(By Jeffery A Miller)
In the short-term world of trading, your job is to anticipate the short-term behavior of others.
In the world of investing, your job is to take advantage of the short-term behavior of others.
Markets render a short-term verdict, but only professors believe them to be efficient. Warren Buffett famously notes (see here for more wisdom):
"I'd be a bum on the street with a tin cup if the markets were always efficient." Fortune April 3, 1995
"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful." Berkshire Hathaway 2004 Chairman's Letter
This is great advice, but difficult for most to follow. How can we tell when the market is inefficient and fearful. We need evidence! Should we bail out of the market? Should we buy puts (even at high prices) to protect our risk? Let us turn to another expert-- Perry Mason (actual historical ad -- and many others -- available here).
Let us take the advice of these two great iconic figures, seeking edge through evidence.
Since the recent European elections there has been a dramatic change in risk appetite. Ed Yardeni sees this as a switch for risk on/risk off.
"The big switch was flipped to the off position following the May 6 French and Greek elections, which could upend all the bailout deal and fiscal pacts worked out by European leaders over the past two years. Such an outcome could push Europe deeper into a recession and weaken global economic activity. In other words, Risk On tends to be associated with widespread confidence in the outlook for global economic growth, while Risk Off indicates widespread fears that the global economy will sputter."
Investors need evidence! Is the pessimistic outlook warranted? This week will provide more data.
As usual, I will offer some ideas 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 list of upcoming events. In contrast, 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.
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 US economic data last week was mixed, but had some high spots.
- Housing and Car Sales Lead. The Bonddad Blog takes a page from UCLA Prof Ed Leamer to reach the following conclusion and chart:
Put simply, as an economic expansion ages, housing is the first sector to weaken, followed by cars. If they are strengthening rather than weakening, a recession is not near. And to be blunt, both sectors are indeed strengthening.
Let's look at this three ways. First here are the raw numbers of housing permits (left scale) and vehicle sales (right scale), measured quarterly to limit some of the noise.