FBIAS™ for the week ending 10/30/2015

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 10/30/2015

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 26.3, little changed from the prior week’s 26.2, 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 60.57, up from the prior week’s 57.59, 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 – recently visited “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5.  The indicator ended the week at 31, up from the prior week’s 27.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth 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 rated as Positive.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

The LargeCap indexes registered modest gains for the week thanks to a strong rally Wednesday, which compensated for losses on each of the other days of the week.  Roughly one-third of the companies in the S&P 500 were scheduled to report third-quarter earnings during the week, and the mix of positive and negative surprises appeared to drive much of the market action.  For the week, the Dow Jones Industrial Average gained +16 points to close at 17663.  The Nasdaq composite held the 5000-level and gained +0.43% to end the week at 5053.  The LargeCap S&P 500 gained +0.2%.  The MidCap S&P 400 added +0.34% and the SmallCap Russell 2000 was the weakest US index, down -0.36%. 

Canada’s Toronto Stock Exchange Index declined -3.04% as the weakness in natural resources continues to impact Canada’s economy.  The United Kingdom’s FTSE declined -1.29%.  Germany’s DAX gained +0.52% and France’s CAC 40 declined -0.53%.  In the major Asian markets, Hong Kong’s Hang Seng declined -2.21%, China’s Shanghai Stock Exchange declined -0.88%, but Japan’s Nikkei bucked the trend by gaining +1.37%.

In commodities, precious metals sold off as Gold and Silver both lost ground down, with gold settling  down $22.30 to $1141.70 and silver settling down -$0.28 to $15.54 an ounce.  A barrel of West Texas Intermediate crude oil rebounded after 2 down weeks, closing up +3.71% to $46.39 a barrel.

October was the best month for LargeCap US indices in the last four years.  Outside of the LargeCap space, gains were unevenly spread.  The S&P 500 and Dow gained more than 8% for the month, but MidCap and SmallCap indices gains were less eye-popping, at 5%+.  Major International indices also gained strongly, in the 6%-7% range for the month, but the gains were not evenly spread and some, like Canada’s TSX, settled for a smaller +1.7% gain.

In US economic news, the economy slowed to a Gross Domestic Product (GDP) growth rate of just 1.5% in the 3rd quarter, down from a 3.9% pace in Q2.  This was a bit slower than the 1.7% growth rate analysts had forecast.  Consumer spending was up a strong +3.2% and housing investment was up +6.1%.  Auto sales have been extremely strong, pushing durable goods spending up +6.7%.  Export growth dipped to +1.9% from +5.1% in the second quarter—the strong dollar is weighing on exports. 

The Federal Reserve left interest rates unchanged Wednesday, which was widely expected, but hinted that a stabilization of market conditions could allow a rate increase at its next meeting in December.  In the release of their meeting notes, Fed policymakers noted a mixed view of economic conditions in their statement—household spending and business investment had increased at “solid rates”, and noted strength in the housing market, but the pace of job gains has slowed.  One statement that Fed watchers noted was missing in the latest notes release was their previous assertion that “recent global economic and financial developments” had stayed their hand.  The absence of the phrase could mean that policymakers are more comfortable with a rate liftoff in December and less concerned about global problems.

There were 260,000 initial claims for unemployment last week, up 1000 from the previous week.  Continuing claims were 2.144 million, down 27,000 from the week before—the lowest level since late 2000.

New-home sales were reported by the Commerce Department at a running at a rate of 468,000, missing forecasts of 549,000.  Supply rose to 5.8 months at the current rate, up from 4.9 in August.  The median sales price was $296,900—14% higher than this time last year.  Housing market research firm Black Knight reported that prices were up +5.5% versus a year ago in August and are now amazingly just 5.3% lower than their 2006 peak.  Its national index is 27% above its lows and 9 of its 40 metro areas notched new highs in August.  S&P/Case-Shiller’s index rose +0.1% in August, matching expectations.  The index is up +5.1% versus a year ago.  San Francisco and Denver remain two of the hottest markets with +10.7% yearly gains.  Case-Shiller’s index is 12% lower than its 2006 peak.

Pending home sales declined -2.3% in September according to the National Association of Realtors, whose analysts had estimated a gain of +1%.  It was the second straight monthly decline and took NAR’s index to the second lowest reading of the year.

