FBIAS™ for the week ending 1/24/2014

FBIAS™Fact-Based Investment Allocation Strategies for the week ending 1/24/2014

The very big picture:

In the “decades” timeframe, we are in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E finished the week at 24.9, down from the prior week’s 25.6, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at 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 P/E’s 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 typical of a 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 US Bull-Bear Indicator (see graph below) is at 72.2, down from last week’s 76.1, and still solidly in cyclical Bull territory.  For more than a year, the US Bull-Bear Indicator has pushed further into Bull territory than other global asset classes, reflecting the higher strength of the US relative to the rest of the world.  The current Cyclical Bull has taken the US to new all-time highs, exceeding the highs of 2007, but most of the world’s major indices have barely matched 2011’s highs, let alone approach 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is in positive status and dropped to 32 from the prior week’s 35.  A further drop to 28 would turn this indicator to negative status.   Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication for the prospects for the first quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear still is in force as the long-term valuation of the market is too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory, with the US being far stronger than any other major market.  The Bond market is in Cyclical Bear territory as of June 7th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets remain in positive status.  The quarter-by-quarter indicator gave a positive signal for the 1st quarter:  both US and International equities were in uptrends at the start of Q1, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Markets worldwide retreated sharply this past week.  In the US, indexes lost an average -2.3%, with the Dow leading the way lower at -3.5%.  SmallCaps and the Nasdaq did the best, at -2.1% and -1.7% respectively.  Canada’s TSX fared considerably better at -1.2%, buoyed by the commodity, precious metals and tech sectors.  Gold and gold miners did considerably better, with gold scoring a +1.1% gain on the week, and commodities as a whole +1.8%.  International markets continue to perform worse than the US, with the Emerging Markets down an average -3.9%, and Developed Markets down an average -2.9%.  Once again, China and Brazil brought up the rear of the major markets, down -4.4% and -5.3% respectively.  Brazil is now at a 5-year low.

Two major economic data points are blamed for the worldwide rout.  First, the early read of the Markit/HSBC Purchasing Manager’s Index (“PMI”) for China came in at 49.6.  Anything below 50 represents a contraction, and the reaction was very negative.  The second data point was a collective fall in emerging market currencies, headed up by Argentina (whose peso had its worst day in 12 years).  Whispers worldwide about rapid withdrawals from Emerging economies by global investors fed the declines.

Since all eyes were on China and other emerging economies, here are some additional data points from China to round out the view: China’s fourth quarter GDP grew 7.7% year-over-year, ticking down from 7.8% the previous quarter, Chinese industrial production slowed in December, declining from 10.0% year-over-year to 9.7%, and retail sales in China inched down to 13.6% year-over-year from 13.7% in November.  None of these data points are particularly serious, but all add to the overall negative-to-neutral view.  And the smog news continues to be horrible.  The density of the two worst air pollutants shot up in China by 55.7% and 30.1% respectively in December, as reported by China’s Ministry of Environmental Protection on Friday.  The 74 major cities monitored nationwide had on average more than 70% of days in December failing to meet ministry air quality standards, with many cities coming in at 90% or more of all days below minimum standards.

(sources: Reuters, Barrons, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.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 rose slightly to 16.0 from the prior week’s 16.5, while the average ranking of Offensive DIME sectors fell to 13.8 from the prior week’s 12.  The Offensive DIME sectors continue to lose the edge they had over Defensive SHUT sectors, now outranking the Defensive SHUT sectors by a slim 2.2.

Note: these are “ranks”, not “scores”, so smaller numbers are higher and larger numbers are lower.

