FBIAS™ for the week ending 12/26/2014

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 12/26/2014

The very big picture:

In the “decades” timeframe, we may still be in the 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.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The Shiller P/E is at 27.4 up from the prior week’s 27.2, 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 63.1, up from the prior week’s 62.3, and continues 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) is Positive and ended the week at 23, up 1 from the prior week’s 22.  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 October for the prospects for the fourth quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  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 are again rated as Positive.  The quarter-by-quarter indicator gave a positive signal for the 4th quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q4, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

Santa came calling on Wall Street, bringing in his bag of goodies a modest rally that – if history is a guide – may continue into year-end.  For the first time in a month, the US was not the biggest worldwide gainer.  That distinction is held by China, gaining +3.5% on news of the easing of Central Bank lending restrictions.  China pulled Emerging International into the lead amongst the world’s broad indices with a gain of +1.5%.  The US indices gained +1.1% on average, with the Small Cap Russell 2000 leading the charge for the third week in a row.  Beaten-down US Small Caps have staged a late-year revival, but still are the year-to-date laggards amongst US indices.  Developed International brought up the rear with a gain of +0.9%, held back by Japan’s lackluster +0.4% gain.  Canada’s TSX rose +1.0% as many energy stocks stabilized or gained.  Both Emerging International and Developed International indices are in the red for 2014 and look unlikely to pull into the green in the remaining three trading sessions of this year.

US economic news was dominated by the “final” reading of third-quarter GDP: a whopping +5.0%.  That is the best since Q3 of 2003, 11 years ago.  The Q2+Q3 combined performance was also the best two-quarter performance since 2003, so Q3 was not just a singular fluke.  Consumer spending rose at a strong +3.2% annual pace in Q3, up from the +2.5% pace of Q2.  A CNN/ORC poll revealed that – for the first time in seven years – a 51% majority of Americans have a positive view of the economy, a sharp increase from the 38% who felt that way in October.  It is not a coincidence that the rise in economic views coincided with the collapse in oil and gasoline prices.  On the negative side, November durable goods orders were down -0.7% when an increase was expected, and November existing and new home sales were both less than forecast and down vs October, despite a record-low 30-year fixed mortgage rate of just 3.8%.

Canada’s stock market remains largely tied to the materials sector, which makes up a third of the Toronto Stock Exchange weighting.  And this year has not been good for materials producers or processors.  Everyone is aware of the plunge in energy prices, but many other materials produced in Canada have also had a rough ride in 2014.  Iron ore lost nearly half its value to reach the lowest price in more than five years.  Coal, silver, potash, copper and lead prices also weakened in the past year.  The carnage wasn’t universal, however, as nickel, uranium, aluminum and zinc managed to hold steady or gain this year.

Christmas week meant no economic news was released in Europe.  But in Japan, there was a slew of bad news.   Industrial production was down -0.6% in November vs October where a gain was expected, retail sales were down 0.3%, consumer prices ex-fresh food (their core) were up only +0.7% after stripping out the effects of April’s sales-tax increase vs the government’s +2% target, while real wages fell the most since 2009, down -4.3% last month vs a year earlier.  Japan has already had two down quarters in a row and now growth in the fourth is very much in question.  Also, for the first time since records were collected in 1955, Japan has a negative savings rate. Japan is a country that is aging rapidly and the Japanese are drawing down their savings.  Household spending is correspondingly down -2.5% as well.  This is a look into the future of many other countries, particularly those in Northern Europe.  Japan’s Cabinet on Saturday approved about 3.5 trillion yen in fresh stimulus to fight the recession.

China’s overcapacity problem is becoming critical.  Factory-gate prices, as producer prices are known in China, have fallen in year-over-year terms for 33 consecutive months.  An op-ed in the Financial Times notes that “The consequences of China’s deflation problems are ubiquitous and spilling into the rest of the world. Slower economic growth and a steady decline in the [Chinese] economy’s commodity intensity is already affecting commodity producers from Perth to Peru, with negative multiplier effects arising from lower revenues and reduced capital spending by resource companies. Moreover, as Chinese companies cut prices to clear excess supply, global competitive pressures intensify, forcing foreign manufacturers to do so too.  China’s structural deflation, along with factors such as excess debt and rapid aging, will continue to have repercussions for monetary policy in advanced economies worldwide…The U.S. Federal Reserve and other western central banks have failed to anticipate this deflation environment…and appear powerless to reverse the trend.”

