Current Signal Performance
Turbo Model Returns (Long & Short Strategy)
Classic Model Returns (Long & Short Strategy)
strongly over the five-day span to recapture a good chunk of the ground
they had lost during the previous two weeks. News that AT&T is
planning to acquire T-Mobile combined with hopes that the nuclear
accident in Japan would soon get under control to give equities a
boost Monday, allowing the S&P 500
to gain 1.5%. After posting marginal losses during a quiet session
the next day, stocks gapped lower at the open Wednesday on fears over
Portugal's debt situation and weaker-than-expected February new-home
sales, which hit their lowest levels of the past fifty years. Yet,
the main indexes managed to turn around and finish the session in
the green, with the S&P 500 gaining 0.3%. Stocks were able to
build onto their gains Thursday as a strong showing by the tech sector
helped lift the entire market and propel the S&P 500 0.9% higher.
The government said Friday that the economy grew at a better-than-expected
3.1% annual rate during the fourth quarter of last year. With investors
also encouraged by a strong earnings report from Oracle, the positive
news helped push stocks solidly higher early on, but the main indexes
gave up most of their gains by day's end to finish modestly in the
green, still capping a strong week for equities. It should be noted,
however, that this week's rally occurred for the most part on below
average volume, showing a lack of conviction among institutional investors.
For the week, the S&P 500 (SPY), Russell 2000 (IWM) and Nasdaq 100 (QQQ)
respectively gained 2.77%, 3.70% and 4.39%. All three ETFs are located
above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a 3.13%
gain over the five-day span. The portfolio consists of the 5 top-ranked
world ETFs as of February 25, which marked the beginning of the current
4-week holding period. The World portfolio is being
rebalanced today, as the current 4-week holding period is now over.
Please note that since we have an active Classic Model Cash
signal, the World approach calls for selling your
holdings if you follow the "Long Only"
or "Long and Short" strategy. Only if you
follow the "Buy and Rebalance" strategy
should you remain invested in the top 5 ETFs, as the strategy calls
for staying invested at all times. Please go to the Classic
page for all the details.
Our current Classic Model Cash
signal and Turbo Model Sell
signal remain in effect.
gas prices, what really drives Inflation?
We thought it might be interesting to take a step away from our
usual market-related comments and spend a few words on a subject
that comes up so very often in the financial and investment press.
Today, we will talk a bit about the boogey-man that is inflation.
Based on emails we receive, newsletters we read, etc. you would
think that inflation is roaring at unprecedented levels. Or at least
on the verge of such a high level as to cripple our very way of
being. As always, we are dismayed that, in this day of 24-hour media,
those who peddle fear seem to get so much airplay and generate so
much noise. Those preaching a more moderate and optimistic (and
boring?) view tend to get drowned out. When it comes to understanding
inflation, one must realize that it's a somewhat shared, but also
a largely personal experience.
What that means is that inflation affects different people and different
households in different ways. How can that be? Well, take energy
prices for a very visible example. If gasoline prices rise by 10%,
someone who commutes to work every day over long distances will
feel much more impact than a person who works from home and does
relatively little driving. People tend to react to energy prices
in part because we see those prices posted every day as we drive
to and fro. We can SEE the energy price inflation happen before
our very eyes. Seeing it tends to overstate its importance in our
mind perhaps. However, since the gas lines and high inflation of
the late 1970s a lot has changed. Cars get 50-100% better gas mileage
than they did in those days. Businesses have significantly reduced
their energy inputs over the subsequent decades as well. Thus, when
oil prices surged to over $140 per barrel in 2007, it was painful,
but not the profit-destroying squeeze seen in earlier decades. Thus,
today's step up in gasoline prices has far less impact than it once
The inflation that gets reported is the Consumer Price Index (CPI),
which is what is often called "headline" inflation. That
is to distinguish it from "core" inflation which subtracts
out energy and food costs. Why remove these seemingly critical components?
