FBIAS™ for the week ending 9/25/2015

FBIAS™Fact-Based Investment Allocation Strategies for the week ending 9/25/2015

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 24.5, down from the prior week’s 24.9, 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 51.12, down from the prior week’s 52.74, and continues in Cyclical Bull territory.  Several of the world’s major markets have entered Bear territory, most notably Germany, China and Brazil, while many of the world’s other markets – including some US indexes – are in “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned Negative on September 25, after being Positive since August 26.  The indicator ended the week at 13, down from the prior week’s 16.  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), a majority of major equity markets still remain in Cyclical Bull territory, although numerous others have moved to Bear status.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are newly 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 ended the week lower despite what some saw as a pep talk by Federal Reserve Chair Janet Yellen, who said that global growth is strong enough to withstand turmoil in emerging markets and elsewhere.  Most of the major stock indexes ended the week in the red.  The Dow Jones Industrial Average gave up 69 points to close at 16314.  The Nasdaq composite lost 140 points and ended the week at 4686.  The LargeCap S&P 500 declined -1.36%, the MidCap S&P 400 index lost -1.75%, and the SmallCap Russell 2000 was the worst of the US indices at -3.49%. 

International markets were also mostly down.  Canada’s TSX declined -1.97%, Germany’s DAX was down for a second week, losing -2.3% (and now in Bear territory, more than 20% lower than its high).  France’s CAC 40 similarly declined -1.22%.  In Asia, Japan’s Nikkei also declined a second week down -1.05%, while China’s Shanghai composite declined only fractionally at -0.18%.

In commodities, a barrel of West Texas Intermediate crude oil gained +$0.02 to $45.34 a barrel.  The price for an ounce of gold increased +$6.40 to $1,145.50, a gain of +0.56%.  Silver declined -0.36% to $15.10 an ounce.  Copper has now entirely reversed its huge surge two weeks ago, declining -4.14%. 

In US economic news, the economy expanded +3.9% in the second quarter’s final estimate.  That’s up +0.2% from the earlier estimate and a healthy rebound from the first quarter’s puny +0.6% gain.  Exports, residential and non-residential fixed investment, and state and local government spending all increased.

On the jobs front, there were 267,000 initial claims for unemployment last week, an increase of 3,000 but still below estimates of 275,000.  There were 2.142 million continuing claims, about the same as last week. 

The US housing market showed signs of weakness as sales of existing homes declined -4.8% to an annual rate of 5.3 million in August, according to the National Association of Realtors.  Forecasts had been for a rate of 5.5 million.  Compared to last year, existing home sales are still up +6.2%.  Prices were +4.7% higher versus a year ago.  The Federal Home Finance Agency (FHFA)’s price index rose +0.6% in July as house price gains accelerated.  FHFA’s index, which includes only mortgages guaranteed by Fannie Mae or Freddie Mac, stands just 1.1% below its 2007 peak.  Contrary to existing-home sales, new-home sales ran at an annual rate of 552,000 in August, beating expectations of 515,000, and are +22% higher than year-ago levels. 

Retail reporting service Redbook reported that same-store sales rose +0.9% versus a year ago last week.  This was a sharp deceleration from the +1.7% annual gain the previous week.  New orders for durable goods also disappointed as orders dropped -2% in August, matching forecasts.  Ex-transportation, orders were flat, which missed estimates of a 0.3% gain—and down 3.9% versus this time a year ago.  Manufacturing has suffered as energy producers hold back on capital expenditures.  Core capital goods orders, considered a proxy for business investment plans, dipped -0.2%. 

Bloomberg’s most recent weekly reading of consumer confidence increased +1.7 points to 41.9, the highest reading in a month.  Consumers’ views of their personal finances rose to the highest level in 2 months.  Likewise, the University of Michigan’s consumer confidence reading for September rose +1.5 point to 87.2, beating expectations but still the weakest reading since last October.

The US Purchasing Managers Index (PMI) for factory output remained unchanged at 53, the lowest reading since October 2013.  Output rose at a slightly faster pace in September, but new business, and employment weakened.  The employment component was the weakest in 15 months.

The Richmond Fed’s regional factory index hit a 32-month low and fell into contraction to -5 in September, down from zero.  Expectations had been for a gain to three.  The worst component was new orders, which plunged to 12, a bad sign for future activity.  Manufacturing has struggled with a stronger dollar, which makes US exports less attractive.  The Chicago Fed’s National Activity Index declined to -0.41 in August from 0.51.  All 4 categories within the index declined. 

