with the equally effective and more transparent approach from Bob Dieli.  Bob's most recent report (official release on Monday) does an exhaustive review of indicators, concluding that a cycle top is (at least) six months away.    Meanwhile, the ECRI has a "long leading" series that is available only to subscribers, which they refer to in media appearances.

 

 

The indicators show continuing sluggish economic growth, and the rate of growth continues to get weaker.  Five weeks ago there was an increase in the SLFSI, generated by a slight increase in LIBOR rates and a big jump in the VIX.  The SLFSI has been stable since then.  I have been doing extensive research on this indicator.  It was not designed to predict the stock market.  It is a reflection of financial risk, based upon what happened in past crises.  I believe that it will prove valuable as a tool for investors who prefer data to story telling.  My interpretation is that it shows that European concerns should not yet be a warning to US equity investors.  This article helps to explain how to interpret the values and also provides historical context.

The ECRI WLI is still at about its average for the last year and significantly higher than in 2009.  The growth index uses an unspecified formula to smooth the changes in the index over an unspecified time.  The ECRI warns against making too much out of declines in this indicator alone unless it is persistent.  Their most recent public announcements repeat a multi-month theme:  Sluggish growth increases the risk of recession.  This makes sense to me.

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. We have a long public record for these positions.

We voted "Bearish" this week, with terrible ratings and two of the inverse ETFs emerging from the Penalty Box.

[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 ETF email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

There is some interesting economic data this week including reports on housing starts, mortgages, and the FHFA price index.  My choice from this lot is the building permits series, which shows a genuine advance commitment for new homes.

The initial jobless claims data demands attention, as the series drifts further above the 400K level.  There will also be a report on "leading economic indicators" which are important to some.

But these are sideshows.

The two big stories will be:

1. The Fed -- where I do not expect anything exciting.  Even something like 'Operation Twist" (if it is even adopted) will not be regarded as significant by the market (and I agree).  Here is a good academic article on this topic (HT Tom Brakke whom I read every day and you should,too).  Keep in mind that the FOMC (as a group) is less pessimistic on the economy than are traders, pundits, the media, and the public.
2. Europe.  At the time of writing, I have no clear idea about the actual outcome of the ongoing meetings this weekend.  I expect a disappointing result.  Most market pundits are looking for some kind of grand plan or silver bullet.  There might be an eventual solution, but it will not be so clear and easy.  Leaders will first buy time, which will be called a band aid or kicking the can.  The final compromise package will have multiple moving parts, and require sacrifices on many fronts.  As I have written for several weeks, we have many months ahead of us where early trading will be based upon some European news, no matter how minor it seems.

 

Trading Time Frame

In trading accounts we went 40% short the market on Friday afternoon, since two inverse ETFs emerged from the penalty box.  This is a bearish vote on the market with a three-week time horizon.

Contrast this with last week.  While our official vote was "bearish" last week, I noted that "abstain" might be better.  In fact, we had no positions, as I reported in last week's article.  We did not join in on the rally, since Felix does not try to call market tops and bottoms, but we were not short.  This week we will begin with a short position, re-evaluated daily.

Investor Time Frame

In our ETF-based Dynamic Asset Allocation program, the portfolio remains very conservative.  This cautionary posture includes bonds, gold ETFs, and utilities.  It is conservative, but has no short positions at this time.

Long-term investors should buy and maintain core holdings of an appropriate size.  This does not mean "buy and hold."  I recommend an actively managed portfolio, adjusted with conditions, but one that includes stocks.  The mid-year selling has tested the resolve of many investors.  It is one thing to state a risk tolerance and another matter to watch it in action.  Investors who are staying the course have "right-sized" their positions and maintained confidence in their methods.

To see this clearly, compare the return of the 10-year Treasury note (formerly regarded as risk free and better than French bonds by S&P) to the dividends on the Dow or the S&P 500.  For help, see Chuck Carnevale, who has a long and thoughtful post on the asset allocation question.  Regular readers know that I am a big fan of Chuck's approach.  Anyone wondering about the best investment for a ten-year time horizon should be looking carefully at his charts of interest rates versus dividends.

Citation for the Fed Policy Quote

I suppose that many readers will have guessed Fed Chair Alan Greenspan as the source.  The quotation is from the December, 2005 Fed transcript where he is explaining why rates should move higher.

His position and reasoning differ sharply from the forecasts of leading bloggers and other observers from that era.  Even those writing popular books about Greenspan have not done the basic research on source material that would normally be expected.

We are about to enter a time when blog predictions from that era can be compared with actual Fed transcripts.  Some have shamelessly mis-represented FOMC motives, what was considered, the evidence available, the intelligence of participants, and possible biases.

It would be interesting to compare some of these aggressive statements with the actual meeting transcripts.

Market Musings and Lessons

There are many events that should cause us to learn, but no one seems to be paying attention.  These are things in my notebook.  All are interesting, but not providing enough for a full article.

