FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 5/30/2014

The very big picture:

In the “decades” timeframe, we have been 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 is at 25.9, up a little 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 65.7, up from the prior week’s 63.6, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) remains in positive status, ending the week at 29, up two from the prior week’s 27.  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 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear still may still be in force as the long-term valuation of the market is simply 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.  The Bond market returned to Cyclical Bull territory as of February 28th.  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 2nd quarter:  both US and International equities were in uptrends at the start of Q2, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

LargeCap Tech has snapped back from the recent technology pullback and set a 14-year high during the week.  The LargeCap Tech index, the Nasdaq 100, lead all US indices for the week and for the month of May, and finished May up +4.0% for the year to date.  The Nasdaq 100 gained +1.6% for the week, and +4.3% for the month of May.  The next best US index was the S&P 500, gaining +1.2% for the week and +2.1% for the month of May.  It, too, is up +4% for the year to date.  The Russell 2000 SmallCap Index is now the only US index in negative territory for the year to date, at -2.5%.  Developed International gained +1.0% for the week, and gained +1.6% for the month of May.  The Emerging Markets index lost ground last week at -1.4%, affected by Brazil’s -2.8% setback.  Canada’s TSX lost -0.7% for the week, and finished May essentially flat for the month but remains well ahead of the US year to date at +8.6%.

The biggest economic news in the US during the week was the release of the revised first-quarter GDP – which was far softer than expected at -1.0% after the initial release showed a gain of +0.1%.   It will be very difficult for the economy to now meet the consensus expectations for a 3%-4% GDP gain for the entire year.  April durable goods was disappointing at +0.8%, which on the surface was a good number, but it turns out it was basically all defense-related, including a single large nuclear submarine order. Taking out defense, orders were actually down  -0.8%.  But the Chicago Purchasing Managers Index (“PMI”) for May was a very strong 65.5, much better than expected, and the S&P/Case-Shiller home price data for March was likewise solid, with prices in the 20-city survey group up +12.4% over March 2013.

GDP was likewise topic number one in Canada for the week.  GDP grew at a +1.2% annualized pace in January through March, according to Statistics Canada – a substantial slowdown from the Q4 +2.7% pace.  Economists surveyed by Bloomberg had predicted growth would slow, but to a higher +1.8 percent pace.  The slump was broadly based and included contractions in investment spending by businesses and housing construction.  Home building recorded its biggest quarterly decline since the 2008 recession, falling an annualized -6.3%.  So did final domestic demand, a measure that excludes the trade sector, which fell by an annualized -0.3%.  Positive contributions by industry segment came from oil and gas, with construction and services-related businesses such as wholesalers and retailers among the biggest drags.

A comment two weeks ago about the frequency of SmallCap pullbacks of 10% or more, and whether the divergence between SmallCap and LargeCap performance portends anything, drew a number of comments and questions.  The most-asked question was “What is the frequency of LargeCap pullbacks of similar magnitude compared to those SmallCap pullbacks?”  Here is a graphic which answers that question nicely – showing that during Cyclical Bull Markets there are many more SmallCap pullbacks of double-digit magnitude than LargeCap, and again showing that SmallCap pullbacks are not necessarily predictive of…anything.  (the Russell 1000 is a LargeCap index, similar to the S&P 500)

Source: 361capital.com

The Eurozone awaits the European Central Bank (“ECB”) meeting this week, where it is expected that Mario Draghi will announce steps to combat looming deflation in many of the European Union countries.  Germany’s unemployment rate ticked up for the first time in 6 months.  France announced it had overestimated tax receipts for the year, with actual tax receipts coming in at barely more than 50% of the projected amount – despite France having raised income tax, VAT and corporate tax rates all since Francoise Hollande came to power.  Skeptics insist that France’s government was lying all along about probable tax receipts in order to avoid ECB-mandated budget cuts.

