FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 8/28/2015

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 25.2, up slightly from the prior week’s 25.0, 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 54.77, up sharply from the prior week’s 48.69, 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) turned Positive this week when the market sharply rebounded from a deep selloff, and ended the week at 3, down from the prior week’s 5, but up from the mid-week level of 2.  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 Positive.  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:

Major stock indices ended the week with modest gains, but not before enduring the highest level of volatility in many years.  For the week, the Dow Jones Industrial Average closed up +1.1%, but not before traveling almost 1,300 points from peak to trough!  The NASDAQ composite gained +2.6% to close at 4828, clawing its way back to positive territory year to date.  The S&P 500 gained +0.91% and the SmallCap Russell 2000 gained +0.53%.

International markets followed the U.S. market’s lead in recovering from the steep losses that occurred early in the week.  Canada’s TSX gained +2.9%, the United Kingdom’s FTSE was up +0.97%, and Germany’s DAX was up +1.72%.  China, on the other hand, did not recover.  Though China was able to halt an absolute market crash, the Shanghai stock exchange composite index still declined -7.85% for the week.  Japan’s Nikkei index also declined, losing 1.54%.

In commodities, crude oil surged more than +12% on news that Saudi Arabia had invaded Yemen.  Early-week strength in gold faded, and gold ended the week down -2.35% to $1132.60 an ounce.  Silver also declined, dropping 4.83% to $14.58 an ounce.  The industrial metal copper ended the week up 2.18%.

In US economic news, the economy expanded at a +3.7% annual rate in the second quarter, according to the Commerce Department.  That smartly beat expectations for an upward revision to 3.2%.  Nearly all the details were stronger and pointed to a healthy economy.  Business investment led the upward revision with nonresidential investment now seen up +3.2% versus down -0.6%.  Intellectual property spending grew the most since 2007.  Both consumers and businesses spent more than initially forecast.

Home prices picked up as the S&P/Case-Shiller 20-city Home Price Index ticked down -0.1% in June, but rose +5% versus a year ago.  The national average was up +4.5% versus a year ago in June.  The hottest cities remain Denver, Dallas, and San Francisco.  New home sales jumped to a 507,000 annual pace in July, a +5% gain versus June.  Sales are up +26% versus a year ago, and it is the eighth straight month of double-digit yearly gains.

Business economists who are members of the National Association of Business Economists expect the Fed to hike rates before the end of 2015.  A large majority, 77% of survey respondents, expect the Fed to hike rates, up from 71% in March.  66% feel that the Fed should take this step.

In a big upside surprise, the Conference Board’s consumer confidence index jumped more than +10 points to 101.5, blowing away expectations of a 94 reading.  Consumers’ views of the labor market drove the increase.  However, the University of Michigan’s sentiment index fell -1 point to 91.9, missing expectations for a gain.  The current conditions gauge fell -2.1 points, but the overall U of M index remains up a strong +11.4% versus a year ago.

US durable goods orders jumped +2% in July, when analysts had been expecting a -0.4% decline.  Orders remain nearly -20% lower versus last year, but analysts cite a large air show order as skewing last year’s data.  Excluding transportation, July orders were up +0.6%, also beating expectations.  Core capital goods, which gauge business investment, rose a strong +2.2% in July – the second straight monthly gain.  This could indicate that the capital expenditure plunge triggered by the precipitous decline in oil prices may have leveled off.

Former Treasury Secretary Larry Summers said in a Washington Post opinion piece that it would be a serious error for the Fed to hike rates in September.  Doing so would jeopardize price stability, financial stability, and even full employment, he wrote.  His opinion is seemingly shared by New York Federal Reserve President William Dudley, a top Federal Reserve policymaker, who said that he’s less interested in a Fed “liftoff” next month, citing “international and financial market developments”.  “From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me that was a few weeks ago,” he said.  However, other Fed officials are more hawkish.  Kansas City Fed President Esther George said in a CNBC interview that recent market action “complicates the picture, but I think it’s too soon to say that fundamentally changes that picture.  So in my own view the normalization process needs to begin and the economy is performing in a way that I think it’s prepared to take that.” 

In the Eurozone, loans to business rose +0.9% for the year in July.  Household borrowing was up a +1.9% yearly gain versus +1.7% in June.  The data suggest that the European Central Bank’s efforts to boost the economy may be finally resulting in more demand.  Consumer confidence also improved in the Eurozone as the EU commission sentiment tracker rose 2 ticks to 104.2.  Consumer, retail, and construction sectors all rose.  The German Economy Ministry soothed concerns that a slowdown in China will have significant negative impact in Germany, pointing out that German exports to China account for only 6.6% of total exports.