As many have suggested, falling energy prices are a boon to consumers.  A surprise to some, though, is the fact that falling energy prices also are a boon to the stock market despite their obvious negative implications for the stocks of energy producers and processors.  Here is a look at 6-month forward historical performance of the S&P 500 (in blue) and the Consumer Discretionary sector (in red) following 6-month periods of rising crude prices and 6-month periods of falling crude prices (source: Strategas Partners).

(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, St. Louis Fed)

The ranking relationship (shown in Fig. 5 below) 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 9.5 from the prior week’s 8.5, while the average ranking of Offensive DIME sectors rose to 16.5 from the prior week’s 18.3. Institutional investors remain cautious, and the Defensive SHUT group continues to rank higher than the Offensive DIME group ranking.   This caution is reflected in the fact that institutional investors are underperforming market averages for 2014, having been cautious and defensively positioned with lots of cash while market averages have gone on to new highs – leaving them behind.

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 globally 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, Folio Institutional.

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 12/19/2014

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 12/19/2014

The very big picture:

In the “decades” timeframe, we may still be in the 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.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The Shiller P/E is at 27.2 up from the prior week’s 26.3, 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 62.3, up from the prior week’s 62.0, and continues 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) is Positive and ended the week at 22, down 1 from the prior week’s 23.  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 October for the prospects for the fourth quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  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 returned to Positive status on October 17th.  The quarter-by-quarter indicator gave a positive signal for the 4th quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q4, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

For most markets this past week, this is all one needs to know:

A rise in the price of oil and the stocks of energy companies helped, too, especially in Canada and other locales sensitive to oil prices.

Prior to Wednesday, Dec 17th, US stocks had declined six out of seven sessions.  But the Fed’s benign language and Janet Yellen’s non-threatening press conference was enough to put in another “V”-shaped bottom, and it was off to the races.  The subsequent Wed-Fri rally was the best since March, 2009.  For the week, US indices gained an average of more than +3%, with the SmallCap Russell 2000 index leading at +3.8%.  Surprisingly, despite the breathtaking rally US indices did not quite recover all of their losses from the prior week, but are nonetheless back to within spitting range of their all-time highs.  Canada’s TSX rallied the most in 5 years, gaining +5.4% on the double shot of good news from the US and from the jump in both oil prices and energy company stocks.  The Energy stocks in the TSX gained an eye-popping +13% for the week.  However, neither Developed nor Emerging International indices fared as well as did the US and Canada.  Developed International gained +1.2% for the week, and Emerging International +1.3%, but neither came lose to overcoming their prior-week losses of -6.2% and 4.7% respectively.

US economic news was benign on balance, as has been the norm for some time.   Industrial production rose +1.3% vs expectations for a +0.7% increase – the +1.3% gain was the biggest monthly increase since May 2010.  Initial jobless claims were reported at 289,000 vs expectations of 295,000.  Capacity Utilization came in above 80% for the first time since 2008.  The 80% level is often seen by economists as a level at which new capital spending must occur for the creation of additional capacity, with that very spending becoming an economic boost.  US manufacturing output rose +1.1% in November, finally surpassing its pre-recession peak.  On the negative side, November’s Purchasing Managers Index (PMI) for manufacturing was reported at 53.7, the lowest reading in more than a year, and the PMI for Services fell to 53.6, the lowest in 9 months.

The Canadian dollar fell for the fourth week in a row, to 0.862 US dollars.  November Canadian consumer prices rose 2% from the year-ago level, down from the October pace of 2.4% annualized.  The modest increase is well within the Bank of Canada’s target range, seen as giving the central bank continued leeway with interest rates.

Eurozone economic data continues to be lackluster.  The “flash” Eurozone composite PMI for December was 51.7 vs. 51.1 in November, with the manufacturing reading going from 50.1 to 50.8 and the service sector rising to 51.9 from 51.1.  Despite these rises, they remain barely in expansion territory (50 is flat).  The readings for the two biggest Eurozone economies, Germany and France, were dispiriting as well.  France saw its manufacturing PMI fall to 47.9 when an increase had been expected, while Germany’s composite PMI rose to 51.2 from 49.5, but the services PMI fell from 52.1 to 51.4.  Deflation remains a major concern as euro area inflation for November was just 0.3% annualized, vs. 0.4% in October and 0.9% a year ago.  Prices declined in Greece (-1.2%) and Spain (0.5%), while they rose just 0.4% annualized in France and 0.5% annualized in Germany.