The “chickens are coming home to roost” regarding the business costs of the NSA spying programs that have been revealed to include the insertion of spy chips and software into the regular products of the likes of IBM, Cisco Systems and others (without necessarily any cooperation from the manufacturers themselves).  The Chinese government is now strongly urging Chinese domestic banks to remove high-end servers made by IBM and replace them with domestic brands, with the People’s Bank of China and the Ministry of Finance saying the reliance on IBM specifically and US companies in general compromises the country’s financial security.  The Financial Times also reported that Chinese state-owned companies have been ordered to cut ties with U.S. consulting firms.

(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, wantchinatimes.com, BBC, 361capital.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 to 11.0 from the prior week’s 10.3, while the average ranking of Offensive DIME sectors was unchanged at 12.3.  The Defensive SHUT retained a slight lead over the Offensive DIME sectors.

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

Summary:

The US led the recovery from 2011’s travails, and continues to be among the strongest of 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™ for the week ending 5/23/2014

The very big picture:

In the “decades” timeframe, we have been 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 little changed at 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 63.6, up from the prior week’s 62.0, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) remains in positive status, ending the week at 27, down one from the prior week’s 28.  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 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear still may still be in force as the long-term valuation of the market is simply 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.  The Bond market returned to Cyclical Bull territory as of February 28th.  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 2nd quarter:  both US and International equities were in uptrends at the start of Q2, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Markets around the world were generally positive for the week ending May 23rd.  In the US, the Nasdaq set the pace with a +2.3% gain, followed by the Russell 2000 at +2.1%.  The Russell 2000 now remains the only US index with a negative year to date return, as the Dow broke into positive territory for the year. The S&P 500 gained +1.2%.  Canada’s TSX index gained +1.4%.  International markets lagged North American markets this week, with Developed International rising +0.3% and Emerging International gaining +0.5%.  Recently-hot Brazil went the other way this week, giving up -2.9%.

The major US economic news this week all started with the letters “R” and “e” – as in Real Estate and Retail.  Existing home sales for the month of April came in up +1.3% month over month, to an annualized figure of 4.65 million – the first such gain of the year (though down -6.8% when compared with April 2013).  New home sales for the month were a little better than expected.  The two taken together indicate some stabilizing after a rough winter.  Another positive is the average rate on a 30-year fixed mortgage is down to 4.14%, the lowest since last October.  All the big Retailers have now reported their first quarter sales, and they were mostly poor, with a few exceptions.  Some samples:

Macy’s…down 1.6%
Wal-Mart…down 2.4%
Kohl’s…down 0.8%
Target…down 0.3%
Nordstrom…up 3.3%
Home Depot…up 2.6%
Lowe’s…up 0.9%
Best Buy…down 1.3%

One of the aforementioned exceptions was Tiffany’s which, although it is nowhere near as large as those retailers listed above, nonetheless impressed with a +11% same-store gain.

Canada’s transportation of oil by rail has risen dramatically, by 50% in just the last year to 160,000 barrels per day.  Despite the horrific accident at Lac-Megantic, Quebec last year, more rail shipments seem destined.  And now TransCanada , which has waited more than 5 years for the Obama administration to move on the proposed KeystoneXL pipeline, has suggested using rail transport to move oil to a Nebraska terminal where it would feed an existing pipeline as a way to cope with the stall by the US.

One of the most common refrains from those watching the fixed-income markets for the past year has been “Rates have simply GOT to go up from here!”  However, rates have failed to cooperate, hovering recently in the 2.5% range for the benchmark 10-year note – far below the consensus view of where they “ought” to have gone.  But when seen from a global competition perspective, a different picture emerges.  There are so many countries with great credit ratings selling 10-year notes for even less than the US, there appears to be little competitive pressure for US rates to rise.  And even countries with much worse credit environments – like Italy and Spain – are able to sell their 10-year paper at rates only a little higher than the US, effectively limiting potential upward movement of US rates.  Here is a graphic illustrating the surprisingly large number of countries offering 10-year paper at even lower rates than the US:

(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, wantchinatimes.com, BBC, wallstreetrant.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 10.3 from the prior week’s 10.8 for the week, while the average ranking of Offensive DIME sectors slipped to 12.3 from the prior week’s 10.8.  The Defensive SHUT sectors have grabbed the lead over the Offensive DIME sectors by a margin of 2.