On Tuesday, China’s central bank cut interest rates and reserve requirements after several days of pronounced weakness in its stock market, which declined more than -7% on Tuesday and more than -8% on Monday.  The People’s Bank of China cut interest rates by 25 basis points to 4.6%.  It also reduced bank reserve requirements by a half percent, a step which should flood roughly $100 billion into the financial system.  The government has stated its intentions of rebalancing the economy towards the service sector and consumption, and away from export-oriented manufacturing.

Finally, the volatility of this past week has many nervous investors searching for good news.  Institutional research firm Ned Davis Research provided that dose of good news this week when it wrote about what it calls “the best indicator you’ve never heard of” – and it is bullish.  This indicator is constructed from the stock market’s Price to Earnings (PE) ratio plus the unemployment rate plus the inflation rate.  The latter two are sometimes combined into a number called the “Misery Index”.  As the chart below shows, the stock market’s historical performance has been far better when this indicator is lower than when it is higher – and we are now in the second-lowest quartile, thanks mostly to a low unemployment rate and very low inflation, nicely offsetting a fairly high PE ratio.  By this metric, anyway, the long-anticipated market correction that has finally occurred may be unlikely to become the beginning of a major bear market.  See the chart below, from marketwatch.com.

(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,  marketwatch.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 5.5 from the prior week’s 4.5, while the average ranking of Offensive DIME sectors rose slightly to 17.8 from the prior week’s 18.0.  The Defensive SHUT sectors maintained a large 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,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 8/21/2015

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 25.0, down from the prior week’s 26.5, 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 48.69, down substantially from the prior week’s 51.47, 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 5, down from the prior week’s 8.  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:

Major indexes around the world experienced their largest weekly declines since 2011 as concerns grew that China’s economic slowdown would weigh heavily on global growth and commodity prices.  A plunge in some emerging market currencies also raised fears of a global round of competitive devaluations.  Nations devaluing their currencies against each other could cut deeper into the profits and competitiveness of U.S. multinational companies.  All of the major benchmarks are now negative year to date.  The Dow Jones Industrial Average and SmallCap Russell 2000 have both declined over 10% from their peaks, putting them into what is commonly considered “correction” territory.

For the week, the Dow Jones Industrial Average lost a whopping 1017 points to close at 16459.  The tech heavy Nasdaq lost the psychologically-important 5000 level, losing 342 points to 4706.  The S&P 500 LargeCap index declined -5.77% for the week and the small cap Russell 2000 gave up -4.61%.  It is noteworthy that the SmallCap Russell 2000 lost less than the LargeCap S&P 500, since the higher-volatility SmallCaps normally lead to the downside during market declines, perhaps due to the perception that SmallCaps have less dependency on China and other international trouble spots than their larger brethren.  Canada’s TSX shed -5.63%, down for the third week in a row.

A broad sweep of international markets also showed weakness.  Developed International gave up -6.38%, Emerging Markets plunged over -7.8%.  Northern European markets were not immune: the United Kingdom’s FTSE dropped -5.54%; Germany’s DAX Composite plunged -7.83%; France’s CAC 40 likewise dropped -6.57%.  In Asia, China’s Shanghai Composite index got the booby prize for the worst performing major market, collapsing 11.54%, while Japan’s Nikkei dropped -5.28%. 

In commodities, an ounce of Gold jumped +4.2% to $1159.90 an ounce.  Silver’s rise was more tepid, a gain of only $0.10 to $15.32 an ounce.  Crude oil had its tenth straight week of declines, giving up over -4.48% for the week.  A barrel of crude oil is hovering just above $40 at $40.29 a barrel, and now is back to levels last seen in the depths of the Great Recession in 2009.

In US economic news, the housing market was the source of the majority of the good news reported during the week.  Home builder sentiment continued to improve as the National Association of Home Builders index rose to 61 from 60—the highest since 2005.  Future sales outlook weakened slightly but remained strong at 70, while the “current conditions” index remained unchanged at 66.  Housing starts neared an 8-year high, now running at a pace of 1.206 million units/yr in July, nicely beating expectations.  This pace has not been seen since just before the Great Recession began.  The National Association of Realtors reported that new and existing home sales jumped +2% in July to a pace of 5.59 million, beating expectations.  It was the highest since February 2007, and was +10.3% higher than a year ago.  The median price was +5.6% higher versus a year ago in July.

The Consumer Price Index (CPI) rose just +0.1% in July, missing expectations of a +0.2% gain.  For the year, the index stands just 0.2% higher.  Core inflation, which strips out food and energy, also rose just 0.1% during the month, but is up 1.8% versus a year ago, much nearer to the Federal Reserve’s 2% target.

