PIIGs Near Seven Year Highs And Other News

PIIGs Near Seven Year Highs And Other News

We have a very quiet week for economic reports. The housing data are quite important, but it will be a Tuesday story without legs. The White House drama will be compelling for the media. Whether investors like the idea or not, we should expect another week of news that is mostly political. My mission at WTWA has two parts:

  1. Recognize the reality – like it or not.
  2. Find the investment implications – however modest.

In a light week for data, it will be easy for the punditry to jump on the Comey firing story. Expect everyone to be asking:

Is this like Watergate? Should investors be afraid?

 

Last Week

Last week the economic news was good, but mostly ignored.

Theme Recap

In my last WTWA I predicted that a bored punditry, lacking fresh data, would be looking at tea leaves to find a message from the markets. That proved to be my worse forecast of the year! After a day of analyzing Mr. Buffett and the Sohn Conference, President Trump grabbed the spotlight. I hope people benefitted from the discussion, even though it never became the focus for the week.

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The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the weak Friday trading, the narrow range, and the closeness of the all-time high.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

Once again, the economic news last week was good, but there was little market reaction. Of course, there were other considerations.

The Good

  • The EIA’s energy outlook suggests stable prices. People seem to regard different prices as “good.” These levels are fine for consumers. The distress in the oil patch has been mitigated. (EIA).
  • Hotel Occupancy increased again matching a record pace. This chart from Calculated Risk provides a nice comparison.

  • Corporate earnings have been strong on all fronts: improvement over last year, beating expectations on earnings, and beating expectations on revenues. FactSet details this important story for investors, illustrated by the chart below. Brian Gilmartin makes a key point, highlighting the modest revisions in earnings expectations:

    The question we should ask for readers is what sectors (using the above data listed in 2nd set of bullet points) are seeing the smallest negative revisions as we approach Q2 ’17?

    Real Estate: +3.6% today vs. +3.5% on April 1 ’17.

    Financials: +9.5% today vs. +10.5% on April 1 ’17.

    Industrial’s: +1.1% today vs. +1.3% on April 1 ’17.

    Technology: +9.6% today vs. +11.5% on April 1 ’17.

    Health Care: +2.2% vs. +3.3% on April 1 ’17

    Readers should remember, that Technology, Financials and Health Care – those 3 sectors alone – comprise about 50% of the SP 500 by market cap.

 

  • Port traffic strength continues at a better rate than the economy. Steven Hansen (GEI) takes his expected deep dive into the data.
  • Initial unemployment claims dropped to 236K. Calculated Risk provides this interesting, long-term chart. It is consistent with the tighter labor market conditions in last week’s JOLTS report.

 

The Bad

  • Retail sales disappointed. Core sales increased 0.4%, less than expectations. This was somewhat mitigated by revisions to prior months. The data are not adjusted for inflation, notes Steven Hansen (GEI), so the picture is a bit worse.

Retail same store sales also disappointed. The entire sector is challenged. (MarketWatch). J.C. Penney hit a record low and big-name department stores were also hit.

 

The Ugly

Some stories do not die, perhaps illustrating why they qualify for the “ugly” category. This week a major ransomware meltdown occurred. Wired asks whether it might be the long-awaited “big one.”

North Korean nuclear and missile development is another regular concern in this section. As I write, there is news of another missile launch, but few details.

 

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. No award this week, but I welcome nominations. The investment world is full of misleading information and bogus conclusions.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a normal week for economic data, but with few important reports.

The “A” List

  • Housing starts and building permits (T). Continuing strength expected in the April data.
  • Leading indicators (Th). Popular economic summary remains in solid growth range.
  • Initial jobless claims (Th). Continues with record low levels.

The “B” List

  • Industrial production (T). Will the rebound continue?
  • Philly Fed (Th). Moves markets, perhaps because it is the earliest read on a new month.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

FedSpeak is down a little after last week’s heavy schedule. I don’t care much about the Empire State index. There are still some earnings reports, including Wal-Mart.

Next Week’s Theme

As I noted last week, when there is not much important news, it creates a vacuum. It does not change the need to fill on-air minutes or column space. If nature abhors a vacuum, the punditry hates it even more! I was right about that, but wrong about what the news would be!

The Comey firing, the suggestion of recordings of Oval Office conversations, and the Kissinger picture have fueled plenty of speculation. Everyone is asking:

Is this like Watergate?

Financial media might also ask:

Do events increase risk for investors? What does it mean?

Expect to be bombarded with speculation, beginning with the Sunday shows.

Some will emphasize Watergate parallels, while others will cite differences. I have a list of such sources, but the arguments are mostly political.

The investment implications are much more difficult to follow. The early theme is that the controversy will derail the Trump agenda. Since recent market gains assume Trump tax cuts, etc. the stock rally is threatened.

This is certainly a big story, but it is not yet a market story.

The Comey firing is “more of a political story than a markets story…Implications directly for the market are pretty muted,” Chris Zaccarelli, chief investment officer for Cornerstone Financial Partners, told MarketWatch. (William Watts).

As usual, I’ll have more in my Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the

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