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.
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.
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.
Dave Anthony, CFP®, RMA®