FBIAS™Fact-Based Investment Allocation Strategies for the week ending 11/27/2015

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.4, unchanged from the prior week, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 62.23, up from the prior week’s 60.99, and continues in Cyclical Bull territory.

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, unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a 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), the US is the only major market still firmly in 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 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 equity market indexes were relatively flat for the holiday-shortened week.  The week included the release of some significant economic data, but the data was mixed and didn’t directionally influence the market.  The Dow Jones Industrial Average lost 25 points to end the week at 17,798 (-0.14%).  The LargeCap S&P 500 was relatively flat, up just +0.04%.  MidCaps and SmallCaps, which have lagged large caps in the recent rally, made up some of that lost ground as MidCaps gained +1.52% and SmallCaps added +2.32%.  Utilities were the weakest sector, down -1.41%.  Canada’s TSX pulled back by -0.49%.

In international markets, European markets fared well while most of the rest of the world fell back.  Italy’s FTSE and Germany’s DAX led the gainers, up +1.96% and +1.56%, respectively.  The United Kingdom’s FTSE gained +0.64% and France’s CAC40 added +0.39%.  There was widespread weakness elsewhere, though; Asia and Brazil led to the downside as China’s Shanghai Stock Exchange gave up -5.35% and Brazil dropped -8.52%.

In commodities, Gold declined for the 6th straight week down $20.60 to $1,056.10, and Silver declined -0.53% to $14.07 an ounce.  A barrel of West Texas Intermediate Crude oil rose +0.75% to $41.77/bbl, fighting to stay above the $40/bbl mark.

In U.S. economic news, the Commerce Department reported the domestic economy rose at a +2.1% annual rate in the 3rd quarter, up from an initial report of a +1.5% gain.  Year over Year GDP rose +2.2%, the weakest gain since the first quarter of 2014.  Nonetheless, the reading makes a December rate hike by the Federal Reserve more likely.  Consumer spending grew at a 3% annual rate after a 3.6% advance in the second quarter.

Initial jobless claims fell 12,000 to 260,000 last week according to the Labor Department.  The jobless rate remains near the lowest levels of the early 1970’s.  Economists say that such low claims numbers should accompany a boom in hiring, but gross hiring activity has remained modest.

New orders for big-ticket items rose +3% last month, helped by a large increase in aircraft orders for Boeing.  This was double the expectations and reversed most of the declines in August and September.  Durable goods orders climbed +0.5% excluding transportation items.  Core capital goods orders, which serve as a proxy for business spending plans, climbed +1.3% – up for the second straight month.

Consumer confidence had an unexpected decline in November to the lowest level in more than a year as Americans reported concerns about the labor market outlook.  The Conference Board’s index declined to 90.4, the lowest level since September 2014.  The share of Americans who see greater job availability in the next 6 months declined to the lowest level since late 2011, and an even greater proportion expect their incomes to actually decline.  The drop was broad-based, confidence declined in all age groups, but was particularly evident among those younger than 35.

Manufacturing slowed in November according to Markit’s flash November Purchasing Managers Index (PMI) manufacturing reading.  The reading declined -1.4 points to 52.6, missing estimates with its slowest growth rate in 2 years.  Growth in new orders was negatively impacted by the stronger dollar and weak global demand as exports also declined.  Markit’s PMI report diverged from the otherwise upbeat reports from the Philadelphia and Kansas City Fed and their indexes of regional factory activity, but was in line with downbeat reports from the Fed’s Atlanta and Richmond regions.

In the Eurozone, economic activity hit a 54-month high in November of 54.4 according to Markit’s flash PMI estimate.  Manufacturing and services had gains of 52.8 and 54.6, respectively.  Despite the good report, Eurozone companies continued reducing prices for goods and services as input costs remained flat.  Analysts are expecting the European Central Bank to unveil more monetary stimulus at its December 3rd meeting.

