FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 2/21/2014

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 25.4, little changed from the prior week’s 25.5, 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 69.4, up from last week’s 68.0, and still solidly in cyclical Bull territory.  For the last three years, 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 approached 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) remains in positive status, ending the week at 21, up 3 from the prior week’s 18.  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 January 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 were mixed worldwide last week.  In the US, LargeCap indices – the Dow 30 and S&P 500 – were down modestly at -0.3% and -0.1%, while the Nasdaq, SmallCap and MidCap indices were up from +0.5 to +1.3%.  The Canadian TSX gained +1.1%, while Internationals were also mixed: Emerging International lost -0.6% and Developed International gained +0.7% on average.

Economic news was light in the US during the week – except for news in the housing sector.  Unfortunately, it ranged from below expectations to bad.  Homebuilder sentiment for February took its biggest plunge on record, while the number for housing starts in January was far below expectations and down 16% compared to December.  Housing starts in the Midwest were at their worst pace since records have been kept (1959), but they did rise in the Northeast to their best level in more than a year.  On Friday, existing home sales data for January was released – a huge decline of -5.1% to an annualized pace of just 4.62 million, the lowest level since July 2012.  Countering the thought that it could be written off to weather, sales also plunged in the West, which wasn’t impacted by the nasty winter weather that plagued the Midwest and NorthEast.  The existing home median sales price was reported as $188,900, up +10.7% from a year earlier, but well off the June 2013 high of $214,000.

Canadians last week were asking “What next?” in frustration after learning that the Keystone XL pipeline will face yet another obstacle in a seemingly endless series of obstacles.  A small Nebraska state commission that has never even considered a major oil pipeline route will now play a pivotal role in deciding the fate of the Keystone XL pipeline.  A Nebraska state court ruling this week gave the Nebraska Public Service Commission authority over the Nebraska portion of the $5.4 billion project, and set aside the approvals Nebraska authorities have previously given or promised to give.  An appeal is certain.

China’s flash Purchasing Managers Index (“PMI”) for manufacturing in February was surprisingly poor, at 48.3 vs. 49.5 in January, and solidly in contraction mode.  Officials hinted that the Chinese Lunar New Year holiday, which fell on Jan. 31, and therefore impacted two months of data, had some effect – yet it is undeniable that the longer-term trend for manufacturing in China has not been good.

Many individual investors are convinced that the investment “game” is rigged against them, so it would not shock them to learn of a quiet announcement from Warren Buffet’s Berkshire Hathaway that was made this week.  It seems that a small unit of Berkshire Hathaway called “Business Wire”, which is in the business of distributing corporate news releases and announcements, has been selling early access to these items to high-speed traders who use it to profit by getting ahead of – well, you and me.  This practice is completely contrary to Warren Buffet’s folksy image as the champion of investors, and perhaps that’s why the company announced that the practice, while not illegal, will cease.

(sources: 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)

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 was unchanged from the prior week’s 11.3, while the average ranking of Offensive DIME sectors fell to 13.8 from the prior week’s 13.  Defensive SHUT continued their higher ranking than Offensive DIME Sectors, by a slightly widened margin of 2.5.

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.

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 2/14/2014

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, up from the prior week’s 25.0, 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 68.0, up from last week’s 66.7, and still solidly in cyclical Bull territory.  For the last three years, 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 approached 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive status this week, ending the week at 18, up 3 from the prior week’s 15.  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 January 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 moved to positive status on February 14th.  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 continued the rally begun on Thursday of the prior week, and all major market groups finished up +2% or more for the week.  In the US, the Dow and S&P 500 gained +2.3%, while the Nasdaq, SmallCap and MidCap indices all gained +2.9%.  The Nasdaq has broken back into the green for the year, while the S&P 500 is just -0.5% lower for the year to date.  Canada’s TSX likewise gained +2.1% for the week, as did the Developed International index, while the Emerging International index gained +2.4% but remains -5.1% for the year to date.  Japan continued to be the worst performing global market for the year to date (after a world-beating +56% for 2013), losing another -0.5% for the week, and China was the best performing major market at +4% for the week.

