FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 12/24/2015

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.1, up from the prior week’s 25.5, 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 around 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 57.70, up from the prior week’s 57.11, and continues in Cyclical Bull territory.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on Friday, December 11.  The indicator ended the week at 17, down a tick from the prior week’s 18.  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 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:

In advance of the Christmas holiday, US stocks rallied in low-volume trading along with oil and other commodities.  The gains brought the large cap S&P 500 index back into positive territory for the year.  The Dow Jones Industrial Average gained 424 points to end the week at 17,552.  The LargeCap S&P 500 gained +2.76%, and is now up 1.5% year to date.  The MidCap S&P 400 and SmallCap Russell 2000 gained +2.97% and +3.01%, respectively.  The Nasdaq composite rose +2.55%, ending the week at 5,048. Canada’s Toronto Stock Exchange Index gained also, rising +2.3%.

Among European markets, the United Kingdom’s FTSE led the way up with a pop of +3.3%, Germany’s DAX gained +1.1% and France’s CAC 40 advanced a less-robust +0.8%.  In Asia, Australia’s ASX and Hong Kong both gained +2%, but the Japanese Nikkei slipped -1.1% – its fourth weekly loss.

In commodities, crude oil rocketed over +9%, ending the week at $38.12 per barrel of West Texas Intermediate crude oil.  Precious metals also participated in the rally as Gold gained +1%, rising $10.80 an ounce to $1075.80 and Silver tacked on 2% to $14.38 an ounce.

In US economic news, the Labor Department reported that initial jobless claims declined by 5,000 to 267,000.  The smoothed 4-week average rose slightly to 272,500, a 3-month high, but has held below 300,000 for most of 2015 after hitting a long-term low in July.

US average home prices have now officially surpassed their 2007 peak, according to Federal Home Financing Agency (FHFA) report.  Prices increased +0.5% on a seasonally-adjusted basis, according to the report, which matched the median estimate of the 16 economists polled by Bloomberg.  The FHFA’s monthly index is now +0.3% higher than the level reached in March 2007.  Nevada, Colorado, and Arizona had the biggest increases.

The National Association of Realtors reported that existing home sales declined -10.5% last month to an annual rate of 4.76 million units, the lowest annual rate in almost 2 years, which missed expectations by a wide margin.  Existing-home sales fell -3.8% versus a year earlier.  NAR blamed the weak housing numbers on a lack of supply.  In contrast to existing home sales, new housing starts jumped in November with single-family starts and permits hitting the highest levels in nearly 8 years.  The Commerce Department reported that new home sales rose +4.3% to a 490,000 annual rate.

The Commerce Department reported that US GDP rose at a 2% annual rate in the 3rd quarter.  The US is on pace for a 10th straight year of failing to achieve the desired 3% annual growth rate.  Exports were slightly weaker than previous estimates thanks to a stronger dollar, but business investment rose at a 9.9% rate – the best in a year.  Consumer spending rose at a solid 3% pace on a stronger job market and lower gas prices. 

The Chicago Federal Reserve’s National Activity index declined last month to -0.3; the index is now negative for the 4th straight month.  The 3-month smoothed moving average of the National Activity Index fell to -0.2, the lowest since the beginning of the year.  The National Activity Index is made up of indicators that attempt to show whether economic growth is above or below historical trends.  The production-related indicators fell further into negative territory.  The employment indicators were positive but declined.  Consumption and housing indicators remained negative but improved.

In the United Kingdom, retail sales grew weaker than expected coming in at 19 according to the business lobby group CBI.  Expectations had been for a reading of 21.  The British economy gained 0.4% over the previous quarter.  Year over year, GDP grew 2.1%. 

In the Eurozone, consumer confidence improved to -5.7 beating estimates of -5.9.  The index reached its highest level since the summer and the latest reading is well above its long-term average.  Producer prices in Germany, Europe’s largest economy, declined -0.2% last month.  Consumer goods declined -0.1% while energy fell -0.2%, and capital goods increased by +0.1%. 

Finally, it’s that time of the year again.  Each year, the best-and-brightest at every major Wall Street investment firm present their highly-educated and generously-compensated prognostications for the coming year.  There are 22 such luminaries bearing the title “Chief Market Strategist” at well-known firms like Goldman Sachs and Morgan Stanley.  Each year they are asked to forecast what the stock market will do over the next year.  They have access to the best information, Ivy League-educated economists, teams of analysts, and connected politicians.  We can’t expect their track records to be perfect, but surely these folks produce truly superior predictions…right? 

