September 20, 2013

Kass: Summers vs. Yellen -

I have long written that Lawrence Summers would be slightly negative for the markets and that Janet Yellen was neutral to the markets. I never bought into the notion, as expressed by Jim Cramer on "Mad Money" last night, that Summers' polarizing presence would somehow act as a "one-man wrecking crew" for the markets.

I have guesstimated a downward influence of about 25 to 50 S&P 500 points to a Summers nomination/appointment and virtually no impact to a Yellen nomination/appointment. The basic reason I held to this view was not that Summers would be more hawkish but rather there would be far less transparency in a Summers Fed vs. a Yellen Fed. And this would lead to more market volatility.To me, the market's Sunday-night and early-Monday gap in futures (up 24 handles) was a total overshoot to reality, as it seemed almost entirely based on the euphoria that Summers was bowing out.On the principal bases (regulatory and monetary policies, personality and forecasting ability), Yellen is simply "a whiter shade of pale" than Summers.Policy FailuresBottom line: I expect little divide between the policy of a Summers-led Fed or a Yellen-led Fed.And this is the market rub: The shoulders of the Fed have been the primary support to domestic economic growth since the crisis in 2008-2009, since our political leaders in Washington, D.C., have been inert, irresponsible and unwilling to come to meaningful compromise in the face of continued structural challenges.While monetary policy has taken on a progressively greater responsibility to energize growth, quantitative easing and zero interest rate policy are growing less effective.Indeed, as Albert Einstein is often credited to have said, "The definition of insanity is doing the same thing over and over again and expecting different results."Recently, in King World News interview, Bill Fleckenstein delivered a variation on Einstein's apocryphal quote more vividly in describing our monetary fantasy:

Right now, people continue to believe that the same idiots that created all of these problems, namely the central banks, are going to somehow get us out of it with the exact same policies that got us into it.... We had so much artificial stimulus, and we've misallocated so much capital (that Americans) believe in the lunatics at the Fed, and the rest of the Western world is that way (as well).... As the fantasy dies ... more people will see that the Fed is trapped.
In summary, I see little difference between Summers and Yellen, and the jubilation on Sunday and Monday (following the Summers announcement) seems misplaced.

Doug Kass on Apple

A year ago, Apple was selling a superior product and was charging a premium price. Now, they’re selling a less-than-superior product and still charging a premium price.

September 19, 2013

Apple: Something is wrong

Just how far behind is Apple trying to fall? I do not get Tuesday's release and product launches. Something is just wrong. The developed world is saturated with smartphones at the high end, so any future growth will have to be geared toward emerging markets.

September 18, 2013

Kass: Google/Android Is an Apple Eater -

I wrote two critical columns yesterday regarding Apple's (AAPL) new product launch and a critical view of the company's pricing strategy.

When I wrote my original negative piece on Apple in September 2012, my principle concern was the rapidly changing competitive landscape. My thesis was that Google's (GOOG) Android, Samsung and others were rapidly catching up with Apple's history of product innovation and that, in the fullness of time, Apple's products would be more costly and provide equal or less product performance and innovation than its competitors.

Today, I want write about how far Apple is falling behind its competition, particularly the Google/Android ecosystem. When I see how innovative Google and its partners have become, it is clear Apple is beginning to fall behind its primary competition ecosystem.  When is the last time you saw something this cool from Apple?  When is the last time you saw anything cool from Apple?  It used to be a given that Apple was introducing things nobody had even thought of before. Now it seems to be playing catch-up or not even in the ballpark.

The next set of Android phones will have the new Qualcomm (QCOM) chip and are likely going to further differentiate their product from the leading competition, including Apple. As an example, notice the comments in this article regarding voice recognition.

These new phones will all start to hit the market soon, starting with the Google Nexus 5.

Google, unlike Apple, understands the importance of market share; it is going to price this device at breakeven -- about $300 to 350 and less than half of iPhone D(ud) -- and that is going to be much higher spec'd (better and bigger screen, processor, battery and camera).

