FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 6/27/2014

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 26.3, unchanged from the prior week 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 69.7, up from the prior week’s 68.8, 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 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 on the first day of April for the prospects for the second quarter of 2014, and is poised to continue its positive disposition into Q3.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear 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:

Most of the world’s markets declined for the week ending June 27th, but generally did not lose very much.  In the US, the S&P 500 slipped just -0.1%, likewise for Canada’s TSX.  The Dow Industrials lost -0.6%, but the SmallCap, MidCap, and Nasdaq indices managed to post gains.  Developed International retreated -0.8%, led by Germany’s   -3% loss, while Emerging International posted a +0.3% gain.

On Wednesday, US GDP for the 1st quarter was given its final revision, and it was a shocker: -2.9%, the worst report since the first quarter of 2009, and the worst non-recession GDP report in more than 50 years.  Despite the horrible GDP number, the US markets actually finished higher on Wednesday.  More than the GDP report, the US markets were rattled by the President of the St. Louis Fed, James Bullard, who speculated on Thursday that the Fed might enact rate hikes sooner than markets anticipate.  He asserted that both the US unemployment rate and US GDP growth rate are rapidly nearing Fed target levels and could reach them as soon as the coming turn of the year. 

In other US economic news, several items from the housing sector were warmly greeted.  Existing home sales increased +4.9%, the biggest gain since 2011, and new home sales increased +18.6% month over month, the largest monthly increase since January 1992.  The Case-Shiller housing price index, though, increased by just +0.2% in April, the smallest increase since February 2012.   The +10.8% year over year home price gain reported by Case-Shiller was the smallest since March 2013.  Both of the Case-Shiller items suggest the recent rapid rise in real estate prices is slowing.

Video camera maker GoPro went public on Thursday via the Nasdaq, rising 23% on its first day.  GoPro was the 144th US IPO this year, the fastest pace in more than twenty years.  The dollar volume, $30 billion so far, points to 2014 potentially being the busiest dollar volume year since 2000.  Alibaba, the Chinese internet company, announced it will hold its IPO on the NYSE (probably in August), dealing a blow to Nasdaq, which had wanted the Alibaba IPO very badly.  The Nasdaq exchange is still feeling the negative aftereffects of the botched Facebook IPO.

Canada’s “Junior Miners” sector, which is populated by micro- and small-cap exploration and discovery companies, has traditionally been readily funded by investors looking for a big score.  Lately, though, funding has dried up for Junior Miners, and many have fallen on hard times.  More than a few Junior Miners have recently decided that there’s more gold in pot than there is in the ground – legal medical marijuana, in particular.  More than a dozen have switched from mineral exploration to marijuana production, all hoping to follow the skyrocketing arc of “Affinor Resources, Inc.”, one of the first to switch.  Affinor’s stock price rocketed 2,600% in just nine weeks after switching to medical marijuana from precious metals, and its market cap went from $2 million to $50 million.

In Europe, a composite flash Purchasing Manager’s Index (“PMI”) reading on the Eurozone’s manufacturing and service sectors came in at 52.8 for June vs 53.5 in May, and with the manufacturing component ticking down to 51.9 from the prior month’s 52.2.  The report breaks out only German and French manufacturing PMIs, and they continue to head in opposite directions.  German manufacturing PMI at 52.4 was slightly better than May’s 52.3, but France continued to worsen with its manufacturing PMI reported at just 47.8 vs. 49.6 in May.  France continues to experience shrinkage of its manufacturing sector with sub-50 (contraction) numbers.

In China, the Hong Kong Shanghai Bank (“HSBC”) flash reading on manufacturing for the month of June showed a rise to 50.8 from 49.4 in May.  HSBC’s figures have long been viewed as more reliable than the government’s readings, and HSBC focuses on the private sector, while China’s bureau of statistics emphasizes state-run enterprises.  Both sources, however, have been showing readings that fluctuate around the 50 level with some months in higher (expansion) and some in lower (contraction) territory.

