FBIAS™ for the week ending 7/24/2015

 

FBIAS™ Fact-Based Investment Allocation Strategy for the week ending 7/24/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.7, down from the prior week’s 27.3, and approximately at the level reached at the pre-crash high in October, 2007.  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 the CAPE 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 more typical of a rip-snorting 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 50.81, down from the prior week’s 52.3, 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 markets have yet to top 2007’s levels – particularly in the Emerging Markets area.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is Negative and ended the week at 11, down sharply from the prior week’s 17.  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 July for the prospects for the third quarter of 2015.

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.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Negative.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  US equities were in an uptrend at the start of Q3 2015, sufficient to signal a higher likelihood of an up quarter than a down quarter.

In the markets:

Stocks declined for the week as disappointing earnings from some key companies weighed on the benchmarks.  The continued slump in commodity prices also added to the gloom.  The Dow Jones Industrial Average fell back into negative territory for the year-to-date, giving up 517 points and -2.86% for the week.  The tech-heavy Nasdaq also declined, but less than the blue chips, at -2.33%.  The LargeCap S&P 500 sank -2.21%, the MidCap S&P 400 ended down -2.06%, and the SmallCap Russell 2000 fell the hardest, down -3.24%.  Canada’s TSX, hard hit by the continuing declines in gold and oil, retreated by -3.12%.

In international markets, Developed International declined a relatively modest-2.17%, but Emerging Markets plunged -4.39%.  Weakness spread across European markets as the United Kingdom’s FTSE dropped -2.88%, Germany’s DAX gave up -2.79%, and France’s CAC40 declined -1.31%.  In Asia, China’s Shanghai index bucked the trend and had its second week of gains after its plunge last month.  Japan’s Nikkei held the 20,000 level, finishing the week down 0.52%.

In commodities, an ounce of gold continued its 6th week of declines, down -2.99%.  Silver also continued its decline, down -0.68%.  A barrel of West Texas Intermediate crude oil plunged -5.55% to $47.96 a barrel, its 6th straight weekly decline.  Copper continued its relentless plunge, down an additional -4.25%.  Copper has dropped over 17% in 10 weeks.  If the price of copper truly is a harbinger of coming worldwide economic conditions, as many believe it to be, there must be big economic trouble brewing.

In US economic news, initial jobless claims reached a 42 year low as there were 255,000 initial jobless claims last week, the lowest since November 1973.  Existing home sales jumped +9.6% versus a year ago and ran at a 5.49 million annual pace in June, beating expectations of 5.4 million.  Existing home prices reached an eight year high and sales were at the fastest pace since February, 2007.  All regions saw year-over-year gains, for the sixth straight month.  The Federal Housing Finance Agency (FHFA)’s home price index rose +5.7% versus a year ago, and has returned to its 2006 levels.  But despite the strong showing in existing home sales, new-home sales widely missed expectations as sales ran at a rate of 482,000 versus expectations of 550,000 in June, and down 7% from May.

The Conference Board’s Leading Economic Indicators (LEI) index was stronger than expected in its June reading.  The index rose +0.6%, reaching a level not seen since 2006.

Credit reporting firm Experian reported that consumer defaults were near all-time lows in June as Americans remained cautious about expanding their borrowing, even as the economy improves.  In the report Experian also noted that a pickup in inflation may pressure consumers but that “consumers remained optimistic and are primed to spend.”

St. Louis Federal Reserve President James Bullard stated that the likelihood of a September fed rate hike is greater than 50%.  He said that the Fed expects the economy above 3% in the second half and that there was no longer a need for “emergency” monetary policy, in his opinion, and that turbulence in Greece and China should not influence US policymaking.

In Canada, wholesale shipments declined -1% in May, missing forecasts of just a -0.2% drop; however, April was up a stronger +1.7%.  A weekly gauge of Canadian consumer sentiment dropped to a four month low last week after the Bank of Canada said the nation’s economy “contracted modestly”.  The latest telephone polling of Canadian consumers by Nanos Research Group shows optimism over the economy’s prospects has deteriorated to the lowest level since 2008.  Canadians also grew more pessimistic about the outlook for real estate, job security, and personal finances.  Canada’s Central Bank reduced its 2015 gross domestic product forecast by almost half to just 1.1% and cut its key interest rate to 0.5%.  The bank blames the weakness on damage from the oil price shock and the “puzzling” lack of a rebound in non-energy exports.