If you spend a minute thinking about these questions, you will be a stronger investor, but there might not be that Internet Gold Standard --- Actionable Investment Advice.  You might have to digest the information and keep it in mind as you evaluate future events and data.

Whatever happened to.....

• Due diligence.  Reports show that the UBS rogue trader wrote on Facebook that he would "need a miracle..."  Were his bosses the last to know?
• The big question about who would buy US bonds after QE II ended?  Yes, I know that Bill Gross admitted that he was wrong about leaving Treasuries out of his portfolio, but that is not the point.  As an opinion leader he did a bogus comparison -- Fed purchases versus Treasury issuance -- and implied that there would be no buyers.  The right comparison (which I wrote about regularly) is Fed action to total trading, a vastly smaller ratio.  This was so obvious, and totally missed by the uncritical media.  The story has quietly disappeared.  Meanwhile, even Rick Santelli gave today's 30-year auction an "A" grade.
• The White Sox late-season surge.  Oops....
• David Rosenberg's 100% recession call last year based upon the ECRI data.  This happened in spite of ECRI denials about the interpretation.  A reader asked me about Rosenberg's most recent recession forecast --- another 100% call using new and improved methods.  I wish I could remember who gave the example of a Neil Diamond concert.  The audience demands "Sweet Caroline."  I'll get more interested when Rosenberg gets a step closer to the mainstream, but meanwhile he has an adoring audience including those interivewing him on CNBC.
• The Meredith Whitney avalanche of municipal defaults.  Wasn't that supposed to happen right after June 30th?  Here is a question:  Has she made any accurate forecasts since FAS 157 was limited?  Just wondering.
• Hard-hitting questions.  Jimmy Rogers got the typical softball treatment in his most recent CNBC gig.  He stated that the rise in M2 proved that the Fed was in the market, probably lying about their actions.  This just goes to show how people can make a lot of money without knowing anything about government.  There is no way that the Fed can or would conduct secret operations.  Has he ever read the transcript from a meeting?  Does he think that there are 100 or so co-conspirators on this?  Sheesh!  Meanwhile, David Faber let this preposterous remark pass, and no one else seemed to notice.
• US profit margin compression.  Still waiting on that one.  My guess is that it will happen eventually, but only after employment, revenue, and gross profits start growing more rapidly.
• The collapse of the Euro.  We started hearing the predictions that it was going to parity with the dollar in May of 2010.  It is still about the same.  Meanwhile, some market pundits embrace the verdict of the thinly-traded CDS markets while rejecting the result of the deep and liquid foreign exchange market.  One sees what one wants to see.
• The S&P downgrade, which did not seem to reduce appetite for US paper.

My favorite take on that was from last week's Mr. Boffo.  The quote of the day was as follows:

"Best & Fine" -- Original name before truth in advertising downgraded them to "Standard & Poor."

And finally -- I wonder.....

What would have happened if Dominique Strauss-Kahn had gotten back to Europe on his originally planned schedule.  While it is nice to see the strong position from his replacement, Christine Lagarde, no one is asking "What if?"  His arrest and detention was  a serious blow to the European stabilization effort.  It caused immediate selling both here and abroad, breaching technical levels and calling the entire effort into question.  Many weeks went by while the leadership void was addressed.  Has anyone else noticed this?

If I (or any other investment manager) had known what was going to happen to him, I would certainly have been short the market.  I suppose this was a tough one for getting inside information.

Enough musing about the unreal world of market commentary.  Back to the data!

Finding the Best Information about Europe

Every day US equity investors awaken and check futures trading and the latest news from Europe.  What might seem like small tidbits of information have major effects on the total market cap for US stocks.  It may not make sense, but it is the reality.

In this environment, it is important to ask:  Whom do you trust?

The answer is more elusive than we might think.

The chief candidates are the following:

• The market
• Political leaders
• Bank executives
• Leading analysts, pundits, and bloggers
• Rumors

Maybe I missed something, but that should get us started.

This morning's market action showed the problem.  Mark Gongloff's prolific blogging at the WSJ kept you on top of the twists and turns.  The market rallied on early comments from Treasury Secretary Geithner offering a guarantee against a Lehman-like event in Europe.  There was then selling because of a report that Austria had rejected expansion of the EFSF.  Then we had a rebound when it was only a delay.

Get ready for months of this, as the 17 different legislatures consider the EFSF, the ECB deliberates, the IMF ponders, the G7 and G20 consider..... well, you get the idea.

If you are a long-term investor, the volatility represents Mr. Market offering you a chance for good prices -- assuming that you are not in the end of the world camp.

If you have a shorter time horizon, or have genuine worries about the financial system, you need to know whom to trust.

My Handicapping

Here are a few thoughts on each of the sources you might consider.

