FBIAS Market update for the week ending 6/23/2017

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 25.35, down from the prior week’s 25.88, after having earlier reached the level also reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) turned negative on January 15th, and remains in Cyclical Bear territory at 50.56, down from the prior week’s 52.03.

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In the intermediate picture:

The intermediate (weeks to months) indicator (see Fig. 4) turned negative on May 12th. The indicator ended the week at 28, down from the prior week’s 29. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is negative (Fig. 3), indicating a new Cyclical Bear may have arrived. The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.

In the markets:

The event that was never supposed to happen, happened. In a surprise upset, the people of the United Kingdom voted in favor of leaving the European Union. This triggered an avalanche of selling across global markets, all of which had rallied in anticipation of the “sure thing” win for the “Remain” side. On Friday the Dow plunged -610 points, erasing substantial gains from earlier in the week and a lot more, closing at 17,400, down -1.55%. The tech heavy NASDAQ composite fell -92 points, ending the week at 4,707, down -1.9%. The LargeCap S&P 500 dropped ‑1.63%. MidCaps and SmallCaps also lost ground, with the S&P 400 MidCap index giving up -1.5%, and the Russell 2000 small cap index also lost -1.5%. In a flight to safety, the defensive Utilities sector managed to avoid much of the carnage, down only -0.13%. The week’s declines brought the S&P 500, the Dow Jones Industrials, and the small cap Russell 2000 index all back into negative territory for the year to date (where the NASDAQ already was).

In international markets, Canada’s TSX fared relatively well with only a slight decline of -0.07%. In Europe, somewhat surprisingly the United Kingdom’s FTSE actually ended up at +1.95% (helped considerably by the plunge in the British Pound). However, on Europe’s mainland, Germany’s DAX ended down -0.77%, France’s CAC 40 gave up -2.08%, and Italy’s Milan FTSE plunged over -7%. In Asia, markets were mixed with China’s Shanghai Stock Exchange losing -1.07% and Japan’s Nikkei plunging over -4.15%. However, Hong Kong’s Hang Seng Index rose +0.44%.

In commodities, precious metals were strongly bid up in the wake of the Brexit vote, with Gold rising $17.50 to $1,319.10 an ounce, up +1.34% and silver rising $0.30 to $17.82 an ounce, up +1.71%. The industrial metal copper saw its second week of buying, up +3.14%. Crude oil continues to consolidate after its strong gains earlier in the year. West Texas Intermediate crude oil fell -$1.29 to $47.57 a barrel, down -2.64%.

In U.S. economic news, the number of Americans filing for unemployment benefits fell to a near-43 year low as weekly jobless claims fell 18,000 to 259,000. Economists polled by Reuters had forecast initial claims falling only to 270,000. Claims have now been below 300,000, a commonly accepted threshold of a strong job market, for 68 straight weeks– the longest streak since 1973. Continuing claims, a reading on the number of people receiving ongoing unemployment assistance, also fell by 20,000 to 2.14 million last week.

In housing, U.S. existing-home sales rose at the fastest pace since 2007. The National Association of Realtors reported that sales were up +1.8% last month to a seasonally-adjusted annual rate of 5.53 million. In addition, prices climbed to a new all-time high. The national median sales price for a previously owned home rose +4.7% from a year earlier to $239,700. Existing home sales make up roughly 90% of the housing market. Gregory Daco, head of US macroeconomics at Oxford Economics, stated that “housing demand is likely to remain solid in the coming months, underpinned by gradually strengthening wage growth and low mortgage rates.”

In contrast to existing-home sales, however, new-home sales declined -6% to an annualized 551,000 in May, according to the Commerce Department. The pullback wasn’t completely unexpected due to the outsized jump in new-home sales in April. While new-home sales are volatile and subject to heavy revision analysts point out that the overall trend remains up. The median price of a new home was $290,400, up 1% from a year ago. Throughout this tepid economic recovery homebuilders have been reluctant to resume the blistering pace of home-building that occurred prior to the housing bust.

In manufacturing, the Chicago Fed’s national economic index dropped sharply as factory output slowed. The index fell to -0.51 last month from a positive 0.05 in April. Most economists had expected an improved reading. The Chicago Fed index is a weighted average of 85 different economic indicators. All four broad categories of indicators decreased from April as weakness was broad-based. The index’s three month moving average, used by analysts to offer a clearer picture of the trend in economic activity, fell to -0.36, the lowest since August 2012.

In contrast to the Chicago Fed’s national report, the Kansas City Fed’s Regional Manufacturing Index rose +7 points to a positive 2 for June– the first positive reading in 18 months and all components were at their strongest levels for 2016. Specifically, the report noted a sharp improvement in the production index to 12 from -11 the previous month, with the components for shipments, new orders, and order backlogs all rising strongly.

American businesses were pulling back from purchasing new equipment as new orders for durable goods—airplanes, industrial machinery, and other products that are designed to last at least 3 years – fell a seasonally-adjusted ‑2.2% last month, according to the Commerce Department. That was a sharper decline than the ‑0.4% economists had forecast. While the drop was led by a -34% plunge in military-aircraft orders, orders were down across the board. Ex-transportation, orders fell -0.3%, and ex-defense spending, orders fell -0.9%. Barclay’s economist Jesse Hurwitz wrote in a note to clients that the report showed “broad-based and persistent softness across the U.S. manufacturing sector.” New orders for non-defense capital goods (a proxy for future business investment), also fell -0.7%.

In Europe, the Brexit vote dominated all market and economic news both before and (especially) after the vote became history. All markets were higher for the week before the vote, and all (save for the UK) were lower for the week after the vote.

The huge drop in the value of the British Pound was the single biggest move, hitting the lowest level versus the U.S. dollar since 1985.

The Eurozone manufacturing sector bounced in June. Markit’s Flash Manufacturing Purchasing Managers Index (PMI) rose to 52.6 in June, up +1.1 points from May and well above the expectation of 51.3. However, while manufacturing improved, the composite (manufacturing +services) PMI fell to a 17-month low of 52.8, down -0.3.

The German stock index, the DAX, fell -1000 points after the Brexit vote, the biggest drop since the financial crisis in 2008, and finished the day down -700. Key business groups in Germany have said that the uncertainty will hit the German economy particularly hard. The president of the Federation of German Wholesale, Foreign Trade and Services, Anton Barber said “Brexit has happened in a time of uncertainty. That is poison for the economy.” German industry is particularly concerned about any effects on trade with the UK, which is its third-biggest export market.

In Japan, representatives of the Japanese government and the Bank of Japan are set to hold meetings over the weekend to analyze the economic impact of Britain’s exit from the European Union. The focus of the meeting will be its impact on the global economy, negative effects on the yen, and the interests of the many Japanese companies on British territory. Japanese finance minister Taro Aso said his government will take “firm action on the yen, if needed”, however he stopped short of promising currency intervention or whether Japan had already intervened in the market.

In China, analysts are concerned that China may feel the effects of the “Brexit” vote particularly strongly. Over the years, Britain has played a significant role in promoting Chinese relations with the European Union, which has become China’s largest trading partner. Britain’s exit may lead to difficult trade and investment agreements between China and the bloc. He Weiwen, co-director of the China-US-EU Study Centre under China’s Ministry of Commerce stated “The European Union [without the presence of Britain] is likely to adopt a more protectionist approach when dealing with China. [The cooperation between China and the EU] may become more difficult.”

Finally, attempts at forecasting future market returns over coming 10-year periods have mostly focused on measurements of market valuation. The well-known Cyclically-Adjusted Price-to-Earnings ratio (CAPE) is a prominent example. Another is Warren Buffett’s favorite: US stock market capitalization divided by US GDP. Both have good records of predicting future returns when at high or low extremes – and both are predicting poor returns over the next 10 years.

clip_image002But one with an even better statistical correlation to future returns (an “r-squared” of 0.91, for you geeks), does not use market valuation at all! Rather, it is based on the percentage of all household financial assets that are invested in the stock market. The higher the percentage, the lower future returns. Currently, households are at the high end of the historical range, at 52% vs the long-term median of 44%. This level portends future 10-year annualized returns of slightly less than 4%, joining the late 60’s, 2000 and 2007 as years with similar readings.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 12,5, down from the prior week’s 10.8, while the average ranking of Offensive DIME sectors rose to 10.8 from the prior week’s 11.8. The Offensive DIME sectors now lead the Defensive DIME sectors by a small margin. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE  at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®

 

 

FBIAS™ market update for the week ending 6/16/2017

FBIAS™ market update for the week ending 6/16/2017

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 29.81, up slightly from the prior week’s 29.79, and now exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 69.08, up from the prior week’s 68.72.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 22, down from the prior week’s 23. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering April, indicating positive prospects for equities in the second quarter of 2017.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: The major U.S. market indexes ended the week mixed. The tech-heavy Nasdaq Composite index had its second down week as the sell-off in mega-cap tech shares continued to weigh on the market. Of note, the Nasdaq’s so-called FAANG companies of Facebook, Amazon, Apple, Netflix, and Google represent well over $2 trillion in market capitalization alone. For the week, the Dow Jones Industrial Average gained half a percent to close at 21,384. The Nasdaq fell -0.9%, or 56 points, ending the week at 6,151. By market cap, large caps outperformed their smaller cap brethren. The S&P 500 large cap index was essentially flat, rising 0.06%, while the S&P 400 mid cap index fell -0.23%, and the small cap Russell 2000 retreated -1.05%.

International Markets: Canada’s TSX fell -1.8%, giving up this year’s gains. The United Kingdom’s FTSE also ended the week down by pulling back -0.8%. Major markets ended in the red across the board on Europe’s mainland. France’s CAC 40 retreated -0.69%, Germany’s DAX fell -0.49%, and Italy’s Milan FTSE gave up -0.86%. Markets were red in Asia as well. China’s Shanghai Composite fell -1.1%, along with Japan’s Nikkei which declined -0.35% and Hong Kong’s Hang Seng which retreated -1.55%. As grouped by Morgan Stanley Capital Indexes, developed international markets ticked up 0.1% for the week, while emerging markets declined -0.9%.