The Conference Board’s consumer confidence reading declined -5 points to 97.6 in October, widely missing the 102.5 forecast.  The present situation index declined to 112.1 from 120.3.  The expectations gauge also declined to 88 from 90.8.  The University of Michigan’s consumer confidence reading rose less than expected in the final October reading.  Interestingly, the gain came mostly from lower-income households.  The current conditions gauge gained +1.1%, and the expectations component gained +5%.

The US service sector weakened more than expected, according to Markit’s October flash Purchasing Managers Index (PMI), which fell to 54.4 from 55.6.  October saw the weakest rise in service-sector employment since February.  The service sector had been a source of strength as manufacturing continues to struggle.

On the manufacturing side, US Durable goods orders declined -1.2% in September, worse than the -1% expected.  Excluding transportation, orders fell -0.4% whereas analysts had expected a decline of -0.1%.  Core capital goods, an indicator for business investment, declined -0.3% on top of a -1.6% decline in August.  However, there were two pockets of strength: motor vehicle orders gained +1.8%, and defense aircraft surged +25%. 

In Canada, railway car loadings fell -5% in August versus a year ago.  Freight origination also declined -4.9%.

In the United Kingdom, GDP grew +0.5% in the 3rd quarter, slightly lower than the +0.6% expected.  The yearly rate of expansion is now +2.3%, down from +2.4%.  Similar to the United States, the service sector is offsetting weakness in manufacturing and construction.  CBI’s October Industrial Trends Survey reported a decline in the rate of manufacturing growth to -18, worse than the -9 analysts were expecting.  Export orders fell to the lowest level since January 2013.  Retail activity in the U.K. sank in October to 19 from 49 according to CBI’s High Street survey—expectations were for a reading of 35.  This was the weakest retail reading since April.

In the Eurozone, German business confidence declined -0.3 point to 108.2 in the German Center for Economic Studies October survey.  However, that beat expectations of a reading of 107.9.  The current conditions gauge also declined, but the expectations component increased ½ point to 103.8—the highest since June 2014.  Consumer confidence in Germany continued to slide a 3rd straight month according to German consumer researcher GfK’s November survey, which fell to 9.4 while analysts had been expecting 9.6.  That’s the lowest reading since February.  A gauge of economic expectations fell for the fifth straight month, into contraction territory for the first time since May 2013.  The surge of refugees into the labor market was widely cited by respondents as a concern.

Finally, China this week officially ended its one-child per working-class couple policy, which had been in place since 1980.  Originally, the program was intended to curb China’s then-ballooning population.  However, China’s most recent population growth rate is closer to 0.5% rather than the 1.2% rate back when the policy was initiated, according to the World Bank.  That rate of population growth compares to a current rate of 0.7% for the United States and 1.2% for India.  Under China’s new policy, couples can now have two children, which had only been allowed in special circumstances previously.  An unintended consequence of the 1-child policy has been a gender-skewing among younger Chinese, with many more men than women (hundreds of millions of baby girls were aborted by parents more interested in having a boy as their only allotted child).  This will make it even more difficult to spur procreation, as there is a huge imbalance of genders preventing the formation of new households on a scale necessary to support the desired growth – or even stability – of the population.

China’s working-age population, defined as the ages between 15 and 64, is now peaking and is poised to fall just as its economy slows.  A shrinking working age population makes it harder to support a growing number of older citizens who will be retiring from the workforce.  China’s population pattern appears to be following Japan’s pattern from 20 years ago, as seen in the first chart below.  Unlike China and Japan, the US working-age population is forecast to continue rising slowly, as seen in the second chart, helped in part by continued high levels of immigration.

(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, Charles Schwab & Co)

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 12.3 from the prior week’s 9.8, while the average ranking of Offensive DIME sectors rose slightly to 13.3 from the prior week’s 13.5.  The Defensive SHUT sectors retain a slight rankings lead overs 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 10/23/2015

FBIAS™Fact-Based Investment Allocation Strategies for the week ending 10/23/2015

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 26.2, up from the prior week’s 25.7, 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 57.59, up from the prior week’s 56.80, 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 – recently visited “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5.  The indicator ended the week at 27, up substantially from the prior week’s 21.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth 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 rated as Positive.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

Friday’s 157 point gain in the Dow Jones Industrial Average marked the end of a strong week on Wall Street.  The Dow gained over 430 points to close at 17,646.  The Nasdaq surged over +2.9% ending the week back above the psychologically-important 5000 number at 5031.  The LargeCap S&P 500 added +2.07%.  However, the gains were concentrated in the LargeCap space, as the S&P 400 MidCap index gained only +0.38% and the SmallCap Russell 2000 rose an anemic +0.32%.  A particularly weak September job gains number is believed by some market watchers to have been the death knell for a 2015 interest-rate increase, and the interest rate cut by the People’s Bank of China added to the buying rush.

