A Dash of Insight

A Question for Shiller Disciples: Why the interest in profit margins?

I love great questions from readers.  These are often the source of new ideas for articles.  That is the case tonight, but there is a twist:  The commenters have conflicting perspectives.

I want to write something on this theme, but before doing so I solicit comments.  Here is the dilemma:

1. Shiller disciples use this approach to earnings:  "Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10 — FAQ."
2. At the same time, Shiller disciples frequently express concern about profit margins because they currently exceed historical averages.

My simple question is, "Why does a Shiller disciple care about profit margins?"

If your method only looks at the trailing earnings from the last ten years, and you think that stocks need to decline 30% or so before you would consider buying, then why the interest in profit margins?  This only affects current and forward earnings, which have little effect on your metrics.

This would seem to be a question of far greater interest for those who see expected earnings as relevant.  Before attempting to answer these questions on a familiar topic, I solicit reader input...

Thanks in advance!

Why Not to Panic about Europe

I feel no panic about Europe.

This is a typical test.  Every long-term investor considers the question of risk tolerance and understands that markets will fluctuate for mysterious reasons.  So far, so good.

Then, when the event actually happens, it is accompanied by a cacophony of fear mongers -- all claiming that this is "the big one."

How can the average person tell the difference?

Knowing What to Ask

The first step in critical thinking about a problem is asking the right questions.  How about these?

1. Is there systemic risk?  By this I am asking whether we have another "Lehman event" where there is a lot of unknown counter-party risk and the credit system freezing up.
2. How big is the problem?  Let us suppose that Greece defaults on debt.  Or leaves the Eurozone.  What is the worst case?
3. How do political events affect the prognosis?  We have election results where leaders and parties less willing to accept austerity have done well.  What does this mean?
4. If some countries back off from "extreme austerity," what will be the response?  Will other institutions step up?  Can there be a new bargain?
5. If everything goes wrong -- absolutely no mitigation from the ECB, the IMF, or other participants --what will be the effect on the European economy?
6. If the European economy falls into a deeper recession, what are the implications for the US economy?
7. If the US economy is weaker, what does it mean for corporate earnings?

The Superficial Answers

Most of the commentary we see has three steps:

1. Some problem in Europe
2. Cockroach/contagion/domino
3. Disaster for the world

This type of  commentary ignores any policy reaction, and also often insults the leadership of European nations, the IMF, and the ECB.

This approach is popular and gets a lot of page views since there is an active response network making these the most popular  media sites -- whether blogs, online MSM, or TV.  It is an easy story, playing to preconceptions and simple analogies.

The Danger for Investors -- and What to Watch

As is always the case, fanning the flames on these stories is what drives ratings and page views.  When the market dips, it seems to provide a confirmation of accuracy, even though the evidence is skimpy.

It is challenging to refute.  You must write an article about what is not happening!

It is doubly challenging since some of the best sources are the big-time private research firms.  Their business models are based upon fees, not page views.  This means that most investors -- including readers of "A Dash" -- do not have direct access to this information.

I suggest that investors read very critically when a story suggests causal relationships that lack specificity or quantification.  Be even more suspicious when the story ignores policy responses.  And finally, how about some quantification concerning Europe's impact on the US economy?

My own conclusion -- familiar to regular readers -- is that the European story is an ongoing process of bargaining and compromise.  US observers are far too ready to impose their own value judgments on other countries and cultures.  The exact trade off of austerity, bank recapitalization, central bank intervention, and rescue funds is a work in progress.  The exact nature will change and I still expect new entrants.

The long-term impact on the US is exaggerated by these fears.  The short-term impact reflects currency trading and (perhaps) the need for some European institutions to repatriate funds.

A Final Thought

For the average investor, a subscription to the prestigious BCA Research reports is not practical.  If you have an advisor with access, you would at least have indirect knowledge of their most recent macro commentary, including the following as part of "Apocalypse (Not) Now":

• Euroskepticism in Europe: Overstated and understudied, mainly since the media does not do its homework.
• Firewalls sufficient to protect Spain.
• The expected fiscal drag from pending policy decisions is limited, manageable, and subject to improvement if risks increase.

These conclusions mirror my own.  I will try to elaborate further on each theme, but I want to emphasize the most important point:

Policymakers have been responsive and flexible.  Skeptics have consistently underestimated the willingness and resourcefulness of the relevant institutions.

The dumbest commentary is from those who use the phrase "out of bullets."  This is exactly what people said about the Fed before the alphabet avalanche.  Whether you liked those programs or not, they were unexpected and powerful.

The current result is that economically sensitive stocks are on sale, including those (like CAT) which have little European exposure.  US financials that will benefit from European asset sales (JPM) are also moving lower for no good reason.  The over-simplified "Risk-off" mentality confers an advantage on those who do stock picking.

 

April Employment Report Preview

Employment is crucial.  Everyone wants to know whether the economy is improving and, if so, by how much. Employment is the key metric since it is fundamental for consumption, corporate profits, tax revenues, deficit reduction, and financial markets.

We have an accurate count on employment gains from state unemployment insurance offices, but there is a significant delay in compiling and reporting the data.  We just got the numbers for Q311.  We would all like to have this information sooner.

Let us call the actual data what it is:  The Ultimate Truth.

The truth for the April report is something that we will not know for about eight months.  There are various methods for estimating what the Ultimate Truth will be.  The BLS has one method, but there are other approaches.

To get the sense of this let us revisit the most recent actual data, from Q311.  We now know that total employment increased by 750K jobs during that quarter.

The difference between the number of gross job gains and gross job
losses yielded a net employment change of 753,000 jobs in the private
sector during the third quarter of 2011. This is the largest net job
gain since the first quarter of 2006.

So what were we really thinking at the time?

The total of the initial BLS reports was 220K, including a scary "0" for the month of August.  The initial ADP estimates (private employment only) totaled 296K.  If you look at a BLS data series now it shows the reports for that quarter to total 383K, including the "benchmark revision" from last March.  The final series will be revised even higher when we get the new benchmark revisions next March, since the BLS estimates seem to be running lower than reality.

How Wrong this Is

One of the talking heads on CNBC today was saying that ADP "missed" the BLS number by an average of 48K per month.  This is complete silliness, since the scorecard used was based on the initial BLS estimate.  It is like asking a forecaster to predict someone else's erroneous estimate instead of the truth.

The investing world should belatedly accept a proposition that I have been offering for years:

The BLS method is one of several approaches for estimating the truth.  Those seeking truth should consider each sound alternative method, and draw conclusions from the composite.

This previous article in the series summarized the various blunders the experts make each month.

I will have more on the investment perspective in the conclusion, but first, what are we looking for tomorrow?

The Data

We would like to know the net addition of jobs in the month of April.

To provide an estimate of monthly job changes the BLS has a complex methodology that includes the following steps:

1. An initial report of a survey of establishments. Even if the survey sample was perfect (and we all know that it is not) and the response rate was 100% (which it is not) the sampling error alone for a 90% confidence interval is +/- 100K jobs.
2. The report is revised to reflect additional responses over the next two months.
3. There is an adjustment to account for job creation -- much maligned and misunderstood by nearly everyone.
4. The final data are benchmarked against the state employment data every year. This usually shows that the overall process was very good, but it led to major downward adjustments at the time of the recession. More recently, the BLS estimates have been too low. (See my prior preview for a more detailed account of this, along with supporting data).

I think the BLS is honest and does a good job, which seems to put me in a small minority of observers.

In particular, I want to highlight the many know-nothing pundits who roll their eyes about the birth/death adjustment whenever it helps their spin.  Two points:

1. The  birth/death adjustment is one of two methods for estimating new job creation, and it is far less important than the imputation step.  This is where the BLS assumes that companies dropping out of the sample are replaced by new companies with similar job characteristics.  Don't hold your breath waiting for someone on CNBC to describe this, since they never have -- despite the importance.
2. The birth/death adjustment has been very accurate.  Here the data from the latest update showing a total error of only 12K jobs in a year.  Amazing!

 

Why doesn't anyone ever explain how the birth/death adjustment works, the imputation step, or how accurate it has been.  Instead, the media endorses the wrong-headed and pervasive skepticism about job creation.

Competing Estimates

The BLS report is really an initial estimate, not the ultimate answer. What we are all looking for is information about job growth. There are several competing sources using different methods and with different answers.

• ADP has actual, real-time data from firms that use their services. The firms are not completely representative of the entire universe, but it is a different and interesting source. ADP reports gains of only 119K private jobs. Steven Hansen at Global Economic Intersection endorses the ADP method over the BLS result. He has a strong analysis covering many nuances in the data. For those who really want to understand the jobs story, it is well worth reading.

• TrimTabs looks at income tax withholding data. The idea is that this is the best current method for determining real job growth. TrimTabs forecasts gains of about 116,000. They have been pretty bearish on job growth, but their approach is worth serious consideration.