Morgan Housel, a columnist at investing site The Motley Fool (www.fool.com), dug deep into the numbers and what he found was disappointing, to say the least.  The average S&P 500 forecast of these experts was off by an average of 14.7% per year, a difference of more than 150% of the actual average return of the S&P 500. Note too in the chart below that as a group the experts did not predict even a single down year, instead choosing to always see a rising market.   A blindfolded monkey with darts would have been substantially superior to this august group – and would cost a lot less, too!

(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 7.8 from the prior week’s 12.0, while the average ranking of Offensive DIME sectors fell to 17.5 from the prior week’s 12.0.  The Defensive SHUT sectors have expanded their lead 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,

FBIAS™ for the week ending 12/18/2015

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.5, little changed from the prior week’s 25.4, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE around 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 57.11, down from the prior week’s 59.89, and continues in Cyclical Bull territory.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on Friday, December 11.  The indicator ended the week at 18, down sharply 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), 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 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:

As expected, the Federal Reserve raised interest rates on Wednesday, ending the nearly decade-long zero-rate policy.  Fed Chairwoman Janet Yellen stated that the conditions for a rate hike had been met, such as improving labor markets.  The Fed made it clear that it is in no hurry to raise rates again and that its favorite gauge of inflation still remains below its 2% target.  Stocks rose sharply in the days leading up the announcement, and on the day of the announcement rose another 1.5% as investors appeared to cheer the vote of confidence in the U.S. economy and the Fed’s dovish comments.  But the day after, reality set back in and the market gave back all those gains on Thursday and Friday.

For the week, the Dow Jones Industrial Average declined -136 points to end the week at 17,128.  Counterintuitively, the Dow Transports sold off even with the continued weakness in oil, down -2.13%.  Utilities rebounded +3% as investors rotated into defensive sectors.  The LargeCap S&P 500 declined a third of a percent but remained barely above 2000 at 2005.  MidCaps and SmallCaps declined -1% and -0.23%, respectively.  The Nasdaq was unable to defend the 5000-level, closing at 4923, down -0.21%.  Canada’s TSX recovered some lost ground from last week’s plunge, gaining +1.83% to close at 13,024.

In international markets, strength was found in European markets as Germany’s DAX gained +2.59%, France’s CAC40 rose +1.66%, and the United Kingdom’s FTSE increased 1.67%.  Major markets in Asia were mixed with China rallying +4.2%, but Japan’s Nikkei declining -1.27%.

In commodities, precious metals were mixed as Silver gained +1.37% to $14.08 an ounce, while Gold went down $8.10 to end at $1,065.60 an ounce.  A barrel of West Texas Intermediate crude oil reached a new 6-year low of $34.53 a barrel last week, but rebounded closing up +1.33% to $35.83.

In US economic news, new unemployment claims declined 11,000 last week to 271,000 the smoothed 4-week average remained flat at 270,500 according to the Labor Department.  It was the 41st consecutive week of jobless claims below 300,000, the longest run since the early 1970’s.

The Commerce Department reported that builders of houses and apartments increased construction by +10.5% in November after the -12% plunge the previous month.  Single-family starts and building permits rose to their best levels since December of 2007.  Housing permits gained +11% to an annualized rate of 1.289 million, beating forecasts of 1.146 million.  Homes under construction rose +2.2% for the month, and is up +18.3% for the year.  The National Association of Home Builders Housing Market Index declined a point to 61 in December, still in expansion but at a slightly slower pace.  All 3 components of the index declined–six-month sales outlook, current conditions, and buyer traffic.

The Labor Department reported that core inflation rose at an annualized rate of 2% last month, reaching the Federal Reserve’s target, an important milestone that set the stage for Wednesday’s first interest rate increase in a decade.  However, the Consumer Price Index (CPI) was unchanged versus October as energy prices fell -1.3%. 

Several regional Fed surveys of the state of manufacturing in their respective areas were released this week.  The Philadelphia Fed’s manufacturing index came in worse than expected as weak global demand, a strong dollar, and falling commodities prices impacted U.S. manufacturers.  The index sank to -5.9, the 3rd negative reading in 4 months.  Analysts had expected a reading of 1.2.  New orders plunged to -9.5, the 3rd straight month in negative territory.  Shipments were up as manufacturers worked through their backlogs, but unfilled orders fell to -17.7, inputs declined to -9.8, and final goods came in at -8.7.   The New York Fed’s Empire State Manufacturing Survey was similarly negative, though less so than the prior report.  The Kansas City Fed’s manufacturing index plunged to 8, the eighth contraction in the last 9 months.   Confirming these regional surveys, the Fed reported that the US-wide Industrial sector was weak in November as output contracted -0.6%, worse than the -0.2% drop expected. 