Manufacturing in the United States slowed in August as Markit’s flash Purchasing Managers Index (PMI) showed the slowest improvement in business conditions in nearly 2 years, falling nearly a point to 52.9.  Output growth drove the decline, but production volumes were also weak.  According to the survey a stronger dollar was weighing on exports, and China’s weaker yuan is expected to further worsen the situation.

In minutes released of the July 28-29 Federal Reserve’s Open Market Committee session, Federal Reserve officials said last that while conditions for raising interest rates were approaching, they saw more room for labor market improvement and need more confidence that inflation is moving toward their goal.  Most meeting participants “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.”  However, St. Louis Fed President James Bullard told MNI News that he will argue for a September rate hike at the central bank’s upcoming meeting.  Bullard said he isn’t concerned that inflation and wages remained below Fed targets, but does fear financial bubbles as the Fed keeps interest rates at record lows.

In Canada, core inflation in the central bank’s measure was at a rate of 2.4% in July, matching expectations.  The Bank of Canada targets inflation at 1% to 3%.  Separately, retail sales rose +0.6% during June and were up +1.4% versus a year ago. 

Good trade numbers headlined Eurozone economic news during the week.  Exports rose +12% in June versus this time last year, thanks to a weaker Euro.  Imports were also up by +7%.  The trade balance increased to €21.9 billion from €21.3 billion.  Trade with member countries was up +10% versus year ago, indicating stronger economic activity.  Markit’s composite PMI for the Eurozone rose +0.2 point to 54.1, one of the strongest readings in the last two years.  Overall, new business ran at the fastest pace since May.  Output accelerated in Germany and confidence increased in France. 

In China, fears of a “hard landing” may become a reality.  The Markit manufacturing PMI index dropped to a 77-month low of 47.1 in August.  The manufacturing output index declined to 46.6, a 45-month low.  Nearly all categories decreased at faster rates than prior months.

Brazil’s economic news has gone from bad to worse.  Economic activity declined more than expected in June.  The central bank’s economic activity seasonally adjusted index fell over half a percent.  Analysts expect the economy to contract -2% in 2015.  Unlike counterparts elsewhere round the world, the Brazilian central bank is not stimulating the economy with cheaper money – instead, it is keeping the Brazilian benchmark interest rate at 14.25% to combat inflation.  This is every central banker’s nightmare scenario – stagflation.

Finally, we highlight the flight of investor money from U.S. stock funds, which some say is actually more of a “stampede”.  According to a recent CNBC article, this year $78.7 billion has left domestic equity-focused funds according to fund researcher Morningstar.  Domestic equity funds gave up $20.4 billion in July alone, and over $158 billion in the past 12 months – a higher outflow than in the Great Recession of 2008-2009.  Analysts are unable to point out the exact cause as, up until this past week, the market hasn’t performed all that poorly. 

Analysts speculate that investors believe the United States is nearing the end of its six and half year bull market, and that globally, internationals are cheaper on a fundamental level.  It is believed that investors think that Japan and Europe are at different points of their economic cycles and that they are still actively stimulating their economies.  International equity funds have indeed garnered much of that outflow, depicted in the graph below:

Source: CNBC “Money Flees U.S. Stocks at highest level since 1993”

(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,  marketwatch.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 again to 4.5 from the prior week’s 5.5, while the average ranking of Offensive DIME sectors rose slightly to 18.0 from the prior week’s 18.5.  The Defensive SHUT sectors again 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,

FBIAS™ for the week ending 8/14/2015

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 26.5, slightly up from the prior week’s 26.4, 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 51.47, up slightly from the prior week’s 51.38, 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 8, 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 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:

US Stocks ended the week with modest gains, thanks to a strong rally at the start of the week.  The S&P 400 MidCap index gained +0.91%, beating the SmallCap and LargeCap indices.  The Dow Jones Industrial Average gained 104 points to close at 17477.  The tech heavy Nasdaq barely budged, up +0.09% at 5048.  The LargeCap S&P 500 and Russell 2000 each rose, up +0.67% and +0.48% respectively.  The beaten-down Dow Jones Utility Average, in the doghouse since February, has come back to life in recent weeks and surged +2.34% on the week.

In International markets, Developed International declined -0.94% while Emerging Markets dropped a more substantial -2.12%.  Individually, Canada’s TSX remained relatively flat down -0.17%.  Major European markets performed poorly, with the United Kingdom’s FTSE declining -2.50%, Germany’s DAX plunging -4.40%, and France’s CAC40 sliding -3.85%.  China continued its rebound from last week, up an additional +5.91%.  Japan’s Nikkei remains near its multi-year highs, giving up -0.99%.

In commodities, Gold had its first positive week in 7, gaining +1.82% to end the week at $1113.20 an ounce.  Silver, stronger than gold recently, gained for the 3rd week in a row by adding +2.94%.  Oil posted its 9th week of losses, declining -2.31% and ending the week at $42.74 a barrel.