In international markets, Canada’s TSX gained +0.84% to close at 13953.  Much bigger returns for the week were found in Europe, where Germany’s DAX vaulted over +6.8%, followed by France’s CAC40 jumping +4.7%.  The United Kingdom’s FTSE gained +1.04%.  In Asia, Japan’s Nikkei gained +2.92% and China’s Shanghai Stock Exchange rose a more modest +0.62%.     

In commodities, Gold declined more than -$14 to $1,162.80 an ounce.  Silver likewise declined -1.27% to $15.83 an ounce.  A barrel of West Texas Intermediate crude oil declined more than -6.5% to $44.60 a barrel.

In US economic news, jobless claims remained near their recent lows as initial claims rose only 3,000 to 259,000 last week.  Analysts had expected a reading of 265,000.  There were 2.17 million continuing claims, while the 4-week moving average of claims reached a 15-year low of 2.184 million.

Housing starts for September came in at an annual rate of 1.206 million in September, which was the second strongest monthly reading since 2007 and well above expectations.  Starts were +17.5% higher versus a year ago.  On the other hand, new construction permits fell -5% at 1.1 million, missing expectations.  This may indicate a slower pace of building in the future.  Existing home sales were up +4.7% last month to an annual rate of 5.55 million according to the National Association of Realtors.  That was the second highest reading since 2007 and handily beat estimates of 5.35 million.  Mortgage and refinance applications both jumped for the week, too, up +11.8% and +16.4% respectively.  More good news on the housing front came from the Homebuilder Confidence reading from the National Association of Home Builders, which jumped to a new decade high in October.

The early reading on October US manufacturing activity, the “flash” Purchasing Managers Index (PMI), saw its sharpest pickup in new business conditions since May.  The reading increased nearly a point to 54.0, beating estimates of an unchanged reading.  Strong output was mostly driven by demand from the domestic US market.

The Conference Board’s US Leading Economic Indicators (LEI) fell -0.02% in September to 123.3.  Expectations had been for a flat reading.  The September reading suggests that growth will continue but at a tepid pace—around +2.5%, according to the Conference Board.

In Canada, wholesale shipments fell -0.1% in August, missing expectations of a slight gain.  Canada’s economy continues to struggle with the effects of low oil prices.  However, retail sales rose +0.5% in August, beating expectations.  The yearly gain increased to +2.8% suggesting better growth for the 3rd quarter.

In the Eurozone, The European Central Bank left rates and its bond buying program unchanged, as expected.  ECB President Mario Draghi suggested an increase in bond buying would be considered in December.  He stated that monetary policy alone wouldn’t be enough to spur the Eurozone to stronger growth.  ECB Governing Council member Ewald Nowotny stated that fiscal policy must become looser.  Previously fiscal policies were “restrictive”, and are now “neutral”, but there may be a need for it to become “expansive”, he was quoted as saying. 

Eurozone construction output declined -0.2% in August.  Building was down 0.2% during the month, and civil engineering fell 0.3%.  Construction activity has remained relatively weak along with the broader Eurozone economy.  Consumer sentiment also lost ground as October’s reading slipped to -7.7 from -7.1.  This was the lowest reading since January.  Germany, struggling to get even a little inflation in its economy, reported that producer prices fell -0.4% last month, more than expected.  The yearly decline now stands at -2.1%, the biggest year-over-year reading since January.  Excluding energy, which fell -1.1%, the producer price index was still down 0.1%.

In China, GDP grew at an annualized rate of +6.9% in the 3rd quarter.  That’s slightly below the official target of +7%, and the slowest rate of GDP growth since 2009.  Industrial production missed expectations, increasing only +5.7% versus last September.  Retail sales rose +10.9% versus last year, matching expectations.  The People’s Bank cut interest rates for the 6th time in a little less than a year and relaxed reserve requirements for banks making China’s stimulus levels the most accommodative since the financial crisis. 