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

Summary:

The US led the recovery from 2011’s travails, and continues to be among the strongest of 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 5/16/2014

The very big picture:

In the “decades” timeframe, we have been 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 little changed at 25.3, 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 62.0, down slightly from the prior week’s 62.6, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) remains in positive status, ending the week at 28, 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 on the first day of April for the prospects for the second quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear still may still be in force as the long-term valuation of the market is simply 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.  The Bond market returned to Cyclical Bull territory as of February 28th.  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 2nd quarter:  both US and International equities were in uptrends at the start of Q2, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

The US and Canada were exceptions in returning flat to down results for the week ending May 16th.  Most other markets worldwide were positive, with Emerging Markets leading the way at +3.2% (driven by China and India, up +4.2% and +8.2% for the week, respectively).  Developed Markets were mixed but positive at +0.4%.

In the US, all indices were contained in a tight range of -0.6% to +0.5%, with the Nasdaq Comp best at +0.5%, the Dow Jones Industrials worst at -0.6%, and the S&P 500 right between them at -0.03%.  Canada’s TSX was likewise flat for the week, at -0.1%.  For the first time in 6 weeks, the Russell 2000 Small Cap Index was not the worst of the US indices.  The Russell 2000 has fallen 10% from its early March highs, and many observers have asserted that the divergence of the Russell 2000 and the Dow / S&P – which each set new all-time highs this week – can only portend bad things for the market.  However, a study from the Leuthold Group points out that the Russell 2000 experiences double-digit declines sometime during practically every year – even during otherwise very good years for the overall market – and that divergence between the Russell 2000 and the Dow / S&P are common and not necessarily indicative of coming calamity.  This illustration is from that Leuthold Group report:

In US economic news, the April retail sales figure was very poor, up just +0.1% when a rise of +0.4% was expected, and was unchanged ex-autos.   April industrial production was down -0.6% vs a forecasted slight gain.  But on Friday, the figure on April housing starts was better than expected, up +13% to a 1.07 million annualized rate.  However,  the lion’s share of the increase was due to construction starts on multifamily projects such as condominiums and apartment complexes, while single-family construction was up just +0.8%.  Single-family home sales via mortgage loans have been sinking rapidly, and RealtyTrac noted that because of tougher lending standards (coupled with rising prices and supply/demand issues), 43% of recent sales nationwide have been all cash.

Canada, a major wheat exporter, saw its agricultural sector jolted by a swift -9.4% decline in wheat futures prices that were down 8 days in a row.  Weather forecasts for good growing conditions in both the US and Western Canada, coupled with a large order from Egypt going to Ukraine instead of North American growers both pressured the market with fears of oversupply.

In Europe, Eurostat, the official statistical arm of the European Union, released GDP figures for the first quarter and the euro area grew a tiny +0.2% over the previous quarter (up just +0.9% year over year).  But if you took out Germany, up a better than expected +0.8% (+2.3% year over year), the rest of the euro-18 actually contracted!  France’s GDP was unchanged, with consumer spending down -0.5% for the quarter; Italy’s GDP was unexpectedly negative, down -0.1%; the Netherlands’ GDP was down a whopping -1.4% for the quarter and even though Spain’s rose +0.4%, it’s still up just +0.6% vs. year ago levels.  Mario Draghi is being pressured to act at the ECB’s early June meeting to both goose GDP and stave off the specter of deflation.  Deflation has already arrived in many weaker EU countries: prices fell in Greece, Cyprus, Portugal, Slovakia, Hungary and Bulgaria.

India’s pro-business opposition leader Narendra Modi is the new prime minister after the ruling Congress party conceded defeat in the Indian general election.  Modi’s Hindu nationalist Bharatiya Janata party (BJP) is expected to win an outright majority, perhaps 300 seats, which is a large victory – the first such victory for a single party in three decades.  The Indian stock market hit new highs as business leaders threw their weight behind Modi’s candidacy.

(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, wantchinatimes.com, BBC, The Leuthold Group)

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 at 10.8 for the week, while the average ranking of Offensive DIME sectors slipped to 10.8 from the prior week’s 11.0.  The Defensive SHUT sectors and the Offensive DIME sectors are equally ranked as indecision has taken hold.