In China, the government has declared that small particles from the smog in many Chinese cities have surpassed smoking as the primary cause of skyrocketing lung cancer diagnoses.  Lung cancer now tops the list of all cancers in China, and has been increasing at an annual clip of almost 27% in recent years according the China’s National Cancer Registration Center.  It is most likely no coincidence that the rate of lung-cancer cases in Beijing, which is plagued by some of the nation’s worst smog, went from 39.6 per 100,000 in 2002 to 63.1 in 2011, an increase in rate much higher than the national average.

Amazon has done a great – if so far unprofitable – job of becoming the dominant online retailer.  Its “Amazon Prime” service, incorporating free shipping, special discounts, and music/video streaming services, has jumped in popularity, rising from 20 million members to almost 60 million just in 2014.

Given that level of penetration, it seems inevitable that Santa would receive this letter:

(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, St. Louis Fed, Business Insider)

The ranking relationship (shown in Fig. 5 below) 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 8.5 from the prior week’s 9.0, while the average ranking of Offensive DIME sectors fell to 18.3 from the prior week’s 17. Institutional investors remain cautious, and the Defensive SHUT group continues to rank substantially higher than the Offensive DIME group ranking.   This caution is reflected in the fact that institutional investors are underperforming market averages for 2014, having been cautious and defensively positioned with lots of cash while market averages have gone on to new highs – leaving them behind.

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 globally 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, Folio Institutional.

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 12/12/2014

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 12/12/2014

The very big picture:

In the “decades” timeframe, we may still be in the 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.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The Shiller P/E is at 26.3, down from the prior week’s 27.3, 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 from the prior week’s 65.5, and continues 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) is Positive and ended the week at 23, down 3 from the prior week’s 26.  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 October for the prospects for the fourth quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2  above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  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 returned to Positive status on October 17th.  The quarter-by-quarter indicator gave a positive signal for the 4th quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q4, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

For the US and many other markets, the week ending Dec 12th was the worst week in several years.  The Dow Industrials suffered its worst loss since November 2011, -3.8%, while the S&P 500 lost -3.5%, its worst performance since May 2012, with both indices snapping seven-week winning streaks after each hit a new high the prior Friday.   The Nasdaq Composite index fell a second consecutive week, losing -2.7%.  The Russell 2000 SmallCap index was the best performing US index, at -2.5%, but fell back into the red for the year to date.  The rest of the world fared even worse.  Once again, commodity-dependent markets performed the poorest, led by Brazil at -9.3%.  Emerging Markets as a whole dropped -6.2% while Developed Markets on average retreated          -4.7%.  The Greek stock market, for political rather than commodity reasons, crashed -20%, the worst performance since 1987.  Canada’s TSX index declined by -5.1%, and has given up almost all of its gains for the year.

Even in the midst of the stock market gloom, there were good US economic reports away from the news-dominating price of oil.  US retail sales rose +0.6% month over month, better than expected.  Consumer confidence came in at 93.88, which was much better than expectations.  The National Federation of Independent Business (NFIB) small business optimism index was reported at 98.1, the highest in almost 8 years.  Initial jobless claims were 294,000, down 3,000 from last week and a bit lower than expected.  The Mortgage Bankers Association reported that home-refinance applications rose +13.2% week-over-week.  And, of course, oil fell          -12.6% just this week and is off more than -40% from its 2014 highs.

The Canadian dollar (the “Loonie”) fell to a 5 1/2 year low of 86.42 cents US.  The Loonie has tumbled almost a full US cent just this week as oil prices continued to plummet.  Partially offsetting the negative Loonie news was a government forecast of stronger non-petroleum exports on the back of new competitiveness from the lower Loonie.

In Europe, poor economic reports for the Eurozone continued.  Eurozone industrial production for the month of October was released, up just +0.1% month over month (and up a scant +0.7% year over year).  German industrial production for October was also up a less-than-expected +0.2% from September.  The New York Times reported on a French poll revealing an astonishing 90% public disapproval of French President Hollande’s economic policies. 

China’s national statistics bureau released a number of reports this week, none of which were particularly good.  November exports rose +4.7% year over year, far less than expected, while imports fell -6.7%.  Exports to the US rose +2.6% year over year, but this was far less than October’s +10.9% pace.  Another key barometer of economic activity, electricity output, rose only +0.6% in November vs last year.  Producer prices (called “Factory Gate” prices in China) fell an amazing 33rd consecutive month, down -2.7%.  This is outright industrial deflation, brought about by severe overcapacity, lower commodity prices, and no pricing power.  Nonetheless, the Shanghai stock exchange index is up +39% for the year to date after having lain dormant for the prior several years.  Unlike most other investor populations around the world, the majority of domestic Chinese individual investors are…women.  Middle-aged women, in particular, called “dama”.  The Beijing Economic Information Daily publication identifies these “dama” investors as the main factor behind the Chinese market’s recent bullish behavior.