Commodities: Precious metals experienced their second down week. Gold fell -$14.90 to $1256.50 an ounce, a decline of -1.17%. Silver, gold’s more volatile cousin, also finished the week down, falling -3.26% to $16.66 an ounce. Oil had its fourth straight week of losses, retreating -1.88% to close at $44.97 per barrel of West Texas Intermediate crude oil. Copper, seen by some analysts as an indicator of worldwide economic health, retraced last week’s gain by retreating -3.23%.

U.S. Economic News: The number of Americans applying for first time unemployment benefits fell 8,000 to 237,000 last week, according to the Labor Department. New applications for benefits have remained under the key 300,000 threshold, used by analysts to indicate a “healthy” jobs market, for 119 straight weeks—its longest run since the early 1970’s. In addition, the number of people already receiving unemployment checks totaled less than 2 million for its ninth straight week. The last time these so-called continuing claims remained under 2 million for this long was in 1973. Combined, the total number of people applying for unemployment benefits and those already receiving them is now at a 45-year low.

Confidence among the nation’s home builders ticked down slightly in June, but remained near historically high levels according to the National Association of Home Builders (NAHB)/Wells Fargo housing market index. The NAHB’s housing market index fell 2 points to 67, after a downward revision May’s earlier-reported reading of 70. Any readings over 50 indicate that more builders view conditions as improving. In the details, the components measuring current sales conditions fell 2 points to 73, along with the index measuring sales expectations in the next six months, which also fell 2 points to 76. The measure of buyer traffic likewise retreated 2 points to 49.

The National Federation of Independent Business (NFIB) said its small-business optimism index remained steady at 104.5 in May from the prior month. The flat reading was seen as a positive by analysts as the sentiment index had fallen for three straight declines the prior month. Business owners are waiting for action in Washington regarding tax relief and rising healthcare costs. NFIB President Juanita Duggan said small business owners remain optimistic that tax and healthcare reforms can pass Congress. Confidence among small-business owners still remains at historically high readings following December’s surge by the largest amount in the 40-year history of the survey. In the details, five of the ten index components gained, four declined, and one remained unchanged. Of concern, only a net 28% of owners plan on making capital outlays—well below historic levels.

Inflation at the wholesale level remained flat last month following the sharp 0.5% increase in April, according to the Bureau of Labor Statistics. Lower costs for gasoline and other fuels kept in check upward price pressures in other areas of the economy. Inflation is becoming more widespread this year after being negligible for most of 2016. The 12-month rate of wholesale inflation stood at 2.4% in May, up from zero a year earlier and just a notch below a five-year high. Stripping out the volatile energy, food, and retail trade margins, core wholesale costs fell 0.1%. The core rate of inflation was up 2.1% over the past 12 months—this is the measure that gets the most attention from Wall Street and the Fed.

For American consumers, the cost of goods and services fell last month for the second time in three months as inflation for consumers continued to recede. The Consumer Price Index, known as the cost of living fell a seasonally-adjusted 0.1% last month with the drop in the price of gasoline (again) playing a major role. For consumers, the rate of inflation over the past 12 months slowed to a 1.9% back under the Federal Reserve’s 2% target. Despite the retreat the Federal Reserve still voted to hike interest rates at its meeting this week, due in large part to the surge in price pressures that accelerated at the end of last year. In the details of the report, gas prices sank 6.4%, while the cost of food rose for the fifth straight month. Stripping out the volatile food and energy categories, the so-called core CPI rose 0.1% in May. Over the last 12 months, the core CPI fell to 1.7% in May from 1.9% in April.

Retailers in the United States reported their biggest decline in sales in 16 months with auto dealers and gasoline retailers bearing the brunt of the weakness. The reversal last month retraced most of April’s 0.4% jump in sales. Overall, retail sales continue to increase at a pace consistent with the steady growth in the U.S. economy. Sales are up 3.9% in the first five months of 2017 compared to the same period in 2016. Gus Faucher, chief economist at PNC Financial Services stated, “More jobs, rising wages, low inflation, rising home sales, and low interest rates will continue to push consumer spending forward in 2017.” Stripping out auto and gasoline sales, retail sales were unchanged according to the Commerce Department. The bright spot of the report continued to be internet sales, with an increase of 0.8%. Shoppers continued their migration from brick-and-mortar stores to internet retailers as traditional department store sales fell sharply, losing 1% in May—their worst performance in almost a year.

The Federal Reserve lifted a key interest rate and laid out its plan to shrink its massive $4.5 trillion balance sheet this week. In a move that was widely expected, the Fed raised its benchmark federal-funds rate by a quarter percentage point to 1-1.25%–its third increase in a year and a half. The move will increase the cost of borrowing for consumers and business to help stave off the threat of excessive inflation and an overheated economy. Senior Fed officials also reiterated their intention to raise interest rates just one more time this year in the face of the unexpected recent softening in inflation data. The recent weak data gives the central bank the latitude to proceed more slowly with rate hikes if it so desires. Paul Ashworth, chief U.S. economist at Capital Economics stated, “The recent run of weaker core inflation readings has clearly rattled some Fed officials.” Still, Fed Chair Janet Yellen and other prominent members point to the tight labor market as a sign that price pressures are more likely to intensify. “Conditions are in place for inflation to move up,” Yellen said in a press conference after the Fed action.

In the “City of Brotherly Love”, the Philadelphia Fed’s manufacturing index retreated 11.2 points this month to 27.6. The reading was seen as a positive because economists had expected the index to fall to 24. The decline was expected following May’s second strongest reading in almost 30 years. In the details, a slowdown in the pace of shipment growth was responsible for most of the decline. The shipments index tumbled to 28.5 from 39.1 in May. On a positive note, new orders ticked up to 25.9 from 25.4 in the previous month.

In New York, manufacturing rebounded to its highest level since 2014 in a further sign of strength for the nation’s factories. The New York Fed’s Empire State index rose over 20 points to 19.8 in June from -1 in May. The new orders index rose to 18.1 after a -4.4 reading last month. The Empire State index only tracks factory activity in New York, but economists use the data as an early indication of factory output nationwide. The Empire State Index has risen seven of the last eight months. The reading is compiled from a survey of about 200 manufacturers in New York State.

International Economic News: After two years, Canada’s economy appears to be taking a positive turn. According to the latest Royal Bank of Canada Economic Outlook, consumer spending, housing starts, and a strong turnaround in business investment are largely responsible for the continued momentum that continues to build on last year’s gains. Bank of Canada governor Stephen Poloz said the economy is rebounding on a variety of fronts suggesting that the interest rate cuts put in place in 2015 “have largely done their work.” Senior Deputy Governor Carolyn Wilkins said that Canada’s economy is picking up after a period of low oil prices in 2014. The Bank of Canada is assessing whether further economic stimulus is still required, she said. Poloz refused to make any predictions about whether that means Canadians should expect a rate hike in the near future. Naysayers, however, point to the overheated real estate market as a bomb waiting to detonate the Canadian economy.

In the United Kingdom, the Bank of England came closer to raising interest rates this week than at any time over the past six years according to its rate-setting Monetary Policy Committee (MPC). In an unexpectedly close vote, MPC members voted 5-3 to keep rates at their historic low of 0.25% on the grounds that the U.K. economy’s recent weakness would keep inflation under control. In its statement, all of the MPC members agreed that the “inflation overshoot relative to the (bank’s 2%) target could be more pronounced than previously thought.” The committee was split on whether there were enough signs of life in the economy to offset the recent weakness in consumer spending from slowing wage growth and rising inflation.

On Europe’s mainland, the Bank of France maintained its second quarter GDP growth forecast of 0.5%. In addition, it anticipated an increase in the services and construction sectors for June. The central bank’s business climate survey for the manufacturing industry came in at 105, matching April’s reading of its highest level in six years. Its business climate indicator for services reading was 101, also matching April’s number.

In Germany, apparently what’s good for Germans is what’s good for the EU. According to a paper released by Swiss-based consultancy Prognos, the German economy is responsible for 4.8 million jobs in all of Europe. The paper asserts that high demand in Germany does not slow development in neighboring countries, but actually is an important driving force behind their growth. The Bavarian Industry Association (BIA) requested the report because of the continued criticism of Germany’s current account surplus from U.S. President Donald Trump and other world leaders. In 2015, Germany imported goods worth around $620 billion (555 billion euros) from other EU countries. A downturn in the German economy would have the effect of lowering economic output across the European Union by 36 billion euros by 2023. “Our study debunks the myth that German economic competitiveness harms our neighbors,” says Bertram Brossardt, head of the BIA.

In Asia, the International Monetary Fund (IMF) reported China’s economy generally remained on solid footing but tighter monetary policy, a cooling housing market, and slowing investment will weigh on the nation’s economy in the coming months. Still, Beijing is expected to meet its annual 6.5% annual economic growth target. The IMF raised its growth forecast for the country to 6.7% as it recommended China accelerate reforms and rein in credit. Economists at Nomura forecast China’s economy will grow an annual 6.8% in the second quarter, only marginally less than the 6.9 percent in the first quarter and providing enough momentum to achieve the government’s full-year target even if there is some second-half softening.

In Japan, the Bank of Japan voted to keep its lax monetary policy intact noting that its policies were supporting improvement in the world’s third largest economy. A statement issued by the central bank said it expects demand to accelerate as the central bank held its key interest rate at an ultralow -0.1%. Of interest, U.S. pension giant TIAA plans to invest about $1 billion in Japanese real-estate. The pension is betting that “Abenomics”, has put the Japanese economy in a position that it will see solid growth in the coming years. The nearly 100-year-old firm, known for offering retirement products to teachers, plans to invest in retail and logistic sites around Tokyo and Osaka. “For the global markets that we’re looking at, the story in Japan, particularly in Tokyo, looks really interesting,” Harry Tan, head of research for Asia Pacific at TH Real Estate, TIAA’s real estate arm.