Google is simply more innovative. It develops a broader ecosystem that includes newer and cooler devices like Google Glass, in addition to handsets and tablets, with numerous partners. It delivers better products, and prices them more aggressively to take market share. Meanwhile, Apple lives in the past and tries to compete on the basis of hardware features much more than it has at any point in the past.

September 4, 2013

Slowing Growth; Radian; GDP: Best of Kass -

For several months I have maintained that expectations for domestic economic growth and corporate profits were too optimistic and that the landscape was growing more challenging.

This view contrasted with the consensus that U.S. economic growth would accelerate markedly in the second half of the year, laying the framework for self-sustaining economic growth and profit prosperity into 2014 and beyond.

The expectation of an acceleration in domestic growth is now fading and is likely the primary reason why stocks have corrected. Further complicating the situation is that most of the Fed members want to taper into what appears, increasingly, as slowing growth. So a policy mistake might be made in the weeks ahead.

This morning the income/spending Milwaukee Manufacturing Index came in weaker than expected. The Chicago Index was in line with consensus (signaling slightly-below-trend activity in the Midwest). Confidence declined in August from a six-year high in July.

Sub-par 2% second-half real GDP remains my expectation.

Many brokerages have lowered their 3Q 2013 real GDP forecasts this morning (Goldman Sachs to +1.8% from +1.8%, Morgan Stanley to +1.9% from +2.2%, Nancy Lazar (one of the biggest supporters of accelerating growth) cut her forecast, as did ISI's Ed Hyman, and Macroeconomic Advisors went to +1.6% from +2.2%.)

More lower economic forecasts lie ahead and with it will be lower forecasts for corporate profits, providing a backdrop for limited upside to markets at best.

At worst (my baseline expectation), the S&P Index still has an appointment with 1550-1600.

September 3, 2013

Weighing the Week Ahead: Expect Volatility, not Clarity - Wall Street Sector Selector

Do not expect much clarity in the week ahead.

Last week I predicted that fear might beget more fear. Starting with Secretary of State Kerry’s Monday press conference the markets moved lower. Tuesday trading exacerbated the effect, and the market did not recover. Rarely has one of my weekly previews been so accurate, so quickly, and for the right reason.

It is a classic case of confusing fear and risk, something I tried to clarify in this post. The fear part is pretty obvious, as we saw frightened individual investors stampeding out of stocks, especially the broad market ETFs. Steven Russolillo reports the story, noting that it is the largest monthly outflow in five years. In sharp contrast, the objective risk measures that we document each week (see below) have moved only slightly higher. For a market-based analysis of Syria, check out Scott Grannis, who asks, How Scary is Syria?

Bespoke offers their own risk indicator – a CDS index – in their post, Credit Markets Not Too Worried.


Dimensions of the Syria Issue

This is a fascinating case study, with big stakes on many fronts. President Obama’s decision to seek Congressional approval for action caused me to scrap my theme for today’s post and to reconsider my own plan for the week. Here is a good analysis of the probable factors at work.

Citizen. As citizens, we should all be interested and informed. If you feel the need to catch up, do not be embarrassed about enjoying your summer vacation. Here is a good source to catch up.Analyst of Presidential Power. This one has not gotten much mention so far. Every schoolboy knows that Congress has the power to declare war. Most college students know that modern wars never had a declaration. Some of them had rather vague Congressional authorizations. Check out the Tonkin Gulf Resolution, which provided some justification for the Vietnam War. If President Obama seems to be ceding power to Congress, it will represent a major shift.Political junkies. This is a field day for political pundits and especially for Obama opponents. He can be criticized for moving too quickly or too slowly. He was attacked via Twitter (just what we need – debating points in 140 characters) for acting without Congressional support. He is already being attacked for soliciting it.US role and moral responsibility. There is widespread agreement about using weapons of mass destruction, especially against civilians. Identifying the culprits and finding a course of action is much more challenging. In particular, what should the US role be? What allied or UN support is required? What level of reaction is appropriate?Investor analysis. Next to the other major dimensions, the investing question seems less significant and a bit tawdry. So be it. Each of us must separate our role as citizen from our role as investor, finding the right answer for each. Oil (NYSEARCA:USO) markets and stocks seem to be reflecting – at least partially – something much more significant than a one-time US strike against Syria. The uncertainty involves possible involvement by Iran (against Israel?) or China. While these possibilities may be unlikely, they are prominently mentioned. This theme of fear and uncertainty will continue, since Congress will not return from recess until September 9th. Even then there is a good chance that Congress will reject action.