Although this past week was a bust for the markets worldwide, it also is the only week in December which is historically negative.  The remainder of December has historically straightened up and sailed profitably through the end of the year, as this chart from SentimentTrader.com illustrates:

(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, St. Louis Fed, Barclays)

The ranking relationship (shown in Fig. 5 below) 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 slipped to 9.0 from the prior week’s 6.5, while the average ranking of Offensive DIME sectors fell to 17 from the prior week’s 16.5. Institutional investors remain cautious, and the Defensive SHUT group continues to rank substantially higher than the Offensive DIME group ranking.   This caution is reflected in the fact that institutional investors are underperforming market averages for 2014, having been cautious and defensively positioned with lots of cash while market averages have gone on to new highs – leaving them behind.

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 globally 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, Folio Institutional.

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 12/05/2014

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 12/05/2014

The very big picture:

In the “decades” timeframe, we may still be in the 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.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The Shiller P/E is at 27.3, up a little from the prior week’s 27.2, 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 65.5, up from the prior week’s 63.3, and continues 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) is Positive and ended the week at 26, down 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 October for the prospects for the fourth quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  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 returned to Positive status on October 17th.  The quarter-by-quarter indicator gave a positive signal for the 4th quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q4, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

In a repeat of the prior week, markets with little dependency on commodities (especially oil) gained, while those with such dependency declined.  US markets gained an average of +0.2%, with the S&P 500 up +0.4% and the Dow Jones up +0.7% (the seventh straight week of gains for those two indices), but the Nasdaq 100 indexed slipped      -0.6%.  Canada’s TSX retreated by -1.8%, having given up all its earlier year-to-date lead over the US as a consequence of the slide in oil and other commodities.  Despite gains in some European indices, both the Developed and Emerging Market averages slipped for the week, -0.1% and -1.5% respectively.

US economic news was positive on balance, capped off by a blowout November jobs number (as long as you don’t read the “household survey” too closely, which was considerably less enthusing).  The Non-Farm Payroll (NFP) figure for November showed a seasonally adjusted gain of 321,000, the strongest month since January 2012, and the 10th consecutive monthly gain of 200,000+.  October’s figure was revised up to 243,000 and September’s to 271,000.  As economists had been expecting November’s figure to be in the 225,000 range, this was a large expectation-beater.  The unemployment rate was 5.8%, unchanged, though still at the lowest level since mid-2008.  For 2014, the economy is on track to produce the strongest annual payroll growth since 1999.  Average hourly earnings rose +0.4%, a solid gain, and are now up +2.1% year-over-year – closer to a level that will generate higher spending by wage-earners.

Canada, on the other hand, surprised with a negative November jobs report.  Employment declined by -10,700 in November after jumps of +43,100 and +74,100 the last two months, as reported by Statistics Canada. The unemployment rate rose to 6.6% from a six-year low of 6.5%.  The Canadian dollar, the “Loonie”, dropped to a 5-year low concurrent with oil dropping to a 5-year low, and few think it to be a mere coincidence.

In the Eurozone, the November Purchasing Managers Index (PMI) was reported to be just 50.1 vs. October’s 50.6, barely above the 50 dividing line between growth and contraction.  Germany was 49.5, a 17-month low, Italy clocked in at 49.0, Greece 49.1, and France 48.4 – all in contraction territory.  Ireland, Netherlands and Spain are bucking the trend and reported decent PMI numbers at multi-month highs, but they are by far the exceptions to the rule.  A composite reading that includes both new orders and the service sector was 51.1 vs. 52.1 in October, the lowest for the Eurozone in 16 months.

In China, HSBC Bank’s final reading on the November manufacturing PMI was at the flat-line of 50.0, a 6-mo. low and down from 50.4 in October. The services reading was 53.0 vs. 52.9. The government’s official manufacturing PMI was 50.3, an 8-month low, vs. 50.8.