Finally, this past week Italian luxury sports car maker Ferrari had its initial public offering priced at $52 a share, under the ticker symbol RACE.  However, Ferrari’s IPO was one of the declining number of IPOs in the current bull market.  According to Dealogic data, to this point in 2015 just 153 deals have been brought public, versus 242 at this same time last year, and 173 the year before.  The cooling in the IPO market is attributed by analysts to a disconnect between company expectations and current market reality.  Supermarket chain Albertson’s wished to raise $1.95 billion through a public sale of stock last week, but delayed its IPO until later this month or next.  Volatile markets, marked by a steep sell-off in late August, have led potential investors to demand better prices from the companies aspiring to go public.  Also not helping the IPO market is the fact that this year’s overall IPO returns are negative.  Renaissance Capital estimates that half of the companies that have gone public this year are trading below their IPO price, and even more are trading below their “first trade” prices (the price assigned to the public IPO-buyer not in on pre-trade share allocations).  In the case of Ferrari, the first-trade price was $60, yet Ferrari closed the week at $56.38, meaning that all public buyers of the IPO at the “first trade” price are under water already.

(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 9.8 from the prior week’s 11.3, while the average ranking of Offensive DIME sectors fell to 13.5 from the prior week’s 11.3.  Despite the market gains of the week, the Defensive SHUT sector have regained a slight rankings lead overs 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 10/16/2015

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 10/16/2015

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 25.7, little changed from the prior week’s 25.6, 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 56.80, up from the prior week’s 53.97, 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 – recently visited “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5.  The indicator ended the week at 21, up substantially from the prior week’s 15.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth 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 rated as Positive.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

The major US benchmarks were mostly up for the week, with the LargeCap S&P 500 index adding to its gains from the previous week, up +0.9% to 2033.  The Dow Jones Industrial Average gained 131 points ending the week at 17,215, a rise of +0.77%.  The NASDAQ continued its run to regain the 5000-level, up +1.16% to 4886.  The SmallCap Russell 2000 diverged from its larger counterparts, ending the week down -0.26%.  The Nasdaq remains the only major US index with a gain year-to-date, but the losses have narrowed considerably.

In international markets, weakness prevailed in most European markets, while gains were the rule in Asia.  Canada’s TSX declined -0.9%, the United Kingdom’s FTSE gave up -0.59%, and Germany’s DAX was nearly flat up +0.08%.  China’s Shanghai Stock Exchange surged +6.54% and Hong Kong’s Hang Seng gained +2.7%.  But South America continued to show weakness with Brazil’s Bovespa index plunging -4.26%.

In commodities, Gold had its second week of gains, up +$21.80 to $1177.40 an ounce.  Silver had its third week of gains, up +1.33% to $16.03 an ounce.  The industrial metal copper pulled back slightly from last week’s large gain, down -0.74%.  A barrel of West Texas Intermediate crude oil declined -3.56% to $47.73 a barrel.

In US economic news, new unemployment claims fell 7,000 to 255,000 last week, matching July’s 42-year low.  Analysts had expected 270,000 claims.  The numbers seem to indicate a continued tightening in the labor market, but actual hiring activity has been tepid, leaving net job growth fairly weak.  There were 5.4 million job openings in August, down from the all-time high reading of 5.7 million in July.  Hires rose slightly to 5.08 million, quits also increased slightly.  Counterintuitively, economists consider higher numbers of “quits” to be a good thing – it is a sign that workers are more confident they’ll find another job.

Consumer prices dropped the most in 8 months as prices slipped -0.2% last month compared to August.  Energy fell -4.7%, and is -18.4% versus a year earlier.  The core CPI, which excludes food and energy, rose +0.2%.  The total CPI was unchanged versus a year earlier, while core CPI was up +1.9% versus last year.  The core CPI is getting close to the Federal Reserve’s 2% target, but policymakers have been hinting that rate hikes are off the table for the remainder of 2015.

US exports fell -6.2% for August versus a year earlier, the fastest decline since 2009.  Manufacturing has been hit especially hard according to recent activity gauges that have shown stagnation or outright decline.  Caterpillar announced huge layoffs last week as it faces weak demand for its heavy-construction and mining equipment.  DuPont also referred to overseas weakness in its earnings warning.  U.S. exports are not alone–China’s exports fell -5.5% versus a year earlier and South Korea suffered a -14.9% plunge.  The strong dollar has had the dual effect of stifling demand for U.S. goods and making other countries’ trade look weak in dollar terms.  Whether it has triggered a manufacturing recession is not yet known, but is increasingly discussed as a real possibility.