Other Uncertainties Loom

Syria is not the only question for the markets. There is an autumn of uncertainty, as noted by Joe Weisenthal. We can expect a lot of discussion about end-of-year positioning for investors. As usual, the cloudier the crystal ball, the more fun it is for the pundits!

I have some thoughts about post Labor Day positioning, and my suggestions for the best sources. I’ll report in the conclusion.  First, let us do our regular update of last week’s news and data.

Background on “Weighing the Week Ahead”

There are many good lists of upcoming events.  One source I regularly follow is the weekly calendar from For best results you need to select the date range from the calendar displayed on the site. You will be rewarded with a comprehensive list of data and events from all over the world. It takes a little practice, but it is worth it.

In contrast, I highlight a smaller group of events.  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. Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine.

My record is pretty good. If you review the list of titles it looks like a history of market concerns. Wrong! The thing to note is that I highlighted each topic the week before it grabbed the attention. I find it useful to reflect on the key theme for the week ahead, and I hope you will as well.

This is unlike my other articles at “A Dash” where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting 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:

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

The Good

There was some significant good news last week.

Q2 GDP was revised higher. While this is backward looking, it does provide a positive base.Ratings for financial TV continue the recent decline. Ryan Detrick explains why this is bullish. (Think the opposite of 2000).Underwater mortgages decline. See GEI analysis of Zillow data. Nice interactive graphics.PIMCO changes course! Josh Brown nails it with his discussion of PIMCO’s complaints about the media, noting some hypocrisy given the media blitz by the firm’s top executives. Barry Ritholtz is even more explicit in his post, Proof the Bond Bull is Over: PIMCO Selling Hedge Funds. This is a good discussion of the recent PIMCO moves and the relaxation of SEC restrictions. Can we expect a change in rhetoric from these sources?Earnings remain positive. Q2 showed an increase of about 4%. This is a win for earnings guru Brian Gilmartin who forecast 5% or so compared to the 1% loss predicted by Doug Kass, which we documented here. We hope they will both have predictions for next quarter as well. Meanwhile, Ed Yardeni notes that estimates for 2014 show an 11% gain over this year.Michigan sentiment made a nice rebound from the mid-month levels. I regard this as a pretty good coincident indicator for spending and employment. You can see the relationship to GDP from Doug Short’s fine chart:


The Bad

In addition to the Syria story, there was some bad economic news.


Trading glitches. Each of these serves to undermine confidence – perhaps with good reason. The Economist reports on several recent incidents. A new study shows just how costly this can be. Policy changes coming?Durable goods orders crashed no matter how you measure the change. Steven Hansen at GEI has the analysis, including this chart:


Emerging markets (NYSEARCA:EEM) continue to decline. Some are suggesting a link between these markets and future world economic issues. These same sources also frequently cite central bank policy as a cause. Ed Yardeni suggests that forward earnings in these countries are more responsible. He also does not see a “panic attack” from the Middle East.Pending home sales fell 1.3%, a disappointment. Calculated Risk notes that some signings may have been pushed forward because of mortgage rates. (Contra Todd Sullivan, whose chart suggests normal seasonality).

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts.  Think of The Lone Ranger.

This week’s award goes to Derek Thompson writing at The Atlantic. Remember all of those recent stories about how 1/3 of young adults were living at home? It turns out that a dorm room counts as “home” in these measurements. That is only one of the three factors making this into a misleading story.
The Indicator Snapshot

It is important to keep the current news in perspective. I am always searching for the best indicators for our weekly snapshot. I make changes when the evidence warrants. At the moment, my weekly snapshot includes these important summary indicators:

For financial risk, the St. Louis Financial Stress Index.An updated analysis of recession probability from key sources.For market trends, the key measures from our “Felix” ETF model.