Summary:

The US led the recovery from 2011’s travails, and is the strongest among all global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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®, RMA®

FBIAS™ for the week ending 1/17/2014

FBIAS™ for the week ending 1/17/2014

The very big picture:

In the “decades” timeframe, we are in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E finished the week at 25.6, little changed from the prior week’s 25.5, and is now approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at 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 P/E’s 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 typical of a 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 US Bull-Bear Indicator (see graph below) is at 76.1, down slightly from last week’s 76.3, and still solidly in cyclical Bull territory.  For more than a year, the US Bull-Bear Indicator has pushed further into Bull territory than other global asset classes, reflecting the higher strength of the US relative to the rest of the world.  The current Cyclical Bull has taken the US to new all-time highs, exceeding the highs of 2007, but most of the world’s major indices have barely matched 2011’s highs, let alone approach 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is in positive status and stayed at 35, unchanged from the prior week.   Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication for the prospects for the first quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear still is in force as the long-term valuation of the market is too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory, with the US being far stronger than any other major market.  The Bond market is in Cyclical Bear territory as of June 7th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets remain in positive status.  The quarter-by-quarter indicator gave a positive signal for the 1st quarter:  both US and International equities were in uptrends at the start of Q1, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

US Markets were flat to mixed for the week, with the Dow Industrials up by a scant +0.1% and the S&P 500 down by -0.2%.  The Nasdaq 100 was the best US performer for the week, up +0.7%.  Canada’s TSX gained +1%, but most other non-US indices were down for the week.  Emerging Markets have continued their losses from 2013, losing another -1.3% for the week, with China and Brazil again leading the way down.

US economic news for the week can be summarized in four words: manufacturing good, retailing bad.  The Empire State index of New York state manufacturing surged to 12.5 in January, up sharply from 2.2 in December.  The first 2014 Federal Reserve “beige book” revealed economic activity expanded in 9 out of 12 Fed districts at the end of 2013, and national industrial production grew 0.3% month over month, the fastest pace in almost three years.  Retail sales for 2013 rose by 4.2% over 2012, but that seemingly good number was the smallest annual gain since the recession ended in 2009.  Many individual retailers have reported disappointing December numbers, with none generating such a strong reaction as Best Buy, which lost 30% of its stock price on Wednesday alone.

Canada’s Toronto Composite Index (TSX) reached a 2-1/2 year high this week, finally homing in on its 2011 highs.  The chief propulsion for the week’s gains was the gold miners group, coming off a -50% drubbing in 2013.  The TSX has gained in 8 of the last 9 sessions, and has outperformed the US so far this young year.  Meanwhile, the Loonie has earned the title of the world’s worst performing currency in the first two weeks of 2014, dropping         -3.1% to 91c/US dollar.

Economic confidence in the Eurozone climbed to 100.0 in December, rising for the eighth consecutive month to the highest level since July 2011.  Industrial production in Germany rose 1.9% in November after a 1.2% decrease in October, and weakling France’s industrial production jumped 1.3% in November, the best month since April.  Italy’s industrial production also rose in November and turned positive on a year-over-year basis for the first time in nearly three years.  Do you remember skyrocketing interest rates on Italian government 3-year bonds back in 2011?  Those who saw bargains in those depressed Italian bond prices have been richly rewarded, as interest rates for Italian 3-year government bonds have now fallen to their lowest level since the Euro was adopted 15 years ago.

Globally speaking, the latest Markit Global Sector Purchasing Managers Index (“PMI”) data indicated that the Technology industry expanded sharply at the end of 2013.  Among the eight broad global industry groups covered by PMI data, Technology was ranked second overall in the fourth quarter, behind only the Basic Materials sector.

(sources: Reuters, Barrons, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.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 rose to 16.5 from the prior week’s 18.3, while the average ranking of Offensive DIME sectors fell sharply to 12 from the prior week’s 7.8.  With a big decline in the ranking of Consumer Discretionary and an equally big gain in Healthcare, the Offensive DIME sectors lost half of their lead over the Defensive SHUT sectors.

Note: these are “ranks”, not “scores”, so smaller numbers are higher and larger numbers are lower.