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Finally: As the stock market continues to grind higher and investors become more complacent we turn our attention to one data point that has remained a “stubbornly fail-safe marker” of economic contraction since 1960. Every time Commercial & Industrial (C&I) loan balances have declined or stagnated—a recession was already in progress or was imminent. This can be seen in the following graphic, from Zero Hedge using Federal Reserve data.

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On a year-over-year basis, after growing at a 7% year over year pace at the beginning of 2017, the latest bank loan update from the Fed showed that the annual rate of increase in C&I loans is down to just 1.6%–its lowest since 2011. Should the rate of loan growth deceleration persist, in roughly four to six weeks the U.S. would post its first year-over-year loan contraction since the financial crisis. This graphic illustrates how steep the decline has been.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 8.00 from the prior week’s 8.50, while the average ranking of Offensive DIME sectors fell to 16.75 from the prior week’s 14.75. The Defensive SHUT sectors further widened their lead over the Offensive DIME sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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Why you need a Retirement Income Road Map

Retirement is a series of irrevocable decisions, make sure that you have a Retirement Income Road Map from Anthony Capital, LLC to help guide you through the process.

retiremenet Income road map

What exactly is a Retirement Road Map?

noun
  1. a map, especially one designed for retirees, showing the income sources that they will have in retirement.
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8 Boxes Matrix--JUDE-PNG

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FBIAS™ Market update for the week ending 3/3/2017

 

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 29.36, little changed from the prior week’s 29.34, and now exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 74.28 up from the prior week’s 72.17.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 33, unchanged from the prior week. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Positive.

In the markets:

The major U.S. indexes ended flat to modestly higher, mostly on the back of an impressive rally on Wednesday. The Dow Jones Industrial Average performed the best for the week, adding +183.95 points to close at 21,005. The technology-heavy NASDAQ Composite rose +0.44% to end the week at 5870. By market cap, large caps edged smaller caps. The LargeCap S&P 500 logged its fifth straight weekly gain, rising +0.67%, while the S&P 400 MidCap index added only +0.16%, and the SmallCap Russell 2000 trailed the others by ending the week down -0.03%.

In international markets, Canada’s TSX rebounded from last week’s weakness by rising +0.48%. Across the Atlantic, the United Kingdom’s FTSE surged +1.8% to an all-time high. On Europe’s mainland, major markets logged a very positive week. France’s CAC 40 jumped +3.09%, Germany’s DAX gained +1.89%, and Italy’s Milan FTSE surged +5.74%. In Asia, China’s Shanghai Composite index slumped -1.08%, while Japan’s Nikkei was up +0.96%. As defined by Morgan Stanley Capital International, emerging markets as a group ended down -0.8%, while developed markets as a group rose +0.9%.

In commodities, precious metals gave up their luster from the past few weeks. Gold fell for the first time in 5 weeks, falling -2.53% to $1,226.50 an ounce. Likewise, Silver gave up its gains of the last few weeks by falling ‑3.62% to $17.74 an ounce. The industrial metal copper remained essentially flat, rising just +0.02%. Oil continued trading in a narrow $52-$55 range, falling -1.22% to $53.33 a barrel for West Texas Intermediate crude oil.

In U.S. economic news, the number of Americans who applied for unemployment benefits last week fell by 19,000 to just 223,000—a new post-recession low. The low number of jobless claims reflects the strength of the U.S. labor market. New claims have been under the key 300,000 threshold that analysts use to define a healthy job market for 104 straight weeks, according to the Labor Department. The less-volatile smoothed four-week average of initial claims dropped by -6,250 to 234,250. That number is at its lowest level since April of 1973. Companies continue to report difficulty finding skilled workers to hire.

The National Association of Realtors (NAR) reported that its gauge of pending home sales fell in January as the market felt the weight of insufficient inventory and rising prices. The NAR’s index fell ‑2.8% to 106.4—its lowest level in a year. The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. Housing markets were mixed by region. The Northeast and South saw gains of +2.3% and +0.4%, respectively, while in the Midwest and West, the index plunged ‑5% and ‑9.8%, respectively.

Home prices surged higher in December. The S&P/Case-Shiller 20-city index rose +5.6% in the three-month period ending in December, compared to a year ago. The broader national index was up +5.8% for the year in December, the biggest increase in two and half years. In the S&P/Case-Shiller report, the hottest markets were once again in the West: Seattle, Portland, and Denver saw home price increases of +10.8%, +10%, and +8.9%, respectively. The national price index is now +0.5% higher than its previous peak in July 2006, while the 20-city index is still 6.7% lower.

Manufacturing in the Chicago area surged higher last month. The Chicago Purchasing Managers Index (PMI) for February rose +7.1 points to 57.4 in February, its highest reading in more than 2 years. It was the indicator’s biggest single month gain since early 2016. The new orders PMI component jumped by +10.1 points, while the production gauge rose to a 13-month high. In addition, the prices-paid PMI component gained +7.2 points to 68.6—its highest level in two and half years. Commenting on the report, Shaily Mittal, senior economist at MNI Indicators, stated “With inflationary pressures on the rise and the job market having improved, the next rate hike could come soon, possibly in the coming quarter.”

The Institute for Supply Management (ISM) reported its national manufacturing index rose +1.5% to 57.5 in January, to its highest reading since August 2014. According to the report, 17 out of the 18 industries tracked showed growth. Textile mills and apparel, leather and allied products led industry growth, while furniture and related products were the only laggards. Looking at the individual components, the new-orders index rose +4.7 points to 65.1, while the production index added +1.5 point to 62.9. As with the PMI reports, ISM reports use a scale in which readings above 50 indicate expansion.

Business investment got off to a weak start at the beginning of the year, according to one closely-watched measure from the Commerce Department. The Commerce Department reported that orders for durable goods rose +1.8% in January, but the gain was due to a spike in orders for commercial and military aircraft. Non-defense capital goods orders excluding aircraft – or “core” capital goods orders – dropped -0.4% in January. Some analysts view the weakness as a sign that businesses are awaiting new policies by the Trump administration before acting; but most aren’t sounding the alarm just yet. Stephen Stanley, chief economist at Amherst Pierpont Securities stated, “My view on business investment remains that there is a good deal of pent-up energy that had been held back by an adverse and uncertain policy environment.”

The service side of the economy that employs the vast majority of Americans expanded last month at its fastest rate in over a year. The Institute for Supply Management’s (ISM) non-manufacturing index rose to 57.6 in February, up +1.1% from January. Sixteen of the eighteen sectors tracked by ISM expanded last month, the highest number since the middle of 2014, according to the survey. In the details of the report, the business activity index rose +3.3 points to 63.6, while the new orders index added +2.6 points to 61.2. Anthony Nieves, chair of ISM said, “Respondents’ comments continue to be mixed, with some uncertainty; however, the majority indicate a positive outlook on business conditions and the overall economy.”

Consumers are the most confident in the U.S. economy in over 15 years, supported by the strongest job market since 2007 and a surging stock market. The Conference Board reported that its survey of consumer confidence rose to 114.8 in February, up +3.2 points from January. The robust job market has lifted the spirits of consumers—the share of respondents who said jobs were “hard to get” fell to an eight-year low of just 20.3%. Millions of Americans have found new jobs since 2010, bringing the unemployment rate down to below 5% and forcing companies to increase wages and benefits. Analysts note that the rise in consumer confidence is particularly notable given the bitter and divisive presidential election. President Trump has promised tax cuts, reductions in regulations, and increased spending for public works. The measure that asks respondents of their expectations for the next 6 months increased +3.1 points to 102.4. Lynn Franco, director of economic indicators at the board remarked, “Overall, consumers expect the economy to continue expanding in the months ahead.”

GDP remained at 1.9% in the fourth quarter of last year—weighed down by a larger trade deficit that offset a surge in consumer-spending. Data from the Commerce Department showed that consumer spending increased +3% in the fourth quarter, 0.5% more than initially reported. Yet the increase was offset by smaller increases in business investment and state and local government spending. As a result GDP was unchanged from its original estimate. In the details of the report, a large portion of the upward revision was due to higher spending on new cars and trucks, which bode well for the economy. Automobile sales typically improve as the economy strengthens. However, the bulk of the increase was due to spending on health care. The rising cost of health care coverage continues to eat into the budgets of U.S. households.

The higher cost of gasoline and other products pushed the level of inflation to its highest level since 2012. The Federal Reserve’s preferred inflation measure, known as the Personal Consumption Expenditures (PCE) price index jumped +0.4% in January. The index is up +1.9% over the last 12 months, matching its highest year-over-year level since October 2012. The rate of inflation is now close to the Fed’s 2% long-term target. A move higher could push the central bank to raise interest rates more aggressively. The rise in inflation over the last year has been mostly correlated with the increase in the cost of oil; however other staples such as healthcare and the cost of rents have also increased. The Core PCE index that strips out the cost of food and energy has been more stable. That index was up +0.3% in January, and has remained between 1.6% and 1.7% over the last 13 months.

In a speech Friday, Federal Reserve Chairwoman Janet Yellen stated that an interest-rate hike at the next policy meeting in less than two weeks is “likely”. In a speech to the Executives’ Club of Chicago, Yellen stated, “At our meeting later this month, the Federal Open Market Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the Federal funds rate would likely be appropriate.” Yellen’s remarks followed similar comments from other Fed officials. Most notably, New York Fed President William Dudley said on Tuesday that the case for an interest rate increase for March had become a “lot more compelling”. Todd Lowenstein, head of research at HighMark Capital Management remarked, “The market views this as normalization, not a tightening, and as a consequence it will not derail the economy.”