In economic news, there were 274,000 initial claims for unemployment in the week of August 8.  Analysts had expected 270,000.  Continuing claims rose by 15,000 to 2.273 million.  There were 5.25 million openings for jobs in June, down from May’s all-time high of 5.36 million.  Hires rose to 5.18 million from 5.06 million.  The Conference Board’s Employment Trends Index rose to 127.89, the second straight monthly gain and a +4.4% rise versus last year.  Job gains have run at about 150,000-200,000 per month; this rate of hiring should “rapidly tighten the labor market”, the Conference Board said.

The National Association of Realtors reported that 93% of metro areas saw prices rising in the second quarter, up from 85% in the first quarter.  However, only 34% of metro areas had double-digit gains compared to 51% last quarter.  CoreLogic reported there were 43,000 completed foreclosures in June, down -14.8% versus last year, but up +4.8% from last month.

US Productivity increased +1.3% in the second quarter, missing expectations of a +1.6% gain.  The -3.1% drop in the first quarter was revised to an improved -1.1% drop.  Gains in productivity (output per hour) are considered critical to long-term worker pay and economic growth.  But productivity data is heavily revised and many economists believe the Labor Department tracks productivity in ways more appropriate for a manufacturing economy, rather than a more-appropriate service economy.

Industrial production in the US rebounded solidly in July.  The +0.6% gain beat estimates and was the second straight monthly gain after 5 straight declining months.  Manufacturing gained +0.8%, the strongest increase in 8 months, helped by a +15% jump in auto production.

Fed Vice Chairman Stanley Fischer told Bloomberg TV that inflation remains low because of temporary factors like the oil price plunge.  He stated that it’s “interesting” that inflation hasn’t picked up even as the labor market has firmed.  Considered a policy centrist, Fischer said he leans towards wanting to see inflation accelerate before hiking rates.

In Canada, most economic news of the week was disappointing.  Housing starts were reported at an annual rate of 193,032 in July, missing forecasts of 195,000.  Single-family starts were down -0.8% last month versus a +2.3% increase in June.  Manufacturing shipments rose +1.2% in June, but analysts had been expecting a +2.5% gain.  Sales are 3.1% lower for the year.

In the Eurozone, industrial production declined -0.4% in June, worse than the predicted +0.1%.  For the year, output was up +1.3%.  Portugal was the biggest decliner, down -2.1%, while the Eurozone’s biggest economy –Germany – contracted by -1.4%.  GDP expanded +0.3% in the second quarter, as the 3 largest Eurozone countries all missed expectations.  For the year, growth increased to a +1.2% pace from +1% pace of the previous quarter, but this also missed forecasts.  France was flat, Spain expanded at +1%, but Germany missed expectations by gaining at only a +0.4% pace.

In China, the government devalued its currency (the yuan) Tuesday and Wednesday, spooking markets and causing concern of a “hard landing” in the world’s second biggest economy.  China cut its daily reference rate by about -4%, triggering the steepest exchange-rate decline since 1994.  A weaker yuan will help Chinese exporters, and make imports into China more expensive for Chinese buyers.  Reuters cited confidential sources who said the ultimate goal is a depreciation of 10%.  In economic news, producer prices declined -5.4% versus a year ago, the sharpest drop since 2009.  Expectations had been for a -5.0% decline.  Production materials fell -6.9%.  Industrial production also slowed to a yearly gain of +6% versus +6.8% in June, the weakest in 4 months. 

Finally, from Charlie Bilello of PensionPartners.com, comes this question:

“What economic characteristic do General Motors, JP Morgan Chase, Microsoft, IBM, Proctor & Gamble, Citigroup, Johnson & Johnson, Coca-Cola, Oracle, and Caterpillar all have in common?” 

The answer: They are on a growing list of large American companies with negative year-over-year revenue growth (i.e., declining sales).  While everyone knows that the plunge in oil prices has caused revenues to decline at energy companies, it turns out that revenues are falling across a much wider swath of the US economy.

In fact, with 80% of companies having reported their Q2 numbers, overall sales among companies in the S&P 500 are on pace to decline a substantial -3.1% year over year.  This will mark the second consecutive quarter of falling sales among S&P 500 companies.

As the following chart shows, the last two times that S&P 500 sales growth went negative were 2001 and 2008 – and both of those years turned out to be unhappy times in both the economy and the stock market.