By a wide margin, this year’s most important economic story has been the slide in oil prices, from a high this year of $107 down to the current $67 – a -38% decline that has had significant positive and negative consequences for countries, companies and people.  Many industry experts claim that booming oil production in the US – particularly from the spreading of fracking extraction techniques and from the shale-oil areas of the country – have been the major factor pushing prices down.  A look at a 30-year chart of US oil production tells the story:

Many high-yield bond investors have been wondering why their high-yield mutual fund and ETF holdings have been declining steeply for the past 4 months (now off almost 20% for many ETFs and mutual funds).  One non-obvious reason is that energy-related loans now comprise triple the share of the high-yield universe compared with just 10 years ago, and with falling energy prices comes a higher expectation of loan defaults from energy-industry borrowers.  This chart shows the steep rise in energy-related borrowers within the high-yield universe:

(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, St. Louis Fed, Barclays)

The ranking relationship (shown in Fig. 5 below) 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 6.5 from the prior week’s 7.5, while the average ranking of Offensive DIME sectors fell to 16.5 from the prior week’s 15.8. Institutional investors remain cautious, and the Defensive SHUT group continues to rank substantially higher than the Offensive DIME group ranking.   This caution is reflected in the fact that institutional investors are underperforming market averages this year, having been cautious and defensively positioned with lots of cash while market averages have gone on to new highs – leaving them behind.

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 globally 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, Folio Institutional.

Sincerely,

Dave Anthony, CFP®, RMA®

The Top Three Things to do with your IRA before the End of the Year!

The Top Three Things to do with your IRA before the End of the year:

It’s December! Congratulations, you’ve made it past Halloween and Thanksgiving, and now it is Christmas Time. A perfect time to make sure that you are taking advantage of all of the allowable tax-breaks and deductions for 2014. Here’s an idea that I bet most of you haven’t thought about, and why now is the time to do it:

  1. Convert that IRA over to a ROTH and do it now! 

Let’s be honest—tax rates are very low, our country is in deep debt, and Washington is coming after your IRA monies. When you retire, almost every type of income counts in the dreaded PROVISIONAL INCOME calculation that determines how much of your Social Security will be taxable, and if you’ll have to pay the additional Medicare Part B penalties and surcharges,  (Your $104/month premium could be as high as $400!) except for income from Health Savings Accounts, 401(H) plans, Life Insurance loans, and ROTH IRA distributions. Do yourself, your spouse, and your kids a favor and convert now!

  1. Off-set your ordinary IRA income tax with tax deductions that pay you back! 

If you convert your $100,000 IRA over to a ROTH in 2014, you’ll have to pay $100,000 in ordinary income taxes (ouch!), but what if you could reduce your ordinary income taxes? You can with a smart investment in Oil and Gas. I’m not talking about the futures market, or an energy mutual fund, I’m talking about a true ownership interest in an actual oil and gas well.

There are currently around 1,800 drilling rigs in the USA that are making about 13-14 million barrels of oil a day. If you are an accredited investor, you can get up to a 90% tax deduction against your ordinary income from an oil and gas general partner investment. Most people think that oil and gas can only off-set passive income, but this is not true. A general partner, can use his $100,000 investment, and receive up to a $90,000 deduction against ordinary income. Like your $100,000 IRA distribution!

On top of that, you’ll get the depletion expenses, etc., for the future years of well use. Be careful, there are lots high commission gas plays out there that are a good deal for the broker, but not for you. Make sure you check out your options.

  1. Reduce your IRA distribution by taking advantage of the valuation discount

There is a reason that the rich get richer…..it is because they take advantage of these crazy deals in the tax code and you don’t. Here’s the strategy:

$100,000 into the oil and gas well in your traditional IRA, get 100,000 of purchasing units

Go in as a limited partner, not a general partner.

Because you have just purchased a non-liquid, non-tradeable asset, you can receive a valuation discount

Accounting firm can run the numbers to show a safe valuation discount of 40-50%.

Convert your IRA that is now valued at $50,000 to a ROTH and pay ordinary income on ½ of what you normally would have

Your 100,000 unit ROTH will grow tax-free!

Sell it 5-7 years down the road for tax-free nirvana gain! (a properly structured deal where you don’t pay crazy broker commissions, and reduce fees should return 20% IRR over 5-7 years)

Buyer beware,  make sure you check out, compare, and contrast the different pricing options from the oil and gas companies. It is the wild west out here, so team up with a good accountant, and firm that can lead you through this maze and has done it before. Do yourself a favor, find out more about this little-known strategy and save some money!

Send me your email and I can send you a free report about how this works: dave@anthonycap.com