• Markets.  Should we accept the verdict of the market on Europe --- the high credit default swap rates, etc?  Is Greece definitely going to default?  Here is the dilemma.  Everyone pointing to the market as the ultimate source on this is a liar!  If you asked them if they believed markets were efficient, they would say "no."  Otherwise they would have no job.  All of us get edge by finding market mistakes.  So pointing to the markets on this one occasion is hypocritical, self-serving and inaccurate.  It is confirmation bias in action.  Furthermore, I believe (but cannot prove) that the CDS market on European sovereigns and banks is relatively thin in relationship to what some can make by shorting the banks.  This is not like 2008.  We do not have an AIG selling CDS instruments with no collateral, so the price can be driven up more readily.  Then you email David Faber to make sure that he reports the bad news.
• Political Leaders.  Should we accept the statements of political leaders? We all know that they are trying to maintain confidence.  We also know that there are no guarantees.  When the Geithner news came out this morning, CNBC reported from both Rick Santelli and Bob Pisani -- veteran floor observers.  No one on either floor believed Geithner!  Here is the dilemma.  We all know that it pays to be contrarian.  Maybe everyone is too skeptical.  The collective memory of the Street is sketchy and simple.  For proof, do you really know what Bernanke said when he talked about subprime being "contained?"  If you do, you are one in a thousand.  Most people just accept the Wall Street Truthiness.  When it comes to this subject, no one is a contrarian. It is "smart" to dis the politicians.
• Bank Executives.  In 2008 we saw a number of statements from executives that proved to be inaccurate.  They could have been lying, mistaken, or inaccurate in their expectations about upcoming behavior.  Most of them did not see the collapse of short-term lending and the aggressive impact of FASB 157.  Is there a lesson?  What I do is to listen carefully -- very carefully -- for specifics.  I consider the overall exposure to dubious lending, the acknowledged level of markdowns, and the reliance on short-term fund sources.  Most traders reject corporate executives because they have "learned the lesson of 2008."  This is a gross oversimplification.  There is a legitimate concern that this is a crisis of confidence, so we need to evaluate each statement on the merits.
• Pundits.  Hooray!  Here is our chance to shine.  Anyone who can parse the information and avoid a knee-jerk reaction adds value.
• Rumors.  Forget them!  Enough said.

Conclusion

Most traders and pundits are wrong about Europe because they are over-weighting markets and under-weighting information from political leaders.  This is not black and white, but it is a dark shade of gray.

I expect that there will be some European solution that will drag out, displease many, and consist of a patchwork of plans.  My trader friends think in simple heuristics and binary solutions, so they will not see this coming.  It is a classic wall of worry, playing out over months.

Since I mostly focus on US equities, I have a second line of defense.  There is really no evidence of a US risk, other than the fact that stocks have declined.

Investment Implications

The most aggressive play would be European banks, but this does not fit my risk/reward criteria.  You can get plenty of leverage on this situation with US stocks, especially financials and those perceived to have European exposure.

I hold JPM and MSFT, as two good examples.

Understanding Chinese Policymaking

Traders do not think like government officials.

My traders friends would enthusiastically agree.

They are smarter, faster, and even better-looking!

It is fine for us to think that we are smarter and wiser than those making government decisions.  Even if this is true, it may not help us when making predictions.

If we want to forecast the behavior of government, we need to take a different perspective.  Most market commentators think about China from a trading perspective.  Consider these two questions:

1. Why does China continue to invest in US bonds?  The interest rate is small.  It is likely to rise leading to capital losses.  The dollar, despite recent strength, is in a secular decline.
2. Why would China invest in Italian bonds?  They are risky.  It seems like there are strikes every day.  The CDS prices are rising.  The market is screaming the risk.

The Trader Perspective

The trader, putting himself in the role of the Chinese, has an easy answer to both questions.  The Chinese commitment to the US bond market is fragile and fleeting.  They could sell at any moment.  Who would then buy our bonds?  It is yet another example of the danger of  debt.

The Chinese would also be crazy to buy the bonds of Italy or any other European country.  There are much safer investments and others that provide a better return.

The Policymaking Perspective

The trader view is far too narrow.  On the first question it has been incorrect for many years.  The Chinese are more interested in economic development, creating employment, and selling products than the profits on their bond portfolio.  The US trade deficit is largely a function of the undervalued Chinese currency, an intentional policy on their part.

The Chinese also have a strong interest in worldwide economic strength and avoiding collapse in Europe.  The consequences of cascading defaults might cost them much more than possible losses on a bond investment.

Conclusion

If you want to predict what governments will do, you must think like a government official.  The trading perspective may be of little concern, a much lower priority.

The rumors of Chinese buying in Europe have been around for weeks.  I did not mention them in my weekly update yesterday, because the story was too thin.

Now that the rumor has been published,  it is worth evaluating.  The outcome is far from certain, and I make no predictions here.  The Chinese may get involved, but seek some other participants.

With this in mind, there are many parties with an interest in stabilizing Europe.  This concept has been widely neglected by pundits who choose the sexy story:  The death of the European Union and the related costs.

EU leaders may find the famous Mark Twain to be appropriate: 

The reports of my death are greatly exaggerated.