(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,  marketwatch.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 5.5 from the prior week’s 8.3, while the average ranking of Offensive DIME sectors slipped to 18.5 from the prior week’s 18.  The Defensive SHUT sectors again 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,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 8/7/2015

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 26.4, down 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 51.38, down from the prior week’s 52.79, 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 8, down a tick from the prior week’s 9.  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 difficult week in the US equity markets as a solid jobs report made a September interest rate increase more likely.  The Dow gave up -317 points ending the week at 17373.  The LargeCap S&P 500 declined -1.25% ending the week at 2077.  The tech heavy NASDAQ was able to maintain the 5000-level at 5043 despite losing 84 points.  The MidCap S&P 400 index declined -0.98%.  Small companies lost more than large ones, as the small cap Russell 2000 suffered a -2.57% decline, a bit more than twice the loss of the S&P 500.  The only major index to have a positive week was the Dow Jones Utility Average which gained 1.11%.

In international markets, Developed International declined -0.26% and Emerging Markets dropped -2.21%.  Canada’s TSX was unable to continue its rebound of last week, declining -1.15%.  Unlike the US, European markets were predominantly positive.  The United Kingdom’s FTSE gained +0.33%, Germany’s DAX increased +1.61%, and France’s CAC 40 added +1.42%.  In Asia, China’s Shanghai Index rebounded +2.20%, and Japan’s Nikkei gained +0.68%.

After large recent declines, gold declined very slightly this week, only losing -$1.70 to $1093 an ounce.  Silver was actually positive, gaining +$0.02 to $14.78 an ounce.  Copper, however, continued its plunge, losing an additional 1.21%, marking its 11th weekly loss of the last 12 weeks.  If copper is truly an indicator of future economic growth, this is definitely a cause for concern.  A barrel of West Texas Intermediate crude oil plunged -6.46% to $43.75 a barrel.  Oil has been negative 8 weeks in a row.

In US economic news, the Labor Department reported that the US economy added 215,000 jobs in July, the third straight monthly nonfarm payroll gain above 200,000.  The jobless rate held at 5.3%, the lowest since 2008, but the rate would be far higher if the labor force participation rate wasn’t at a multi-decade low.  Federal Reserve Governor Jerome Powell told CNBC that he is not all that impressed with the jobless rate, saying that there’s “more slack in the economy than the 5.3% (unemployment rate) would suggest.”

According to paycheck processor ADP, private payrolls increased by only 185,000 in July.  Expectations were for a gain of 210,000.  Almost all of the gains were in the service sector; construction added 15,000 jobs, the smallest gain in more than a year but the 4 year streak of hiring after the housing bust remains intact.  Outplacement consultancy Challenger, Gray & Christmas reported that U.S. employers said they would cut 105,696 workers, the most in nearly 4 years.  This is a 136% increase versus last month, and a 125% increase over July of last year.  However, more than half of the cuts are attributed to the US Army, which is cutting 57,000 troop and civilian staff positions.

Real estate research firm CoreLogic reported that home prices rose +1.7% in June, a +6.5% year-over-year increase.  Prices were at new all-time highs in 15 states and the District of Columbia.  Sales excluding distressed properties increased +6.4% versus a year ago.  Mortgage applications jumped +4.7% in the July 31 week, according to the Mortgage Bankers Association.

US Manufacturing declined as the Institute for Supply Management (ISM)’s index declined -0.8 point to 52.7, missing expectations.  The details of the report were mixed.  New orders gained a half point to 56.5, a good sign for the future, and production also increased to 56.  However, the order backlog sank further into contraction territory (<50) to 42.5, and the employment component dropped 2.8 points.  The “Prices Paid” measure also declined further into contraction territory, at 44.  Of the 18 industries surveyed, just 11 reported any growth in July.

The services side of the economy is doing better, though.  The US Non-manufacturing Purchasing Managers Index (PMI) jumped +4.3 points to 60.3 in July—a 10 year high.  New orders were up +5.5 points to 63.8, and employment rose to 59.6, the highest since 2005.

Gallup’s US Economic Confidence Index dropped sharply from -8 to -12 as Americans turned sharply less confident in July.  Only 39% of respondents said the economy was getting better, while 56% said it was getting worse.

In Canada, the trade balance declined to 0.48 billion Canadian dollars in June, from 3.37 billion CAD in May.  Imports dipped -0.6%, but remained 4.4% higher than this time last year.  Exports jumped +6.3%, but remain 1% lower for the year.  Canada’s unemployment rate remained at 6.8% as the country added 6,600 jobs.  Full-time positions fell 17,300 while part-time positions rose 23,900.

In the Eurozone, manufacturing remains solid according to the latest Purchasing Managers Index, which ticked down -0.1 point to 52.4 even though an all-time low reading of 30.2 was reported by Greece.  All other countries recorded growth, except France.  Producer Prices declined -0.1% in June, the first monthly decline in 6 months and the yearly rate dropped -0.2% to -2.2%.  This deflation in producer prices is not what the European Central Bank is looking for, as its goal is for 2% inflation.  In France, the factory sector slid into contraction again, as July’s PMI declined -1.1 point to 49.6 with broad weakness among the report’s subindices.  Germany, though, reported slight manufacturing expansion at 51.8.  Job creation was at a 3-month high and German factory orders rose +2% in June.