Financial Risk

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 recently edged a bit higher, reflecting increased market volatility. It remains at historically low levels, well 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 SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events.  It uses data, mostly from credit markets, to reach an objective risk assessment.  The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.

Recession Odds

I feature the C-Score, a weekly interpretation of the best recession indicator I found, Bob Dieli’s “aggregate spread.“  In this series of videos, Dr. Dieli explains the rationale for his indicator and how it applied in each recession since the 50's.  I have organized this so that you can pick a particular recession and see the discussion for that case.  Those who are skeptics about the method should start by reviewing the video for the specific recession that concerns them.  Anyone who spends some time with this will learn a great deal about the history of recessions from a veteran observer.

I have promised another installment on how I use Bob’s information to improve investing.  It has been on my “important but not urgent” list, since I am not currently worried about a recession. Meanwhile, anyone watching the videos will quickly learn that the aggregate spread (and the C Score) provides an early warning.  Bob also has a collection of coincident indicators and is always questioning his own methods.

I also feature RecessionAlert, which combines a variety of different methods, including the ECRI, in developing a Super Index.  They offer a free sample report.  Anyone following them over the last year would have had useful and profitable guidance on the economy.  RecessionAlert has developed a comprehensive package of economic forecasting and market indicators, well worth your consideration. Dwaine has also developed a market-timing approach which follows ten bear-market signals. His latest installment provides detail and a current look.

Georg Vrba’s four-input recession indicator is also benign. “Based on the historic patterns of the unemployment rate indicators prior to recessions one can reasonably conclude that the U.S. economy is not likely to go into recession anytime soon.” Georg has other excellent indicators for stocks, bonds, and precious metals at iMarketSignals. For those interested in gold, he has a recent update, asking when there will be a fresh buy signal.

Unfortunately, and despite the inaccuracy of their forecast, the mainstream media features the ECRI. Doug Short has excellent continuing coverageof the ECRI recession prediction, now almost two years old.  Doug updates all of the official indicators used by the NBER and also has a helpful list of articles about recession forecasting.  His latest comment points out that the public data series has not been helpful or consistent with the announced ECRI posture.  Doug also continues to refresh the best chart update of the major indicators used by the NBER in recession dating. These are showing some recent weakness, so let us take a look at the chart.

Dshort big four

We can see that the recent real income data has been weak, and the overall growth has been modest. There is still nothing resembling a business cycle peak and a significant pull back, which is the NBER definition for a recession.

The average investor has lost track of this long ago, and that is unfortunate.  The original ECRI claim and the supporting public data was expensive for many.  The reason that I track this weekly, emphasizing the best methods, is that it is important for corporate earnings and for stock prices.  It has been worth the effort for me, and for anyone reading each week.

Readers might also want to review my Recession Resource Page, which explains many of the concepts people get wrong.

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.  A few weeks ago we briefly switched to a bullish position, but it was a close call. While we are currently “neutral,” Felix might switch to a bearish posture if the overall market drifts lower. The inverse ETFs are more highly rated than positive sectors by a small margin, but remain in the penalty box. These are one-month forecasts for the poll, but Felix has a three-week horizon.  Felix’s ratings seem to have stabilized at a low level. The penalty box percentage measures our confidence in the forecast.  A high rating means that most ETFs are in the penalty box, so we have less confidence in the overall ratings.  That measure remains elevated, so we have less confidence in short-term trading.

[For more on Felix or the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

This week brings plenty of news and data, including some important reports.

The “A List” includes the following:

The employment situation report (F). This is the biggest data point for the week, and a key factor for some of the FOMC members.Initial jobless claims (Th).   Employment will continue as the focal point in evaluating the economy, and this is the most responsive indicator. It shows only job losses, not gains, so the monthly employment data are more important when available.ISM index (T). The calendar quirk pushed this important concurrent indicator into next week. It is important for employment forecasts and overall economic growth.