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

Summary:

The US led the recovery from 2011’s travails, and continues to be 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 5/9/2014

The very big picture:

In the “decades” timeframe, we have been 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 unchanged at 25.4, 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 62.6, down slightly from the prior week’s 63.1, 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, 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 28, 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 on the first day of April for the prospects for the second quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear still may still be in force as the long-term valuation of the market is simply 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 returned to Cyclical Bull territory as of February 28th.  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 2nd quarter:  both US and International equities were in uptrends at the start of Q2, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Most markets worldwide were negative for the week ending May 9th.  In the US, only the Dow Jones Industrials were higher for the week, at +0.4%, while all other US indices were down ranging from -0.1% for the S&P500 to     -1.9% for the Russell 2000 SmallCap index.  The Dow actually closed the week at a new all-time high, while at the same time the Russell 2000 is off about -10% from its March highs – an unhealthy divergence.  Developed International markets were down an average -0.3%, while Emerging International markets were flat on average with China notable among them at -1.2%.  Canada’s Toronto Composite Index was in the worst performers of the week group, at -1.6%.

In the US, the Institute for Supply Management (“ISM”) non-manufacturing index increased to 55.2 in April from 53.1 in March, exceeding the 54.0 economists were forecasting.  Any reading above 50 signals growth in the sector.  Two subindices were notable: the new-orders subindex jumped to 58.2 from 53.4, and the export orders subindex climbed sharply to 57.0 from 49.5.  Home purchase applications rose a modest +0.9% from the prior week as 30 year mortgage rates hit a 26 week low.  Total US exports increased +2.1% month-over-month in March, up from a -1.3% decline in February, helping the trade deficit narrow to $40.4B in March, down from $41.9B in February.

Federal Reserve Chair (“Chair” is at her request – not “Chairman”, and not “Chairwoman”) Janet Yellen made her first appearance before Congress’ Joint Economic Committee and reaffirmed that the Fed believes the economy is on the mend but that the central bank is prepared to act further if necessary.  The single sentence in her prepared remarks that got the greatest attention of investors:  “A high degree of monetary accommodation remains warranted.”

Canada’s stock market decline of -1.6% was in part due to a jobs report that greatly surprised to the downside: 28,900 jobs were lost in April vs expectations of a 12,000 job gain.  The losses were widespread, with only 3 of 10 provinces reporting job gains.  The unemployment rate was unchanged at 6.9% (13.4% for the 15-24 age bracket).  Some observers downplayed the report, however, noting that Good Friday fell in the survey week and may have distorted the reported numbers.

In Europe, economic monitoring firm Markit reported that an output measurement for the Irish economy was at a 94-month high, while for Spain it was at an 85-month high.  Germany and Italy were modestly positive, but France was moribund and continues to lag its EU counterparts.  French President Hollande’s approval rating seems likewise stuck, at just 20%.

In China, HSBC’s Purchasing Managers Index (“PMI”) for April came in at just 48.1 vs 48.0 in March, making March the fourth month in a row of contraction (below 50 is contraction).  China did receive better than expected news on the export front, up +0.9% from a year earlier in April after being down two straight months.  Imports rose +0.8% after being down -11.3% in March.  Inflation was up only +1.8% in April from a year earlier, while producer prices fell for a 26th straight month, down -2%, as manufacturers with excess capacity compete on price to keep their factories busy.

(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, wantchinatimes.com, BBC)

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 10.8 from the prior week’s 11.5, while the average ranking of Offensive DIME sectors rose to 11 from the prior week’s 11.8.  The Defensive SHUT sectors maintained their slim lead over the Offensive DIME sectors.