Finally, Apple is now in what Wall Streeters call “correction” territory.  In Wall Street speak, this means it has declined at least 10% from its prior high of $134.5 (Apple closed the week at $115).  The importance of Apple’s stock to the major market indexes is no secret.  Apple makes up 4.4% of the Dow Jones Industrial Average, 14% of the Nasdaq 100 Index, and is worth more in market cap than the bottom 105 companies in the S&P 500 index combined!  It is widely expected that further weakness in Apple’s stock would bring the broader market down with it. 

Mark Hulbert published an article at marketwatch.com stating that “a bigger decline in Apple’s stock is just what we should expect, given extensive research into how bad news tends to get reflected.”  What he was referring to is that analysts are quite slow to reflect a company’s declining stock price in their published price targets until well after a significant decline has taken place.  When analyst price predictions are finally lowered, that has historically caused further declines.  In the case of Apple, despite the almost 15% decline in price, analysts price targets have hardly budged, staying well north of $145.  Hulbert concludes “It’s a good bet that Apple’s price will fall even further as analysts gradually incorporate the bad news into their analysis and lower their target prices.”

(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,  marketwatch.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 8.3 from the prior week’s 10.8, while the average ranking of Offensive DIME sectors slipped to 18 from the prior week’s 17.8.  The Defensive SHUT sectors again 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,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 7/31/2015

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, unchanged from the prior week, 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 52.79, up from the prior week’s 50.81, 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 9, down from the prior week’s 11.  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:

After a poor start to the week, stocks reversed course and ended the week higher.  Midcap stocks (up +1.77% for the week) led small caps (up +1.03%), while the Dow Jones Industrial Average remained the only major index in negative territory for the year, up 121 points to 17689 on the week.  The NASDAQ maintained its solid hold above 5000 at 5128, up +0.78%.  Previously beaten-down Dow Transports and Dow Utilities were big outperformers for the week, up +3.96% and +3.77% respectively.  Canada’s TSX gained +1.99%, despite the continuing declines in oil and gold

European markets were mixed: Germany’s DAX declined -0.34%, while France’s CAC40 gained +0.5%.  Spain showed improved economic numbers but still declined -1.14%.  The United Kingdom’s FTSE gained +1.77%. 

In commodities, Gold continued its decline for the 6th straight week, losing -$3.40 to $1095 an ounce.  Silver was able to halt its 5 week decline and gain +0.34% ending the week at $14.76 an ounce.  Oil, like Gold, also continued its decline, down -2.48% for the week to $46.77/barrel for West Texas Intermediate.

The month of July was positive for US stock indices overall, although the SmallCap Russell 2000 index fell -1.22%.  The S&P 500 gained +1.97%, and the best performing US index was the Nasdaq Composite at +2.84%.  Canada’s TSX fell in July by -0.58%, but the real losers in global indices were to be found in Emerging Markets, paced by China’s huge -15% loss in July (the worst monthly drop in 6 years), with Brazil close behind at -12.45%.  The Emerging Market index shed -6.31% overall.  Nonetheless, Developed International markets overall traded higher in July, with the Developed International index gaining +2.03%.

In US economic news, the second quarter’s initial GDP reading reported that the economy had expanded at a 2.3% quarterly rate, whereas economists had expected a 2.9% increase.  First quarter GDP was also revised up to +0.6% from the previous -0.2% decline.  However, the government’s revisions of GDP calculations for 2012-2014 were all downward, to an average growth of 2% versus the previously reported 2.3%.  This makes the current economic expansion the weakest since World War 2.

Home prices increased, but at a slower rate according to S&P/Case-Shiller’s 20 city index, which came in at a +4.9% annual gain in May vs expectations of a +5.6% gain.  All 20 cities in the index showed a year over year increase.  The 20 city index remains 14% below its 2005 peak.  The industry hopes that the slower pace of price appreciation could give first-time buyers a better entry point into the market.

New durable goods orders rose +3.4% in June, beating expectations of a +3.1% gain.  However, most of the rise was attributed to orders written at the Paris Air Show.  Excluding the volatile transportation sector, orders rose just +0.8% – but even that was stronger than expected. 

Consumer confidence dropped nearly 9 points to 90.9 in July–a 10 month low.  There was broad weakness across the entire report.  The expectations gauge fell almost 13 points to 79.9, a level indicating a particularly poor outlook.  Also declining was the University of Michigan’s consumer confidence gauge, down -0.2 to 93.1 for its final July reading, and missing expectations for a reading above 94.