In the United Kingdom, minutes released by the Bank of England revealed that the bank has moved closer to a rate hike as policymakers were inclined to vote to raise rates in early July, but market turbulence in China and Greece deterred them from taking action.  The central bank’s governor has hinted that a rate rise is due sometime in 2015.  Markit’s flash Purchasing Managers Index (PMI) for Eurozone composite activity declined -0.5 point to 53.7, and the manufacturing component dropped -0.3 point to 52.2.  Markit noted that these numbers are still relatively strong, given that the region has struggled to come back from the downturn.

Strong exports in the second quarter strengthened the German economy, according to the Bundesbank.  Orders for domestic and international goods also bolstered industry, the central bank said.  Producer prices came in matching expectations of a -0.1% dip in June.  For the year, the German producer price index is -1.4% lower.

In China, manufacturing activity declined in July missing expectations for a slight gain, according to the flash PMI.  It reached a 15 month low of 48.2, down from 49.4, and remained in contraction (<50) territory.  New orders, new export orders, and employment all decreased.

Finally, the price of an ounce of gold has continued to slide, as noted above, which has frustrated gold investors who believe that the various central banks around the world, engaging in profligate amounts of quantitative easing,  will inevitably debase their nation’s currency and lead to inflation—or even hyperinflation.  Some economists and financial analysts view gold as a “barbarous relic”—the term for gold believed to be first coined by John Maynard Keynes.   Warren Buffett said this about gold in a speech he gave at Harvard in 1998: “(It) gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”  In truth, there are lots of uses for gold other than simply putting it in a vault – some of them obvious, some not.

Here is a table from Morgan Stanley that details the source and destination of gold.  Not surprisingly, Jewelry is the #1 destination, with Coins the #2 destination.  Surprisingly, though, dentistry still consumes 55 metric tons of gold annually, and electronics another 300 metric tons.  “Investment” is just 25% of total demand.

(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, pensionpartners.com, cnbc.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 12.3 from the prior week’s 13, while the average ranking of Offensive DIME sectors fell to 18.5 from the prior week’s 18.3.  The Defensive SHUT sectors expanded their lead in rankings 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 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 the world 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 7/17/2015

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 7/17/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.3, up from the prior week’s 26.7, and approximately at the level reached at the pre-crash high in October, 2007.  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 the CAPE 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 more typical of a rip-snorting 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 52.3, up from the prior week’s 50.1, 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 markets have yet to top 2007’s levels – particularly in the Emerging Markets area.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is Negative and ended the week at 17, up from the prior week’s 15.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 2015.

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.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Negative.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  US equities were in an uptrend at the start of Q3 2015, sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

It was a positive week across the board as the US market tracked global markets higher on news that Greece had largely agreed to the demands of its creditors and would implement a series of austerity steps in return for bailout funds.  Positive earnings reports from tech giants Google and Netflix helped launch the Nasdaq to a hefty +4.25% gain for the week.  The Dow Jones Industrial Average gained over 320 points, up +1.84% to close at 18086.  Recent worrisome index laggards, the Dow Transports and Utilities, also gained +1.12% and +0.78% respectively.  The S&P 500 gained surged +2.41%, while previous market leaders MidCaps and SmallCaps lagged behind at +0.27% and +1.2%, respectively.  Canada’s TSX gained a respectable +1.61%.

In international markets, Developed International gained +1.57% and emerging markets added +0.83%.  Europe, in particular, had a great week: London’s FTSE rebounded for a second week up +1.52%, Germany’s DAX jumped +3.16%, and France’s CAC 40 surged +4.51%.  In Asian markets, China’s Shanghai index had its first positive week in 4, up +2.05%.  Japan’s Nikkei also gained a strong +4.4%.  Emerging Markets were merely OK, at +0.83%.