In international news, the Canadian economy gained momentum in the fourth quarter of last year, rising at a +2.6% annualized rate, according to Statistics Canada. In the report, the single biggest driver of GDP growth was the increase of +0.6% in household consumption. But business investment fell for its ninth consecutive quarter, falling -2.1%. The final number was a retreat from the 3.8% annualized rate set the third quarter, following the rebound in the energy industry after the Fort McMurray wildfires. Brian DePratto, senior economist with TD Economics released a note to clients stating “Canadians opened their wallets both at stores and construction offices, delivering a solid fourth-quarter economic performance.”

In the United Kingdom, British Prime Minister Theresa May said there was economic case for breaking up the United Kingdom following remarks by Scottish nationalists pushing for independence. Since last year’s Brexit vote, Scottish National Party leader Nicola Sturgeon has repeatedly said she could push for a new independence referendum if the country is forced into a clean break with the bloc. May told her Conservative Party’s Scottish conference, “The economic case for the union has never been stronger. There is no economic case for breaking up the United Kingdom, or of loosening the ties which bind us together.”

In France, presidential candidate Marine Le Pen laid out a plan envisioning the “protective hand of the state” to guide a reordered economy that punishes companies that fail to serve the interests of the country and rewards those that put France first. In a speech, Le Pen laid out her policies based on “economic patriotism” that would be enacted if she wins the two-round presidential election. The plan includes a tax of 35% for French companies that produce their goods elsewhere and then reimport them. Companies that manufacture products in France would be compensated. She said, “No country has ever succeeded in building its industry without protecting it.”

In Germany, a new report has shown the poverty rate is breaking new records in Germany, even as GDP continues to grow. Several of Germany’s major charities have called for a “rigorous change of course” in the government’s tax and finance policies to fight growing poverty. The poverty rate reached a new record level of 15.7% in 2015, according to a report entitled “Human dignity is a human right” by an alliance of organizations called the Paritatische Gesamtverband. While the charities are calling for better redistribution of wealth, some economists say factors like immigration are likely playing a large role.

China is working on various infrastructure projects around the world in an ambitious desire to be the world’s next economic superpower, at the same time that President Trump is turning his back on globalization. This year, a 300-mile railway will begin transporting people through Kenya from the capital Nairobi to one of East Africa’s largest ports, Mombasa. The formerly 12-hour trip will now take only 4 hours, and it is hoped the train will lead to an economic and tourism revival in the region. China Road and Bridge, a state-owned enterprise, leads the construction of the $13.8 billion project. Trump’s pivot to economic nationalism and disdain of multilateral trade deals creates an opportunity for China, says Louis Kuijs, head of Asia Economics at Oxford Economics, who states, “As the U.S. becomes more insular in economic philosophy, I think it gives China one more reason to say, ‘We are still interested, and we want to continue globalization.’ ”

In Japan, factory output unexpectedly fell -0.8% in January, its first decline in 6 months and the latest in a series of economic concerns for the world’s number three economy. The figure missed economists’ expectations of a +0.4% expansion and came a week after Japan registered its first trade deficit in almost six months. Taro Saito, director of economic research at the NLI Research Institute said, “This is a reminder to be cautious for those who have been upbeat on Japan’s economy.” Although production of electronics expanded the first month of the year, it was offset by a decline in vehicle production.

Finally, here’s a cautionary tale that should remind us that “nothing is forever”. Everyone knows that one of the original smartphone pioneers was Blackberry. In fact, for some time, it was the dominant smartphone. Back in 2011, Blackberry’s handset sales peaked at over 52 million units. But as iPhone and Android sales gained ground, Blackberry’s share of the market slid precipitously. The reasons are myriad, but in short Blackberry devices were surpassed by the hardware and most importantly the apps and software available for the Apple iPhone and Google Android devices. Despite numerous attempts featuring new hardware and software, Blackberry has never been able to regain even a shadow of its former glory. In the final quarter of last year, Blackberry hit a terrible milestone by recording a 0.0% (rounded) market share of the smartphone market, according to research firm Gartner. The chart below, from Gartner and tech research firm Recode, illustrates the steep decline to effectively zero.

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose sharply to 16.75 from the prior week’s 21.75, while the average ranking of Offensive DIME sectors slipped to 17.50 from the prior week’s 16.75. The Defensive SHUT sectors have overtaken and now lead the Offensive DIME sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks

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clip_image006Fig. 1

Fig. 2

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Fig. 3

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Fig. 4

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Fig. 5

How to make sure that the IRA distribution / withdrawal from your IRA won’t be taxed when you roll it over to a new IRA with 60 days

Moving money between two IRA accounts can sometimes be a tricky endeavor, and it is critical that you understand your transfer options to make sure that you don’t cause yourself any unnecessary taxes on whatever it is that you are trying to do.

For most individuals, moving money from one IRA custodian to another IRA custodian occurs when they are switching advisors  or money managers. You might have an IRA at Fidelity, but want to move your account to an IRA at Vanguard, and this process is completed by what is know as a “trustee to trustee” transfer.

The paperwork process to complete this transaction is fairly simple:

  1. Open a new IRA account at the brokerage firm / custodian of your choice
  2. Fill out the Trustee to Trustee IRA transfer paperwork
  3. Your new IRA firm will then submit your signed request to your old IRA company, and your IRA assets will then be transferred over tax free.

For example: 

You have an IRA at Fidelity, and you want to open up a new account with Anthony Capital to take advantage of their FBIAS™ Fact Based Investment Allocation Strategy portfolios that are risk managed. You would open up a new IRA account at the custodian that we use, Interactive Brokers by clicking on THIS LINK, and then request to transfer the account positions over via the Trustee to Trustee transfer process.. Viola! Piece of Cake!

What if you have cashed out your IRA? How do you put the money back in to an IRA and not pay taxes on it?

If you’ve withdrawn monies from your IRA, you have 60 days to put the monies back in another IRA before it will be deemed as Ordinary Income on your 1040 tax return and you’ll be liable for the taxes. To prevent that from happening you’ll need to do the following:

  1. Report the amount of distribution on line 15(a) of Form 1040 as a non taxable distribution.

1040-screen-shot

Because you cashed in your IRA, your old broker/custodian will send you a 1099 form for that tax year and will report this distribution as ordinary income to the IRS. You want to fill out line 15a on your 1040 form to acknowledge that you did take a distribution, but it should not be taxable because you have deposited the monies into a new IRA with in 60 days. As long as you redeposit the entire amount, within 60 days, it won’t be taxable–hooray!

For example–If you took out $100,000 from your IRA, then you’d list $100,000 on Line 15a.

2. Write ROLLOVER next to line 15b to indicate to the IRS that you transferred the money to a new IRA account. You want to make it easy for them to know that you did not spend the money!

3. Make sure that your new IRA custodian reports this $100,000 IRA on the IRS Form 5498

When you deposit money into your new IRA, make sure to tell them the money is coming from another IRA account and that you are doing it within the 60 day rollover window. Your new IRA company will send you and the IRS, Form 5498, IRA Contribution Information, which resembles the Form W-2 that businesses use to report wages to the IRS. The form is used to not only report IRA contributions to the IRS (box 1), but also IRA rollover contributions (box 2) that satisfy the 60 day rollover rule.

form-5498This form is required to be sent to you by May 31st following the year that the contribution was made. Since your tax return form is due April 15th, it is not meant to help you report your contribution/60 day rollover, since the information you provided on your Form 1040 line 15a would have done this, rather it is used to help the IRS make sure that the amount of IRA deductions on the IRA owners’ tax returns matches the trustee reports.

You don’t need to do anything with the form itself, meaning you don’t attach it and send it in with your tax return, but you should keep it for your records and make sure that your new IRA custodian sends it to the IRS.

Hope that helps! Now that you have your money inside of your IRA, you should look at some proactive money management strategies to invest your money, like FBIAS™ Fact Based Investment Allocation Strategies. These is a risk-managed investment process that seeks to profit in bull markets and protect profits in bear markets.

If you have any questions, please reach out to an Anthony Capital, LLC advisor today!

Success!

Dave Anthony, CFP®, RMA®

 

FBIAS™ Market Update for the week ending 12-23-2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.99, up from the prior week’s 27.92, and now exceeding the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 62.01, up from the prior week’s 60.94.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, unchanged from the prior week. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

After a strong start, the major equity indexes drifted lower and ended the week only marginally higher. The Dow Jones Industrial Average rose for a 7th straight week, adding +90 points to close at 19933. The Dow is inching closer to the psychologically-significant 20,000 level, up +0.46% for the week. The LargeCap S&P 500 edged higher by +0.25%, while the S&P 400 MidCap and Russell 2000 SmallCap indexes rose +0.35% and +0.52% respectively, continuing their 2016 outperformance relative to the LargeCaps.

In international markets, Canada’s TSX advanced +0.5%. Across the Atlantic, the United Kingdom’s FTSE rose for a third consecutive week, gaining +0.8%. On Europe’s mainland, France’s CAC 40 added +0.13%, Germany’s DAX gained +0.4%, and Italy’s Milan FTSE rose a fifth straight week, up 1.74%. In Asia, a mixed bag: Japan’s Nikkei had its seventh consecutive week of gains, rising +0.14%, China’s Shanghai Composite suffered a fourth straight week of losses losing -0.4%, and Hong Kong’s Hang Seng fell -2%. As a group, developed markets (as measured by the MSCI Developed Markets Index) rose +0.25%, while emerging markets (as measured by the MSCI Emerging Markets Index) fell -1.36%.

In commodities, precious metals are still searching for a bottom as Gold fell another -$3.80 an ounce to $1,133.60, and Silver caught up to Gold’s weakness losing -2.8% to end the week at $15.76 an ounce. Oil was basically flat, rising +$0.07 to $53.02 a barrel for West Texas Intermediate crude. Coincident with the rebound in oil prices, the number of U.S. previously-idled oil rigs going back into production surged to its highest level since January.