The Federal Open Market Committee released a statement on Wednesday stating “the labor market continued to improve, with solid job gains and declining unemployment.”  Federal Reserve policymakers said they continued to move closer to ending an unprecedented period of near-zero interest rates, but without providing a clear signal on the timing of liftoff.  Chairwoman Janet Yellen is guiding the Fed toward its first rate increase in almost a decade.  She said the Fed is likely to tighten this year if the economy continues to improve as she expects.  A rate hike may come as soon as September—economists surveyed last week assessed the odds of a rate increase in September at around 50%.

In Canada, C.D. Howe, the business cycle group based in Toronto, stated that Canada was not in a recession.  The economy has been weighed down by the plunge in oil prices which had prompted two interest rate cuts in 2015, “but the labor market remains strong” according to the group.

In the Eurozone, bank lending to businesses rose by €3 billion in June, a 33% increase over May and April.  Loans to households were up by €15 billion, also greater than the €10 billion rise in May.  The EU Commission’s economic sentiment index rose half a point to 104.0 in July—expectations had been for a slight decrease.  France and Germany saw the biggest sentiment gains.  Inflation expectations fell to the lowest since February.  Unemployment remains stubbornly high across the Eurozone: the unemployment rate remained unchanged at 11.1% in June, and youth unemployment rose to 22.5%.

German business confidence improved to 108 from 107.5, beating expectations of a decrease.  The current conditions gauge improved to 113.9, also, beating forecasts.  German manufacturing continued to show relative strength over construction and retail.  German inflation remained tame with the CPI rising 0.2%.  The yearly rise was also 0.2%.  Finally, German joblessness rose by 9000 in July, the biggest jump in over a year.  The unemployment rate remained 6.4%.

Spain’s economy grew 1% in the second quarter.  Spain is on track to expand more than 3% this year, much better than most other Eurozone countries.  Real output increased +3.1% versus a year ago, the best increase in 8 years.

In Japan, retail sales increased +0.9% for the year in June, the third straight month of year over year increase, although only half of the retail categories showed gains.  Industrial production also increased in June, up +0.8%, handily beating expectations of a +0.3% gain. 

Finally, a recent study by Pew Research focused on the rising number of millennials living at home.  “The Great Recession seems to have hit millennials particularly hard, making it even more difficult for young people to find good jobs and to establish their own households,” the study observes.  However, economic numbers for millennials have been improving.  The unemployment rate has been heading lower since peaking in 2010 and now stands at 7.7%.  Wages have also been slowly creeping up.  But the % of millennials living at home has actually increased even while more millennials find better-paying employment.

The US has not reached the level of, say, Italy, where the phenomenon of adult children living at home – particularly males – has spawned the use of two words in the Italian language to describe them: “mammino” (mama’s boy) and “bamboccioni” (big babies).

One other big factor could be at play here: the skyrocketing cost of rent.  Several major cities across the country are reporting significant percentage increases in rent, some in the double digits.  From real estate website Zillow:

(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 10.8 from the prior week’s 12.3, while the average ranking of Offensive DIME sectors rose to 17.8 from the prior week’s 18.5.  The Defensive SHUT sectors again 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,

FBIAS™ for the week ending 7/31/2015

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, unchanged from the prior week, 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 52.79, up from the prior week’s 50.81, 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 9, down from the prior week’s 11.  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:

After a poor start to the week, stocks reversed course and ended the week higher.  Midcap stocks (up +1.77% for the week) led small caps (up +1.03%), while the Dow Jones Industrial Average remained the only major index in negative territory for the year, up 121 points to 17689 on the week.  The NASDAQ maintained its solid hold above 5000 at 5128, up +0.78%.  Previously beaten-down Dow Transports and Dow Utilities were big outperformers for the week, up +3.96% and +3.77% respectively.  Canada’s TSX gained +1.99%, despite the continuing declines in oil and gold

European markets were mixed: Germany’s DAX declined -0.34%, while France’s CAC40 gained +0.5%.  Spain showed improved economic numbers but still declined -1.14%.  The United Kingdom’s FTSE gained +1.77%. 

In commodities, Gold continued its decline for the 6th straight week, losing -$3.40 to $1095 an ounce.  Silver was able to halt its 5 week decline and gain +0.34% ending the week at $14.76 an ounce.  Oil, like Gold, also continued its decline, down -2.48% for the week to $46.77/barrel for West Texas Intermediate.

The month of July was positive for US stock indices overall, although the SmallCap Russell 2000 index fell -1.22%.  The S&P 500 gained +1.97%, and the best performing US index was the Nasdaq Composite at +2.84%.  Canada’s TSX fell in July by -0.58%, but the real losers in global indices were to be found in Emerging Markets, paced by China’s huge -15% loss in July (the worst monthly drop in 6 years), with Brazil close behind at -12.45%.  The Emerging Market index shed -6.31% overall.  Nonetheless, Developed International markets overall traded higher in July, with the Developed International index gaining +2.03%.