• Economic correlations. Most Wall Street economists use a method that employs data from various inputs, sometimes including ADP (which I think is cheating -- you should make an independent estimate). I use the four-week moving average of initial claims, the ISM manufacturing index, and the University of Michigan sentiment index. I do this to embrace both job creation (running at over 2.3 million jobs per month) and job destruction (running at about 2.1 million jobs per month). In mid-2011 the sentiment index started reflecting gas prices and the debt ceiling debate rather than broader concerns. When you know there is a problem with an input variable, you need to review the model. For the moment, the Jeff model is on the sidelines.
• Briefing.com cites the consensus estimate as 167K and their own forecast is for 145K.

Trading Implications

What does this mean for our trading and investing?  Caution.

I am concerned about a big miss this month.  There is too much focus on the initial number.  Take a look at this assessment of revisions from Scott Murray at The Stock Sleuth (now added to our featured sites).

2011              Initial Release            Revision           Net Change

August                           0                            104,000            +104,000

September           103,000                       210,000            +107,000

October                  80,000                       120,000              +40,000

November          120,000                       157,000               +37,000

December           200,000                       223,000               +23,000

January               243,000                       275,000               +32,000

February            227,000                       240,000                +13,000 

March                 120,000                                  ????

In the past I have suggested that revisions were not predictable.  The first two come mostly from additional responses to the survey.  More recently we have the effects of "concurrent seasonal adjustments" as well as the benchmark revisions.   I have a concern that the seasonal adjustment method does not work as well at market turning points, helping to explain why the initial reports have been too low.

While the evidence all suggests continuing economic growth in the 2- 2.5% range, this report could easily be a disappointment.  While I am seeking buying opportunities  and new positions for long-term accounts, it  usually pays to be cautious before the employment report.  That may be especially true this month.

 

Weighing the Week Ahead: An Economic Turning Point?

[Note to readers -- Whenever I actually enjoy some time off on a weekend, there is a challenge in posting the regular WTWA article. I could always do a simple indicator update, and I monitor many sources in real time. I also have a plan for my own trading for the week ahead. Finding the six hours or so to write it all down is sometimes a challenge. When I travel or take some time off I can either be late, be incomplete, skip the week, or do some combination of the above. This week I am choosing to provide some continuity on the series, while posting a little late.]

This is an especially important week for financial markets, so I am doing my weekly update, even though it is late, and more focused on the future than last week.

Going into this week, the recent economic reports have all been a bit disappointing -- nothing terrible, but a little worse than expectations.

The timing of the weaker data coincides with seasonal patterns from the last two years and the anticipated end of the current Fed "Operation Twist." It raises the question: Have we reached an economic turning point?

Friday's employment report will be the most important evidence, but the rest of the week includes many of the most important economic reports. I will offer my guess about what to expect in the conclusion, but first let us do our regular review of last week's news and data.

Background on "Weighing the Week Ahead"

There are many good sources for a comprehensive weekly review. I single out what will be most important in the coming week. My theme is an expert guess about 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. Do not be bashful. Join in and comment about what we should expect in the days ahead. 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

Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
2. It is better than expectations.

The Good

The general economic data continues to be a little soft, while earnings have been very good.

• Corporate earnings have been stronger than expected and so have revenues. Some observers continually write that earnings estimates are too optimistic. When the beat rate is excellent, they then say that the bar was set too low. One analyst from my geographical region has a convoluted explanation about why earnings are not as good as they seem. This is the same guy who has been saying that the chance of recession is 50-50 and warning that earnings could plummet by more than 50%. He gets big time exposure both from Barry Ritholtz and CNBC, but has no published record of forecasting either earnings or recessions. Can we ask for some accountability?
• The ISM report was great -- 54.8 -- reaching levels from early last year. The underlying components were also very good. The ISM's research suggests that this index level (if annualized) is consistent with GDP growth of 4.1%. See the detailed analysis and charts from Steven Hansen.
• Reported GDP growth understates economic strength. It is all about the inventory changes. Inventories have moved lower, which hurts GDP. When inventories go up, bearish pundits say that the number is overstated and bullish pundits argue that businesses expect the need for more goods. It is confusing, but Bob McTeer shows that the data are actually pretty good. He explains why the first quarter report of 2.2% is actually stronger than Q411's 3.0%.
• The Fed acted as expected, and Bernanke's explanation (We'll be there if needed.) was understood.

 

The Bad

The economic news last week was disappointing, with everything a touch worse than expected.

• Initial jobless claims continued at a high level. We are getting outside the time frame where pundits can blame an early Easter. Those of us who rely on data and watch the four-week moving average are concerned about the higher level of initial claims.
• GDP Growth was weak. Taking a somewhat different perspective from McTeer, Calculated Risk considers a number of factors, including weather.
• Social Security and Medicare are running out of money sooner than expected. Who could have known?
• Various lesser economic reports are all slightly worse than expectations. It is becoming a trend -- and one worth watching.
• The Conference Board Consumer Confidence index is still at recessionary levels (via Doug Short).

The Ugly

Florida State is eliminating its Computer Science Department to save less than $2 million while increasing the athletic budget by a larger amount. I understand that football generates direct revenue and the nerds and geeks do not -- but still.......Something is wrong here.

 

The Indicator Snapshot

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

• The St. Louis Financial Stress Index.
• The key measures from our "Felix" ETF model.
• An updated analysis of recession probability.

The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread." I'll explain more about the C-Score soon. Bob also has a group of coincident indicators. Like most of the top recession forecasters, he uses these to confirm the long-term prediction. These indicators are not close to a recession signal. Bob has graciously offered the most recent report as a free sample for our readers.

I am a big fan of Dwaine van Vuuren, whose excellent statistical work is giving us better insight into a wide range of recession forecasting methods. The data point that I cite each week (the four-month recession outlook) is only one aspect of a comprehensive report. The SuperIndex includes nine different methods, including the ECRI. The analysis has a very strong, practical market application which has paid off richly for subscribers over the last few months. How? Mostly by putting the ECRI recession forecast into better perspective. I am publishing the one-month delayed Leading SuperIndex estimate of recession probability in the near future -- three or four months. This is plenty of time to have value for public followers of their reports.

Dwaine seems to produce another interesting report every week. At at time when there is worldwide economic pressure, many want to know whether the US economy can escape. Here is a great chart:

To understand the continuing relative strength of the US economy, you should read the complete article, which reaches the following conclusion:

"The next few months behavior of this index will be interesting to watch but we can make one observation about the current levels and that is it is not indicative of a pending stock market correction or peak. If anything, if the index starts pointing upwards, this will signal continued U.S stock market gains."

 

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions. Two weeks ago we shifted from bearish back to neutral. The last several weeks have been pretty close calls. The ratings have improved a bit. The inverse ETFs are no longer at the top of the list, so I would not be surprised to see a little buying next week.

[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. For daily ETF commentary from Felix, you can sign up for Wall Street All-Stars, where I still have a few discounted memberships available. You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

The big story this week will be Friday's employment report, but the calendar has created another deluge of data.

I am very interested in the ISM reports on manufacturing and services, since these give great insight into employment.

The ADP private employment report (Wed) is also significant, since it provides an interesting and credible alternative to the regular BLS approach. Initial claims (Thurs) are also significant, even though the data are out of the survey range for Friday's report.

There are other reports, but the big story will be about jobs.

Trading Time Frame

We mostly out of the market last week in trading accounts, after a long period when Felix caught the rally pretty well. We have a small bond position -- a further indication of caution.

The current market has been confusing to many top professionals, as I reported in this article featuring commentary from Art Cashin. Many wannabe traders look at big market moves and think that this means they should be doing something.

This is wrong!

Traders must act only when they have edge. Wild volatility may look like opportunity, but it only works if you are calling the turns. The most important decision is to act only when you have edge.

Investor Time Frame

For investment accounts I have been buying on dips in stocks that we like. I tried to explain the most important concept for individual investors in this article about the Wall of Worry. I have had many emails from people who had a personal breakthrough in their investing when they understood this concept. If you missed it, I urge you to take a look.

Investors should not be trying to guess the next market move. Instead, take what the market is giving you. I have been offering this advice for months, and it led to a great quarter for anyone taking heed.

If you are really worried, you can imitate our enhanced yield program. Buy good dividend stocks and sell short-term calls. I am targeting 8-9% returns on this approach, and achieving it no matter what the market is doing. You can, too. This has been meeting objectives in spite of the market twists and turns.

Final Thoughts on the Turning Point

When it comes to the economy I am watchful and wary, but I do not yet see a turning point. Many investment managers sharpened up their tools after 2008. Regular readers can join me in monitoring both systemic risk and recession risk.

Both remain much lower than headline risk!

The market makes new highs in spite of the headline risk that sells newspapers, but it is no surprise to those who follow data on corporate earnings, recession risk, or the declining chances of a financial meltdown.