US Small business owners were more optimistic last month according to the National Federation of Independent Business (NFIB), although sales outlooks weakened.  The NFIB’s small business optimism index rose +0.2 point last month to 96.1—still historically below average.  In the report, finding qualified labor continues to be a growing concern.  Over 15% of smaller firms say finding qualified workers is a growing problem, up from just 9% a year earlier.  Finding qualified workers is the number 3 overall worry of small business owners, following taxes and government regulations/red tape.

Retail sales disappointed in September, rising only +0.1%.  Had it not been for the launch of the iPhone 6s, retail sales would have fallen.   The Producer Price Index (PPI) slid -0.5% in September, the biggest decline in 8 months and worse than the -0.2% drop expected.  Core PPI, which excludes food and energy, still retreated -0.3% versus expectations of a +0.1% increase.  Year over year, wholesale prices have fallen -1.1%. 

Industrial production decreased -0.2% in September, better than the -0.3% decline expected, but its second straight decline nonetheless.  Production was +0.4% higher versus a year ago.  Manufacturing declined -0.1%, less than expected, and was +1.4% higher than this time last year.  The energy slump that began last year continues to impact production.  Capacity utilization, which measures slack in firms’ industrial equipment, fell slightly to 77.5% from 77.8%.  Regional Fed measures of manufacturing in Philadelphia and New York were both in contraction territory, though slightly improved from the prior month.

In Canada, manufacturing sales declined -0.2% in August, much better than the -0.7% loss analysts expected.  This reading followed a +1.7% surge in July.  For the year through August, sales were down -0.6%.

Europe continues to flirt with deflation, despite the European Central Bank’s intensive Quantitative Easing (QE) activities intended to spark activity – and inflation.  In Germany, September consumer prices fell -0.2% vs. August and were flat versus this time last year.  Wholesale prices declined -0.6% versus August and down -1.8% versus this time last year.  In the United Kingdom, consumer prices fell -0.1% from August and down -0.1% from this time last year.  Core CPI was unchanged from the previous month and rose +1% versus a year earlier.

In Asia, China’s September trade balance was $60.34 billion, up slightly from August and much higher than the forecast of $46.79 billion.  In dollar terms, imports tumbled more than -20% versus a year earlier after falling over 13% in August.  Exports fell -3.7% versus this time last year.  The import and export figures signal weakening Chinese demand for raw materials and weaker global demand for Chinese finished goods. 

Finally, this past week the Misery Index hit a 59-year low.  Created in the 1970s by economist Arthur Okun, the Misery Index attempts to capture the “misery” felt by a country’s citizenry.  The Misery Index is the sum of the unemployment rate and the inflation rate, and sits today at its lowest level since 1956.  The index is created by adding the unemployment rate to the inflation rate over the last year.  The Misery Index used to be significant and widely quoted, particularly when the US was suffering from “stagflation”.  Jimmy Carter used it in his campaign against President Gerald Ford in 1976, and in the “what goes around comes around” vein, Ronald Reagan then used it very effectively against then-President Carter in 1980, famously asking “Are you better off than you were four years ago?”

But in today’s economy, the Misery Index doesn’t seem to capture the “misery”, concerns and worries of the current time.  The economy presently enjoys a low unemployment rate and almost no inflation.  Despite this apparently obvious good news, a recent NBC News/Wall Street Journal poll reported that a whopping 62% of Americans say the country is on the wrong track.  High underemployment, weak wage growth, widening of the wage-gap, government dysfunction, and a seemingly amoral corporate culture (see recent drug-price gouging examples) are possible reasons for the apparent divergence between the presumably good numbers and their perception.  In any event, it seems the Misery Index doesn’t capture the angst of the current age!

(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 11.3 from the prior week’s 11.5, while the average ranking of Offensive DIME sectors rose again to 11.3 from the prior week’s 13. The Defensive SHUT sector has given up its lead over the Offensive DIME sectors, and the two groups are now tied.   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 10/9/2015

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 10/9/2015

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 25.6, up 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 53.97, up from the prior week’s 51.81, 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) returned to positive on October 5.  The indicator ended the week at 15, up sharply 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 negative indication on the first day of October for the prospects for the fourth 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 rated as Negative.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

Stocks recorded their biggest weekly gains in several months as investors became more confident that the Federal Reserve would not raise interest rates for the remainder of the year.  The small cap Russell 2000 (+4.6%) and Mid Cap 400 index (+4.07%) outperformed their large cap counterparts.  The Dow Jones Industrial Average regained the 17,000 level up over 600 points for the week.  The S&P 500 gained over +3.2%.  The tech heavy Nasdaq was the laggard up “only” +2.6%.