The “B List” includes the following:

ADP jobs Data (Th). This might actually be better than the official numbers for private employment, although it does not get the respect. Economists will adjust Friday estimates based upon this report.Beige book (W). The anecdotal evidence for the next Fed meeting will get extra scrutiny this week.Auto sales (W). Vehicle sales are seen as a good indicator of consumer spending, and truck sales as an independent indicator of economic activity in construction and small business.Trade balance (W). Followed more closely as a factor in GDP calculations.Factory orders (Th). Expected to be pretty weak.Construction spending (T). Everything related to construction is interesting, especially with interest rates rising.

There are also some Fed speeches, including some of the more hawkish members. There will be plenty of sounding off about Syria. President Obama will be in Russia for the G20 meetings, generating unpredictable economic and political news.

You can see why I expect volatility (NYSEARCA:VXX) rather than clarity.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has continued a neutral posture, now fully reflected in trading accounts which have only a position in gold miners(NYSEARCA:GDX). The overall ratings are slightly negative, so we are close to an outright bearish call. This could easily be the case by the end of next week. While it is a three-week forecast, we update the model every day and trade accordingly. It is fair to say that Felix is cautious about the next few weeks. Felix did well to avoid the premature correction calls that have been prevalent since the first few days of 2013, accompanied by various slogans and omens. The signals have basically lacked a clear direction for most of the summer.

Insight for Investors

The challenge for investors is to distinguish between the major trends and the short-term uncertainty. The main themes are not related to headlines news, even though sentiment may drive market fluctuations. Do not be seduced by the idea that you can time the market, calling every 10% correction. Many claim this ability, but few have a documented record to prove it. Most who claim past success are using a back-tested model. Please see The Seduction of Market Timing.

Here are the key concepts.

Beware of yield plays. For several months, I have accurately emphasized the danger of yield-based investments – yesterday’s source of safety. The popular name for this is “The Great Rotation.” It is still in the early innings, since bond (NYSEARCA:IEF)fund investors are only getting the bad news from their statements. Even the best bond managers (like Gross and Gundlach) cannot win when interest rates are rising. The exodus from their funds is starting. Most investors are emphasizing cash, real estate, and gold. .333 is good in the major leagues, but not for your investments!

It may be a “generational selling opportunity” for bonds. I locked in some positions after the recent big move, but this story is not over.

Find a safer source of yield: Take what the market is giving you!

For the conservative investor, you can buy stocks with a reasonable yield, attractive valuation, and a strong balance sheet. You can then sell near-term calls against your position and target returns close to 10%. The risk is far lower than for a general stock portfolio. This strategy has worked well for over two years and continues to do so. (I freely share how we do it and you can try it yourself. Follow here).

Last week provided chances to set new positions on down days and also to sell calls against existing energy positions on the Syria news. Take what is offered each day.

Lose the focus on fear! Many are rewarded for making sure that you are “scared witless” (TM OldProf euphemism). If you are addicted to gold NYSEARCA:GLD) and allegedly safe yield stocks, you need a checkup. Gold works in times of hyperinflation or deflation/crisis. When neither happens, the ball is going between these Golden Goalposts. There is a good transition plan for those with a fixation and fear and gold.

And finally, we have collected some of our recent recommendations in a new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love feedback).

Final Thought

It is often a challenge for investors to keep an unemotional, data-based perspective when the headlines are all related to the latest crisis. In the WTWA series I have an emphasis on recent developments. It is also important to do a broader assessment on occasion. Everyone should take a few minutes to review Scott Grannis’s 20 optimistic charts. He writes as follows:

“I continue to believe that the market is dominated by pessimism rather than optimism. Or, if you will, that there is a shortage of optimism.

What follows are some 20 or so charts, in random order, which highlight optimistic developments in the economy and financial markets which I believe are underappreciated. They paint a picture of an economy that is stronger and more durable than the skeptics seem to believe. There’s still plenty of room for improvement, to be sure, but there are few if any signs of deterioration.”

These are all interesting indicators, not contrived with some pre-conceived conclusion in mind. Here is just one example.