(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, S China Morning Post, NY Post)

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 10.5 from the prior week’s 13.0, while the average ranking of Offensive DIME sectors fell to 14.3 from the prior week’s 13.  Institutional investors remain cautious, despite recent new highs, and the Defensive SHUT group ranking is now higher than the Offensive DIME ranking.

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

Summary:

The US has led the worldwide recovery, 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 6/20/2014

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 26.3, up slightly from the prior week’s 26.1 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 68.8, up from the prior week’s 67.6, 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 35, up 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 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 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:

Save for some emerging markets, the week was positive for stock indexes worldwide.  US markets closed on another new high for the Dow and S&P 500, gaining an average +1.4% across all US indices and led by the SmallCap Russell 2000 at +2.2%.  US market action recently has been marked by a total lack of volatility, with Friday marking the 45th straight day the S&P closed up or down less than 1% – the longest such stretch since 1995.  Canada’s TSX gained +0.7% and finished the week at a new high, besting its previous high set in June of 2008.  Developed markets gained an average +1.2%, but Brazil and China both declined on the week, dragging down the Emerging Markets index, which lost a modest -0.1%.

In the US, inflation fears regained center stage for the first time in a long time, with a 2% inflation rate reported by the government.  Fed chair Yellen, however, downplayed any threat saying that inflation appeared to be contained at or below their acceptable target.  But lots of evidence says otherwise.  The New York Post recently ran a piece subtitled “Barbecue-Season Bummer” containing these US Department of Labor stats: the cost of ground beef has gone up 11 percent, pork has increased 9.4 percent and fish has spiked 4.2 percent just since last spring.  One official at Associated Supermarket in Manhattan, who has worked in the grocery business for 30 years, said “I’ve never seen increases like this – where they jump as much as this.” He reported costs for beef, tilapia and pork chops all rising between 30 and 40 cents per pound since last year.   And then there’s oil…

Canada, which has long enjoyed a reputation as a model of immigrant assimilation, has just enacted very restrictive rules on the use of immigrant labor at the low end of the wage scale.  The period of time that an immigrant laborer can keep one of the entry-level jobs is now restricted to just two years and the percentage of employees that can be comprised of immigrants is also capped.  Restaurants and other service industry groups are very unhappy and are predicting closures, shortened hours, and higher prices as a result.

The UK, currently enjoying the strongest economy in the European Union, has also been home to the strongest rise in home prices in the EU.  A serious bubble has formed in some areas, particularly the toniest neighborhoods of London.  The UK Office of National Statistics said London home prices were up a whopping +18.7% in April from a year earlier, up 9.9% across all the U.K., but another survey revealed London prices were actually down -0.5% in June over May – so the top may be in.

China, too, is experiencing a reversal in fortunes in the housing arena.  Prices fell in 35 of the 70 cities monitored by China’s National Bureau of Statistics, down a composite -0.3% from April and down -11% from May 2013.  Developers are reported to be cutting prices for the first time in memory.  The real estate industry accounts for about a fifth of China’s GDP and JPMorgan Chase & Co. is among those warning of a potential crisis with developers that have had trouble obtaining financing, and from “property trusts” that lend money to smaller builders and face record repayments next year, just as the market is cooling.

Also from China comes this disturbing piece from the South China Morning Post: “Large colonies of micro-organisms – some capable of causing serious disease – have been discovered inside pipelines carrying drinking water to homes in most major mainland Chinese cities.  Most Chinese people habitually boil water before drinking, killing off the organisms and reducing the risk of outbreaks.  But many foreign visitors are completely unaware of the issue and often drink water straight from the tap.”  You have been warned – don’t breathe the air or drink the water!

(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, S China Morning Post, NY Post)

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 13 from the prior week’s 15.5, while the average ranking of Offensive DIME sectors fell to 13 from the prior week’s 11.3.  Institutional investors renewed their caution, despite new highs, and the Defensive SHUT group ranking is now exactly equal to the Offensive DIME ranking.