In commodities, Gold rose $18 to end the week at $1,155.60.  Silver gained +3.8% to end the week at $15.82 an ounce.  The industrial metal copper also recorded a strong gain, up over +3.1%.  A barrel of West Texas Intermediate crude oil skyrocketed more than +8% to $49.49 a barrel.

In US economic news, first time unemployment benefit claims fell by -13,000 to 263,000 last week, according to the Labor Department.  The reading is close to the 3 ½ year low set earlier this summer.  Analysts had expected 271,000 new claims. 

Home prices rose by +6.9% in August versus a year earlier, and +1.2% versus July, according to industry watcher CoreLogic’s Home Price Index.  CoreLogic is also predicting a further +4.3% rise in home prices over the next 12 months.  Home price appreciation in New York, Los Angeles, Dallas, Atlanta, and San Francisco remain strong.  Also in housing, mortgage applications surged +25% amid worries about new mortgage regulations and the possibility that the Federal Reserve may boost interest rates.  The Mortgage Bankers Association reported that refinance applications surged +24% and purchase applications rose +27%.  The applications were filed just before significant changes to the Truth in Lending Act and the Real Estate Settlement Procedures Act (known in the industry by the jaw-breaking acronym “TILA-RESPA”) took place on Oct 3.  The changes require, among other things, that lenders disclose all of a loan’s details at least three days before closing.  The changes went into effect on Oct. 3.

The Institute for Supply Management’s (ISM) US nonmanufacturing index fell -2.1 points in September to 56.9, slightly lower than expected but still above the neutral 50 as services continue to remain largely insulated from global economic concerns.  The new orders index fell -6.7 points to 56.7, the lowest level since early last year.  The employment gauge picked up +2.3 points to a strong 58.3.  The ISM nonmanufacturing reading follows a disappointing ISM manufacturing index, which fell to a barely-positive 50.2 as was reported here last week.

The US trade deficit rose sharply in August, attributed to weakness in exports and a surge in Apple iPhone imports.  The trade gap widened +15.6% to $48.3 billion in August.  It was the 2nd biggest imbalance since March 2012.  Overall imports rose +1.1%, but exports sank -2% versus last month and -6.2% versus a year earlier—the worst reading since October 2009.

Former Federal Reserve Chairman Ben Bernanke stated he sees no reason to raise interest rates as service sector growth slowed and overall global activity continues to weaken.  Ex-Fed chief Ben Bernanke told CNBC he sees no reason for central bank policymakers to increase interest rates right away “Easy money is justified” because inflation is so low.  He also highlighted last Friday’s weak jobs report.

In Canada, caution and restrained expectations for prices and sales dominated the Bank of Canada’s Q3 Business Outlook Survey.  No firms reported higher sales from this time last year, down 12% of firms in July.  Planned investments rose slightly, but were far short of last year’s readings.  The Canadian Central Bank sees the economy as on a “slow upward turn”.  Canada’s unemployment rate increased to 7.1% in September from 7.0% in August.  Canada added 12,000 jobs to its payrolls last month, while the labor force participation rate remained steady at 65.9%.  Inside the numbers, however, the balance between part-time and full-time jobs was not good.  Part-time positions rose +74,000 while full-time positions fell -61,900 (the steepest decline since October 2011).  The weakness in oil continued its damaging effects.

In the United Kingdom, the Bank of England kept interest rates at a record low of 0.5%.  The Monetary Policy Committee voted 8-1 to keep rates unchanged, citing cost pressures in the labor market that it said were rising too slowly.  The BoE expects inflation to remain below 1% until spring ’16.  British rates have remained steady for more than six years.

In the Eurozone, the composite Purchasing Managers Index (PMI) fell to 53.6 in September, down -0.7 point.  Employment grew for the 11th straight month.  The European Central Bank confirmed that it was committed to fully implementing its 60-billion-euro a month quantitative easing program at least through September of next year, according to the minutes of the ECB’s Sept. 2nd and 3rd meeting.  Emerging markets and China along with the oil market were mentioned as risks to “price stability”. 

Germany is still growing, however its composite PMI fell to 54.1 from 55.  Backlogs and job creation were the strongest since 2011.  German factory orders dropped an inflation-adjusted -1.8% following a -2.2% drop in July, whereas forecasts had expected a modest rebound. 