Summary:

The US led the recovery from 2011’s travails, and is the strongest among all global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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®, RMA®

FBIAS™ for the week ending 1/10/2014

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 1/10/2014

The very big picture:

In the “decades” timeframe, we are in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E finished the week at 25.5, down from the prior week’s 26.2, and is now approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at 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 P/E’s 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 typical of a 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 US Bull-Bear Indicator (see graph below) is at 76.3, up from last week’s 75.8, and still solidly in cyclical Bull territory.  For more than a year, the US Bull-Bear Indicator has pushed further into Bull territory than other global asset classes, reflecting the higher strength of the US relative to the rest of the world.  The current Cyclical Bull has taken the US to new all-time highs, exceeding the highs of 2007, but most of the world’s major indices have barely matched 2011’s highs, let alone approach 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is in positive status and stayed at 35, unchanged from the prior week.   Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication for the prospects for the first quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear still is in force as the long-term valuation of the market is too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory, with the US being far stronger than any other major market.  The Bond market is in Cyclical Bear territory as of June 7th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets remain in positive status.  The quarter-by-quarter indicator gave a positive signal for the 1st quarter:  both US and International equities were in uptrends at the start of Q1, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Save for the Dow Jones Industrials, US indices were positive for the week, averaging a +0.7% gain.   Canada’s TSX was more positive, at +1.5%.  International indices were split, with most developed markets gaining an average +1.2% while emerging markets averaging +0.4% although several big components, like China and Brazil, were negative.

The big news of the week was the December US jobs report, which shocked everyone at only +74,000, a third of the average prediction.  Markets everywhere were affected, with the currency and bond markets being affected most.  The 10-year yield fell by the most in several months.  In a seeming non-sequitur, the unemployment rate fell sharply, to 6.7%, the lowest since October 2008.  The data revealed, however, that the decline was for the worst of reasons: 347,000 workers dropping out of the workforce, reducing the number of the officially “unemployed” (since those who have given up looking for work are no longer counted as unemployed).

In Canada, the news was actually worse, as Statistics Canada reported a loss of 45,900 jobs in December.  The monthly loss means Canada’s economy only added 102,000 jobs for all of 2013.  Ontario lost 39,000 jobs during the month and even resources-rich Alberta, a source of recent strength, shed 12,000 jobs.  The Loonie, Canada’s dollar, proceeded to touch a four-year low.  Several important retailers reported negative year-over-year comparisons for the holiday season, a major disappointment.  Women’s apparel retailer Reitmans said holiday sales fell -5.3% per cent, Target said poor holiday sales at its Canadian stores will have a big impact on fourth-quarter results, and Sears Canada reported a  –4.4% holiday drop.

In the European Union, employment was also headline news this week.  Eurostats (the EU’s statistical arm), reported the overall unemployment rate in the eurozone at +12.1%, the same as in April.  Germany is at just 5.2%, but France is at 10.8%, Italy 12.7% (vs. 11.3% a year ago), Cyprus 17.3%, Greece 27.4%, and Spain 26.7%. Even the Netherlands has risen the past 12 months, from 5.6% to 6.9%.  Ireland wins the prize for “most improved”, with its unemployment rate down to 12.3% from the year-ago 14.3%.  Youth unemployment remains shockingly high for the peripheral countries, however:  Greece has a youth jobless rate of 54.8%, Spain 57.7%, Portugal 36.8%, Italy 41.6%.  A generation of working-age citizens is maturing with no work experience.

China’s HSBC manufacturing Purchasing Managers’ Index (“PMI”) showed a slowing pace of expansion in December at 50.5.  HSBC’s companion figure for the service sector for December came in at 50.9 vs. 52.5 in November, a six-month low, while producer prices fell a 22nd straight month.  December exports rose a disappointing 4.3% last month, compared to a much higher 12.7% increase in November.  Overall, a picture of stalled to tepid growth.

(sources: Barrons, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.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 rose to 18.3 from the prior week’s 19.8, while the average ranking of Offensive DIME sectors fell slightly to 7.8 from the prior week’s 7.5.  The Offensive DIME sectors kept their substantial lead over the Defensive SHUT sectors.

Note: these are “ranks”, not “scores”, so smaller numbers are higher and larger numbers are lower.