In Canada, wholesale sales were flat in July, missing expectations of a +0.7% rise.  Machinery, equipment, and supplies rose +1%, but sales of construction, forestry, mining and industrial machinery fell -3%.  Canadian retail sales rose +0.5% in July, missing expectations of a +0.8% gain, but the third straight monthly rise nonetheless.  Sales growth was driven by motor vehicle and parts, clothing and accessories. 

In the Eurozone, the September composite PMI from Markit ticked down to 53.9 from 54.3, but that closed out the best quarter in four years.  New orders were at a five month high and order backlogs improved, signaling probable higher future economic activity.

The Asian Development Bank (ADB) said that the Chinese economy will grow less than its government’s 7% target this year, and that the country’s slowdown could ripple throughout Asia.  The ADB forecasts growth of 6.8%, down from 7.2%.  China’s factory PMI from Caixin is now at a 6 ½ year low, declining -0.3 point to 47.  Output, new orders, new export orders and employment gauges all declined at faster rates.

Finally, this week we take a closer look at the declining fortunes of “the world’s factory” — China.  Unlike other Purchasing Managers Index (PMI) readings around the world, in China the PMI readings are from two sources: the official state-issued PMI, and the Caixin PMI.  The difference between them is that the official state-issued version covers state-owned and very large enterprises, whereas the Caixin version is a gauge of nationwide manufacturing activity that focuses on smaller, medium-sized and privately-owned companies. 

As seen on the chart below, both the state-issued and the Caixin PMI values show declines year-over-year, but the Caixin PMI has fallen hard and fast in the last few months.  Both are now in the sub-50 area, signaling contraction.  The Caixin version is now lower than the state version by a very significant 2+ points, indicating greater trouble in the small-medium-private sector…or perhaps indicating misrepresentation by the Chinese government in the state-issued version.

(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 9.3 from the prior week’s 8.8, while the average ranking of Offensive DIME sectors fell to 18.3 from the prior week’s 17.  The Defensive SHUT sectors still have a 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 through new highs were reached in the US earlier this year. 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 9/18/2015

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 9/18/2015

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 24.9, up slightly from the prior week’s 24.8, 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 52.74, down from the prior week’s 53.18, and continues in Cyclical Bull territory.  Several of the world’s major markets have entered Bear territory, most notably China and Brazil, while many of the world’s other markets – including some US indexes – are in “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) has been Positive since August 26, after having been Negative since May 6.  The indicator ended the week at 16, up 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 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:

Stocks closed the week mixed, as initial exuberance over the widely anticipated (in)action of the Federal Reserve quickly dissipated.  The Dow Jones Industrial Average lost -48 points on the week, ending at 16,384.  The interest-rate sensitive Dow Jones Utility Average, however, surged +2.83%.  The tech-heavy Nasdaq remained nearly flat, up +4 points to 4827.  The large cap S&P 500 ended the week down only -0.15%.  The small cap Russell 2000, more insulated from the shocks in the global economy, actually gained +0.48%. 

In international markets, Canada’s TSX ended a 2 week down streak by closing up +1.38%.  The United Kingdom’s FTSE closed down -0.22%.  On mainland Europe, Germany’s DAX ended down -2.05%, and sits perilously close (at 19.9%) to the -20% level marking “bear” territory, while France’s CAC 40 declined -0.28%.  In Asia, China’s Shanghai index declined -3.2%.  Japan’s Nikkei also ended down for the week, losing -1.06%. 

In commodities, Gold ended a 3 week down streak by gaining +2.8%, finishing the week at $1,139 an ounce.  Silver also gained, rising +3.87%.  A barrel of West Texas Intermediate crude oil gained $0.54 to $45.32.

In US economic news, the news that overshadowed all other news was that on Thursday the Federal Reserve left interest rates near zero, saying ‘global economic and financial developments’ may curb economic growth and inflation.  Federal Reserve policymakers stated that “economic activity is expanding at a moderate pace.  Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft.  The labor market continued to improve, with solid job gains and declining unemployment.  On balance, labor market indicators show that underutilization of labor resources has diminished since early this year.”  Stocks were volatile, with the Dow rallying +190 to a session high 45 minutes after the announcement, but by the close that gain had been erased, and the Dow settled negative at 65.