Germany’s 3rd quarter growth was fairly flat as Europe’s largest economy was impacted by the slowdown in China and recessions in some emerging economies.  German GDP rose 0.3% from the 2nd quarter missing estimates of +0.4%.  Year over year, Germany’s economy grew at a modest +1.7%.   In Japan, Prime Minister Shinzo Abe is considering various additional measures to boost growth and inflation.  Multiple reports indicate that the Japanese economy fell into a recession in the spring and summer.  One draft referred to a minimum wage hike of 3% to try to boost consumer spending, according to the Nikkei newspaper.

Finally, many individual investors think that getting in on hot Initial Public Offerings (IPOs) is the way to stock market riches.  The news frequently covers the big “pop” in price that many IPOs experience on their first day, but rarely follow up with articles about how those hot IPOs fared over the following months.  This year, the majority those hot IPOs have cooled to icy cold, and their individual shareholders have been left holding the bag. 

GoPro, the maker of “action cameras” frequently mounted to helmets, cars, and even pets, has had a pretty rough 2015 even though a GoPro camera seems to be on every young person’s Christmas wish list.  Despite the product popularity, GoPro is down -70% since last December:

Etsy is a very popular e-commerce website that focuses on handmade or vintage items and supplies as well as unique factory-manufactured items.  It also had a strong IPO lift-off, and then a subsequent fade, falling by more than two thirds:

Others with similar-looking charts that started out as invincibly hot IPOs are Box, Castlight Health, Alibaba and Apigee.  To be fair, there are a few examples of IPOs that have held up this past year, like ZenDesk, Go Daddy and PayPal, but they are the exceptions and not the rule thus far in 2015.

(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 slipped slightly to 17 from the prior week’s 16.8, while the average ranking of Offensive DIME sectors fell slightly to 11.3 from the prior week’s 11.0.  The Offensive DIME sectors continue to lead the Defensive SHUT 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,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 11/20/2015

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.4, up 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 60.99, up from the prior week’s 60.16, and continues in Cyclical Bull territory.

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, down from the prior week’s 33.  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), the US is the only major market still firmly in 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 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:

A week of strong gains nearly offset the previous week’s sharp losses and brought the LargeCap S&P 500 index back into positive territory for the year.  The Dow Jones Industrial Average gained 578 points to end the week at 17,823, a gain of +3.36%.  The tech-heavy Nasdaq blew through the 5000-level again, gaining 177 points and closing at 5,104, an improvement of +3.59%.  The LargeCap S&P 500 gained +3.27%, the MidCap S&P 400 was up +2.92%, and the SmallCap Russell 2000 was up +2.49%.  As has been the case for some time, the SmallCap and MidCap indexes have been unable to match the gains of their LargeCap brethren.  Canada’s TSX gained +2.74%, at the low end of US gains.

In Europe, Germany’s DAX Composite was up a strong +3.84%, and the United Kingdom’s FTSE gained +3.54%.  Doing less well, but still positive, were France’s CAC40 (+2.14%) and Italy’s Milan FTSE (+1.36%).  In Asia, major markets gained across the board with China’s Shanghai Stock Exchange up +1.39%, Hong Kong’s Hang Seng rising +1.6%, and Japan’s Nikkei climbing +1.44%.

In commodities, a barrel of West Texas Intermediate crude oil gained $0.73 to $41.46 a barrel.  Crude oil spent the week retesting support at the $40 a barrel level, last visited in late August.  Precious metals gave up ground as both Gold and Silver were down roughly -0.6% at $1076.70 and $14.14 an ounce, respectively.  Copper continued its plunge, down over -5.7% last week.  If copper is a harbinger of upcoming worldwide industrial health, as many maintain it is, then the future is not bright for that segment as copper hit a low this week not seen since the Great Recession of 2008-09.

In US economic news, initial claims for state unemployment benefits fell by -5,000 last week to 271,000, according to the labor department.  Initial claims have been holding near a 42-year low and have been below 300,000 for over half a year.  The number of people continuing to claim benefits rose by +2,000 to 2.18 million.