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

Summary:

The US has led the worldwide recovery, 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 6/13/2014

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 26.1, barely changed from the prior week’s 26.2 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 67.6, little changed from the prior week’s 67.8, 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 34, up from the prior week’s 33.  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 week was a modest loser for most of the world’s developed markets.  US indices fell from -0.2% to -0.9%, while Developed International retreated by -0.7% with Germany being the worst major component at -1.8%.  The Emerging Markets index, however, rose +0.1% for the week, mostly on the strength of Brazil at +3.8%.  For the first time in three months, the higher-volatility Russell 2000 SmallCap Index fell less ( -0.2%) than the lower-volatility S&P 500 (-0.7%), but the Russell 2000 remains the only US index in the red for the year at -0.1% year-to-date.  Some analysts noted that the S&P and Dow both registered a pattern called “Buying Climax” this week – a pattern created when a new 52-week high is set during the week, yet the week closes down from the prior week.  The “Buying Climax” pattern is said to indicate potential exhaustion of demand.  Canada’s TSX was buoyed by the Energy sector’s gains (due to the Iraq civil war), gaining +1.1% for the week and finishing only a half-percent beneath its all-time high set in 2008.

One of the key concerns among US economists has been the shrinking of the rate of consumer credit expansion over the last two years – reflecting credit card debt, appliances, auto purchases and the like.  Recently strong auto sales hinted at a higher rate of credit expansion, and recent Fed data now confirms a strong turnaround in credit expansion so far this year as reflected in this chart.

Other economic news in the US was notable for a couple of measurements that have regained their pre-recession highs.  The National Federation of Independent Business (“NFIB”) small business optimism index came in at 96.6, better than the 95.8 expected.  The optimism index is now at the highest level since September 2007.  Small businesses also reported great difficulty in finding skilled workers.  The government’s “Job Openings and Labor Turnover” report, known simply as the “JOLT”, reported 4.45 million job openings in April, substantially besting expectations of 4.05 million, and the most since September 2007.

Eurozone April industrial production rose by +0.8% month-over-month, better than the rise of +0.5% expected and the decline of -0.3% in March.  Italian industrial production rose by +0.7% in April, much better than the unchanged expected and the decline of -0.4% in March.  But French industrial production rose by only +0.3%, slightly lower than the increase of +0.4% expected.  UK industrial production rose by +0.4% month-over-month in April, in line with expectations and by +3.0% year-over-year, the largest increase since 2011. UK unemployment continues to decline with the unemployment rate falling to 6.6%, the lowest level in 5 years.

Chinese residential property sales are deflating from their bubble, with Standard & Poors predicting that Chinese home prices will actually decline this year, by -5%, coming at the same time that overall home sales are reported to have declined by -11% year-over-year.

No such bubble-popping in Canadian real estate yet!  Data released by the Toronto Real Estate Board this week shows there were 461 detached home sales for more than $2-million through its Multiple listing Service system in the first five months of the year, a 37% increase over the past year.  “What you are seeing is $2-million is the new $1-million,” says Drew Laszlo, a Toronto home architect.  The Royal Bank of Canada (RBC) said its affordability index deteriorated in the first quarter of this year – the third quarter of affordability declines out of the last four – with the deterioration particularly acute in the hot markets of Toronto, Calgary and Vancouver.

(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 sharply to 15.5 from the prior week’s 10.8, while the average ranking of Offensive DIME sectors rose to 11.3 from the prior week’s 12.3.  Perhaps in recognition of the new all-time highs in the Dow and S&P this week, Offensive DIME sectors now hold a lead over Defensive SHUT sectors.

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

Summary:

The US has led the worldwide recovery, 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 6/6/2014

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 26.2, up from the prior week’s 25.9 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 67.8, up from the prior week’s 65.7, 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 33, up four from the prior week’s 29.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second quarter of 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:

Gains were achieved in markets around the world for the week ending June 6th.  For the first time in twelve weeks, the Russell 2000 SmallCap index led the US indices with a +2.7% rise, followed by MidCaps at +2.4%.  The Russell 2000 SmallCap index has now joined other US indices in the green (barely) for the year to date. The S&P 500 gained +1.3% and is now +5.5% year to date.  Canada’s TSX gained +1.6%, and now stands just shy of +9% for the year to date.  Emerging International Markets picked up the pace again after several weeks of sluggish performance, led by Brazil at +2.9%, while Developed International Markets rose +1.2%.