Meanwhile, those who emphasize slogans have downplayed "upside risk." Here are two developments to consider:

1. Could housing be improving? I have been stodgily bearish, but I am seeing construction in my area. Calculated Risk sees signs of a bottom. Our Felix model likes home builders, although the sector is still in the penalty box. Most people do not realize that the housing decline has been subtracting 1 to 1.5% from GDP growth. Even a flat housing market is an improvement.
2. Can there by stimulus from energy? I wonder if most people even noticed this interesting op-ed piece in the FT by Philip K Verleger Jr., former Director of the Office of Energy Policy at the US Treasury. He points out that US economic growth has consistently exceeded expectations, and makes a bold prediction for the next decade:

"Ten years from today, the CEA and Federal Reserve chairman will again celebrate a decade of unexpected strong growth. This time the credit will go to countrywide gains from the very low energy prices found only in the US. Low-cost energy will have spawned an export surge in all sorts of goods, from chemicals to tyres.'

Readers should check out the entire article, if only to provide an alternate perspective about economic growth prospects.

 

Guess the Pundit

You are invited to play "Guess the Pundit."

This is inspired by an old game show called "Name that Tune."  While the format changed a bit over the years, the idea was that you would hear a few notes and then guess the tune.  In some variations contestants could say...."I'll name that tune in X notes...,"  the fewer the better.

The Current Pronouncement

As stocks move higher, there are more pundits seeing the advance as an opportunity to call the top.  With this in mind, here is a statement taken right from the news:

"My main call is about the multiple you pay for earnings.... Why should I pay a higher multiple for earnings produced where you have massive fiscal stimulus, incredibly accomodative monetary policy, by a government whose debt to revenue is worse than Greece?  Why should I pay more for those earnings?"

I have some thoughts about this observation, but first a small quiz.  Who is the source of this quotation:

1. A leading blogger of the bearish persuasion.
2. A leading hedge fund manager, talking his book.
3. A leading sell-side firm, behind the curve.
4. A leading bond fund manager, explaining why stocks are still inferior to bonds.
5. A leading political leader, with any of several motives.

The answer is below, but first a few thoughts.

Choosing the Right Multiple

I am astonished at the wrong-headed analysis in the cited quotation.

When I pick a stock, I focus on the current and future business of the company.  I look at earnings, cash flow, the balance sheet, the dividend, stock buybacks, and the earnings growth rate.  I am interested in the business model and future prospects of the company.

And finally, I compare each investment choice to the available alternatives.  I often find myself in complete disagreement with the top Wall Street pundits, something that has worked well for me for many years.

There are currently many stocks that are very attractive according to this method.

I accept the reality of government policy--and so should you.  In democratic societies the leaders do not stand back and watch the economy fail without taking any action.  Fed policy -- whether stimulating or restricting -- is just part of the economic landscape.  So is fiscal policy.

I change my price targets based upon new information, as I described here.

The idea that a professional would discount earnings because he disagrees with government policy -- or thinks it might not work -- is abdicating his role as objective analyst.

And the winner is......

Any reader who guessed the "sell side" firm.  The quotation is not from Tyler Durden, John Hussman, Bill Gross, John Mauldin, or even Newt!  Here is the commentary from Adam Parker, Chief Equity Strategist from Morgan Stanley.

 

 

Parker and a team of fellow PhD's have taken over the forecasting at Morgan Stanley and have a price target for the S&P 500 of 1157.  That is their story, and they are sticking to it!

I have no objection to PhD's; some have been known to make valuable contributions.  When it comes to investment analysis I like to see representation from various disciplines.  The Morgan Stanley team is overloaded with stat guys.  They need more balance, including policy specialists, and most importantly,  experts in research design.  I see too much focus on being clever with numbers and finding correlations without good theoretical foundations.

They are not alone.

One after another, those claiming expertise in the objective analysis of data are falling into excuses laced with political rhetoric.  Watch for the telltale signs from those who used to talk data.  Do they now complain about "printing money?"  About bailouts?  Are these surprises?   Things that have never happened before?

Understanding, predicting, and explaining government actions is part of making accurate market forecasts.  Learn this or lose.

 

Weighing the Week Ahead: Time to Worry about China?

Last week featured more than the usual quota of Dueling Experts.

Goldman Sachs grabbed headlines with a long report proclaiming this to be a "generational opportunity" to buy stocks.  Here is a good summary from Joe Weisenthal.  Several other top strategists are pretty bearish and sticking to their calls.

Market Watch rounded up the usual suspects to explain why the markets will soon crash and what you should do about it.

By the end of the week the discussion had moved to the topic of Chinese economic growth.  The pundit parade featured people who have recently been employed as experts on why European leaders were failing at their jobs.  They have now moved seamlessly onto the topic of China, talking about hard landings, mal-investment, and what the leaders of the world's largest country should be doing.

At least they can probably find China on a map!

Investors should protect themselves with knowledge.  This includes knowing about sources.  With so many advising you to go "all-in" or "all-out" it is wise to check the record.  I offered some suggestions in this article about experts and market timing.

The same argument applies to China.  Investors are consumers of information.  Being a good consumer involves doing the homework of checking your sources.  The big concern this week was a declining Chinese PMI.  Most people discussing this could not write three sentences on the topic, but they certainly have opinions.  I would just love for some interviewer to ask an "expert" what the difference was between the flash PMI and the official version.  Or what the components are.  Or who is surveyed.  Or how it compares to the US equivalents (which most people also do not understand).

I'll offer some suggestions about the search for good information about China in the conclusion. First, let's do our regular review of last week's news and economic data.

Background on "Weighing the Week Ahead"

There are many good sources for a comprehensive weekly review.  I single out what will be most important in the coming week. My theme is an expert guess about 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. Do not be bashful. Join in and comment about what we should expect in the days ahead. 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

Each week I break down events into good and bad.  Often there is "ugly" and on rare occasion something really good.  My working definition of "good" has two components:

1. The news is market-friendly.  Our personal policy preferences are not relevant for this test.  And especially -- no politics.
2. It is better than expectations.

The Good

The news was mostly good last week.

• Economic prospects look better to CEOs in a global survey by McKinsey.  Instead of government data, this is based upon executives with information about their own companies.  The conclusions are reached in spite of lingering Eurozone concern and higher oil prices.
• Building permits increased by over 5%.  This is the best leading indicator for housing.  For a more comprehensive look at all of the housing data, check out John Lounsbury and Steven Hansen at Global Economic Intersection.  Their year-over-year analysis removes some of the issues with seasonality, and they have many great charts.  The Bonddad Blog is also positive on the housing data.
• Bank lending is increasing nicely.  Scott Grannis reports on several  indicators -- all hard data -- that suggest improvement for the economy and the markets.  Here is a sample chart -- one of several:

• Congress bans insider trading --- by members of Congress!  Better late than never, I guess.  The Senate vote was 96-3.  Hmm....
• Initial jobless claims edged lower again to 348K.
• The Conference Board's leading economic indicators beat expectations and continue to look strong.  See Doug Short's analysis for multiple charts and background on how to interpret the data.  Here is a sample:

The Bad

There was also some bad news last week, mostly from abroad.

• The HARPEX index shows a weakening global economy.  See the interesting analysis of this relatively new index by Prieur du Plessis, including a helpful comparison to the Baltic Dry Index.

• Real estate shadow inventory is still high, via GEI.
• Rail traffic is still weak, via GEI.
• European sovereign debt rates edged higher.  The Italian 10-year, for example, moved back above a 5% yield.  While much lower than a few months ago, that is the highest rate in about three weeks.  I am also watching Spanish bonds.
• European and Chinese PMI's moved below 50, indicative of economic contraction.  This was probably the most worrisome event of the week.
• Gasoline prices continued the upward march.  War game results show the likely results of a conflict with Iran.  The oil market reacts in a jittery fashion to each rumor.  The Saudi's are trying to provide more oil, but Russia would like to see higher prices.  There is no easy and imminent solution here.

The Ugly

MF Global and customers' money.  It now appears that Jon Corzine did authorize transfers of customer funds.  There will be close scrutiny of his sworn testimony before Congress.  This sort of news further reduces investor confidence in financial institutions.

The Silver Bullet

The silver bullet is given only occasionally when someone is willing to act like the Lone Ranger, pointing out errors that have been widely embraced.  Nominations are always welcome.

This week's award goes to New Deal Democrat at The Bonddad Blog and Invictus writing at The Big Picture.  The latest employment report error comes via Art Cashin quoting The King Report.  Cashin is a favorite source of ours, mostly because he accurately conveys what people on the NYSE floor are thinking.  At the moment they are reaching to find economic data that does not support a recovery.  In this case, they looked at job changes, not seasonally adjusted, for the first two months of the year and cited job losses of 1.8 million.  The fact that this is below normal for that time period means nothing when you are on a mission.  Here is how NDD puts it:

"On a YoY basis, the last 12 months have seen the 3rd best job growth in the last 12 years.

There is not a shred of credibility in the claim made by the King Report, the original Cashin claim, or the revised Cashin claim. Rather than repeating the claims at other business sites, it's time to throw out the garbage."

Both articles are worth reading in full to get a real understanding of the data.

The Indicator Snapshot

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

• The St. Louis Financial Stress Index.
• The key measures from our "Felix" ETF model.
• An updated analysis of recession probability.