Housing starts fell -11% in October to an annual rate of 1.06 million units, with the decline led by a plunge in new apartment construction.  On the other hand, permits for single-family homes rose to the best level in almost 8 years.  Single-family home starts fell -2.4% to 722,000, the lowest since March.  The Mortgage Bankers Association reported that mortgage applications rose +6.2% last week; rising mortgage rates are encouraging buyers to act sooner rather than later.  Delinquency rates for mortgage loans fell in the third quarter to their lowest rate since 2007, and mortgage foreclosures fell to the lowest rate since 2005.

The October US Consumer Price Index rose +0.2% versus September.  Energy prices rose last month, but are still down -17.1% versus October of last year.  Core inflation, which excludes food and energy, remained at 1.9% and is holding just below the Federal Reserve’s oft-stated 2% target.

US manufacturing rebounded in October as manufacturing output rose +0.4% after two months of declines.  Motor vehicle production advanced +0.7% to a +10.9% annual gain as carmakers enjoy their strongest US sales in years.  However, overall industrial production declined -0.2% last month, reflecting weakness in the mining sector and utilities.

The New York Federal Reserve’s Empire State Manufacturing Index was still in contraction at -10.74 in November.  Economists had been expecting an improvement to -5.  New orders and shipments improved, but were still negative for the fourth straight month.  Unfilled orders, the workweek, and employment gauges were all the weakest in a year.  The Empire State index is the first of several factory activity gauges scheduled for release in November.

New York Fed President William Dudley said that he Federal Reserve rate hike should show confidence in the economy, though he admits he doesn’t know how markets would react to a rate lift off.  He also stated that winding down the global banking giants safely in a crisis would require more work–specifically making their legal structures “more rational and less complex.”

In their October meeting minutes, released on Wednesday of this week, Federal Reserve policymakers inserted language stating that “it may well become appropriate” to raise the benchmark lending rate in December, and largely agreed that the pace of increases would be gradual.  According to the minutes, “members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting.”  A majority of Fed officials have now signaled that they expect to raise interest rates this year for the first time since 2006. 

In Canada, September retail sales fell -0.5% after 4 months of gains, worse than expectations.  Excluding price changes, retail sales volume rose a bare +0.1%.  Canada’s October consumer price index rose +0.1% versus September, and sits at 1% versus a year earlier.  Core CPI was up +0.2% versus September and up 1.7% versus a year earlier.

In the Eurozone, European Central Bank (ECB) policymakers will “do what we must”, as expressed by ECB President Mario Draghi, giving an indication that the ECB will ease further at its December 3rd meeting.  The ECB President also stated that the bank is ready to act quickly to boost anemic inflation in the Eurozone—“If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible.”  They definitely have their work cut out for them: October consumer prices rose +0.1% versus September, while Core CPI grew +0.2%.  Core inflation was an annualized 1.1% for October versus September’s 1%.

Japan has fallen back into recession as the economy contracted at a -0.8% annual rate in the third-quarter, following a -0.7% decline in Q2.  Business spending fell at a -1.3% rate, worse than forecasts and the second straight decline.  The data will doubtless put even more pressure on the Bank of Japan to step up its monetary easing program.

Finally, last week we noted the narrowing leadership in the LargeCap S&P 500.  The largest 90 of the S&P 500 are showing gains for the year, while the remaining 410 are, on average, down substantially.  The same situation – but even more narrow – exists in the Nasdaq 100, the home of the largest tech titans.  A new acronym has been born – “FANG”.   FANG stands for Facebook, Amazon, Netflix and Google.  One could say that “without FANG, the market’s not worth a dang!”  Consider this: with FANG, the Nasdaq 100 is +10% for the year; but without just these four FANG members (leaving 96 other Nasdaq 100 stocks), the Nasdaq 100 is -5% for the year.

(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 16.8 from the prior week’s 18.0, while the average ranking of Offensive DIME sectors fell slightly to 11.0 from the prior week’s 10.8.  The Offensive DIME sectors continue to lead the Defensive SHUT 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,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 11/13/2015

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, down from the prior week’s 26.5, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 60.16, down from the prior week’s 63.57, and continues in Cyclical Bull territory.  This week, International (ex-US) Equities’ and Canada’s Bull-Bear Indicators changed status to Bear, leaving the US as the only major Bull left standing.

