Weighing The Week Ahead: What Determines The Agenda For Investment News?

Quant Corner and Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.

Short-term and long-term technical conditions both continue at the most favorable level. Our fundamental indicators have remained bullish throughout the December decline and rebound. The C-Score has stabilized despite a flatter yield curve and increases in headline inflation. I continue to watch this closely, analyzing signs of possible confirmation of higher recession odds. Our methods give us an early warning, helping us to avoid costly “false positives.”

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Georg Vrba: Business cycle indicator and market timing tools. The most recent update of Georg’s business cycle index does not signal recession.

Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis, especially the Big Four economic indicators watched by the NBER recession daters. Here is the most recent update, including the weak retail sales data.

The downtick in three of the indicators concerns Eric Basmajian, whose methodology is quite different. He prefers to look at changes in growth on a year-over-year basis. The result is a focus on the change in acceleration or deceleration. It is very sensitive to potential turning points. He believes that employment will soon follow the other series.

The Big Four chart shows some decline from the peak in three of the series. Will these indicate the start of a recession? In my resource page on recession forecasting, I cite the NBER criteria:

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”

Jill Mislinski provides another chart that helps us with this question.

So far, it does not seem like a significant decline. It is worth watching.

Guest Commentary

“Davidson” (via Todd Sullivan) considers a wide array of indicators. His focus is on what works and the potential for recession. The Employment Demand Index has a short history but is quite interesting, nonetheless. He writes, “The current recession fears are diametrically opposed to economic fundamentals making today’s market a good buying opportunity.”

James Picerno considers the question, Is The Fed Losing Control Of Inflation? The post is a helpful synthesis of recent data, the thinking of some Fed participants, and the conclusions from Fed observers. It also addresses the current divergence between trading markets (weaker economy, lower rates coming) and the Fed (watchful and waiting).

Nowcast GDP estimates are lower.

Insight for Traders

Our weekly “Stock Exchange” did not appear last week due to some key absences on our team. I am planning a special issue this week, featuring an interview with our model developer, Vince Castelli.

Insight for Investors

Investors should embrace volatility. They should join my delight in a well-documented list of worries. As the worries are addressed or even resolved, the investor who looks beyond the obvious can collect handsomely.

Best of the Week

If I had to recommend a single, must-read article for this week, it would be Lyn Alden Schwartzer’s Put Discover Financial Services On Your Radar. While she does a great job of analyzing Discover (DFS), the article includes some great general advice. One concept is the ability to engage in second-level thinking. She writes:

One of the most important things to get right when it comes to investing is second-level thinking. If you are going to outperform the market on a risk-adjusted basis, then in addition to being right, you have to be more right than others, and thus different.

She then quotes Howard Marks with some great examples.

Her next theme is the long-term advantage of the small investor – a longer time horizon. This contrasts sharply with advisers and fund managers who are often measured by short-term market comparisons.

In particular, small investors get to separate volatility from risk. In financial circles, risk and volatility are often thought of as the same thing. However, another way to define risk is the probability of permanent capital loss, which is separate from mere volatility. A company can be volatile but not too risky, or it can risky without being volatile, when thought of in this way. The two concepts are correlated but not identical.

This concept is especially important in the current market environment.

Stock Ideas

Chuck Carnevale sees 3M Company (MMM) “a sound investment today based on quality and valuation.” He notes that this moves it to his watch list, not an immediate buy. As always, you get a careful analysis of the investment thesis, the business, and the elements of valuation.

In Permian Focused Oil Stocks to Buy Now, Kirk Spano describes the catalysts for rising oil prices in the near term. Then he turns to a list of companies that are solid on fundamentals and have takeover potential in the wake of the competition to buy Andarko. The fundamental forces for this viewpoint are supported by Andy Hecht’s While Oil Prices Weaken, Geopolitics Scream Higher.

Is it time to consider retail? Andrew Bary (Barron’s) makes the case for Nordstrom (JWN) “a can’t miss bargain.”

Bhavneesh Sharma continues his investigation of the Allogeneic CAR-T space, Atara Bio (ATRA). Read the full post for a discussion of the pipeline, clinical results, and company financials.

Want to trade REITs on your own? Here are 10 things you need to know.

Barron’s has 5 Cheap Stocks to Ride Out the Trade War. Read the full article to see the reasoning behind these interesting choices.

24/7 Wall St. suggests 13 “dirt cheap dividend stocks.” [Jeff – We own some of these, especially in our “Enhanced Yield” program where we do near-term covered calls. This program does not require an immediate upside catalyst – just a safe platform for generating income.]

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Dick Kaplan 1 year ago Member's comment

Always a pleasure to read this every week.