The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread." I'll explain more about the C-Score soon. (I know that I am behind schedule on this.  The message remains comforting.)

The SuperIndex from PowerStocks research is adjusting what information to make publicly available and in what time frame.  I am a big fan of Dwaine van Vuuren, whose excellent statistical work is giving us better insight into a wide range of recession forecasting methods.  The data point that I cite each week (the four-month recession outlook) is only one aspect of a comprehensive report.  The SuperIndex includes nine different methods, including the ECRI.  The analysis has a very strong, practical market application which has paid off richly for subscribers over the last few months.  How?   Mostly by putting the ECRI recession forecast into better perspective.

Spend a few minutes at their site and you will see the following:

• A description of the SuperIndex components and methods.
• A collection of research reports, including how to improve the ECRI method, using the Conference Board's LEI, and deciding how much recession warning you need.
• A sample report.  This shows the richness of the weekly information, including differing time frames for recession warnings as well as an updated GDP forecast.

This is all driven by the most recent data from all of the indicators.  We will determine what we can publish and try to maintain something in our summary, even if there is a delay.

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions.  This week we are continuing our neutral vote, a position started two weeks ago, for the first time since December.

[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.  For daily ETF commentary from Felix, you can sign up for Wall Street All-Stars, where I still have a few discounted memberships available.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

There are more housing reports this week, including pending home sales and Case-Shiller prices on Monday and Tuesday.

Durable Goods (Wed), Initial Claims (Thurs), and Personal Income and Spending (Fri) are all key reports.

Conference Board consumer sentiment (Tues) and Michigan sentiment (Fri) have continuing importance.

Fed Chair Bernanke has a number of speeches, including more college lectures.  These are unlikely occasions for any new hints on policy.

The final GDP revision and various regional Fed surveys are unlikely to be market-moving.

There are many scheduled reports this week, but most are minor.  We are also a little ahead of the new earnings season.  This absence of information may permit even more attention to economic news from abroad.  Daily trading continues to show this effect.

China's economic growth rate is the major concern for many.

Trading Time Frame

Our trading accounts have been 100% invested since December. Felix caught the current rally quite well, buying in on December 19th. There are now only a few sectors in the buy range, but the overall ratings have improved a little.  This program has a three-week time horizon for initial purchases, but we run the model every day and change positions when indicated. Felix has been more confident than I have been on the trading time frame, and has stayed invested in the face of a lot of skepticism. This illustrates the importance of watching objective indicators instead of headlines.  Despite the modest overall ratings, Felix kept us fully invested for trading accounts last week.

We have 28 sectors in the universe, so we can be fully invested if there are three strong sectors, even if the market overall is neutral or negative.

Investor Time Frame

Long-term investors should be aware of the rapid decline in the SLFSI.  Even for those of us who see many attractive stocks, it is important to pay attention to risk. In early October we reduced position sizes because of the elevated SLFSI. The index has now pulled back out of our "trigger range," and is declining further. This sort of decline has been a good time to buy stocks on past occasions. Worry is still high, but has now declined to a more comfortable level.

Even though stock prices are higher than in October, the risks are much lower. I continue to increase position size for risk-adjusted accounts. I am also looking more aggressively for positions in new accounts.

The continuing reduction in volatility is helping our existing covered call positions.

Our Dynamic Asset Allocation model has become much less conservative.  Gone are positions in bonds and gold.  DAA responds to the message of the market, cashing in on extended moves.  It is rather like what some call a "lazy portfolio" but better.

Final Thoughts on China

Getting good information about China can be a challenge.  Bloomberg reports that Chinese companies have been "forced" to falsify data.  We cannot expect this to change soon.  Nor can we assume that we know the direction of any distortions, since government motives are not always clear.

The "flash PMI" from HSBC, the one that caused the stir last week, has been running lower than the official result which is published later.  This chart (via Blackswan) shows the pattern as well as the current trend:

To be a good consumer of information about China, you need to identify the best sources.  One of the best is Stephen Roach, who was Morgan Stanley's point man in Asia for many years and is now teaching at Yale.  He sees the current reactions as vastly exaggerated:

"I would definitely subscribe to the view that these fears over a hard landing are vastly overblown. You've had a lot of people on your show and other shows talking about a banking crisis, that China's a massive property bubble, that there's a runaway inflation problem. Like most of these stories there's a shed of truth to some aspects of it, but it's a shred. It's been vastly exaggerated."

Here is more good background from a summary of Roach with Charlie Rose.

This is a story that we will all be watching for a while.

The Seduction of Market Timing

Here is the dirty secret about market timing: Claims of success are exaggerated -- big time!

Every investor wants to buy the bottom, and (especially) to sell the tops. This is so deeply craved that investors want to believe it is possible. In the wonderful world of financial news, this defines the opportunity.

The best sales approach is to claim expertise in market timing. This often means citing a single dramatic moment:

• Predicting one of the various bubbles is an especially great credential. It is especially humorous when the expert is introduced as being an "early" forecaster of housing problems. There were many who qualified on that front who did not have good investment results over the entire cycle.
• Calling the bottom in 2009. There were a series of nominees on this front as well. Someone was calling a bottom nearly every week, and there were a few big winners.

A Brief Digression for a Small Quiz

Anyone who follows financial media is a consumer of market punditry. Here are some regular pundits. How would you rank their market-timing advice? Just put a number next to the name.

Pundit
Ken Fisher
David Dremen
Louis Navellier
Laszlo Birinyi
Doug Kass
Marc Faber
Bernie Schaeffer
Jim Cramer
Stephen Leeb
Jim Jubak
Charles Biderman
Bill Cara
John Mauldin
Gary Shilling
Bill Fleckenstein
Abby Joseph Cohen
Peter Eliades
Robert Prechter

The Current Question for Investors

The average investor is too easily swayed by smooth-talking experts on TV. I want to discuss this in two parts -- some observations I made in 2010 and then an update on current issues and pundits.

Here is the key point:

Learn to distinguish between market commentary and specific investment advice!

When Warren Buffett (or Jeff Miller) provides a market commentary, it is not intended as investment advice. It is a general market observation. Anyone who starts by saying that "he got me out of the market in 2008" or "he got me invested in 2009" is making a mistake. This is not the right way to think about your future.

Your investment program should be like a made-to-measure suit -- just for you.

I went on to suggest the following advice:

For retirement clients I consider five different strategies.

• A bond ladder -- near-term instruments roll off and we go out to the end of our time frame, currently eight years. This leaves us less sensitive to increasing rates. this is very important right now.

• Dividend stocks. I emphasize the stock-picking part of this. Buying a poor stock with a good yield is not the answer.

• Covered calls. Writing calls against stock positions adds to income. If you do a good job of picking the stocks and which calls to write, this can be a major boost to yield. I have a method combining fundamental and technical analysis. It is not just a matter of finding the highest premium.

• Stocks. Yes, stocks belong in the portfolio of nearly everyone. You are never too old to own a great growth stock.

• ETFs. A disciplined ETF strategy should be part of nearly every portfolio. There is a need to establish rules and to follow them.

So the key point is that you should not go "all in" or "all out" because of something you read or see on financial TV.

Quiz Answers

With this in mind, let us return to a review of forecasts. These are the people that you read in the financial press or see on TV. The principal credential offered is that they are often quoted or on TV!

Wouldn't it be nice to know whether famous pundits had a good track record? One of my missions at "A Dash" is to find the best experts. Beware of those who pretend expertise that they really lack.

A great source for track records is CXO Advisory. This source is objective and strong on research methods. The guru grades page shows the public record of many of the people we follow. You can check out the individual analysis to see exact public statements and the interpretation. I strongly recommend frequent visits to this site. But let us check out the quiz list. I made it easy by listing them in order of success.

 

The first thing we should note is that most pundits bat less than .500. The second impression is that, with the exception of Cohen, the doomsters are at the bottom of the list. This is surprising given that the decade featured includes some of the worst performance in history.

Analyzing John Hussman

CXO does not have a grade for John Hussman because the story is too complicated. Hussman has had reasonable returns -- not as good as the best of us, but with lower volatility. The key thing to understand is that he provides no edge in market timing, and that is where he gets his major publicity.

Most recently he writes that this is one of the worst times to invest, and he is featured in Barron's and widely cited. Here is Josh Brown's summary. Regular readers know that I do not accept his methodology or his conclusion, because he creates after-the-fact models and excessively tweaks the various parameters. He then adds a layer of dense prose that prevents anyone from explaining what he has done. None of it is peer-reviewed. It is simple data mining, creating a "syndrome" from known results - impossible to disprove.

But put aside my conclusion, and turn to an independent review. Hussman is easy for CXO to analyze since he has a fund with a public track record in addition to his statements. CXO does a careful analysis. Here is the conclusion:

In summary, while hedging has generally been advantageous for equity investing over the past 11 years, evidence from simple tests provides little support for a belief that John Hussman successfully times the stock market via hedging adjustments based on his assessments of market valuation and market action.