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 33, down from the prior week’s 35.  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), the US is the only major market still firmly in 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 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:

All the major US indices closed in the red for the week, except for the defensive Utilities.  The Dow Jones Industrial Average lost 665 points (-3.7%) to end the week at 17,245.  The Nasdaq composite lost the 5000-level once again dropping over 219 points or -4.3%.  The LargeCap S&P 500 index, which had been showing greater strength than Mid- and SmallCaps, continued to do so by declining less, at -3.6%, than the MidCap S&P 400 (-3.9%) and the SmallCap Russell 2000 (-4.4%).   Canada’s TSX lost -3.5%, marginally better than the US indices.

Asia showed relative strength as Japan was up +1.7% and China was down only a quarter of a percent.  However, European bourses were hit as hard as the US, with the United Kingdom’s FTSE declining -3.7%, France’s CAC40 down 3.54%, Germany’s DAX backtracked -2.54%, and Italy’s Milan FTSE retreated -3.05%.

In commodities, Gold declined -$5.50 an ounce (-5.1%) to $1083, and silver declined -3.46% to $14.23 an ounce.  Energy continued to plunge as a barrel of West Texas Intermediate crude oil plummeted over -8.5% to $40.73 a barrel.

In US economic news, initial jobless claims remained close to a 42-year low, and were unchanged at 276,000 last week.  The number of people continuing to get state unemployment benefits climbed 5,000 to 2.17 million.

The retail sector had a difficult week as a few of the big name brick-and-mortar retailers were under pressure.  Nordstrom, Macy’s and Fossil were among the big names falling double-digits.  October retail sales rose less than +0.1%, missing forecasts.  Apparel chains, autos, electronics/appliance stores and gas stations all posted sales declines.  However, non-store sales (i.e., e-commerce) jumped +1.4% versus September and +7.1% versus a year earlier.  E-commerce accounted for more than a quarter of all the increase in retail sales even though it still only makes up barely 10% of the total.

Home buying sentiment dipped as the Fannie Mae Home Purchase Sentiment Index fell -0.6 point to 83.2 in September.  The net share of people who said it’s a good time to buy a home fell -2 percentage points to 34%, while 10% said it’s a good time to sell, down from 16%.  The Mortgage Bankers Association said mortgage applications declined -1.3% last week.  The average 30-year fixed-rate mortgage jumped +11 basis points to 4.12%, the highest in 3 months.

Non-mortgage consumer borrowing rose by $28.9 billion for the month, the biggest dollar gain since 1941.  Of that amount, $22.2 billion came in non-revolving debt – primarily auto and student loans.  Revolving debt, typically credit card debt, advanced $6.7 billion or an 8.7% annual rate. Year over year, revolving debt grew 4.7%, the highest since August 2008. 

The National Federation of Independent Business (NFIB) Small Business Optimism Index remained flat at 96.1 last month.  In the report, more small businesses are planning to boost pay now than at any time in the past 8 years.  A net 17% of small business owners plan to boost compensation, the highest since October 2007.  However, hiring activity actually slowed.  A net 8% said that actual sales fell, the worst data since early 2014.  The NFIB report indicates that the increase in compensation reflects a lack of qualified workers rather than strong demand.  Just 27% of firms have job openings, but 48% say that they find few or no qualified applicants for open positions.

San Francisco Fed President John Williams stated that the U.S. has reached full employment now that the jobless rate has reached 5%.  He now expects inflation to pick up, so the next step is to start raising rates.  “I do think it makes sense to gradually remove the policy of accommodation that helped get the economy to where we are,” he said.  Williams’ comments carry special significance because he was Fed Chair Janet Yellen’s chief researcher when she was head of the San Francisco Fed.

It hasn’t been tried in the US, but in Europe negative interest rates are a reality – and the European Central Bank (ECB) policymakers say deposit rates could be pushed much further into negative territory.  The ECB’s deposit rate has been at -0.2% since September of 2014.  Sweden and Denmark have their deposit rates at -0.75%.

