Jeff Miller

About the Author Jeff Miller

Jeff is the President of NewArc Investments Inc., manager of both individual and institutional investments. Jeff is a registered investment advisor, and portfolio manager for NewArc's investment programs. Jeff is a former college professor with a hands-on, real world attitude. His quantitative modeling helped inform state and local officials in Wisconsin for more than a decade. A Public Policy analyst, he taught advanced research methods at the University of Wisconsin, and analyzed many issues related to state tax policy. Jeff began in the financial business as Research Director for trading firm at the Chicago Board Options Exchange. He investigated anomalies in the standard option pricing models, taught classes for beginning options traders, and developed new forecasting techniques. In 1991 he established a general research consultancy, working with professional traders at all of the Chicago financial exchanges. In 1998 he started NewArc Investments, Inc. Jeff has a commitment to the specific needs of individual investors. NewArc offers five different programs. It is not a one-size-fits all approach, but one that emphasizes the unique circumstances of each client. Jeff also serves on the board of two small technology companies (currently Chairman at one). He is occasionally as an expert witness in legal cases involving financial markets and hedging.

Will the Fed Put the Brakes on the Breakout?

Prior Theme Recap

In my last WTWA I predicted that the market story would turn to housing, the subject of most of the week’s data. That proved to be one of my worst predictions! My discussion of the theme is intended as preparation for the media focus, not just my own opinion. My personal conclusion was that the housing story was important, but others did not think so. It did get reasonable attention, but earnings stories dominated, with secondary attention to Europe and China news. By Thursday, it was all about the market breakout and getting back to breakeven on the year. To get the full story, let us look at Doug Short’s weekly chart. You can clearly see the mid-week turnaround. (With the ever-increasing effects from foreign markets, you should also add Doug’s World Markets Weekend Update to your reading list).


While I take a weekly focus, Doug’s update provides multi-year context. See his full post for more excellent charts and analysis.

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.

This Week’s Theme

We have a huge economic calendar, with more important reports than we have seen in many weeks. Whenever the week includes a Fed meeting, we expect that to command attention. While most do not expect a policy change, it remains possible and could dominate market discussion until Wednesday afternoon. Much of the most important data will not be known (even by the Fed) until later in the week. This is a perfect setup for pundit pontification!

I expect a weeklong Fed focus, with everyone asking:

Will the Fed put the brakes on the breakout?

The question implies two parts:

  1. Will Fed policy change?
    1. Yes. A rate increase would merely move toward normal.
    2. No. There is no sign of inflation and economies are weak. (Noah Smith at Bloomberg View and Paul Kasriel of Norther Trust).
    3. No. It would create too much dollar strength. (Bloomberg)
    4. It is too late. The Fed should have acted when the economy was stronger.
  2. Does it matter?
    1. Yes. The market strength rests upon worldwide liquidity. Changing this could halt the rally.
    2. No. It is all about technical analysis and which wave we are in. (Avi Gilburt at MarketWatch).
    3. No. Fed policy has done little to help the economy, so gradual cuts will make little difference.
    4. No. The economy is strong enough to deal with higher rates. (Christopher Swann, CNBC).

There are sources taking each of these positions. I expect all to be cited in the week ahead.

As always, I have my own ideas, reported in today’s conclusion. But first, let us do our regular update of the last week’s news and data. 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:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

The news of the week was mostly good.

  • Government shutdown less likely. The apparent choice of Paul Ryan as House Speaker is a good signal on this front. Investors who join me as political agnostics should not care about the partisan issues, just the consequences. We know that the market hates the uncertainty brought on by a debate over raising the debt limit, so this is good news.
  • Jobless claims. The lowest four-week moving average since 1973. (Calculated Risk)
  • China GDP beats forecasts benefiting from stimulus. (Bloomberg)
  • Central bank policy. China took aggressive action, but ECB President Mario Draghi needed only words. Paul Vigna of the WSJcaptured the essence of the story in a few words:

    First there was the Fed, which backed off a rate hike in September, and seems unlikely to implement one at all this year. Earlier this week, the ECB chimed in, with President Mario Draghi dropping tea leaves the size of tires that the bank could and would expand its stimulus program later this year, if needed. Lastly, the PBOC joined the parade overnight. The People’s Bank made two powerful moves: it cut interest rates by 25 basis points, and cut the reserve-requirement ratio for banks. The ratio dictates how much money banks need to keep on hand. Cutting it is viewed as a very blunt and powerful way to push money into the economy. They needed to do something. China’s third-quarter GDP report was its worst showing since 2009, and most people think the real growth picture is even worse.

  • Housing data were strong. Calculated Risk reported updates and additional commentary on each report.
    • Existing home sales
    • Builder confidence
    • Mortgage applications
  • Earnings beat rate. 77% of stocks are beating reduced expectations. (FactSet)

The Bad

There was some negative data, including some of the important earnings stories.

  • Earnings commentary. The data showed success versus the lowered expectations, but the accompanying messages suggested continuing economic weakness. The weekly summary from Avondale is a helpful companion piece. They are using Seeking Alpha’s excellent transcript service, which now includes over 100,000 earnings calls. This is a great service that I use on my stocks. You should, too.
  • Housing permits declined.New Deal Democrat has a good story, noting that the overall trend is intact. This is an important indicator.
  • Bearish sentiment is declining (a contrary indicator). Bespoke has the story and helpful charts.


  • Earnings are poised for a second consecutive quarterly decline, currently estimated at 3.8% (FactSet)


The Ugly

Cheating in science and medicine. Faked data supporting academic articles with faked reviews and email addresses. (The New England Journal of Medicine). Perhaps authors should not be counted upon to suggest the reviewers? Sheesh!

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.  Think of The Lone Ranger. No award this week, despite the abundance of really bad analysis. I am thinking of starting a nominee section. This would include items that have obvious errors but which have not attracted any replies or refutation. Almost any two-variable chart these days is a candidate.

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.


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