In US economic news, the second quarter’s initial GDP reading reported that the economy had expanded at a 2.3% quarterly rate, whereas economists had expected a 2.9% increase.  First quarter GDP was also revised up to +0.6% from the previous -0.2% decline.  However, the government’s revisions of GDP calculations for 2012-2014 were all downward, to an average growth of 2% versus the previously reported 2.3%.  This makes the current economic expansion the weakest since World War 2.

Home prices increased, but at a slower rate according to S&P/Case-Shiller’s 20 city index, which came in at a +4.9% annual gain in May vs expectations of a +5.6% gain.  All 20 cities in the index showed a year over year increase.  The 20 city index remains 14% below its 2005 peak.  The industry hopes that the slower pace of price appreciation could give first-time buyers a better entry point into the market.

New durable goods orders rose +3.4% in June, beating expectations of a +3.1% gain.  However, most of the rise was attributed to orders written at the Paris Air Show.  Excluding the volatile transportation sector, orders rose just +0.8% – but even that was stronger than expected. 

Consumer confidence dropped nearly 9 points to 90.9 in July–a 10 month low.  There was broad weakness across the entire report.  The expectations gauge fell almost 13 points to 79.9, a level indicating a particularly poor outlook.  Also declining was the University of Michigan’s consumer confidence gauge, down -0.2 to 93.1 for its final July reading, and missing expectations for a reading above 94.

The Federal Open Market Committee released a statement on Wednesday stating “the labor market continued to improve, with solid job gains and declining unemployment.”  Federal Reserve policymakers said they continued to move closer to ending an unprecedented period of near-zero interest rates, but without providing a clear signal on the timing of liftoff.  Chairwoman Janet Yellen is guiding the Fed toward its first rate increase in almost a decade.  She said the Fed is likely to tighten this year if the economy continues to improve as she expects.  A rate hike may come as soon as September—economists surveyed last week assessed the odds of a rate increase in September at around 50%.

In Canada, C.D. Howe, the business cycle group based in Toronto, stated that Canada was not in a recession.  The economy has been weighed down by the plunge in oil prices which had prompted two interest rate cuts in 2015, “but the labor market remains strong” according to the group.

In the Eurozone, bank lending to businesses rose by €3 billion in June, a 33% increase over May and April.  Loans to households were up by €15 billion, also greater than the €10 billion rise in May.  The EU Commission’s economic sentiment index rose half a point to 104.0 in July—expectations had been for a slight decrease.  France and Germany saw the biggest sentiment gains.  Inflation expectations fell to the lowest since February.  Unemployment remains stubbornly high across the Eurozone: the unemployment rate remained unchanged at 11.1% in June, and youth unemployment rose to 22.5%.

German business confidence improved to 108 from 107.5, beating expectations of a decrease.  The current conditions gauge improved to 113.9, also, beating forecasts.  German manufacturing continued to show relative strength over construction and retail.  German inflation remained tame with the CPI rising 0.2%.  The yearly rise was also 0.2%.  Finally, German joblessness rose by 9000 in July, the biggest jump in over a year.  The unemployment rate remained 6.4%.

Spain’s economy grew 1% in the second quarter.  Spain is on track to expand more than 3% this year, much better than most other Eurozone countries.  Real output increased +3.1% versus a year ago, the best increase in 8 years.

In Japan, retail sales increased +0.9% for the year in June, the third straight month of year over year increase, although only half of the retail categories showed gains.  Industrial production also increased in June, up +0.8%, handily beating expectations of a +0.3% gain. 

Finally, a recent study by Pew Research focused on the rising number of millennials living at home.  “The Great Recession seems to have hit millennials particularly hard, making it even more difficult for young people to find good jobs and to establish their own households,” the study observes.  However, economic numbers for millennials have been improving.  The unemployment rate has been heading lower since peaking in 2010 and now stands at 7.7%.  Wages have also been slowly creeping up.  But the % of millennials living at home has actually increased even while more millennials find better-paying employment.

The US has not reached the level of, say, Italy, where the phenomenon of adult children living at home – particularly males – has spawned the use of two words in the Italian language to describe them: “mammino” (mama’s boy) and “bamboccioni” (big babies).

One other big factor could be at play here: the skyrocketing cost of rent.  Several major cities across the country are reporting significant percentage increases in rent, some in the double digits.  From real estate website Zillow:

(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 10.8 from the prior week’s 12.3, while the average ranking of Offensive DIME sectors rose to 17.8 from the prior week’s 18.5.  The Defensive SHUT sectors again 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,