Note that this review was done before the recent market rally, where Hussman again has been wrong. The review explains that whatever risk-adjusted advantage Hussman gains comes from stock-picking, not market timing. For consumers of his regular market commentaries, this is bad news.

Conclusion

I often feel lonely in offering the most important advice for investors:

1. Asset allocation is a personal decision, based upon your own circumstances.
2. Find a plan that fits your investment time frame and needs.
3. Don't think that there is a magic system to time the market.

My own methods reflect potential gains and risk, the classic investment tradeoff. Meanwhile, exaggerated reactions to news occur constantly. Beware.

UPDATE 3/24/12, 10 AM CDT:  The original post had a typo giving an incorrect score to Marc Faber.  Thanks to reader JM for pointing this out.  I apologize for the error.

A Weighing the Week Ahead: Seeking Safety?

If you are looking for safety, you are not alone.  Many people who lost money in stocks and real estate have become more risk averse.  The problem?

They are looking for safety in all the wrong places!

Owners of (formerly AAA-rated) US debt experienced this last week.  If you own a ten-year Treasury note, you lost 2.5% in market value as the yield increased 30 basis points in a few days.  What if the yield moves to 3%, a level that is still quite low by historical standards?  That would cost another 6%, or more than 8.5% in total.  You will still get your investment back if you hold until maturity, but I suspect that many seeking safety might need access to these funds in the interim.  (Check here to learn about bond pricing and use a free online calculator).

The same is true for bond funds, where the long bull market has created the impression that values can move only one way.

Gold investors also took it on the chin last week, losing 3.3%.  Gold is attractive to two distinctly different camps:  those expecting rampant inflation and those predicting a gloomy deflationary spiral with desperate consequences.  Sometimes the sellers of gold (and fear) offer both propositions -- either in the alternative or simultaneously.  Two years ago I described these as the "golden goal posts."

Right now the prospects for either alternative have been reduced, making gold less attractive.  Since there is no fundamental method for valuing gold, the presence of these fears makes the difference.  Right now the fear trade is not working, since the ball is going through the uprights.

I'll offer some suggestions about the search for safety in the conclusion. First, let's do our regular review of last week's news and economic data.

Background on "Weighing the Week Ahead"

There are many good sources for a comprehensive weekly review.  I single out what will be most important in the coming week. My theme is an expert guess about 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. Do not be bashful. Join in and comment about what we should expect in the days ahead. 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

Each week I break down events into good and bad.  Often there is "ugly" and on rare occasion something really good.  My working definition of "good" has two components:

1. The news is market-friendly.  Our personal policy preferences are not relevant for this test.  And especially -- no politics.
2. It is better than expectations.

The Good

The news was mostly good last week.

• Global earnings estimates are moving higher (via the FT).  Eventually, this is the most important data point for investors.
• Wall Street strategists are bearish.  Bespoke has their expected great chart and this explanation:

If strategists as a whole were particularly prescient, this would be a bearish sign, but fortunately that's not the case.  The peak recommended stock weighting came just after the peak of the Internet bubble in early 2001, while the lowest recommended weighting came just after the lows of the financial crisis.

• Tame inflation data.  As measured by the government, inflation is under control.  The Fed seeks 2% inflation as a target consistent with its dual mandate of price stability and full employment.  The current policy is designed to increase inflation expectations to that level to avoid what economists call a "liquidity trap."  While many disagree with the economic theory and the policy, investors should accept the reality.  Doug Short provides this fine chart of long-term inflation, as well as a discussion of some of the alternative viewpoints.

• Initial jobless claims returned to the 350K range, the lowest since 2008.  Calculated Risk has a helpful chart.

 

The Bad

There was also some bad news last week.

• Budget deficits.  The Obama budget has higher near-term deficits according to the CBO.  This is a complex subject, since there is a trade-off of near-term deficits versus long-term savings.  There are also assumptions about whether or not the Bush-era tax cuts are extended.  Finally, we have ongoing debates about the debt limit compromise and whether one side or the other will look for a way to weasel out.  Stay tuned! 
• Consumer sentiment (via the University of Michigan) is weaker.  This was lower and missed expectations.  I place a lot of emphasis on this series because of the excellent methodology, not because it is my school. This series usually informs us about employment, but currently includes political effects as well as high gas prices.  Despite the issues, I regard this as important information and a cause for concern until it gets back to normal levels.
• Industrial production was flat, missing expectations.  There was only a small market reaction, but this is one of the factors followed by the NBER in dating recessions.  Steven Hansen has a more positive take, focusing on manufacturing and de-emphasizing utilities.  Here is the key chart.

• More estimates on the impact of the Iran situation on the price of gas.  This is worse than I have been citing, possibly as much as $6/gallon.
• We are at a "Bradley turning point."  Ordinarily I would not even mention this, but it is the latest cause celebre of the bearish punditry.  Two of my favorite sources, Charles Kirk in his commentary, and my astute colleague at Wall Street All Stars, Bob Marcin, have mentioned this method.  Neither endorses this approach, based upon the alignment of the stars, but both cite recent accuracy.  As Charles notes in his members only commentary, if Friday turns out to be a market top, everyone on trading desks will be talking about this.  [If it is not, there will soon be a new candidate.  Time for another article along the lines of the Hindenburg Omen.]
• Federal tax receipts are soft.  Here is Dr. Ed's chart:

 

The Ugly

Campaign advertising!  With the Illinois primary coming up on Tuesday, voter attention has turned from our last Governor (finally) starting his prison stretch with one more press conference, to the avalanche of attack ads interrupting the basketball.

There is a simple reason that political campaigns use these ads:  They work!  While voters claim to be high-minded, in fact these deceptive ads swing many opinions.

For an investment angle, you might compare this with advertising about Gold, a staple of certain talk shows, investment TV and radio, and commanding multiple-page spreads in the newspaper.

If so many people think they can get great investment ideas from ads on talk radio, what can we expect for their voting decisions?

 

The Indicator Snapshot

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

• The St. Louis Financial Stress Index.
• The key measures from our "Felix" ETF model.
• An updated analysis of recession probability.

The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

This week continues two new measures for our table. The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread." I'll explain more about the C-Score soon. (I know that I am behind schedule on this.  The message remains comforting.)

The second is the SuperIndex from PowerStocks research.  I am a big fan of Dwaine van Vuuren, whose excellent statistical work is giving us better insight into a wide range of recession forecasting methods.  The data point that I cite each week (the four-month recession outlook) is only one aspect of a comprehensive report.  The SuperIndex includes nine different methods, including the ECRI.  The analysis has a very strong, practical market application which has paid off richly for subscribers over the last few months.  How?   Mostly by putting the ECRI recession forecast into better perspective.

Spend a few minutes at their site and you will see the following:

• A description of the SuperIndex components and methods.
• A collection of research reports, including how to improve the ECRI method, using the Conference Board's LEI, and deciding how much recession warning you need.
• A sample report.  This shows the richness of the weekly information, including differing time frames for recession warnings as well as an updated GDP forecast.

This is all driven by the most recent data from all of the indicators.

 

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions.  This week we are continuing our neutral vote, a position started last week, for the first time since December.

[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.  For daily ETF commentary from Felix, you can sign up for Wall Street All-Stars, where I still have a few discounted memberships available.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

A Note on the Recession Outlook

We should note that the ECRI is still pounding the table on their recession forecast.  Even if this eventually proves to be correct, the timing was terrible for investors who took heed right away, missing a 25% gain.  I have been highlighting sources with better recession forecasts, including those that have better timing using the ECRI's own data.

My weekly review describes my conclusions.  It is not a place where I develop an argument, so let us save that for later.  Meanwhile, please read New Deal Democrat at The Bonddad Blog for a good analysis (calling BS) of the key issues.  The ECRI has not responded to the many critics, and they get very polite questioning in interviews.  It is past time for some real explaining.

The Week Ahead

This is not a big week for economic data other than housing.  I covered my thoughts about housing a month ago, and nothing has changed.  It is interesting that Calculated Risk thinks we might have a bottom.  This week's Barron's had the housing rebound story on the cover.

There are a raft of housing releases.  My focus will be building permits on Tuesday (a leading indicator) and new home sales on Friday.

Initial claims on Thursday is the most important weekly data series.  We also get the latest version of the Conference Board's leading indicators, which are expected to remain positive.

Fed Chair Bernanke gives a couple of college lectures.  Everyone will be watching for any policy hints, but don't hold your breath on that one.

There are some other Fed speeches.

To summarize, this is a week with little data, except for housing where nothing is likely to turn sentiment.  It is a week as quiet as they come, and right after options expiration.  Volatility has moved lower.

Trading Time Frame

Our trading accounts have been 100% invested since December. Felix caught the current rally quite well, buying in on December 19th. There are now only a few sectors in the buy range. The overall ratings have deteriorated.  This program has a three-week time horizon for initial purchases, but we run the model every day and change positions when indicated. Felix has been more confident than I have been on the trading time frame, and has stayed invested in the face of a lot of skepticism. This illustrates the importance of watching objective indicators instead of headlines.  Despite the weakening overall ratings, Felix kept us fully invested for trading accounts last week.