The major economic news in the US was the highly anticipated non-farm payrolls number for May, released on Friday.  US companies added a net 217,000 workers to their payrolls in May, in line with expectations and the fourth month in a row above 200,000. The US unemployment rate held steady at 6.3%, the lowest since September 2008. A psychological milestone was also reached: all the jobs lost in the recent recession have been regained (though, of course, the workforce is now larger).  The Institute for Supply Management (“ISM”) services index for May rose 1.1 points to 56.3, the best level since last August.  The ISM manufacturing index rose to 55.4 from 54.9 in April.  US auto sales were reported to have risen 11% in May to a seasonally adjusted annualized selling rate of 16.77 million cars and light trucks, according to Autodata Corp., confirming the rebound from the harsh winter.  Except for Ford, these are impressive numbers: Ford +3%, GM +13%, Chrysler +17%, Toyota +17%, Honda +9%, Nissan +19%, BMW +17%, VW +15%.  And even Ford’s numbers represented the best May sales since 2004.  The overall industry is heading for its best year since 2006.

Canada’s unemployment report, while positive, continued to show a very sluggish economy.  Statistics Canada announced the country added 25,800 new jobs in May, which, besides being all part-time, still didn’t in numerical terms make up for the 29,000 lost the previous month.  Over the past 12 months, Canada’s economy has added 86,000 new jobs, for a 0.5% per cent increase, while the US has proportionally far outperformed, adding 2.4 million, for a 1.7% per cent increase.  Canada can still point out that all of the Canadian jobs lost in the recession were regained by early 2011, while the US only achieved that milestone last week.

For the first time ever in a major economy, a Central Bank is trying out an anti-deflation theory: negative interest rates on bank deposits with the Central Bank.  That’s what Mario Draghi and the European Central Bank (“ECB”) did on Thursday, while also reducing its lending rate to 0.15%.  A high level of confidence that Draghi will continue to do “whatever it takes” persists in Europe.  For example, 10-year Spanish bond rates are selling at an incredibly tiny 4 bps premium over the US 10-year note.

For the last several years, whenever the ECB has asked member countries to impose austerity on their economies in order to hasten recovery, the International Monetary Fund (“IMF”), particularly the Managing Director Christine Lagarde, has lashed out, decrying austerity as an unjustifiable, unnecessarily punitive path – promoting more government deficit spending and stimulus instead.  Many governments hid behind her skirts in order to avoid the hardships of austerity – particularly France, Madame Lagarde’s home country.  The UK, on the other hand, moved ahead with austerity reforms, and drew the contemptuous ire of the IMF.   The IMF’s chief economist, Oliver Blanchard, said UK budget cutting risked “playing with fire”, and predicted dire consequences for the UK economy.  The prominent American economist and New York Times columnist Paul Krugman was equally condemning, predicting that austerity would not work anywhere.  However, instead of descending into chaos, the UK has sprung smartly from recession and now leads the recovery among all EU countries by a wide margin.  Madame Lagarde was forced to admit to a BBC interviewer last week that “We got it wrong…clearly the confidence building that has resulted from the economic policies adopted by the government has surprised many of us.”  Pressed by the interviewer whether she owed an apology to the Chancellor of the Exchequer George Osborne, whom she had particularly castigated when austerity was being debated, Madame Lagarde replied huffily “Do I have to get on my knees?”  We should not hold our breath waiting for a similar acknowledgement from Paul Krugman who has, to his knowledge, never been wrong.

(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 rose slightly to 10.8 from the prior week’s 11.0, while the average ranking of Offensive DIME sectors was unchanged for the third week at 12.3.  Despite the market’s new highs in many indices, the Defensive SHUT sectors retained a slight lead over the Offensive DIME sectors as institutional investors continue to express some fear and doubt.

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.