In commodities, Gold lost its support level from November of last year and dropped a further $30.70 to $1,132.30 an ounce – a five-year low.  The more volatile Silver also lost its support plunging over -4.8% to $14.81 an ounce.  Oil also continued to weaken, losing -3.86% to $50.78 for West Texas Intermediate.  Oil has been down for 5 straight weeks.

In US economic news, there was improvement on the jobs front as jobless claims declined 15,000 to 281,000.  Continuing claims also fell 112,000 to 2.215 million.  Real Estate research firm CoreLogic reported that there were 41,000 completed foreclosures in May, up +4.1% for the month but -19.2% lower than this time last year.  Real Estate purchases declined -8% during the week, but remained +17% higher versus this time last year.  Refinancings increased +4% even as rates remained unchanged.  The National Association of Homebuilders index for July beat expectations by rising a point to 60 – the highest reading since November 2005.  The current-conditions component increased to 66 and the expectations component jumped to a very strong reading of 71.  Housing starts increased to 1.174 million units in June, up from May, and up +27% versus this time last year.  However, most of the strength was in multifamily units – see the comments at the end of this section.

US industrial production beat expectations, increasing by 0.3% in June and rebounding from a decline in May.  Capacity utilization, which measures slack in firms’ capital capacity increased to 78.4%.  Retail sales declined -0.3% in June, missing expectations of a +0.3% gain.  May’s +1.2% increase was revised down to +1%.  Minus autos, June sales were down -0.1%.  Experts have been expecting consumers to increase spending as the job market firms and gas prices remain low, but sales have remained stagnant.

US Small business owners have serious concerns according to the past month’s survey from the National Federation of Independent Business (NFIB).  The NFIB index had the biggest monthly decline since November 2012, dropping 4.2 points in June to 94.1, far below the survey’s 42-year average of 98.  The NFIB stated that the index “is a disappointing sign that economic growth on Main Street is not set for a strong second half.”

In Canada, home prices jumped to a record high in June according to the Teranet-National Bank Composite index.  Prices gained +1.4% for the month and +5.1% for the year.  Multi-year real estate hotspots retained their leading positions: home sales in Vancouver surged +8.5% and Toronto saw a +7.8% increase.  Canada’s Consumer Price Index (CPI) increased +0.1% to an annual rate of just 1% in June, matching consensus forecasts.  The core inflation rate measure watched by Canada’s Central Bank was up +2.3% for the year.

Industrial production in the Eurozone missed analyst expectations of a +0.2% gain by dropping -0.4% in May.  Most of the weakness was in the energy sector which declined a large -3.2%.  Inflation in the Eurozone remained tepid as consumer prices rose just +0.2% versus a year ago, down from +0.3% in May.  Much of the slowdown was attributed to Germany, where the yearly rate fell from +0.7% to +0.1%.  The European Central Bank has a 2% inflation target, and the most recent reports are still too close to deflation for comfort.

In China, exports rose for the first time in four months in June.  Overseas shipments rose +2.1% from a year earlier, exceeding the -1.2% forecast, and imports dropped -6.7%, an improvement from the huge -18.1% fall last month.  The trade surplus stands at 284.2 billion yuan ($45.8 billion).  The improvement in exports provides support for an economy that has been burdened by a decline in investment growth. 

Finally, this week saw a slew of positive reports on US housing, all seeming to signal a rebound in the housing market.  However, a deeper look into the numbers doesn’t paint as rosy a picture.  U.S. builders have been anticipating a wave of renters, and consequently multifamily housing starts have surged.  Builders broke ground on “multi-family” (apartment building) starts at the fastest pace in nearly 30 years.  The bottom line: multi-family starts rose +29% for the month of June, but single-family starts actually decreased -0.9%.  Furthermore, the US home ownership rate is currently at a 20-year low of 63.7%, and first-time home buyers have comprised a smaller share of the market than they have historically.

(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, pensionpartners.com, cnbc.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 13 from the prior week’s 12.3, while the average ranking of Offensive DIME sectors fell to 18.3 from the prior week’s 17.8.  The Defensive SHUT sectors maintained their lead in rankings over the Offensive DIME sectors despite the sizeable rally this week.   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 the world 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®