In U.S. economic news, the Labor Department reported that the number of newly unemployed jumped to the highest level since early summer. Initial jobless claims rose a seasonally-adjusted 21,000 to 275,000, a 6-month high. However, it also marks the 94th consecutive week of initial claims below 300,000—a threshold many analysts use as the sign of a healthy job market. Continuing jobless claims, the number of unemployed already receiving benefits, fell by almost 79,000 to 2.04 million.

Sales of previously owned U.S. homes rose +0.7% last month to an annual pace of 5.61 million, according to the National Association of Realtors (NAR). Analysts noted that higher prices and lean inventories continue to weigh on the housing market. NAR Chief Economist Lawrence Yun noted the “big obstacle is the ongoing housing shortage”. At the current pace of sales, there is a just a 4 month supply of homes on the market, compared to the more-desirable 6 month supply. The shortage of homes is pushing prices up: the median home price across the country is $234,900, an increase of +6.8% over November of last year. Sales were mixed regionally. In the Northeast, sales increased +8% accompanying a +1.4% gain in the South. The Midwest and West both declined, ‑2.2% and -1.6% respectively. First-time buyers made up 32% of all purchases last month.

Sales of new homes jumped last month to its second-highest pace since early 2008, another sign of robust housing demand. The Commerce Department reported that sales ran at a 592,000 seasonally-adjusted annual rate, up +5.2% from October and up +16.5% from this time last year. The median sales price was $305,400 in November, up $2,700 from October. The stronger sales continued to deplete the supply of new homes for sale, with 5.1 months’ worth of new homes available for sale last month, down from 5.4 months a year ago.

U.S. Consumer spending slowed in November after several months of gains as income growth flattened. Personal incomes were unchanged and spending rose +0.2%, according to the Commerce Department. Inflation also remained unchanged. The personal consumption expenditures (PCE) index rose +1.4% compared to this time last year. The PCE price index is the favored inflation gauge of the Federal Reserve. Ex-food and energy, the index is up +1.6% – a retreat from the +1.8% annual increase in October and a step further away from the Fed’s 2% target.

Confidence among consumers continued the surge following the election of Donald Trump to President, hitting its highest level in 12 years. The University of Michigan’s Consumer Sentiment index rose to 98.2, up a steep 5 points from November. The index is now at its highest level since January of 2004. Survey respondents stated that they expected a stronger economy that would create more jobs. Blerina Uruci, economist at Barclay’s, stated “Ongoing solid readings of consumer confidence reinforce our view that GDP growth should remain firm in the near term, and we see the level of confidence as consistent with ongoing strength in consumer spending.”

Orders for long-lasting “durable” goods fell last month for the first time in five months. Orders for durable goods fell -4.6% last month, led by a drop in orders for Boeing aircraft. The drop almost completely retraces the +4.8% increase in October. In an unusual twist, the details of the report were actually more optimistic than the headline. Ex-transportation (i.e., remove Boeing), orders for durable goods were up over +0.5%, the fifth straight monthly gain. Citi economists released a note stating “Core orders are a particularly important series to follow over the next few months as we try to discern whether investment spending is picking up in post-election data. Today’s number implies that at the very least equipment investment did not decline and may be a first hint that it is on a more favorable trajectory.”

Factory production weakened last month, according to the Chicago Federal Reserve. The Chicago Fed’s National Activity Index fell to -0.27 last month, down -0.22 from October. The index is a weighted average of 85 economic indicators, designed so that readings above zero indicate trend growth. Production-related indicators decreased to -0.2 in November falling from -0.01, reflecting weakness in the nation’s manufacturing sector. Steven Shields, economist with Moody’s wrote, “A reading of -0.27 still suggests the U.S. economy expanded at a below-average rate and is easing its foot off the accelerator after a stronger performance in early summer.”

The overall U.S. economy grew at a faster pace than originally thought in the 3rd quarter, according to the Commerce Department. Upward revisions in consumer spending and business investment pushed the latest GDP estimate up +0.3%, to a healthy 3.5% annualized rate. In addition, strong trade data in the form of a +10% spike in exports also contributed. Michael Gapen, chief U.S. economist at Barclay’s noted that the data signaled “the manufacturing, trade, and energy sectors stabilized during the quarter after nearly two years of contraction.”

In Canada, the steep rise of home prices has reached a level such that the Bank of Canada made the remarkable move of taking its warning of high household debt levels and red-hot home prices online in a most modern way: a video posted on YouTube. The Bank of Canada has voiced its concerns to Canadians for months, but it appears to have fallen on deaf ears. For example, Toronto home prices are up nearly +15% since this summer when Bank of Canada governor Stephen Poloz warned that price gains were “difficult to match up with any definition of fundamentals that you could point to.” In addition, Statistics Canada showed that the household debt-to-income ratio broke yet another record last quarter, further increasing the Bank of Canada’s unease.

In France, International Monetary Fund chief Christine Lagarde was found guilty of criminal negligence for an improper government payout to French businessman Bernard Tapie eight years ago while she served as France’s finance minister. The French court chose not to sentence Lagarde to a fine or jail time. In a statement Monday, Lagarde said she was not satisfied with the court’s decision but had chosen not to appeal.

In Germany, the Finance Ministry predicted that German economic activity will be shown to have picked up in the fourth quarter as household spending remains strong and exports are likely to show improvement. “For the final quarter, indicators are signaling a light acceleration in overall economic activity,” the Finance Ministry said in its monthly report.

The Italian government agreed to bail out the world’s oldest bank, Monte dei Paschi di Siena, after the bank failed to raise five billion euros from private investors. Paolo Gentiloni, Italy’s new prime minister said that the government would tap a 20 billion euro fund that had already been approved by the parliament earlier this week. In an effort to curb losses for Italy’s small investors that hold bank notes, finance minister Pier Carlo Padoan said the government would compensate small savers for their bank losses. Small investors are estimated to hold roughly 2 billion euros worth of Monte dei Paschi’s bonds.

The Bank of Japan is more optimistic about the Japanese economy, raising its assessment for the first time since May 2015. The BOJ’s more optimistic tone came as the government released its growth forecast for the coming year. The government now sees the economy picking up speed to a 1.5% growth rate, from the prior 1.3%. In a move widely expected, the BOJ kept its short-term rate target at -0.1% and its 10-year Japanese government bond yield at near zero. It also said it would continue to buy Japanese government bonds at the previous pace of around 80 trillion yen a year.

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Finally, for more and more of us, online shopping has become the new normal. The primary beneficiary of this trend has been Amazon. Market research firm Slice Intelligence looked at 1.7 million online shopping receipts from early November to mid-December and discovered that the leader in online purchases is far-and-away Amazon, with a 36.9% share of the online market. No one else is even close. The next four are brick-and-mortar retailers with major online operations, but their combined market share adds up to only 12%. (Chart from CNBC)

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 21.25 from 22.25, while the average ranking of Offensive DIME sectors slipped to 11.75 from 11.25. The Offensive DIME sectors continue to strongly lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE  at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®

 

`

FBIAS™ market update for the week ending 11/25/2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.40, up from the prior week’s 27.01, and only a little lower than the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 57.72, up from the prior week’s 55.40.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, up from the prior week’s 27. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

This week, the Dow Jones Industrial Average, NASDAQ, and Russell 2000 all hit all-time highs together for the first time since 1999. Major indexes were strong both at home and around the world. The Dow Jones Industrial Average gained +284 points to close at 19,152, up +1.5%. The tech-heavy NASDAQ Composite rose +77 points to end the week at 5398, up +1.45%. Smaller market caps outperformed large caps for the third consecutive week, as the MidCap S&P 400 index rose +2.17% and the SmallCap Russell 2000 added +2.4%, while the LargeCap S&P 500 gained +1.44%. Of note, both the Dow Jones Transports and Utilities indexes had strong weeks. The defensive Utilities sector joined the fun after having been beaten down since the election, gaining +2%.

Canada’s TSX rose a third straight week, up +1.4%. Across the Atlantic, the United Kingdom’s FTSE also had its third week of gains, up +0.96%. On Europe’s mainland, France’s CAC 40 rose +1%, while Germany’s DAX gained a third of a percent. Italy’s Milan FTSE added +1.5%. Major Asian markets were strong across the board. China’s Shanghai Composite rose +2.16%, Japan’s Nikkei surged +2.3%, and Hong Kong’s Hang Seng index gained +1.7%. Overall, emerging markets as a group (as measured by the MSCI Emerging Markets Index) edged developed markets as a group (as measured by the MSCI Developed Markets Index), with emerging markets rising +1.9%, while developed gained +1.1%.

In commodities, oil plunged almost -4% on Friday, but for the week managed to end down only -0.65%. Precious metals had a third consecutive down week as Gold fell -2.5% to close at $1,178.40 an ounce while Silver dropped ‑0.93% to $16.47. The industrial metal copper, an indicator of global economic activity, had a big week by surging over +8%

In U.S. economic news, the number of Americans who applied for new unemployment benefits rose by 18,000 to 251,000, according to the Labor Department. The increase comes one week after initial claims fell to a 43-year low. Economists had forecast initial claims to rise to a seasonally adjusted 248,000. Most of the increase appears to have come from Illinois and California. Initial claims have remained below the key 300,000 threshold for 90 straight weeks, the longest streak since 1970. The economy has been adding about 180,000 new jobs a month this year, and the unemployment rate remains at a low 4.9%.

Existing home sales soared to almost a 10-year high last month, further evidence of the strong demand supporting the housing market. According to the National Association of Realtors, existing home sales ran at a seasonally adjusted annual rate of 5.6 million, an increase of +2% from September and +5.9% higher than a year ago. Forecasts had been for only a gain of 5.4 million. It was the fastest rate of sales since February of 2007. All four regions of the country recorded gains. In addition, it was the 17th straight month of yearly inventory declines with 4.3% fewer homes on the market than in October of last year. With inventory shrinking, it’s no surprise that the median sale price ratcheted up to $232,200, +6% higher than last year.