We have 28 sectors in the universe, so we can be fully invested if there are three strong sectors, even if the market overall is neutral or negative.

Investor Time Frame

Long-term investors should be aware of the rapid decline in the SLFSI.  Even for those of us who see many attractive stocks, it is important to pay attention to risk. In early October we reduced position sizes because of the elevated SLFSI. The index has now pulled back out of our "trigger range," and is declining further. This sort of decline has been a good time to buy stocks on past occasions. Worry is still high, but has now declined to a more comfortable level.

Even though stock prices are higher than in October, the risks are much lower. I am increasing position size for risk-adjusted accounts. (We cut back by about 30%). I am also looking more aggressively for positions in new accounts.

Our Dynamic Asset Allocation model has become much less conservative.  Gone are positions in bonds and gold.  DAA responds to the message of the market, cashing in on extended moves.  It is rather like what some call a "lazy portfolio" but better.

The Final Word on Safety

The most important question for any investor is the first one I ask of a prospective client:  Do you need to preserve wealth or to create wealth?

Left to their own devices, many people mistakenly go "all in" or "all out" instead of thinking about the right answer.

Once deciding on a level of safety, it is time to consider the risks, including those often ignored:

• Gradual inflation, of 3-4%.  This will cut your purchasing power in half in twenty years.  Owning stocks that reflect price increases can help.
• Weaker dollar.  This can also hurt your purchasing power, but can be offset by owning foreign stocks or US stocks with significant foreign exposure.
• Rising energy prices.  If you own some energy stocks, you can actually benefit from this trend.

There are other examples, but my point is to open minds to a reasonable level of stock ownership.  This can be done through a very conservative plan of dividend stocks with enhanced yield or a more aggressive apporach.  The key is matching your personal needs to a plan.

The traditional concepts of safety are fine for those who are preserving wealth.  For the rest, this is an illusion.

 

Evaluating Recession Forecasts: What Every Investor Must Know

For investors who believe that stocks eventually reflect the fundamental strength of the companies, understanding the business cycle is crucial.  Since popular sentiment and stock prices are often excessively negative about economic prospects, there is great opportunity for those who can get this right.

Regular readers know that I have been conducting research on this topic since May, providing some occasional updates and background.  I am now ready to describe what I have learned.  This is going to require about five articles over the next couple of weeks.  Today's installment is the first.  Tomorrow I plan to discuss the best single method that I found.

Deceptive Dangers

Many pundits, including some of the most famous and powerful, are playing fast and loose with the "R" word.  John Hussman, a leader in keeping investors scared witless (TM OldProf eumphemism), now warns us that everyone else is looking at lagging or coincident indicators, and that we might all be blindsided by a recession.  Here is a key argument:

Let's examine the seemingly most "compelling" data point first - the fact that December payrolls grew by 200,000. Surely that sort of jobs number is inconsistent with an oncoming recession. Isn't it? Well, examining the past 10 U.S. recessions, it turns out that payroll employment growth was positive in 8 of those 10 recessions in the very month that the recession began.

Let's keep that one in mind for a moment while we consider another popular allegation.  It goes like this:

Mr. X (substitute nearly any mainstream analyst) thought that the economy was fine in December of 2007, the very month the recession was starting.

These statements are accurate, but deceptive.  Understanding why is crucial to an objective analysis of recession forecasting.

What is a Recession

For the purposes of my series, and also the basis for the deceptive arguments, we are looking at the official recession dating by the National Bureau of Economic Research (NBER).  The NBER is not a government agency.  It is a private, non-profit, non-partisan group.

I did an extensive discussion of the NBER process in April, 2008  (when the recession was still actively debated) in my article, How to Win a Recession Predicting Contest.  You can go back and see who was predicting what at that time, but the more important point is the process used by the NBER.  To summarize that description, the NBER does two things:

1. Wait until there is a significant move lower in a group of four factors, with special emphasis on personal income less transfer payments and employment.
2. Only after noting such a decline does the recession-dating committee go back to find the last cycle peak and declare that to be the start of the recession.

In the case of 2007-08, the NBER determined that the recession started in December of 2007 in December of 2008, a year later.  If the economy had rebounded during the year, or maybe if the Lehman failure had been avoided, the dating and scope would have been different.

When a recession ends, the NBER does the same two steps in the opposite direction.  The end of the recession, June 2009, was declared fifteen months later in September of 2010.

Here is a simple rule for understanding the NBER dating:

Forget the term "recession."  Think of their work as identifying peaks and troughs in the business cycle.

To avoid mistakes, the NBER waits for solid evidence before declaring a peak or trough.

This definition does not correspond to what most people think of as a recession.  Most of us just mean that the economy is growing at a rate significantly below potential, usually reflected in the long-term trend.  By this definition we never emerged from the 2008 recession.  Others like to use two quarters of negative GDP growth.  Most people have never heard of the NBER and mistakenly think that it is just another clueless government agency.

Feel free to use your own definition, but when you are reading about economic forecasting, the shaded areas you see on the charts reflect the official NBER dating.

Revisiting the Deceptive Statements

If you keep the NBER definition in mind, you will see why the deceptive statements are unfair and misleading.  Of course most recessions started when there was positive employment growth.  If you grasp that the start of a recession is defined by the NBER as an economic peak, this is almost inevitable.  If the employment growth were weak, it would not be the peak; some earlier month would be selected as the start of the recession.

Similarly, citing what someone said in December of 2007 is unfair, since no one knew for sure that it would be the peak.  It is like someone giving directions -- "If you see the school on the left, you have gone too far."

We need to find true leading indicators -- the focal point of my mission in this series.

Current Relevance

For those who are predicting that we will enter a recession next month, it could, of course, prove to be correct, but it is very unlikely.  Meanwhile, it is safe to say that the recession did not begin before December.  Why not?  None of the four major NBER factors have shown a peak so far.  Unless we have an instant and surprising decline in January, December will not be the peak either.  Check out The Bonddad Blog for a fine review of the major NBER factors and an analysis of how close we came to a recession in 2011.

Let us revisit the Hussman "leading indicators" with this quotation from Business Insider:

A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.

Please note the "always and only" phrase.  This is what I call a leading indicator -- a really long, long leading indicator, since the article is from June of 2010!

I am also bothered by the logic implied.  An ISM index of 54 corresponds to GDP growth of about 4% according to the ISM's own analysis.  This sort of illogical data relationship smacks of back-fitting rather than scientific hypothesis testing.

The Real Tests

My interest in the recession forecasting quest is to improve  understanding of the business cycle.  As you will see in this series, my mission does not include any preconception about what is the current "correct" answer.  I started worrying about the ECRI forecast in May, when it was still quite bullish.  You will see that I do not endorse the LEI approach, which is currently quite bullish.

I laid out "Jeff's Acid Test" at the start of the project:

• 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).

 In Part 2 of this series I will describe the method that best meets these criteria.

My Bespoke Roundtable Answers

For the last few years I have participated in two different "year ahead" preview articles -- one for The Bespoke Investment Group and one for Seeking Alpha.  These are both excellent resources -- each valuable because of the specific approach taken.

Last week I suggested that readers join me in checking out the ideas of the Bespoke panel.  If you have not done so, it is still an excellent and timely idea.

I know that many readers do not click through to the links.  With this in mind, I am repeating the text of my responses here at "A Dash." These reflect my current thinking on many issues covered recently in other articles, and will be the basis for continuing work.

For your convenience

Below is the full 2012 Bespoke Roundtable Q&A with Jeff Miller of A Dash of Insight.

 

1) Looking back on 2011, what were your best and worst calls?

 

Thanks again for inviting me to participate.  The questions are excellent, so I always learn something just by formulating my own answers.  You also have a great roster of participants, and I learn from their wisdom.  I know from the comments that readers of my blog also appreciate the work you do in producing this Roundtable.

 

Turning to my own results, my best calls were sticking with Apple, trading drilling stocks in a timely fashion, and accurately predicting earnings on most of my holdings.

 

My worst calls were in the medical device area, where earnings remain solid, but fear of policy changes is overwhelming.  Even though I was underweight financial stocks, the correct weighting would have been zero!

 

Overall, my worst prediction was that the market would gradually accept the evidence of better earnings and an improving economy.  I was right on the facts, but wrong on the reaction.

 

2) What surprised you the most about financial markets in 2011?

 

I was most surprised about the persistence of highly-correlated trading based on the headline of the day.  We all know that this will eventually end, and I expected that to happen last year.  The risk on, risk off, simplification underscores the irrelevance of most actual data.

 

One lesson for us was the increased emphasis on yield.  It caused us to develop a new program for yield-oriented investors.  By combining solid dividends with covered calls, we created a strong, income-oriented investment program.

 

3) The S&P 500 hit its bull market highs in April 2011.  Which will happen first?  Will we first take out the April highs or have we entered a new bear market (a decline of 20% from the highs)?