Job openings soared to a fresh all-time high in July, evidence that the labor market continues to heat up.  However, employers aren’t necessarily filling those positions with higher paychecks.  The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) last week showed that actual hires fell 4% to 5 million, more than ¾ of a million lower than openings.  July marked the 6th straight month in which that relationship was upside down.  Tara Sinclair, chief economist at job website indeed.com attributes this to the hangover of a weak labor market.  “Employers had many years where they were able to get workers they wanted without having to make the job competitive,” she stated.

Builder sentiment rose to a high not seen since November 2005.  The National Association of Home Builders Housing Market Index gained a point to 62, beating expectations of a flat reading.  The gauge of current sales conditions rose 1 point to 67 and buyer traffic rose 2 points to 47.  Mortgage applications declined -7% in the Mortgage Bankers Association’s composite index last week.  Applications to purchase were down -4% and refinancing applications declined -9%.  Builders broke ground on fewer homes than expected in August.  Housing starts ran at a 1.12 million annual pace in August, down from a 1.16 million pace in July and below forecasts of 1.17 million.  However, August housing starts were +17% higher than year-ago levels. 

The consumer price index declined -0.1% in August, missing forecasts of a flat reading.  For the year, the CPI is +0.2% higher.  Excluding food and energy, the index rose +0.1% for the month and was +1.8% higher versus a year ago.  The number is still short of the +2% goal of the Federal Reserve.

Retail sales were up +0.2% in August, a tick less than expected, but July’s number was increased to +0.7% from +0.6%.  Core retail sales, used in calculating GDP, advanced a strong +0.4% following a +0.6% gain in July.  Core retail sales exclude automobiles, gasoline, building materials and food services.  Redbook reported that same-store sales rose +1.7% versus a year ago last week.  This was an improvement over the +1.3% yearly rise the prior week.

Industrial production declined -0.4% in August, worse than the -0.2% expected.  Manufacturing declined -0.5% and mining activity fell -0.6%.  Weaker overseas economies and a stronger dollar may be taking a toll on industrial exporters.  Capacity utilization, which measures how much spare capacity remains in capital equipment, declined –0.2% to 77.6%.

In Canada, inflation remains flat as the consumer price index was unchanged in August and up +1.3% versus a year ago.  The Bank of Canada’s core reading rose +2.1% for the year, down from +2.4% recorded in July.  The plunge in oil prices continues to weigh heavily on the Canadian economy.

In the Eurozone, industrial production rose +0.6% in July, beating expectations, and June’s reading was also revised upward.  Output is +1.9% higher versus a year ago, also beating expectations.  Subsectors were mixed with energy up +3% but consumer nondurables down -0.6%.  The currency bloc’s trade surplus rose to €31.4 billion ($35.6 billion), up from €21.2 billion a year ago.  Exports rose +7%, and imports rose +1%.  All in all, the data suggests a gradually improving European economy.  Inflation in the Eurozone weakened as the consumer price index for August was revised down to a yearly gain of just +0.1%, the weakest since April.  The core reading, which excludes food, alcohol, tobacco, and energy was revised down to+ 0.9% – just half the ECB’s target level.

In China, industrial output rose +0.53% in August, stronger than July.  Output for the year was up a slightly disappointing +6.1%, vs. expectations of a year to date gain of +6.5%.  Retail sales were up +10.8% year to date in August, better than expected.

Finally, earlier this month Starbucks fans were treated to the annual arrival of Pumpkin Spice Latte.  The Pumpkin Spice Latte is Starbucks most popular specialty beverage of all time and marks the return of autumn for many customers.  Starbucks has significantly revamped the beverage this year because of pressure brought to bear by a food safety and nutrition writer with a wide following on the Internet.  For example, for the first time ever, this year the Pumpkin Spice Latte will contain actual…pumpkin!  Several other changes have been made, but it is still the case that a grande’ Pumpkin Spice Latte will shock your system with more than 500 calories (about the same as a Big Mac), including an astounding 50 grams of sugar!

Here is the graphic published by the internet food writer Vani Hari, aka “The Food Babe”, which galvanized pressure on Starbucks and appears to have forced the changes for this season (the full article that started it all can be found at http://www.foodbabe.com/2014/08/25/starbucks-pumpkin-spice-latte):

Beside the addition of actual pumpkin, the most significant other change announced by Starbucks is the exclusion of the caramel coloring.  The Starbucks press release on the changed ingredients can be found at: http://blogs.starbucks.com/blogs/customer/archive/2015/08/17/pumpkin-spice-latte-2015.aspx

(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 slightly to 8.8 from the prior week’s 9, while the average ranking of Offensive DIME sectors fell to 17 from the prior week’s 16.3.  The Defensive SHUT sectors still have a 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 9/11/2015