In contrast to existing home sales, new single-family home sales actually fell -1.9% to 563,000 in October according to the Commerce Department. The number missed economists’ expectations of 595,000. Nevertheless, October’s sales were +17.8% higher than October of 2015, and year to date sales in 2016 are +12.6% higher than this time last year. The median sales price last month was $304,500, versus $298,700 a year ago. At the current sales rate, it would take 5.2 months to exhaust the supply of homes on the market. Strong demand for housing with the corresponding lean supply has been keeping prices relatively high. Home builders are just now starting to ramp up construction of new homes to a level that analysts believe will sustain a healthier housing market.

Sentiment among American consumers rose sharply following Donald Trump’s election, with many Americans expressing greater optimism now that the election is over according to the University of Michigan’s consumer sentiment survey. The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates. The survey climbed to 93.8 last month, up a rather large move of +6.6 points to the highest level since early summer. Richard Curtin, chief economist of the U of M survey wrote, “The post-election boost in optimism was widespread, with gains recorded among all income and age subgroups and across all regions of the country.” However, he points out, “presidential honeymoons” can end quickly and consumers’ confidence in the economy can wane if the new administration doesn’t take quick action to improve the economy.

A gauge of manufacturing in the Midwest is running below its potential, according to analysts. The Chicago Fed’s national activity index rose +0.15 point to -0.08 last month as consumer spending, housing spending, factory production, and business orders all showed improvement. The Chicago Fed index is a weighted average of 85 different economic indicators, designed to have an average value of 0, so that a positive reading indicates growth above trend and negative readings correspond to growth below trend. As with other volatile data sets, analysts use a 3-month moving average to discern a clearer picture of the trend in economic activity and in this case it weakened to a -0.27. Bernard Yaros, economist with Moody’s stated that the weaker 3-month average is “indicating inflationary pressure from U.S. economic activity will be limited.”

Orders for long-lasting goods, known as durable goods, surged +4.8% last month, according to the Commerce Department. The increase is the fourth in a row and beat economists’ forecasts of a +3.3% gain. Behind the impressive result, was a +94.1% spike in new orders for passenger planes. Aircraft orders often swing sharply from month-to-month and their effects can wildly skew trends in durable goods data. Demand for autos fell ‑0.6%. Ex-aircraft and auto industries, orders for durable goods increased a much less impressive +1% last month. Joshua Shapiro, chief economist at MFR Inc. stated “The underlying details in the report were lackluster in October.” Core capital goods orders, a key measure of business investment, rose an anemic +0.4% following a drop in September. Although these orders have recovered slightly, they are 4% lower than this time a year ago.

Growth in the service sector reached its second highest level in 12 months according to Markit’s flash November Purchasing Managers’ Index (PMI). The service sector PMI came in at 54.7, down -0.1 from October. In the survey, respondents commented on “stronger demand from both businesses and consumers in November, helped by the improving economic backdrop.” In the details of the report, new business growth rose to the strongest pace since last November. Backlogs fell, but that was due in part to stronger hiring. Survey respondents were optimistic on growth prospects over the coming year. Markit reported that growth is continuing to accelerate as the year comes to an end.

Minutes of the most recent Federal Reserve meeting show senior Fed officials agreed that it may finally be appropriate to raise interest rates “relatively soon”, given the environment of an improving labor market and somewhat higher inflation. Minutes from a two-day session in early November, show that “most participants expressed a view that it could well become appropriate to raise the target range for the federal-funds rate relatively soon.” Noteworthy in the latest minutes is concern among several officials that the U.S. economy could be at risk if the central bank waits too long to raise rates, a marked change from just a few months ago. The Federal Reserve will reconvene in December where an increase in key interest rates is seen as essentially guaranteed. Financial markets see a 93.5% chance the central bank will raise its benchmark short-term interest rate range by a quarter point to 0.5%-0.75%, according to the Chicago Mercantile Exchange’s FedWatch Tool.

Canada’s Environment Minister Catherine McKenna announced that Canada will shutter all of its coal-fired power plants by 2030 as part of its strategy to cut greenhouse gas emission under the Paris climate accord. The plants, located in four provinces, produce an estimated 10% of Canada’s total CO2 emissions. Closing them will remove the equivalent of 1.3 million cars from Canada’s roads (roughly 5 megatons of greenhouse gas emissions), she announced. “As part of our government’s vision for a clean growth economy, we will be accelerating the transition from traditional coal power to clean energy by 2030,” she said. With an abundance of hydroelectric power, as well as nuclear, solar and wind power, 80 percent of Canada’s electricity production emits no air pollution.

In the United Kingdom, the global think-tank Organization for Economic Cooperation and Development (OECD) said that Britain’s economy is growing faster than the rest of the G7 – another sign that most of the fears surrounding the Brexit vote were (so far) unfounded. The UK grew by +2.3% in the third quarter of 2016, outpacing all other countries in the group. The average third-quarter growth rate of G7 economies was +1.4%. The robust economic growth comes after strong employment numbers, lower than expected inflation, and surging retail figures.

In France, Former French President Nicolas Sarkozy’s political career is essentially over after a humiliating defeat by his former Prime Minister Francois Fillon in the first round of the race to choose the Republican party’s candidate for the presidency next spring. Fillon, a social conservative and free-market reformer, came close to winning the nomination getting 43% of the vote. He now faces a runoff vote against a more moderate Alain Juppe. Mr. Juppe is the mayor of Bordeaux and former prime minister under Jacques Chirac. Sarkozy had come under fire following several legal investigations into corrupt campaign financing.

In Germany, Bavarian economic minister Ilse Aigner said that Germany needs a “comprehensive” new EU trade deal with the UK following the Brexit vote, in order to minimize the potential fallout for its own economy. She argued that Brexit poses a “high risk” to the German economy and that the UK is “one of the most important trading partners for Bavaria”, one of Germany’s most prosperous states. Britain’s leaders have been optimistic that Germany will help temper France’s call for Britain to pay a tough economic price for its decision to leave the EU.

Italian voters will head to the polls on December 4th in a referendum on constitutional reforms that will have far-reaching consequences for the country – and for the euro. If Italian leader Matteo Renzi loses the vote, it’s believed that the anti-euro 5-star Movement could take over as ruling party and reject the country’s debts. Market risk assigned to Italian government debt has consequently surged in recent weeks. European Central Bank vice-president Vitor Constancio said he is closely watching the outcome of Italy’s vote amid concerns that the outcome could impact stability in the whole of the European Union.

In Asia, refusal by the U.S., European Union, and others to recognize China as a market economy is the latest sign of friction in the trade between the Asian economic giant and other world powers. Penny Pritzker, U.S. Secretary of Commerce, said that the time “was not ripe” to grant China market-economy status under World Trade Organization rules. China’s status therefore remains a “non-market economy” under the treaty, meaning that Chinese products such as steel can be saddled with steep tariffs if it is determined that the country is “dumping” those goods. Recognition as a market economy would force trading partners to use domestic Chinese prices as a baseline for judgements about export prices, limiting their ability to impose restrictions. For many goods, prices are far lower in China than their international prices.

Japanese consumer prices fell last month extending the streak to the longest in 5 years, government data showed. Japan has been struggling to reverse a deflationary spiral of falling prices and tepid growth. October’s reading marked the 8th straight month of price declines, the longest since 2011. Bank of Japan governor Haruhiko Kuroda blamed weak crude oil prices. Yasunari Ueno, chief market economist at Mizuho Securities said he believed that “prices will turn into positive territory eventually, but so far upward movement of prices…is still weak.” In addition he stated that the reason behind the slow pace of price rises is because the economic recovery is very slow.

Finally, television executives and advertisers are concerned over a disturbing new trend: young people are turning off sports, crime dramas and – most especially – news at an alarming rate. On the other hand, comedy was enjoyed by 18-24 year olds much more than by older cohorts. Viewers between the ages of 18 and 24 were the least interested in news as a genre, according to a survey of 31,000 people across 10 countries carried out by research firm Ampere Analysis. The trend was most pronounced in the United Kingdom and United States.

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 23.00 from 23.50, while the average ranking of Offensive DIME sectors was unchanged at 11.25. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

FBIAS™ for the week ending 11/18/2016

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 11/18/2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.01, up modestly from the prior week’s 26.80, and only a little lower than the level reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 55.40, up from the prior week’s 53.47.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on November 10th.  The indicator ended the week at 27, up sharply from the prior week’s 19.  Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks added to the strong post-election rally, pushing many of the major benchmarks to new all-time highs.  The smaller-cap indexes, typically more volatile, performed the best.  The Dow Jones Industrial Average rose +20 points to 18,867, up +0.11%, while the tech-heavy NASDAQ Composite rallied +1.6% to 5,321.  The LargeCap S&P 500 added +0.8%, but was sharply outpaced by its Small- and Mid- brethren:  the MidCap S&P 400 index surged +2.75% and the Russell 2000 SmallCap index gained +2.59%. 

In international markets, Canada’s TSX rose +2.12%, a second week of gains.  Across the Atlantic, the United Kingdom’s FTSE recovered a bit more from early November’s plunge adding +0.67%.  On Europe’s mainland, France’s CAC40 gained +0.34%, Germany’s DAX ended nearly flat, down just -0.03%, and Italy’s Milan FTSE fell 3.25%.  In Asia, China’s Shanghai Stock Exchange was flat-to-down at -0.1%.  Japan’s Nikkei surged a very handsome +3.4%, possibly due to views that President-elect Trump’s economic policies may benefit Japan—more on that below. 

In commodities, precious metals had a second difficult week as Gold fell another $15.60 an ounce to $1208.70, down -1.27%.  Silver plunged even further down -4.36%.  Precious metals typically respond negatively to a rising dollar, and that has been the situation of late – in spades – as the dollar has ripped higher since the election all the way to a 14-year high.  The industrial metal copper gave back some of last week’s gains by falling -1.65%.  Crude oil rebounded following 3 weeks of losses, rising $2.95 a barrel to end the week at $46.36, a weekly gain of +6.8%.