 

We almost had the decline already!  In October we were down 19.4% on an intra-day basis.  Right now it is a good question since we are about 9% off of the highs.  I expect us to take out the highs in the first half of 2012.

 

4) Depending on your answer to question 3, how long do you expect the bull or bear to last? 

 

At least through 2012.  The biggest concerns come from things that most people are not already worrying about.  Everyone is closely monitoring the economy and Europe, for example.  North Korea is a wild card.  Middle East tension and concern over nuclear weapons in Iran could generate a spike in oil prices.

 

To summarize, some shock to the economy is the biggest worry in 2012.  Barring that, a bull market will end when Fed policy sends interest rates significantly higher, probably not until 2013 at least.

 

5) How should an investor with average risk tolerance be positioned for the year ahead?

 

I appreciate the careful wording of your question.  Most investors are freaking out, over-reacting to headlines.  The big market swings induce plenty of fear.   If you think (incorrectly in my opinion) that your upside in stocks is only 8% for the year, why deal with a market that often moves 2-3% in a day.

 

Most investors are not honest with themselves about risk.  Even in a good market year it is typical to have a 15% drawdown at some point.

 

In my approach the first and most important question for the investor is not what they hope to gain, but what level of risk is appropriate.

 

With this in mind, positions should be about 30% smaller than normal because of the current risk level.  I use the St. Louis Financial Stress Index as an objective means of determining actual risk.  It is not a forecast of the stock market.  My research found that a level of 1.1 in this index was the start of a trigger range.  This level was briefly exceeded a couple of months ago.  The index has pulled back into the .8 range, but not enough to give an "all clear."

 

6) How do you see the European sovereign debt crisis playing out in 2012?

 

This is the biggest current issue and the best source for profit by getting it right.  There is an overwhelming consensus that this is an inevitable disaster.  Merely questioning this and raising alternative possibilities leads to a chorus of people questioning your sanity!

 

This is a very crowded trade: short the euro, long bonds, long puts, short US financials, 100% out of the stock market for investors, and short for many hedge funds.

 

I have a resource page linking to more detailed coverage (http://oldprof.typepad.com/a_dash_of_insight/european-debt-crisis.html), so this is just a summary of conclusions.  Check out the link to see the argument.

 

There will be a problem with European sovereign debt for a long time, a period measured in years.  Merkel has said that it is a marathon.  The market is treating it as a sprint!

 

At a dinner in October I surprised some blogging colleagues when I told them that we would no longer be worried about this issue in eight months: June or July.  Today's news reports that Mark Mobius just said something similar.

 

What is taking place is a process of negotiation and compromise that will gradually involve many different programs and participants.  The final result will be a combination of bailouts, leverage, ECB bond buying, investments from sovereign wealth funds and China, austerity, economic growth, and maybe even the departure of one or more eurozone members.

 

Not one of these things, but all of them.  Democratic governments move slowly, trying to figure out what works.  They will do more of what is working and less of what does not.  The partial moves, disparaged as "kicking the can" by the average talking head, actually provide some useful time.

 

There will be no trumpet sound ringing when it is over, just as there is no gong sounding right now.  The Europe story will gradually fade, and people will notice that it no longer dominates the news. 

 

7) How bullish or bearish are you on the following markets: The US, Europe, Developed Asia, China, Emerging Markets?

 

There are many good investments, but the US has an advantage on a risk adjusted basis.  I own many stocks with substantial global exposure.  I like China better than the general emerging market theme.

 

8) What do you believe is the contrarian call on equities right now?

 

My measure of sentiment is the P/E multiple on forward earnings, especially as compared to interest rates or inflation expectations.  This tells you what those with assets are really doing as opposed to what they are saying.

 

By that metric, sentiment is more negative than it was at the 2009 bottom.

 

9) How confident are you that US companies can live up to current consensus earnings expectations?

 

I have a contrarian take on earnings forecasts: I find them to be of some value!  No one else does.  I share the popular skepticism about "buy" and "hold" ratings, but I find the earnings forecasts to be helpful.

 

Most observers will tell you that earnings estimates are too optimistic.  The same people will tell you that the bar is too low at the time companies report.  Well you cannot have it both ways.  If these statements are both true, then at some point in time, earnings forecasts must have been reasonably accurate.  My research shows that the one year forecast period is very good, incorrect only when there is a recession.  http://oldprof.typepad.com/a_dash_of_insight/2010/10/profiting-from-forward-earnings-estimates.html.

 

I actually prefer that analysts do not try to be amateur economists and include recessions in the forecast.  I can handle that myself.

 

With this background in mind, I think that the consensus expectations for 2012 are quite reasonable.  And yes, I know that profit margins are high and will revert to the mean.  This will happen as labor markets tighten, new businesses form, and the economy improves.

 

10) Are US stocks cheap right now based on the valuation methods you rely on most?  Will multiples expand or contract in 2012?   

 

Stocks are extremely cheap based upon earnings expectations and the potential return from other investments.  This approach to valuation is only a general guide, as experienced observers understand.  Whenever there is intense skepticism about the economy, something that has been the prevalent state since the 2004 election campaign, there is a consensus that earnings estimates are too high.

 

I have frequently invited readers to lead me to any source that has done better at forecasting earnings than the consensus methods.  The most popular alternatives are backward looking methods, embraced by the bearish punditry.  Since no single stock trades on the historical earnings record (we breathlessly await each new announcement) I wonder why people think that the sum of the parts is more meaningful than the whole.

 

This leads me to the question of multiple expansion, my worst prediction from last year.  I have actually done some research on this question, discovering a curvilinear relationship between interest rates and the stock earnings rate (the inverse of the P/E multiple).  In general, the two move together: higher interest rates lead to a lower stock multiple.

 

The exception occurs when interest rates are exceedingly low, indicating fears of deflation.  In those cases no one really believes the earnings forecasts and the result is multiple compression.

 

Last year I was wrong because (like almost everyone else) I expected interest rates to rise.  Instead, the fear and skepticism intensified.  The result is like a coiled spring.  At some point interest rates will move higher.  When that happens, at least until the ten-year note gets to the 4% level or so, the stock multiples will also increase. http://oldprof.typepad.com/a_dash_of_insight/2010/12/why-the-market-multiple-will-be-higher-in-2011.html.

 

If the Europe story fades, 2012 could be a very big year for stocks.

 

11) Describe some of your favorite market indicators and what they are signaling for stocks in 2012?

 

N/A 

 

12) What are your favorite and least favorite sectors for the year ahead? 

 

Since I have confidence in an improving economy, I like cyclical stocks and technology.  I also think that energy can work well.  The health sector is in limbo due to politics, but there will be an opportunity at some point during 2012.

 

13) What is your outlook for Financials?

 

Since I expect the European concern to diminish, this is probably the area for the greatest payoff during 2012.  Having said this, financials may not be the winners in the first half of the year.  No one believes the earnings forecasts or assurances about the lack of European exposure, so this is the most hated sector.

 

14) What is in store for the US economy in 2012?

 

There is a sharp divide in the approach to recession forecasting.  The ECRI has made an aggressive forecast of an inevitable recession.  At first they provided no time frame, but now they have narrowed it to the next six months.  They went to a 100% probability without any real notice.

 

The problem is that their methods are secret.  My review of several other sources, which I started long before the ECRI call, shows that most disagree.  Many of these sources have been just as good with real-time forecasts, but less publicized.

 

None of them has a recession forecast higher than 25%.  The mainstream economic forecast is for growth higher than 2.5%.

 

To summarize, my base case is continuing modest growth, improving from 2011.

 

15) Economic indicators as a whole came in better than expected in the fourth quarter.  Do you expect this trend to continue in the first part of 2012?

 

Yes.  There was improvement early in the year.  There was an external shock from the earthquake and tsunami, as well as problems in the Middle East and higher fuel prices.  You could interpret that slowdown as the result of temporary factors, or the onset of a recession.

 

The pseudo crisis around the debt ceiling led to another economic threat.  Through all of this, the base case from many indicators that I watch has been economic growth of about 2 to 2.5%.  This is now looking a bit stronger.

 

16) What is your take on the employment picture in the US?  Will we see the unemployment rate get below 8% by Election Day?

 

If current economic trends continue, net job creation will improve quite a bit, taking unemployment below 8% by Election Day.  The controversy over labor force participation will rage on.  There is no question that some baby boomers are leaving the labor force early and also that many people are under employed.  We also will have returning soldiers.  I cover employment pretty extensively, including aspects generally missed in the mainstream coverage.  http://oldprof.typepad.com/a_dash_of_insight/2011/11/who-gets-the-jobs-story-wrong-everyone.html. 

 

17) Are Ben Bernanke and the Fed helping or hurting the recovery?

 

The Fed is an easy target for politicians and pundits.  I am interested in investments; making money no matter who is in power.

 

Bernanke is a Republican, reappointed by a Democrat.  He has done good service, unappreciated by many.  It is interesting to note that Fed critics are of two camps:

 

-Those who think they should have done less: the crash and burn group

-Those who think they should have done more: the activist wing

 

The two wings agree on one thing: The Fed is wrong!