Summary:

The US led the recovery from 2011’s travails, and is the strongest among all global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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®, RMA®

FBIAS™ for the week ending 1/3/2014

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 1/3/2014

The very big picture:

In the “decades” timeframe, we are in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E was almost unchanged at 26.2 for the week, and is now at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at 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 P/E’s 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 typical of a 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 US Bull-Bear Indicator (see graph below) is at 75.8, down slightly from last week’s 76.2, and still solidly in cyclical Bull territory.  Early in the year, the US Bull-Bear Indicator pushed further into Bull territory than other global asset classes, reflecting the higher strength of the US relative to the rest of the world.  The current Cyclical Bull has taken the US to new all-time highs, exceeding the highs of 2007, but most of the world’s major indices have barely matched 2011’s highs, let alone approach 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is in positive status and ticked up to 35 from the prior week’s 34.   Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication for the prospects for the first quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear still is in force as the long-term valuation of the market is too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory, with the US being far stronger than any other major market.  The Bond market is in Cyclical Bear territory as of June 7th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets remain in positive status.  The quarter-by-quarter indicator gave a positive signal for the 1st quarter:  both US and International equities were in uptrends at the start of Q1, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Markets started off the new year with a bit of a thud, probably a hangover from the big party that was 2013.  For the week, US indices were down -0.5% on average.  Canada’s TSX retreated -0.3%, but International markets were substantially weaker by an average -1%, with Emerging Markets once again leading on the downside, losing -2.9%.

For the year 2013, US markets were the strongest worldwide (except for Japan), with US indices returning from +26% to +38%.  After the US, Developed International came in at +21.6% on average, with Canada’s resource dependence holding the TSX Composite Index down to a still respectable +9.6%.  But Emerging Markets stood alone with a negative average return of -3.7%.

Reports of slowdowns in China were widely credited with triggering the selloff in the first two days of the new year, a tribute to the sway that the Chinese economy has over the rest of the world.  In fact, some reports indicate that China might have overtaken the US in total trade for the first time, thereby becoming the world’s largest international trader.

US economic news was largely positive.  The Institute for Supply Management (“ISM”) manufacturing index grew for the seventh straight month, manufacturing output increased at fastest pace since 2012, construction spending hit the highest levels since 2009, and consumer confidence came in at 78.1, well above expectations of 76.

A new poll by Canada’s CIBC found that paying down debt is by far the top financial priority for Canadians – a mixed blessing, as more savings equals less spending.  In that vein, a BMO report says that 48% of Canadians now have a Tax Free Savings Accout (“TFSA”), up from just 23% a year ago.  But there is much confusion about what may be held in a TFSA – most Canadians surveyed did not realize that stocks, mutual funds and similar investments can be held in a TFSA, not just savings accounts and CDs.  Another survey reported that most Canadians thought that Blackberry was the worst performer in the Canadian stock market for 2013 – it was bad, at -33%, but it was not the worst big Canadian company: Eldorado Gold Corp holds that honor, at -52.9%, a reflection of the worst year in the gold market in the last 3 decades.

In Europe, the UK and Germany continued their strings of good economic reports, while France continued its string of poor ones.  There were some slight glimmers of hope for Spain and Italy at the end of the year: Spain reported stronger retail sales, up 1.9% in November year-over-year, while Spanish unemployment fell in December by the most on record for the month (though officially the jobless rate is still 26%).  Italy had a solid Purchasing Managers Index number for manufacturing at 53.3, the first good manufacturing report in recent memory.

(sources: Barrons, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.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 sharply to 19.8 from the prior week’s 16.5, while the average ranking of Offensive DIME sectors rose again to 7.5 from the prior week’s 8.  The Offensive DIME sectors increased their wide lead over the Defensive SHUT sectors.

Note: these are “ranks”, not “scores”, so smaller numbers are higher and larger numbers are lower.

Summary:

The US led the recovery from 2011’s travails, and is the strongest among all global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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®, RMA®