Two items dominated all others in the US: Fed Chair Janet Yellen’s first congressional testimony since ascending to the Fed Chairmanship, and the vote to increase the debt-limit.  Both resolved positively, giving the market an excuse to plow higher, erasing almost all of the losses of the young year.  Ms. Yellen soothed any fears that she would do anything other than continue the easy money policies of her predecessor.  As a Keynesian economist, she is on record with a pro-stimulus viewpoint, so there is no chance she’ll take away the punch bowl anytime soon.  Surprisingly to some observers, however, her testimony was marred by her inability to recall or recite many basic facts and figures about the Fed and its current policies.  Seemingly the only losers from Ms. Yellen’s testimony are savers, who have borne the negative effects of the Fed’s zero interest rate policy for some years now and will likely continue to do so.

House Speaker Boehner engineered a “clean” debt limit bill (“clean” meaning it was devoid of any riders or amendments that would bog it down in the Senate or invite a Presidential veto).  After some procedural maneuvering, it also passed the Senate.  The bill extends the debt limit to March of 2015, so debt limit histrionics are off the table for another year.

The Canadian dollar, the “Loonie”, sank again this past week although in the view of some, it still has a way to go before Canada’s central bankers are satisfied.  Luc de la Durayante, of CIBC Global Asset Management, said “The government has become more aggressive now about pursuing a lower dollar — If we want to regain our competitiveness, we should see the dollar back below 88 cents (US). We’re about 50 to 75% of the way there, so it’s still early.”  Perhaps the lower Loonie made it easier for Canadian Olympic skier Jan Hudec to afford to bury his “Lucky Loonie” at the finish line of the men’s Super-G – and true to superstition, he won a medal, tying American Bode Miller for the Bronze prize.

Although many of China’s statistics are of dubious quality, one minor one stood out for its likely truthfulness: sales of luxury gift items in the major city of Fuzhou, capital of Fujian Province, have fallen by as much as 70% in high-end shopping districts.  It seems that an anti-graft and anti-corruption campaign has been in full swing there, and observers believe that – since nearly every government transaction has historically had to be “greased” with gifts – the plunge is due entirely to the campaign, accentuating the depth of the ingrained problem.

(sources: 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)

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 11.3 from the prior week’s 11, while the average ranking of Offensive DIME sectors rose to 13 from the prior week’s 14.5.  Defensive SHUT continued their higher ranking than Offensive DIME Sectors, but only by a very slim 1.7.

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.

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 2/7/2014

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 25.0, up a small amount from the prior week’s 24.8, 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 66.7, down from last week’s 68.2, and still solidly in cyclical Bull territory.  For the last two years, 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 approached 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is in negative status, and sat at 16 at the end of the week, down from the prior week’s 21.  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 January 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 moved to negative status on January 29th.  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:

After a deep decline in the first half of the week, markets rebounded on Thursday and Friday to finish mixed for the week.  In the US, the Dow, the S&P 500 and the Nasdaq finished in the green, while the MIdCap and SmallCap indices finished in the red.  The average gain for all US indices was +0.2%.  Canada’s TSX gained +0.7%.  Developed International did the best of all major world groups, at +2.4%, while Emerging International gained an average +1.4%.  Reversing recent results, Brazil gained a sizable +3.6%, but China continued its recent poor performance, down -0.5%.  Emerging Markets continue to trail the rest of the world markets for the year to date, averaging  -7.3%

Although most investors think that Emerging Markets are highly correlated to the US (given the dependence of emerging economies on the health of the US economy), in reality the US and Emerging Markets can greatly diverge for years at a time.  The underperformance of Emerging Markets over the last several years is not unusual.  For example, looking at the past 25 years, there have been these consecutive periods of dramatic out- and under-performance:

US

(S&P 500)

Emerging Markets

(MSCI Emerging Mkts)

1988 – 1993

+122.0%

+545.4%

1994 – 1998

+193.9%

-38.5%

1999 – 2007

+38.1%

+420.1%

2008 – 2013

+43.7%

-5.2%

A big economic shocker in the US was the drop in the factory new orders index for January, which plunged the most since 1980.  However, Markit published data to show it was more of a correction of prior over-reporting than a reflection of a sudden dramatic industrial slowdown.  Friday’s non-farm payroll number was lower than most estimates, at 113,000 vs consensus expectations of 189,000, but investors gave it the benefit of the doubt and drove the Dow higher by triple-digits for the second consecutive day.