Finally, we’ve all heard of “bandwidth hogs” – applications, programs or people that consume an outsize portion of total available internet capacity.  Some internet providers have loudly complained that they feel like they are working for – but not getting paid by – Netflix and YouTube.  Indeed, as the chart below shows, those two “bandwidth hogs” have accounted for a steadily-increasing proportion of total internet consumption over the last few years, breaching the 50% level for the first time this year.  (note: the “HTTP” and “SSL” slices represent plain vanilla internet browsing).  One of the surprises in this chart is how the peer-to-peer file-sharing application BitTorrent has fallen off over the past few years – now just 2.5% of total bandwidth use.  At one time, BitTorrent was the #1 bandwidth-consuming application on the internet, topping 40% in 2009.  But because BitTorrent was widely used to illegally share movie and music files, it came under concentrated and relentless attacks from movie and music industry groups who vowed to defeat it.  The legal attacks by the industry groups were largely under the rights granted them by the Digital Millennium Copyright Act, but it is widely accepted that the industry groups also conducted very successful guerrilla warfare, as well.  It is rumored that the industry groups planted defective movies and music everywhere in the BitTorrent network, making the user experience so poor that demand largely dried up.  Resourceful, if not entirely kosher!

(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 slightly to 11.5 from the prior week’s 11.3, while the average ranking of Offensive DIME sectors rose sharply to 13 from the prior week’s 17.8. The Defensive SHUT sectors’ lead over the Offensive DIME sectors is now very slim, at 1.5.   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 10/2/2015

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 10/2/2015

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 24.5, 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 51.81, up a little from the prior week’s 51.12, 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 7, down from the prior week’s 13.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth 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 rated as Negative.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter.

In the markets:

The major market indexes were mixed as worries over China’s economic slowdown and potential new rules in drug pricing gave way to a strong Friday afternoon rally that allowed many indexes to regain positive territory for the week.  The Dow Jones Industrial Average gained 157 points for the week to close at 16472, a +0.97% advance.  Large caps fared the best as the LargeCap S&P 500 gained +1.04%.  The MidCap S&P 400 declined -0.15%, and the SmallCap Russell 2000 declined -0.77%.  Recent sector losers – particularly Biotech, Energy and Basic Materials – all rallied hard into the end of the week.  Whether these turnabouts are dead-cat bounces or genuine bottoms will not be known for a while.

In international markets, Canada’s TSX declined -0.29%.  In Europe, France’s CAC 40 lost -0.49%, Germany’s DAX gave up -1.4%, while the United Kingdom’s FTSE gained +0.34%.  In South America, Brazil’s Bovespa Stock index rallied +4.9%, after being deeply oversold and deep in “Bear” territory.

In commodities, silver added +0.93% to end the week at $15.23 an ounce.  Gold diverged from silver and lost $7.90 for the week, closing at $1137.60 an ounce despite a gain of $24.90 on Friday.  A barrel of West Texas Intermediate crude oil gained +0.71% to $45.66 a barrel.

For the month of September, losses were booked in every market segment, but LargeCaps did better by far than SmallCaps.  While the LargeCap Dow only lost -1.47% in October, the SmallCap Russell 2000 dropped -5.07%, cementing its position as the US market laggard at the ¾ marker of the year 2015.  International investors were not spared any pain, either, as Developed International retreated -4.42% and Emerging International slipped 3.13% (with Brazil leading the Emerging category to the downside, plunging -11. 78%).  Gold and Oil were also down for the month, but by lesser amounts than many recent months, at -1.80% and 7.61%, respectively.

The 3rd Quarter looked like a larger version of September, with losses across the board.  Like September, the LargeCap Dow and S&P indexes lost the least, at -7.58% and -6.94% respectively, while the SmallCap Russell 2000 lost the most, at -12.22%.  Canada’s TSX was in between, at -8.56%.  Developed International lost -9.72%, but that looks good compared to Emerging International, which sank -17.26% during the Quarter. Brazil, the worst of the category in September, was also the worst of the Emerging group for the 3rd Quarter, losing a whopping 33.02%.