In U.S. economic news, jobless claims are at a 43-year low as the number of people who applied for unemployment benefits last week fell by 19,000 to 235,000.  Initial claims have now remained under the key 300,000 threshold level for 89 straight weeks, the longest stretch since 1970.  The U.S. unemployment rate also remains near an 8 year low of 4.9%.  Continuing jobless claims, the number of people already receiving unemployment benefits, also decreased by 66,000 to 1.98 million – the first time that number has been below 2 million since mid-2000.

Sentiment among home builders remained unchanged in November, according to the National Association of Home Builders’ (NAHB) index.  The latest reading of 63 matched the median forecast among economists.  Current sales conditions and sales expectations were at 69, while the index of buyer traffic rose a point to 47.  Readings over 50 signal improving conditions.  Robert Dietz, the home builder trade group’s chief economist, said in a statement “Ongoing job creation, rising incomes and attractive mortgage rates are supporting demand in the single-family housing sector.  This will help keep housing on a steady, upward glide path in the months ahead.”

Construction of new houses jumped 26% last month to the highest level in 9 years, boosted by a spike in multi-family units.  Housing starts climbed to an annual rate of 1.32 million from 1.05 million in September, according to the Commerce Department.  Economists had expected only 1.17 million new starts.  Higher prices and a shortage of properties for sale have encouraged builders to step up construction.  New construction accelerated in all regions of the country, surging by more than +44% in the Northeast and Midwest.  Construction of apartment buildings, condominiums, and multi-unit dwellings were up +75% last month.  Single-family home starts rose almost +11%, the fastest pace since October, 2007.  Future building activity also looks promising as permits are running about +5% above year-ago levels.

Retail sales surged for a second consecutive month for the best two-month performance since early 2014.  October retail sales jumped +0.8% last month, following a +1% rise in September.  Economists had forecast a +0.7% gain.  With consumer spending a main driver of economic growth, the increase in retail sales suggests that the U.S. economy got off to a good start in the 4th quarter.  Alan MacEachin, an economist at Navy Federal Credit Union, stated “A solid jobs market is driving up household incomes and boosting spending power.”  A large portion of the gains were due to auto dealers where sales hit an 11-month high following strong incentive programs.  Even ex-autos and gas, sales were still up a healthy +0.6%. 

The New York Fed’s Empire State Index turned positive for the first time in four months following improvement in new orders and shipments.  The Empire State Manufacturing sub-index rose back into expansion by rising +8.3 points to 1.5.  New-orders surged +8.7 points to 3.1, and shipments jumped +9.1 points to 8.5.  Inventory levels declined significantly, plunging -11.3 points to -23.6—a multiyear low.

Manufacturing in the mid-Atlantic region recorded slightly slower growth, according to the Philadelphia Fed’s manufacturing index.  The index slowed slightly to 7.6, down -2.1 points from September.  The index has remained above the 0 level, indicating improving conditions, for four consecutive months.  Most sub-indexes remained positive with general activity, new orders, and shipments all recording strong results. 

Inflation at the wholesale level remains low, coming in unchanged for October, but the reading follows several years of weaker prices.  Higher costs for natural gas and gasoline were offset by declines in food and services.  Taking a long-term view, over the past 12 months wholesale costs have risen +0.8%, the highest one-year change since the end of 2014.  Stripping out the volatile food, energy, and trade margin categories yields the so-called core producer prices.  That measure is rising at an even faster rate, up +1.6% over the past 12 months, the fastest in 2 years.  If these trends continue, higher wholesale prices will eventually lead to higher prices for consumer goods and services. 

Consumer inflation rose at the fastest rate in 6 months, according to the latest Consumer Price Index (CPI) reading.  The Labor Department reported that the index rose +0.4% last month, after rising +0.3% in September.  On an annualized basis, the CPI is up +1.6% – the biggest year-over-year increase since October of 2014.  The increase was in line with economists’ forecasts.  Core inflation, which strips out potentially volatile food and energy costs, climbed +0.1% last month.  Annualized, core inflation is currently 2.1% – right in line with the Federal Reserve’s 2% inflation target.  The firming inflation along with the labor market approaching full capacity leads many analysts to believe that the Federal Reserve will have the green light to raise interest rates at its December 13-14 policy meeting.

Industrial production—a measure of output from America’s factories, utility plants, and mines—was unchanged in October, said the Federal Reserve, as a sharp drop in utilities production was offset by modest gains in factory output.  Economists had forecast a +0.2% gain.  In the details of the report, manufacturing output rose +0.2% and mining output jumped by +2.1%, but utilities production plunged 2.6%.  High Frequency Economics chief U.S. economist Jim O’Sullivan said in a note to clients “Through the volatility, the trend in manufacturing appears to be at least modestly positive, and the oil-drilling-led plunge in mining seems to have ended.”  Capacity utilization, a gauge of slack in the industrial economy, ticked down 0.1 percentage point to 75.3% last month in line with expectations.

In international economic news, the Bank of Canada said it won’t necessarily move in lockstep with the Federal Reserve if the U.S. central bank hikes its key interest rate next month, a move which is widely expected.  Deputy Governor Timothy stated “We are free to adjust our policy interest rate in the context of Canadian economic conditions—and in particular, we do not need to move in step with the Federal Reserve” in a speech in Waterloo, Ontario.  Mr. Lane pointed out that Canadians will no doubt feel the reverberations from whatever the U.S. does.  Higher U.S. interest rates will likely push the Canadian dollar lower, boost exports, and push up some Canadian rates.  As a net importer of foreign capital, Canada’s economy is exposed to the “vagaries of global flows”, Mr. Lane acknowledged.

In France, Emmanuel Macron formally declared that he will seek the French presidency in next year’s election, ending months of speculation.  The 38-year-old former economic minister and protégé of President Francois Hollande left his government post in August saying he wanted more freedom for his ideas to repair France’s ailing economy and growing social divisions.  Macron created his own political movement known as “En Marche” roughly translated as “On the Move!” and remains a popular political figure.  His platform offers voters a pro-EU platform, in contrast with the National Front party of Marine LePen, the current front-runner.

German economic growth slowed in the third quarter of the year, hampered by weaker exports.  Europe’s largest economy grew by just +0.2%, half the rate of the second quarter and far below the first quarter’s +0.7% advance.  Germany’s Federal Statistics Office stated “Exports were slightly down while imports were slightly up compared with the second quarter of 2016.  Positive impulses on the quarter came mainly from domestic demand.  Both household and state spending managed to increase further.”  Some analysts stated that the uncertainty caused by Britain’s vote to leave the EU may have counteracted the country’s solid domestic activity.  In addition, worries of a more protectionist U.S. economy added to fears.  ING Bank economist Carsten Brzeski said, “If Germany’s single most important trading partner, the US, really moves towards more protectionism, this would definitely leave its mark on German growth.”

In Asia, the election of Donald Trump may have put China in the driver’s seat for a new trade deal in the Pacific Rim.  A decade-old plan for a free-trade area in Asia is set to be resurrected at a meeting of Pacific Rim country leaders in Peru, as the region works on an alternative to the U.S.-led Trans-Pacific Partnership.  Donald Trump had taken a strong anti-TPP stance during his campaign.  Leaders are looking to resurrect the Free Trade Area of the Asia Pacific (FTAAP).  Completion of the deal would hand Chinese President Xi Jinping the reins in a most important geopolitical shift.

In Japan, Goldman Sachs chief Asia Pacific economist Andrew Tilton released a note that a firmer U.S. dollar is positive for Japan, even as Donald Trump’s victory cast uncertainty over the Asian economic outlook.  The dollar surged to a 14 year high against a basket of major currencies and U.S. debt yields hit nearly one-year highs on expectations that Trump’s policies will boost the U.S. economy.  Tilton told the Reuters Global Investment Outlook Summit in Hong Kong, “More Fed tightening and a stronger dollar is probably good for Japan.  Japan is a very low-inflation country that is trying to stimulate the economy… but can’t really lower rates feasibly much further.  So if the U.S. can raise rates and raise the currency versus the yen, then yen can depreciate without Japan having to do anything else.  For Japan, this is great news.”

Finally, treasury yields have soared following the surprising election of Donald Trump for President of the United States.  Theories abound regarding the causes and consequences of the move, but as always it is good practice to step back and take a look at the big picture.  Veteran technical analyst Louise Yamada, in a CNBC interview, looked at interest rates in the U.S. over the last 200 years and draws our attention to a few points.  First, according to Ms. Yamada, is that interest rates are most likely to only go up from here.  Yamada refers to an apparent “bottoming formation” that has been forming over the last several years.  On the 10-year Treasury note, a move above 3% would confirm her assessment because that’s the “level at which we can definitively say that rates have reversed”, Yamada states.  Yamada predicts that higher rates will boost equity prices in the near term, as in past cycles.  However, she will be watching the roughly 5% level where “you’ll start having problems.”  10-year Treasury notes finished this past week at 2.34%, so we’re a long way away from her danger zone.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell slightly to 23.50 from 23.30 , while the average ranking of Offensive DIME sectors was unchanged at 11.25.  The Offensive DIME sectors continue to lead Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

FBIAS™ market update for the week ending 11/18/2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.01, up modestly from the prior week’s 26.80, and only a little lower than the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 55.40, up from the prior week’s 53.47.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 27, up sharply from the prior week’s 19. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks added to the strong post-election rally, pushing many of the major benchmarks to new all-time highs. The smaller-cap indexes, typically more volatile, performed the best. The Dow Jones Industrial Average rose +20 points to 18,867, up +0.11%, while the tech-heavy NASDAQ Composite rallied +1.6% to 5,321. The LargeCap S&P 500 added +0.8%, but was sharply outpaced by its Small- and Mid- brethren: the MidCap S&P 400 index surged +2.75% and the Russell 2000 SmallCap index gained +2.59%.