Canada’s employment report returned to the positive side of the ledger, reporting a gain of 29,400 jobs for January, following the shocking -45,900 December report.  In typical modest and understated Canadian fashion, Bank of Canada official Tiff Macklem spoke on the troubling lack of inflation in Canada, saying “We need to do our best to determine why inflation is below target, but no matter how hard we try, there will be uncertainty about our diagnosis.”  Canadian central bankers have expressed ongoing concern that deflation could derail the Canadian economy and have established a target of 2% inflation which has so far not been achieved.

In Europe, several countries which have been stagnating for years have begun to show life, at least in the Services sector.  Spain’s Services Purchasing Managers Index (“PMI”) increased to 54.9 in January, a strong start to the year.  Italian and French Services PMIs both rose in January also, increasing to 49.4 and 48.9, respectively, continuing recent improvements as they try to get back into expansion territory above the 50 level.  On the manufacturing side, the January Eurozone PMI came in at 54.0, the best since May 2011. Germany’s was 56.5, a 32-month high, while France edged up to 49.3, a 4-month high.  The biggest surprise came from Greece, which came in at 51.2 – the first time since 2009 Greece was in the expansion territory above 50.

(sources: 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)

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 11 from the prior week’s 11.5, while the average ranking of Offensive DIME sectors also rose, to 14.5 from the prior week’s 16.5.  Defensive SHUT continued their higher ranking than Offensive DIME 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.

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 1/31/2014

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 24.8, little changed from the prior week’s 24.9, 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 68.2, down from last week’s 72.2, 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 approached 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is in negative status, having dropped to 21 from the prior week’s 32.  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 January 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 moved to negative status on January 29th.  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:

It was another down week for most markets worldwide, culminating a decisively down January.  The Dow, down 4 of the last 5 weeks, finished January down -5.3% and was the worst of the US indices (and the worst month for the Dow since May, 2012).  Developed Markets were down a similar -5.2% on average for January, but Emerging Markets fared much worse at an average -8.6% for January alone (and adding to losses from 2013).  Canada’s TSX bucked the trend, however, gaining +0.5% for the month on the back of a winning month for precious metals and miner stocks.  China reversed a string of recent weekly losses and gained 1% for the week while Brazil continued its losing ways, down almost -2% for the week.  Japan’s Nikkei had the worst week of major global indices at -3%, and is at its lowest level since November.

The world economy dodged a bullet during the week when China Credit Trust Co Ltd, a leading Chinese “shadow bank” (a private trust used to finance projects that state-run banks won’t), was bailed out through some unexplained mechanism.  Had it failed, many privately-owned Chinese companies would have been badly affected and with them, the Chinese markets and, by extension, many others.  However they did it, let’s hope it sticks.

A number of emerging-market countries have seen their currencies battered in recent weeks as investors sold them aggressively, perhaps in response to the Fed’s tapering which is thought to have knock-on negative consequences for emerging economies.  Some countries have tried to protect their currencies with interest-rate increases, while others welcome the de facto devaluations as a means to maintain or increase competitiveness.  Turkey, Argentina, Ukraine, Hungary and Poland have all shared the headlines.

In the US, mixed economic news included the early read of the January Purchasing Managers Index (“PMI”) which rose to 56.6 in January, up from 55.7 in December.  But pending home sales cratered -8.7% month over month, the biggest miss in over 3 years and worst numbers since May 2010.  Durable goods orders dropped by -4.3% vs an expected +1.8% rise, and core capital expenditures fell -1.3% vs an expected +0.3% rise.  And new home sales tumbled -7.1% month over month in December, much worse than the expected -1.9% drop.

Canadians welcomed the news on Friday that the US State Department has concluded that the Keystone XL Pipeline project will have negligible adverse consequences to the economy and the environment.  Although the battle is not quite completely won yet (Pres. Obama gets the last word), some might wonder whether the prominent advertising campaign in Washington DC’s Metro train stations had some effect.  The National Post reports that “Since at least early January, thousands of commuters in the U.S. capital have passed under massive banners showcasing idyllic scenes and touting up the Great White North as “America’s best energy partner.”

(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 sharply to 11.5 from the prior week’s 16.0, while the average ranking of Offensive DIME sectors fell to 16.5 from the prior week’s 13.8. The Defensive SHUT sectors have overtaken the Offensive DIME sectors and now lead them by 5 ranking positions.

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.