Weighing The Week Ahead: Time To Digest?

Last week’s economic data included many reports but a similar message: Continuing growth, but a touch less than hoped for.

The big news came from the energy markets and the plunge in oil prices after the OPEC meeting. The knee-jerk reaction was to sell anything related to energy. This is surprising for several reasons:

The failure of OPEC to reach an agreement to curtail production was widely expected. Last week we found few taking the other side (although you can now expect some to claim victory after the fact). This is a classic case of information being “in the market.” When this happens we usually expect to see buy the rumor and sell the news (or the opposite in this case). Instead, the trading reaction was negative — -and not just by a little.

The selling in energy names was indiscriminate. Lower oil prices might be good for (some) refiners, for example, but they declined as well. Major integrated oil companies might be able to replenish reserves at lower cost. There was no analysis of this.

Many traders do not have access to futures markets. As a result they trade energy ETFs as a proxy.

I am expecting the week ahead to embrace three different themes:

A day or two of digestion – the OPEC meetings and economic data, with the “A Teams” back on the trading desks. We will also see some analyst reports that highlight the discrepancies I have noted above. That should get us through Tuesday.

A switch to the old standby – the Fed – as the beige book appears and pundits ponder the upcoming jobs report.

A late-week focus on jobs data. A key theme is whether good news about the economy will finally be good news for the market.

To summarize: This week is a time for digestion.

A Personal Message

Last week I offered some thanks to all of those who have helped us achieve a successful year. I also mentioned that I might take the weekend off or do an abbreviated version as we enjoyed some family time. I am trying to do the small version. My hope is that the abbreviated version is better than nothing. I always track everything going on and use it in my own planning. At the margin, I sometimes do not have time to write. Putting thoughts to pixels and (especially) providing the best of my supporting sources adds several hours to the post each week.

I hope that readers will find this abbreviated version to be helpful. If it is, I will try to repeat this approach on the other few occasions when I might otherwise miss completely. I am hitting the high spots on last week’s news, but I have included the updates on Felix and some investment ideas, including my own conclusions. Readers, especially those new to this series, will benefit from reading the background information.

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.

Overall News Summary

Last week’s economic news was mixed. Most of the reports (initial jobless claims, consumer sentiment, and durable goods) were small disappointments or marginal gains. There was no change to the general summary of modest growth.

Housing data were also mixed. New home sales beat expectations while pending sales disappointed. As always, I strongly recommend reading every report from Calculated Risk on all things housing. Here are Bill’s comments on new home sales, where he expects continuing increases.

The best news was from GDP, surprisingly revised higher to 3.9% for Q3. This is a backward look, but it does provide the foundation for future expectations. I especially enjoy Doug Short’s analysis of the components of GDP growth.