In China, the world’s biggest trading nation reported that last month’s imports fell -18.8% versus last year to $130.8 billion.  It is the 12th consecutive drop and on the heels of September’s -20.5% plunge.  Exports were also down -6.9% to $192.4 billion, the fourth straight monthly decline.  However, China’s retail sales rose +11% in October versus a year earlier, which was the fastest pace since last December.  On a weaker note, industrial production rose 5.6% versus a year earlier, missing expectations and down from 5.7%.  Producer prices declined -5.9% from the prior year, the 44th straight month of declines.  Lending is also starting to slow as Chinese banks loaned 513.6 billion yuan in new loans, down from 1.05 trillion yuan in September.  Demand is slowing and the banks are reluctant to write potentially bad loans.

Finally, you may have heard the term “a narrowing of leadership” to describe  a condition in the stock market in which fewer and fewer leaders drag the market higher, while more and more stocks fall to the side or even decline while the “leaders” march ahead.  The market is currently exhibiting that condition – in spades.  Here is a table from CNBC showing how skewed the returns among the S&P500 members have been this year.  The gainers have been the so-called “mega-caps” – those huge companies at the top of the size heap, with capitalizations greater than $100 billion.  At the other end, companies in the smaller size group (< $10b capitalization) of the LargeCap S&P 500 universe are way down, off an average of -9.6%.

(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 18.0 from the prior week’s 15.0, while the average ranking of Offensive DIME sectors fell slightly to 10.8 from the prior week’s 10.5.  Despite the market’s decline during the week, the Offensive DIME expanded their lead over the Defensive SHUT 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,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 11/6/2015

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.5, up from the prior week’s 26.3, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 63.57, up from the prior week’s 60.57, 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 35, up from the prior week’s 31.  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:

Stock market gains were widespread for the first week of November.  The SmallCap Russell 2000, which had not been participating in the rally off October’s lows jumped +3.26% last week.  The Nasdaq composite added another +1.85% to end the week at 5,147.  The Dow Jones Industrial Average gained +246.79 to end the week at 17,910.  The S&P 400 MidCap index, which with SmallCaps had been relatively weak of late, added +1.28%, and the LargeCap S&P 500 added +0.95%.  The only major US index to the downside was the Dow Jones Utilities Index, which plunged 4.14%.  Canada’s TSX lagged the US indexes, gaining +0.18% for the week.

Among international markets, the big winner was China which lead the way with a +6.1% surge in the Shanghai Stock Exchange.  Brazil also shook off recent weakness and gained +2.29%.  France and Germany gained +1.77% and +1.27%, respectively.  The United Kingdom was the only major European market in the red for the week, down, 0.11%.

In commodities, West Texas Intermediate crude oil was unable to build on last week’s strength and declined -4% to end the week at $44.52 a barrel.  Precious metals also got hit as an ounce of gold declined -$52.80 an ounce to $1,088.90 and silver dropped -5.12% to $14.74 an ounce.  The industrial metal copper also declined -3.15%.

In economic news, all eyes were on the Friday jobs report, taken as a harbinger of a possible December rate hike.  The U.S. Department of Labor reported that employers added 271,000 jobs in October, blowing away forecasts of 190,000 and sending the official jobless rate to a 7 year low of 5.0%.  Wage growth improved as well, with average hourly earnings rising +2.5% versus a year earlier.  Most industries saw job growth.  Chicago Fed President Charles Evans stated that the strong jobs report was “very good news” and that rising wages should help push up inflation.  The lack of inflation in the recovery has hindered the Fed’s ability to raise interest rates.  St. Louis Fed President James Bullard stated that the concerns that quelled a rate hike in October “have mostly passed”.  The jobs report coincided with congressional testimony by Fed Chair Janet Yellen who told the House Financial Services Committee that the prospect of a December rate hike was a “live possibility” if the economy continued to perform well.

Payment processor ADP reported that private employers added 182,000 jobs in October.  This was down slightly from the 190,000 added in September, but it met expectations.  Small businesses made up half of those gains, while construction added 35,000 jobs.  Manufacturing lost 2,000 jobs.  Job placement firm Challenger reported that announced layoffs fell 14% to 50,504 last month, down from an average of 68,000.  About a quarter of the cuts were related to the weakness in the oil market. 