 

18) The Fed's Zero Interest Rate Policy (ZIRP) has really hurt savers and anyone out there looking for yield.  Where should investors go to find yield right now?

 

I understand that the question talks about the effect of ZIRP rather than the reasons, but we should all be clear about that.  The Fed had a dual mandate:  inflation and employment.  They do not have a mandate to provide a guaranteed income for savers.  Those making this argument typically have an intense political agenda: one that is hazardous to your investment health.

 

I have written a series of articles on "The Quest for Yield."  It was one of the most popular series on Seeking Alpha and also on my blog.  It reflects the great interest in the topic.

 

My conclusion is that it is possible to get an excellent income stream (10% or so after fees) from a combination of buying strong yield stocks and writing call options against the positions.  It takes a lot of work, but it is worth it.

 

My idea of a strong yield stock is not just a mechanical search for the highest yield.  I would rather have a 3% yield from a company that will maintain the dividend and also the stock price over five years.  Selling calls against these positions is very profitable right now!

 

19) The housing market continues to struggle.  Are we close to making another bottom in residential real estate?  Are there specific areas of the country that you are more bullish or bearish on?

 

N/A

 

20) Will the Dollar (US Dollar Index) be up or down in 2012 and why?  Are there any other currencies that you have a strong opinion on?  How much trouble is the Euro in?

 

There is a fundamental relationship that investors should understand.  As long as the US has a negative trade balance, the dollar must move lower.

 

21) Gold has underperformed stocks in recent months.  Will this continue in 2012?  Will gold see gains in 2012?

 

I do not know how to value gold or gold stocks on a fundamental basis.  The price is a function of two wildly disparate fears: hyperinflation and worldwide economic collapse.  Both of these concepts are easy to sell to a gullible public and the profit margins are high.

 

Since I have no pressing fear of either inflation or disaster, I am not currently a gold enthusiast.  I want to emphasize that I am open-minded and have often included precious metals in my portfolios.  I just do not think that this is the time.

 

22) The ratio of platinum to gold is currently at its lowest level ever (platinum is actually cheaper than gold right now).  Is platinum a good buy relative to gold?

 

N/A

 

23) Where is the price of oil headed?  How about the spread between Brent Crude and West Texas?

 

The general trend of energy prices is higher.  In China we have 25 million drivers and a billion to go.  The headline risk is also for higher prices.  This is only a matter of time.

 

There is already arbitrage activity between Brent and WTI, so the gap will close.

 

24) What are your predictions for the 2012 election?  Which party will win the Presidency, the House and the Senate?  Who will become the GOP nominee, and what are the chances that nominee will beat President Obama?

 

As a former poli sci/public policy prof, and a student at the top school for election analysis, this is right up my alley.  Despite this background, I think it is too close to call.  My guess at the moment is that Obama will win, mostly because the economy is improving and there is no strong opponent.  My further guess is that Romney will get the nomination, beating out a weak field.  It is still very early.

 

I suspect that we face at least two more years of divided government, with the GOP keeping control of the House.

 

That is interesting.  What do you mean by weak field?

 

Many of the candidates have solid traditional credentials, but they all come with some electoral "baggage."  The GOP establishment has struggled to find their candidate.  The primary process is really not ideal for finding either the most qualified candidates or the most electable.  At the moment, no one seems to combine the themes that resonate with the right personal charisma and traditional values.

 

25) How will the elections impact the stock market in 2012 and beyond?

 

This is a really great question, but it is too soon to answer.  I can do better when the GOP candidate is known.

 

26) Will the US Supreme Court rule that ObamaCare is unconstitutional?

 

No one really knows the answer to this excellent question.  If the ruling goes with the established political lines, the answer will be "yes."  There are challenges to two justices already, suggesting that they should recuse themselves from the decision because of conflicts.  The key question, whether people can be required to buy insurance, has many analogies and is quite thorny.

 

A good question for investors would be how to find stocks that will benefit from clarification, regardless of the decision.  That is a current research topic for my team.

 

27) How do you see the US tackling its debt problems in the years ahead?

 

The Simpson/Bowles approach is sound.  There must be a sacrifice on entitlements and also an increase in tax revenue.  People get the government they vote for.  In 2010 the country voted for divided government with an aggressive minority opinion that could block most compromises.  We are now seeing the results of that decision and a general lack of leadership.

 

The most difficult problems can best be solved right after an election, a time when we can hope for a brief spurt of bipartisanship.  Unfortunately, we seem to be in a perpetual election mode.

 

28) What are the biggest threats to the global financial system right now, and are they avoidable?

 

N/A

 

29) Hedge funds as a whole underperformed the S&P 500 in 2011.  How will hedge funds perform in 2012?  What is your take on the hedge fund model in general?

 

N/A

 

30) Will the following be up or down (positive or negative) in 2012?  Where noted, what are your 2012 year-end price targets?  The price targets are meant to obtain a wisdom of crowds consensus number from all Roundtable participants.

 

-S&P 500 (up or down and year-end price target) Up, say 1450.

-Long-Term US Treasuries (up or down) Price Up, Yields Down, 3.2%

-Corporate Bonds (up or down) The yield spread with Treasuries will get tighter, but the overall yield will move higher.

-Junk Bonds (up or down) Perhaps not much change. Higher overall yield and less risk.

-Gold (up or down and year-end price target) No opinion.

-Oil (up or down and year-end price target) Up about 20%.  The underlying trend is positive and the risks are all to the upside.

-Dollar (up or down) As long as the US has a trade deficit, the dollar trend will be lower.

-Average US Home Prices (up or down) There are recent signs of bottoming.  We need to see improvement on employment for a real change here.  GDP would be better if we just stopped the decline.

-China's stock market (up or down) No opinion.

 

31) Please provide readers with any stocks that you really like right now for 2012 and beyond.

 

I look first for themes, next for sectors, and finally for stocks.  I like a number of big-cap stocks as cyclical and tech plays, including Caterpillar (CAT), Intel (INTC), and Microsoft (MSFT).  There are other similar names.  I like energy stocks including Diamond Offshore (DO) and Chevron (CVX).  I expect financial stocks to rebound so JP Morgan (JPM) is a leading candidate.

 

I think that housing and health stocks will be winners, but it may be a bit early for these names.

 

32) Where is Apple headed as both a company and a stock?  How about Google?

 

I love Apple, and I have held the stock for many years.  I do not think that the markets for their products have maxed out.  The stock is cheap on an earnings basis, especially allowing for the cash and liquid assets.  It is a stock that I buy for new clients on day one.

 

I understand that Google has had some similar growth metrics, but it has never qualified on my criteria.

 

33) Facebook is expected to IPO in 2012.  Would you be a buyer or seller of the stock at its opening price on the day it goes public?  How long would you hold it?

 

None of the recent IPOs have been attractive for the open-market buyer.  It just seems like many people need gains and are trying to hit a home run.  They are also substituting familiarity with the product for knowledge about value.

 

34) Which technologies are you currently the most bullish or bearish on?  Are any of them game changers like the PC or the Internet were?

 

N/A

 

35) What are the website, magazines, newspapers, books, apps that you use the most and would recommend others to use?

 

This is another good question.  I read many sources, including the work of my colleagues in this Roundtable.  It is difficult to answer without leaving out something important.  Most people do not have the time or opportunity to follow as many information sources.

 

I have a list of favored sources on the blog.  My weekly column, Weighing the Week Ahead, has many citations every week, highlighting the sources that I find most useful.

 

I religiously read Abnormal Returns as the principal gateway to news, Bespoke Investment Group for top notch research and charts, Charles Kirk for both links and a trader perspective, and Calculated Risk for comprehensive coverage of economic news.  But these are just my starting points. 

 

36) What are your favorite Twitter feeds?

 

This is difficult to narrow down, since I follow different feeds for different reasons.  Since I make my own market decisions, I do not rely much on those calling for short-term market moves.  I follow many political commentators, mostly as general background.  Simply put, I know which feeds to monitor for the topic of the moment.

 

 

You can see who I follow by checking out https://twitter.com/#!/dashofinsight.  For a favorite non-market feed try https://twitter.com/#!/MikePereira to get authoritative answers on NFL officiating and https://twitter.com/#!/BorowitzReport for an irreverent (but liberal) take on politics.  I am a bipartisan consumer of political humor.

 

37) Do you have any other advice that you would like to share with readers as we enter 2012?

 

 

It is important to be open-minded about your investments, especially the global macro themes.  We are in the political silly season, where many people have strong motivations behind their economic arguments.  Most of those making comments are not trying to help your investments.  I recommend that you join me in being politically agnostic, willing to make strong investment returns no matter who is in power.

 

 

I also keep an open mind.  While I think that I can make the best returns for those willing to be aggressive, my main focus is on risk.

 

 

Most investors want to be cautious.  The downside is more important to them than gains.  They want to sleep at night.  I respect this and have created enhanced income programs that will suit these investors.