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 9/11/2015

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 24.8, up from the prior week’s 24.4, 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 53.18, up from the prior week’s 50.92, and continues in Cyclical Bull territory.  Several of the world’s major markets have entered Bear territory, most notably China and Brazil, while many of the world’s other markets – including some US indexes – are in “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) has been Positive since August 26, after having been Negative since May 6.  The indicator ended the week at 11, up from the prior week’s 7.  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:

US stock indexes rose in a holiday-shortened week as market participants await the Federal Reserve’s decision on interest rates in the coming week.  For the week just ended, the Dow Jones Industrial Average gained 330 points to end the week at 16,433, a rise of +2.05%.  The tech-heavy Nasdaq rose almost +3% to end the week at 4,822.  The Nasdaq is now the only major index in the green for the year.  The LargeCap S&P 500 gained +2.07%,  the MidCap S&P 400 tacked on +2.03%, and the SmallCap Russell 2000 added +1.9%.

In international markets, Canada’s TSX ended slightly down by -0.12%, the United Kingdom’s FTSE gained +1.24%, France’s CAC40 added +0.57%, and Germany’s DAX gained +0.85%.  In Asia, China’s Shanghai Stock Exchange composite ended a 3 week downtrend by gaining +1.27%.  Japan’s Nikkei rebounded from last week’s plunge by gaining +2.65%.

In commodities, crude oil resumed its decline by giving up -2.16%, ending the week at $44.78 a barrel.  Gold experienced its 3rd week of declines, down -1.28% to $1107.90 an ounce.  Silver tacked on +$0.03 an ounce to $14.59, and Copper surged +6.06% after being down the prior week.

In US economic news, the Job Openings and Labor Turnover Survey (JOLTS) revealed there were 5.75 million job openings in July, the highest in the history of the Labor Department’s survey and up more than a million versus a year ago.  Seemingly at odds with the JOLTS number, actual hires declined to 5 million from 5.2 million.  This discrepancy illustrates what economists call a skills mismatch.  Employers aren’t finding the workers they want even as lots of Americans remained unemployed.  The “Quits” number, which signals job holders’ confidence in the job market, declined slightly to 2.69 million from 2.73 million.

The Mortgage Bankers Association’s weekly index dropped -6.2% last week as refinancings dropped -10%.  Purchases were down -1%, but up +41% compared with this time last year.  Fannie Mae introduced the Home Purchase Sentiment Index that combines the results from consumer surveys into a new index.  The new sentiment index declined to 80.8 in August due to consumer concerns of expectations of rising interest rates and the direction of the economy.  CoreLogic reported that foreclosures were down -24.4% vs. a year ago in July.

Consumer confidence sank as the University of Michigan’s reading for September fell 6.7 points to 85.7.  That was the largest monthly decline in nearly 3 years.  Most of the drop came from a -8.4% decrease in the expectations component.  The current conditions gauge fell -4.6 points to 100.3.  Producer prices were flat in August, beating consensus of -0.2% and were down -0.8% versus a year ago.  Ex food and energy, prices rose 0.3% in August, beating expectations.  That measure is up 0.9% versus a year earlier, but well below the Fed’s 2% inflation target. 

Import prices were down -1.8% in August, more than the -1.6% expected and remain -11.4% below year ago levels.  Export prices dipped -1.4%, lower than the -0.4% expected, and down -7% for the year.  Prices of imports and exports returned to levels not seen since 2009.  The Fed’s target for inflation is 2%, but as the price of oil continues to test lows that target is going to be hard to reach.

Redbook reported that same-store sales rose +1.3% versus a year ago last week—in line with expectations.  Small business sentiment showed improvement as the National Federation of Independent Business’s optimism index rose almost half a point to 95.9 in August, barely missing expectations of 96.  More owners stated they plan to hire, however plans to expand capital stock remain unchanged.  The sales outlook improved, but overall views of the economy pulled back.

In Canada, housing starts rose +12.2% in August to an annualized rate of 217,000, beating expectations of 194,000.  It was the highest reading since August 2012.  Multi-family units gained almost +20% while single-family homes were up just +1.4%.  The household debt-to-income ratio rose to an all-time high of 164.6% in the second quarter, with mortgages accounting for the biggest portion of household debt.  The Canadian housing market has been robust amid concerns that two rate cuts by the central bank will prompt consumers to borrow even more.

In the United Kingdom, a country sometimes called “a nation of shopkeepers”, those same shopkeepers have been having a tough time maintaining their pricing: the British Retail Consortium reported that retail shop prices fell 1.4% in August, the 28th straight month of declines.