Nonfarm productivity jumped to a +1.6% annual rise in the 3rd quarter, more than the 0.1% expected, and following a 3.5% gain last quarter.  Unit labor costs rose 1.4%, less than the 2.2% expected.  The self-employed reported a drop in hours worked for the first time since the recession ended.  Manufacturing reported productivity gains to the fastest rate since 2011. 

Real Estate research firm CoreLogic reported that home prices were up +6.4% nationally last month versus a year ago.  This is at the higher end of the annual increases that prices have averaged the past 15 months.  CoreLogic forecasts a +4.7% yearly rise from August 2015 to September 2016.  The Mortgage Bankers Association reported that home purchase applications fell -1% and refinancings fell -1% as well.  The composite index declined 0.8% last week.  The average 30 year fixed rate mortgage rose 3 bps to crack the 4% level, to 4.01%.

US Manufacturing barely held on to expansion as the Institute for Supply Management (ISM) factory gauge declined  -0.1 point to 50.1 last month—just slightly beating expectations for an even 50 reading.  New orders increased +2.8 points to 52.9, a good sign for future growth, but employment contracted to 47.6 (sub-50 is contraction territory).  This is only the second time that employment has fallen into contraction since May of 2013.  Exports improved a point to 47.5, but remained in contraction as well. 

The service sector continued showing strength as the Purchasing Managers’ Index (PMI) for nonmanufacturing jumped +2.2 points to 59.1 last month.  Production was up +2.8 points to 63 and new orders surged +5.3 points in a sign of strong activity in the future.

US factory orders were down -1% in September, the second-straight monthly decline, according to government figures.  Transportation orders were down -3.1%; orders excluding transportation fell -0.6%.  October marked the ninth straight month of year-over-year declines for core capital goods orders.  This category is often used as a proxy for business investment.  Those declines have accelerated from -1.2% in January to -7.5% in September. 

However, market research firm Markit’s survey disagreed, with its manufacturing PMI rising +1 to 54.1.  According to Markit, new orders rose the most since this spring.  Export orders increased, but at a slower pace due to the stronger dollar.  Employment and backlogs also both increased, said Markit.

In Canada, hiring jumped by +44,000 last month, blowing away expectations of a slight decline.  Participation rose to the strongest rate in over a year at 66%.  The jobless rate ticked down -0.1% to 7%.

In the Eurozone, Markit’s final manufacturing PMI for October was 52.3, a gain of +0.3 point.  Several countries saw multi-month highs.  New business and new export orders also improved, along with employment.  In the major Eurozone economies, German manufacturing decreased slightly to 52.1 from 52.3, French manufacturing was unchanged at 50.6, and manufacturing in the United Kingdom surged 4 points to 55.5.  Ireland, Spain and Germany had the strongest composite (services + manufacturing) readings.

In Asia, factories in China are still struggling as the official government PMI was unchanged at 49.8 in October, remaining slightly in the contraction range.  The Caixin-Markit manufacturing gauge for China’s private firms also remains in contraction for the eighth straight month, at 48.3. 

Finally, this week Bloomberg published a research note reporting that the U.S. earnings season is on track to be the worst since 2009.  So far roughly three-quarters of the S&P 500 have reported results, with aggregate profits down -3.1% on a share-weighted basis.  This marks the biggest quarterly drop in earnings since late 2009, and the second straight quarter of declines for this metric.

The one bright spot in the report is that damage seems to be heavily concentrated in the companies comprising the energy and commodity sectors.  The energy sector is showing a -54% drop in quarterly earnings so far this earnings season, and profits in the materials sector are down -15%.  On the flip side, the consumer discretionary and telecom sectors have been showing robust growth, with earnings per share growth up +19 percent and +23 percent respectively.

(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 15 from the prior week’s 12.3, while the average ranking of Offensive DIME sectors rose to 10.5 from the prior week’s 13.3.  The Offensive DIME sectors took the lead over the Defensive SHUT 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,