In international markets, Canada’s TSX rose +2.12%, a second week of gains. Across the Atlantic, the United Kingdom’s FTSE recovered a bit more from early November’s plunge adding +0.67%. On Europe’s mainland, France’s CAC40 gained +0.34%, Germany’s DAX ended nearly flat, down just -0.03%, and Italy’s Milan FTSE fell ‑3.25%. In Asia, China’s Shanghai Stock Exchange was flat-to-down at -0.1%. Japan’s Nikkei surged a very handsome +3.4%, possibly due to views that President-elect Trump’s economic policies may benefit Japan—more on that below.

In commodities, precious metals had a second difficult week as Gold fell another $15.60 an ounce to $1208.70, down -1.27%. Silver plunged even further down -4.36%. Precious metals typically respond negatively to a rising dollar, and that has been the situation of late – in spades – as the dollar has ripped higher since the election all the way to a 14-year high. The industrial metal copper gave back some of last week’s gains by falling -1.65%. Crude oil rebounded following 3 weeks of losses, rising $2.95 a barrel to end the week at $46.36, a weekly gain of +6.8%.

In U.S. economic news, jobless claims are at a 43-year low as the number of people who applied for unemployment benefits last week fell by 19,000 to 235,000. Initial claims have now remained under the key 300,000 threshold level for 89 straight weeks, the longest stretch since 1970. The U.S. unemployment rate also remains near an 8 year low of 4.9%. Continuing jobless claims, the number of people already receiving unemployment benefits, also decreased by 66,000 to 1.98 million – the first time that number has been below 2 million since mid-2000.

Sentiment among home builders remained unchanged in November, according to the National Association of Home Builders’ (NAHB) index. The latest reading of 63 matched the median forecast among economists. Current sales conditions and sales expectations were at 69, while the index of buyer traffic rose a point to 47. Readings over 50 signal improving conditions. Robert Dietz, the home builder trade group’s chief economist, said in a statement “Ongoing job creation, rising incomes and attractive mortgage rates are supporting demand in the single-family housing sector. This will help keep housing on a steady, upward glide path in the months ahead.”

Construction of new houses jumped 26% last month to the highest level in 9 years, boosted by a spike in multi-family units. Housing starts climbed to an annual rate of 1.32 million from 1.05 million in September, according to the Commerce Department. Economists had expected only 1.17 million new starts. Higher prices and a shortage of properties for sale have encouraged builders to step up construction. New construction accelerated in all regions of the country, surging by more than +44% in the Northeast and Midwest. Construction of apartment buildings, condominiums, and multi-unit dwellings were up +75% last month. Single-family home starts rose almost +11%, the fastest pace since October, 2007. Future building activity also looks promising as permits are running about +5% above year-ago levels.

Retail sales surged for a second consecutive month for the best two-month performance since early 2014. October retail sales jumped +0.8% last month, following a +1% rise in September. Economists had forecast a +0.7% gain. With consumer spending a main driver of economic growth, the increase in retail sales suggests that the U.S. economy got off to a good start in the 4th quarter. Alan MacEachin, an economist at Navy Federal Credit Union, stated “A solid jobs market is driving up household incomes and boosting spending power.” A large portion of the gains were due to auto dealers where sales hit an 11-month high following strong incentive programs. Even ex-autos and gas, sales were still up a healthy +0.6%.

The New York Fed’s Empire State Index turned positive for the first time in four months following improvement in new orders and shipments. The Empire State Manufacturing sub-index rose back into expansion by rising +8.3 points to 1.5. New-orders surged +8.7 points to 3.1, and shipments jumped +9.1 points to 8.5. Inventory levels declined significantly, plunging -11.3 points to -23.6—a multiyear low.

Manufacturing in the mid-Atlantic region recorded slightly slower growth, according to the Philadelphia Fed’s manufacturing index. The index slowed slightly to 7.6, down -2.1 points from September. The index has remained above the 0 level, indicating improving conditions, for four consecutive months. Most sub-indexes remained positive with general activity, new orders, and shipments all recording strong results.

Inflation at the wholesale level remains low, coming in unchanged for October, but the reading follows several years of weaker prices. Higher costs for natural gas and gasoline were offset by declines in food and services. Taking a long-term view, over the past 12 months wholesale costs have risen +0.8%, the highest one-year change since the end of 2014. Stripping out the volatile food, energy, and trade margin categories yields the so-called core producer prices. That measure is rising at an even faster rate, up +1.6% over the past 12 months, the fastest in 2 years. If these trends continue, higher wholesale prices will eventually lead to higher prices for consumer goods and services.

Consumer inflation rose at the fastest rate in 6 months, according to the latest Consumer Price Index (CPI) reading. The Labor Department reported that the index rose +0.4% last month, after rising +0.3% in September. On an annualized basis, the CPI is up +1.6% – the biggest year-over-year increase since October of 2014. The increase was in line with economists’ forecasts. Core inflation, which strips out potentially volatile food and energy costs, climbed +0.1% last month. Annualized, core inflation is currently 2.1% – right in line with the Federal Reserve’s 2% inflation target. The firming inflation along with the labor market approaching full capacity leads many analysts to believe that the Federal Reserve will have the green light to raise interest rates at its December 13-14 policy meeting.

Industrial production—a measure of output from America’s factories, utility plants, and mines—was unchanged in October, said the Federal Reserve, as a sharp drop in utilities production was offset by modest gains in factory output. Economists had forecast a +0.2% gain. In the details of the report, manufacturing output rose +0.2% and mining output jumped by +2.1%, but utilities production plunged 2.6%. High Frequency Economics chief U.S. economist Jim O’Sullivan said in a note to clients “Through the volatility, the trend in manufacturing appears to be at least modestly positive, and the oil-drilling-led plunge in mining seems to have ended.” Capacity utilization, a gauge of slack in the industrial economy, ticked down 0.1 percentage point to 75.3% last month in line with expectations.

In international economic news, the Bank of Canada said it won’t necessarily move in lockstep with the Federal Reserve if the U.S. central bank hikes its key interest rate next month, a move which is widely expected. Deputy Governor Timothy stated “We are free to adjust our policy interest rate in the context of Canadian economic conditions—and in particular, we do not need to move in step with the Federal Reserve” in a speech in Waterloo, Ontario. Mr. Lane pointed out that Canadians will no doubt feel the reverberations from whatever the U.S. does. Higher U.S. interest rates will likely push the Canadian dollar lower, boost exports, and push up some Canadian rates. As a net importer of foreign capital, Canada’s economy is exposed to the “vagaries of global flows”, Mr. Lane acknowledged.

In France, Emmanuel Macron formally declared that he will seek the French presidency in next year’s election, ending months of speculation. The 38-year-old former economic minister and protégé of President Francois Hollande left his government post in August saying he wanted more freedom for his ideas to repair France’s ailing economy and growing social divisions. Macron created his own political movement known as “En Marche” roughly translated as “On the Move!” and remains a popular political figure. His platform offers voters a pro-EU platform, in contrast with the National Front party of Marine LePen, the current front-runner.

German economic growth slowed in the third quarter of the year, hampered by weaker exports. Europe’s largest economy grew by just +0.2%, half the rate of the second quarter and far below the first quarter’s +0.7% advance. Germany’s Federal Statistics Office stated “Exports were slightly down while imports were slightly up compared with the second quarter of 2016. Positive impulses on the quarter came mainly from domestic demand. Both household and state spending managed to increase further.” Some analysts stated that the uncertainty caused by Britain’s vote to leave the EU may have counteracted the country’s solid domestic activity. In addition, worries of a more protectionist U.S. economy added to fears. ING Bank economist Carsten Brzeski said, “If Germany’s single most important trading partner, the US, really moves towards more protectionism, this would definitely leave its mark on German growth.”

In Asia, the election of Donald Trump may have put China in the driver’s seat for a new trade deal in the Pacific Rim. A decade-old plan for a free-trade area in Asia is set to be resurrected at a meeting of Pacific Rim country leaders in Peru, as the region works on an alternative to the U.S.-led Trans-Pacific Partnership. Donald Trump had taken a strong anti-TPP stance during his campaign. Leaders are looking to resurrect the Free Trade Area of the Asia Pacific (FTAAP). Completion of the deal would hand Chinese President Xi Jinping the reins in a most important geopolitical shift.

In Japan, Goldman Sachs chief Asia Pacific economist Andrew Tilton released a note that a firmer U.S. dollar is positive for Japan, even as Donald Trump’s victory cast uncertainty over the Asian economic outlook. The dollar surged to a 14 year high against a basket of major currencies and U.S. debt yields hit nearly one-year highs on expectations that Trump’s policies will boost the U.S. economy. Tilton told the Reuters Global Investment Outlook Summit in Hong Kong, “More Fed tightening and a stronger dollar is probably good for Japan. Japan is a very low-inflation country that is trying to stimulate the economy… but can’t really lower rates feasibly much further. So if the U.S. can raise rates and raise the currency versus the yen, then yen can depreciate without Japan having to do anything else. For Japan, this is great news.”

Finally, treasury yields have soared following the surprising election of Donald Trump for President of the United States. Theories abound regarding the causes and consequences of the move, but as always it is good practice to step back and take a look at the big picture. Veteran technical analyst Louise Yamada, in a CNBC interview, looked at interest rates in the U.S. over the last 200 years and draws our attention to a few points. First, according to Ms. Yamada, is that interest rates are most likely to only go up from here. Yamada refers to an apparent “bottoming formation” that has been forming over the last several years. On the 10-year Treasury note, a move above 3% would confirm her assessment because that’s the “level at which we can definitively say that rates have reversed”, Yamada states. Yamada predicts that higher rates will boost equity prices in the near term, as in past cycles. However, she will be watching the roughly 5% level where “you’ll start having problems.” 10-year Treasury notes finished this past week at 2.34%, so we’re a long way away from her danger zone.

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell slightly to 23.50 from 23.30 , while the average ranking of Offensive DIME sectors was unchanged at 11.25. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®