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

Summary:

The US led the recovery from 2011’s travails, and continues to be 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™ for the week ending 5/2/2014

The very big picture:

In the “decades” timeframe, we have been 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 little changed at 25.4, 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 63.1, up from the prior week’s 62.2, 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, 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 28, up 1 from the prior week’s 27.  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 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 returned to Cyclical Bull territory as of February 28th.  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 2nd quarter:  both US and International equities were in uptrends at the start of Q2, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

The month of April was a mixed bag for markets worldwide.  In the US, only the LargeCap S&P 500 and Dow Industrial indices eked out gains for the month, while the SmallCap Russell 2000 fell almost -4%.  Canada and most International indices were winners for April, with Canada leading the way at +2.4% and an impressive year-to-date gain of +8.7% through April.  Although some segments of Emerging International have made big turnarounds recently (like Brazil), the MSCI Emerging Markets Index nonetheless finished April with a -1.1% year-to-date tally.

For the week, all major indices were positive, with International markets outpacing the US.  During the course of the week, the Dow established new all-time highs, and the S&P 500 kissed its all-time high for a moment, but the shakes over Ukraine pulled the rug from beneath the market on Friday and the week finished with a fizzle rather than a bang.  SmallCaps again underperformed LargeCaps as the rotation from small to large, and growth to value continued.  Canada’s TSX finished the week with a robust +1.6% gain.

Economic news in the US was bipolar: a lousy Q1 DGP (just +0.1%, well below the economy’s “stall speed”), and a very good April non-farm payrolls number.  The Fed, and most economists, seemed to give the GDP number the benefit of the doubt due to the unusually severe winter.  The non-farm payrolls number and attending unemployment rate were greeted warmly by the Administration, whose spokesmen mostly ignored the huge number of workers dropping out of the workforce (more than 800,000) which in turn facilitated the sizeable drop in the unemployment rate – and dropped the workforce participation rate to its lowest level in 36 years.  At least consumer spending for the first three months of the year was up smartly, even as business spending was down      -2.8%, the weakest performance since Q4 2009. Manufacturing figures from both the Chicago Purchasing Managers’ Index (“PMI”) (63.0) and the national Institute for Supply Management (“ISM”) reading (54.9) were above consensus, well above in the case of the Chicago PMI.

The US housing market continues to be tentative at best.  US home prices were nearly unchanged in February, after slumping -0.1% in each month since November, according to the Case-Shiller 20-city composite index released Tuesday. “The annual rates cooled the most we’ve seen in some time,” David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said in a statement.  Including February, prices remained about 20% below a 2006 peak.  The Mortgage Bankers Association’s chief economist said housing is in a ”weaker spring market than we have seen in years.”

It is likely that not many teachers in Ontario, Canada, knew their pensions were partly invested in….lean hogs.  It was revealed last week that the Ontario Teachers Pension Plan Board was fined by the Chicago Mercantile Exchange for violating position size limits multiple times, and forced to disgorge some profits as well.

The unemployment rate for the Eurozone in March was unchanged at 11.8%, the same level as December and just a slight improvement over the past 12 months from the peak in March 2013 of 12.0%.  The unemployment rate was 5.1% in Germany, while unemployment is 10.4% in France (unchanged over the past year), 12.7% in Italy (up from 12.0% a year ago), 25.3% in Spain (down from 26.3%) and 26.7% in Greece.  Ireland’s jobless rate has fallen from 13.7% to 11.8% over the past year, but many attribute the decline to a renewed emigration by young Irish.  As for the youth unemployment picture, it remains incredibly sickly across southern Europe: Spain, 53.9%, Greece, 56.8%, and Italy, 42.7%.

In China, a crackdown by the government on internet porn requires Chinese online companies to review and censor all content before publishing it online.  This, of course, requires “porn investigators” to closely inspect all content – and a job posting for such a position generated 4,000 applicants within hours.  The video-sharing sites of web portals Sina and Sohu were forced to close after two of Sohu’s original video series were considered by the government to contain pornographic content, a closure which reduced China’s total internet traffic by an incredible 20% at one point.

(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, wantchinatimes.com, BBC)

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 11.5 from the prior week’s 12.0 while the average ranking of Offensive DIME sectors fell to 11.8 from the prior week’s 10.3.  The Offensive DIME sectors have given up the lead to the Defensive SHUT sectors.

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

Summary:

The US led the recovery from 2011’s travails, and continues to be 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.