In the Eurozone, the economy grew +0.4% in Q2, up from the initial +0.3% reading.  For the year, growth was revised up to +1.5% from +1.0%; expectations were for a +1.2% gain.  Much of the gain was due to a strong rise in exports, attributed to the weaker euro.  In export powerhouse Germany, exports jumped +2.5% in July, to a +6.2% annual increase and a new record high.  Imports rose +2.3%, increasing the trade balance to 22.8 billion euros from 22.1 billion.  Weakness persists in France, as French industrial production dropped -0.8% in July.  Expectations had been for a flat reading, but most subcomponents declined, including manufacturing, which was down -1%.  Output was also -0.8% lower for the year to date.

In Asia, China’s trade balance rose to $60.24 billion in August from $43.03 billion.  Exports declined -5.5% versus a year ago.  Imports declined more than twice the decline in exports, plunging by -13.8%, and twice the -6.5% decline forecast, widely interpreted as a sign of weak domestic demand.

Finally, if you have thought to yourself recently that there seems to be a rise in the number of days when all stocks are going up or all stocks are going down, with large moves in either direction…you are right.  Between August 20 and September 4 (12 trading sessions), there were 8 days when at least 80% of all stocks went in the same direction, whether up or down.  This is very unusual, having only happened two other times since 1990, according to research group Bespoke.

Some analysts believe that the rise in popularity of “Index” ETFs and Mutual Funds are at least part of the cause, since (to use an oversimplified example) when there is buying in an S&P 500 Index ETF, well, 500 stocks have to be simultaneously bought, and when there is selling in that same S&P 500 Index ETF, 500 stocks have to be simultaneously sold.

One might think that this simultaneous buying or selling of huge swaths of the market in these “one-way days” would increase correlation among those stocks, and that is what appears to be happening over the past decade or so, paralleling the rise in Index ETFs and Mutual Funds, according to this chart by FactSet, using Bloomberg data:

(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 9 from the prior week’s 6.8, while the average ranking of Offensive DIME sectors rose to 16.3 from the prior week’s 17.3.  The Defensive SHUT sectors still have a 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 9/4/2015

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 9/4/2015

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 24.4, down from the prior week’s 25.2, 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 50.92, down from the prior week’s 54.77, and continues in Cyclical Bull territory.  Several of the world’s major markets have entered Bear territory, most notably China and Brazil, while many of the world’s other markets – including the US – are in “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) has been Positive since August 26, after having been Negative since May 6.  The indicator ended the week at 7, up from the prior week’s 3.  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:

Stocks gave up last week’s gains and reversed course again to end the week in negative territory for both the week and year-to-date.  Volatility remained high with sharp drops on Tuesday and Friday more than offsetting earlier gains.  The Dow lost over 540 points to end the week at 16,102.  The Nasdaq declined over 144 points, closing at 4683.  The SmallCap Russell 2000 showed relative strength, down only -2.3%.  The SmallCaps are thought to have fared better due to their lower level of exposure to the travails in China, compared with LargeCap companies (-3.4% for the week) most of which have overseas operations.  Canada’s TSX did a bit better than the US at -2.8%.

European market results looked quite similar to the US for the week: the United Kingdom’s FTSE dropped -3.28%, Germany’s DAX ended down -2.53%, France’s CAC40 declined -3.25%, and Italy’s FTSE Milan index also lost over 2.3%.  In Asia, China’s Shanghai composite had its 3rd consecutive week of declines, down -2.23%.  Japan’s Nikkei, which had been holding tenaciously to the 20,000 level until the week before last, fell sharply to end the week at 17,792 – a loss of more than -7%!

In commodities, crude oil had its second straight week of gains up +1.02% to close at $45.77 a barrel.  Gold lost $10.30 an ounce, closing the week at $1122.30.  Copper gave up last week’s gain, dropping -1.24%.

In US economic news, the very important NonFarm Payroll report (NFP) was released on Friday, showing that US employers added 173,000 jobs in August, missing expectations of a 223,000 gain.  The jobless rate fell to 5.1%, the lowest level since April 2008.  The latest rate meets the Federal Reserve’s definition of “Full Employment”, even though the labor force participation rate remained unchanged at a historically low 62.6%.  Analysts speculate that the latest jobless numbers may give the Fed the confidence it needs to finally begin raising interest rates.