For one, they are very volatile, rising sharply one month, falling
sharply the next. For another, they are not the main drivers of
the type of inflation that causes major systemic problems. For many,
if not most, businesses, food and energy costs are a minor cost
of operation. They are factors, to be sure. But labor cost is by
far a more important driver of cost for most businesses. Thus, it's
wage inflation that becomes more critical for businesses
to keep an eye on. With unemployment still hovering around 9%, there
is little likelihood of pervasive wage inflation on the horizon.
The real problem with inflation comes when it becomes an expectation
built into prices and behavior. When we start to expect that prices
can ONLY go higher, never lower. When that expectation takes hold,
there is substantial incentive to spend today rather than wait until
tomorrow when prices will be even higher. This behavior is akin
to housing boom periods where a house seller has potential buyers
bidding against each other and throwing all caution out the window
in order to get the deal closed. This type of behavior is at the
heart of the inflation spiral that is truly damaging and hard to
contain. We are nowhere near that sort of mindset these days.
To better understand inflation, let's take a quick look at the components
of the reported CPI:
Chart 1: Consumer Price Index Components
You can see that housing is by far the largest piece, and indeed
is by far the greatest expense most of us face. With housing prices
falling substantially over the past few years, this has been a DE-flationary
period for many housing costs, though again, it depends on your
personal situation and locale. Some renters have certainly faced
increasing rents, for example. The other factor which can lead to
de-flation in housing cost is an ability to refinance to lower rates.
When it happens, the refinance usually results in hundreds of dollars
of savings each and every month. That savings typically dwarfs any
inflation from food, energy, et al.
Though we give increases in price lots of lip service, for many
people it's just not as big a deal as we make it out to be. For
example, let's look at energy costs. A full $1.00 increase in gas
prices probably adds $10-15 per week in cost for many folks. That's
a monster inflationary 25-35% hike in gas prices! However, that
increase in costs is easily covered by one less meal at a local
restaurant, for one example; hardly a huge impact in the overall
scheme of things.
Granted, there are households where the impact is greater, far greater.
Those living on fixed incomes have few alternatives if prices rise
sharply. Certainly, there are many who live paycheck-to-paycheck
without that extra $10-15 per week for added fuel costs. It is those
households for whom inflation is truly a significant concern. An
economy-wide view, however, still shows the two main drivers of
cost - wages and housing - as being far away from the worrisome
price increases that would spark true, broad-based inflation concerns.
Indeed, increasing housing prices (and wages) would be a welcome
change for most.
The intent of this information and commentary is not to set aside
the potential for very damaging inflation. That always exists and
becomes more possible as the Federal Reserve holds interest rates
down to try and stimulate further economic growth. Instead, the
intent is to encourage a broader view of inflation and move beyond
the typical one-liners about gas prices or the ever-increasing cost
of a latte.
For more detail on inflation and a next level of detail, we suggest
the following link and give thanks to Doug Short for his excellent
Where did the Quad-Q go?
Wednesday marked a sudden change in a close friend. The Nasdaq-100
ETF, widely known as the Quad-Q for its ticker symbol QQQQ, dropped
a 'Q' becoming the QQQ, ("Tri-Q"?). To be fair, QQQ used
to be the symbol for this favorite ETF when it once traded on the
American Stock Exchange ("Amex"). When the ETF moved over
to the Nasdaq exchange, it adopted the four-letter nomenclature
required by Nasdaq. As time has passed, those requirements have
been relaxed. Invesco, the large investment house now responsible
for the ETF, has decided to return to the original 3-letter name,
consistent with most stocks, which are also 3-letter tickers. QQQ
is the fourth largest ETF trading these days with over 60 million
shares changing hands each day. For us, with many data feeds built
to find the quad-letter version, we had a very busy week adjusting
to the new name. Don't worry Q, despite all that painful rearranging,
we're still friends.
Warm wishes and until next week.