In US economic news, Friday’s Non-Farm Payrolls (NFP) report was the biggest single economic piece of news of the week.  Nonfarm payroll jobs added in September were 142,000, nowhere near the 203,000 consensus estimate.  The Labor Department reported that the official unemployment rate remained unchanged at 5.1%.  The labor participation rate fell to just 62.4% — a 38-year low.  Global economic weakness and a stronger dollar were cited as reasons for the decidedly poor numbers.  The report was perceived as reducing the chance the Federal Reserve will raise interest rates this month.  Last month, the Fed held off on raising rates citing global economic concerns, and those concerns were not allayed by any news since then – and most certainly not by the NFP report.  Nonetheless, New York Federal Reserve President William Dudley stated that the Federal Reserve will likely raise rates this year, as the effects of cheaper oil and a stronger dollar play out.  He reiterated that the Fed remains data-dependent, and that the hike could even come at this month’s meeting.

US factory orders fell -1.7%, worse than the consensus estimate of a -1.3% decline.  Durable goods orders fell 2.3%.  Ex-transportation, orders fell -0.8% in August.  Consumers spent more than expected as incomes strengthened and inflation remained tame.  On Monday, the Commerce Department reported that personal incomes rose +0.3% in August, just slightly below the +0.4% gain expected.  Spending was stronger than expected with a +0.4% gain in August.  Core inflation rose +0.1% in August, which is 1.3% higher versus a year ago.

Mortgage applications fell -6.7% last week, according to the Mortgage Bankers Association.  Applications to purchase were down -6% and applications to refinance fell -8%.  Home sales declined as contract signings fell 1.4% in the National Association of Realtors Pending Home Sales Index.  This vastly missed expectations, which had been for a +0.5% gain.  The West was the only region to see a gain in August home sales.  The Federal Reserve is hoping a rebound in housing will offset the current decline in manufacturing activity in the United States.  Home prices in the S&P/Case-Shiller index declined -0.2% in July.  The 20 city index rose +5% for the year, slightly missing expectations.  Dallas, Denver, and San Francisco continue to see the strongest price gains.  Overall, prices remain about 12% below 2006 peaks, even while higher prices have been constraining more robust growth in the market.

Consumer confidence improved as the Conference Board’s sentiment gauge jumped to 103 from 101.3.  Expectations had been for a continued decline to 96.  The “present situation” component of consumer confidence increased to 121.1 from 115.8, but the “future expectations” component declined a half point to 91.

The Institute for Supply Management (ISM) Manufacturing Index fell -0.9 point to 50.2, the lowest since May 2013 and just barely above the 50 dividing line between expansion and contraction.  ISM’s export orders gauge remained at 46.5, matching the worst reading since July 2012.  The Chicago Purchasing Managers Index (PMI) fell into contraction at 48.7 from 54.4.  Forecasts had been for a slight downturn, but that the index would still remain in expansion (i.e., above 50).  It was the PMI’s fifth time below 50 in 2015 and an accompanying note said “the speed of the September descent is a source of concern.”  The reading follows other regional contraction-level readings in New York, Philadelphia, Richmond and Texas.

In Canada, industrial producer prices declined -0.3% in August, beating expectations of a -0.5% decline.  For the year, prices are -0.4% lower, led by a -14.8% plunge in energy prices.

In the Eurozone, a tiny bit of recent inflation has turned back into deflation.  Consumer prices went negative in September, falling -0.1% versus a year ago.  It was the first negative reading in the six months since the ECB launched a bond buying program.  Expectations had been for an unchanged reading. 

Germany’s PMI was revised downward in September to 52.3.  The average PMI for the months comprising the third quarter was 52.5, the strongest reading in more than a year, but the lower reading for September indicates a slowdown in momentum heading into the fourth quarter.

Finally, the general perception among many investors is that the place to find growth is in the Emerging Markets, which presumably are expanding more rapidly than their developed-world counterparts.  Sometimes, this is a correct perception – such as during the Bull Market running from 2003 to 2007.  However, it has most definitely not been true for the last couple of years.  In fact, growth has turned to contraction in many Emerging Market countries, and the Manufacturing PMI readings for Emerging Markets have fallen sharply into the sub-50 contraction territory.  Stock prices, too, have reflected this unhappy state, with most Emerging Markets indexes lower than their levels of 5 years ago.  This chart, from Markit, shows that the Emerging Market Manufacturing PMI is now at a 6-year low and back to the same level reached in Q2 of 2009 when Emerging Markets were first exiting from the Great Recession.

(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 11.3 from the prior week’s 9.3, while the average ranking of Offensive DIME sectors rose to 17.8 from the prior week’s 18.3.  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 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®