The Mortgage Bankers Association (MBA) reported that refinancing applications jumped +17% last week.  Mortgage rates remained unchanged, though treasury yields declined slightly.  Applications to purchase a home rose +4%.  The MBA’s composite index rose +11.3% for the week.  CoreLogic reported that home prices rose +1.7% in July, a 6.9% yearly increase.  CoreLogic is forecasting a +4.7% yearly gain thru next July.

The US services sector remains strong as the Institute for Supply Management’s (ISM) nonmanufacturing index stayed at 59 in August.  It was the second strongest month since December 2005, and beat analyst forecasts.  New orders came in at an even stronger 63.4.  Factory growth in the Midwest remained stable according to the regional ISM Chicago/Midwest manufacturing index.  The gauge edged down -0.3 point to 54.4 vs. forecasts for no change, but still in expansion (>50) territory.  Nationally, however, the US Purchasing Managers Index (PMI) for manufacturing hit a two year low, falling 1.6 points to 51.1 in August.  This is the lowest since May 2013. New orders dropped -4.8 points to 51.7, while export orders fell further into contraction.

Oil’s plunge is hitting the Lone Star State particularly hard.  The Dallas Federal Reserve reported regional energy production and manufacturing fell sharply, as did a measure of new orders.  Oil prices have continued the retreat since late June, reaching a fresh 6-year low below $38 a barrel last week before rebounding back into the low $40’s this week.

Canada’s economy contracted for a second straight quarter, putting the country technically in recession (the technical definition is two consecutive quarters of GDP shrinkage).  GDP declined at a -0.5% annualized pace in the second quarter, according to Statistics Canada.  The agency revised the first quarter contraction to -0.8% from 0.6%.  Business investment fell by -7.9% in the second quarter after a -10.9% decline in the first three months of the year.  The decline in business investment and the continued weakness in crude oil prices were cited as the chief causes of the contracting GDP.  Employment in Canada was a mixed picture in August.  Payrolls expanded by +12,000 beating expectations of a decline of -2500, but despite the gain the jobless rate ticked up to 7% from 6.8%.

In the Eurozone, August consumer prices rose just +0.2% vs. a year earlier, while core prices climbed +1%, the EU’s statistics office said.  Both were unchanged from July.  The European Central Bank (ECB) has an inflation target of just under 2%, but has struggled to make headway toward that goal given sluggish Eurozone and global activity while renewed falls in oil prices and strength in the Euro continue to put downward pressure on prices and inflation.  The European Central Bank therefore cut its forecast on inflation to just 0.1% this year, from 0.3%.  It also reduced next year’s forecast to 1.1% in 2016 from 1.5%.  GDP was also revised down to 1.4%.  ECB president Mario Draghi said the ECB’s bond buying program would be expanded if necessary.

Manufacturing in the Eurozone declined slightly from 52.4 to 52.3, according to Markit’s August PMI.  The report noted that employment was rising at the fastest pace in four years.  Although France and Greece remained in contraction, other large Eurozone economies including Spain and Italy had strong readings.  The composite PMI ticked up to 54.3 in the final August reading, up +0.4 point from July.  The service component was 54.4, also a +0.4 increase over July.

Manufacturing in China fell further into contraction according to the private Caixin-Markit PMI, which came in at 47.3.  This was the quickest deterioration in operating conditions since 2009.  It was also the sixth straight month of contraction.  Factory output sank the fastest since November 2011.  The “official” China PMI, which focuses more on large state-owned companies, declined -0.3 point to 49.7, the lowest in three years.

Finally, as mentioned earlier in this report, the US unemployment rate now stands at 5.1% – the lowest since 2008.  Market weakness on Friday is being attributed at least in part to the reality that with the unemployment rate now in the Federal Reserve’s target window of “full employment”, a rate hike could be in the cards as soon as mid-September.  Even though at first blush the August NonFarm Payroll (NFP) report was on the weak side at just 173,000 jobs added, the August jobs report in particular has a longstanding reputation for being frequently revised upward due to problems with seasonal adjustments and widely off-the-mark estimates.  Jim O’Sullivan, Chief U.S. Economist at High Frequency Economics stated that “payrolls were weaker than generally expected, but there has been a clear tendency for the August data to be underreported initially and then revised up later.”  Here is a multi-part graphic from marketwatch.com that nicely summarizes all the major parts of the August report:

(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 6.8 from the prior week’s 5.5, while the average ranking of Offensive DIME sectors rose slightly to 17.3 from the prior week’s 17.8.  The Defensive SHUT sectors still maintain a sizable 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®