Markit’s Purchasing Managers Index (PMI) for manufacturing 51.3 for December, the lowest reading in over 3 years and widely missing estimates of 52.8.  New orders showed the weakest rate of monthly expansion in 6 years.  Backlog orders were in contraction for the second consecutive month.  Markit’s flash PMI for services slowed to 53.7 from November’s 56.5, the lowest services reading in a year.  The weak overall reading reflects 5 months of contraction in backlog orders along with the slower growth in new orders. 

In Canada, the consumer price index declined -0.1% in November, but was up +1.4% compared to the same time last year.  The decrease was attributed to seasonal factors.

In the Eurozone, industrial production ex-construction rose +0.6% in October, beating expectations of a +0.2% gain, and was the first increase since July.  Year over year industrial production rose +1.9%.  Output increased +1.4% in capital goods and +1.8% in durable goods over September.  December’s flash PMI composite report slightly missed estimates, coming in at 54.  Manufacturing was at 53.1 and the services component was at 53.9, both in the “greater than 50” expansion area. 

Finally, “Bonds is Bonds” is the attitude many investors have when it comes to fixed income investments.  That attitude has been dangerous this year, as the bond market has bifurcated dramatically along “quality” lines. 

Higher quality bonds – Treasuries and high-grade Corporates – have maintained their values well during 2015, but the lower-quality end of the market, commonly called the “Junk Bond” market, has suffered badly.  One Junk Bond mutual fund, the Third Avenue Focused Credit Fund, even announced that it was halting redemptions and would proceed into liquidation – after dropping about 50% in value. 

Overall, the Junk Bond area has lost about -12% in the last 6 months, while high-grade bonds have maintained their value and the stock market has pulled back about -5% during the same period.   See the chart below for the comparison.

(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 12.0 from the prior week’s 14.8, while the average ranking of Offensive DIME sectors fell to 15.0 from the prior week’s 13.5. The Defensive SHUT sectors have taken back the lead from 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,

FBIAS™ for the week ending 12/11/2015

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.4, down from the prior week’s 26.4, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE around 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 59.89, down from the prior week’s 62.71, and continues in Cyclical Bull territory.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on Friday, December 11.  The indicator ended the week at 27, down sharply from the prior week’s 32.  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 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:

Concerns over further declines in the price of oil and other commodities led to widespread weakness in the market, and every major US index finished down substantially for the week.  In the typical pattern as of late, the SmallCap and MidCap indexes took a heavier hit than their LargeCap counterparts.  For the week, the Dow Jones Industrial Average declined over 580 points, closing at 17265, a fall of -3.26%.  The Dow Transports plunged over 5.4%.  The tech-heavy Nasdaq Composite Index lost the psychologically-significant 5000-level, declining over -4% to 4933.  The LargeCap S&P 500 retreated -3.7%, the MidCap S&P 400 gave up -4.1% and the SmallCap Russell 2000 plunged over 5%.  Canada’s TSX pulled back more than -4.25%, as the heavy weighting of energy stocks took its toll.

Weakness hit European and Asian major markets as well.  The United Kingdom’s FTSE index declined over -4.5%.  Germany’s DAX ended down -3.8% and France’s CAC 40 lost -3.5%.  In Asia, Hong Kong’s Hang Seng declined -3.4% and China’s Shanghai Stock exchange declined -2.5% (and LargeCap Chinese stocks lost more than -7.5%).  Japan lost -1.4%.

In commodities, West Texas Intermediate crude oil cratered over -11.9% to $35.36 a barrel, a price not seen since 2009.  Precious metals were also weak as Silver lost -4.5% to $13.89 an ounce and gold declined $12.10 to $1073.70. 

In US economic news, initial unemployment claims hit a five month high, rising by 13,000 to 282,000.  It’s the highest reading since mid-summer and points to potential softness in the labor market if it continues.  Overall, jobless claims using the more-meaningful multi-week average remained below the 300,000 level, which has been associated with a healthy job market.

Job openings declined 2.7% to 5.4 million in October according to the Labor Department’s Job Openings and Labor Turnover Study (JOLTS) report.  The hiring rate held steady at 3.6%, and 5.1 million people were newly hired.  The rate of people quitting their jobs held near a historically low reading of just 1.9%.  Counterintuitively, higher rates of “quits” are a good thing, as it indicates that the quitters are confident of finding new employment promptly.

US import prices continued to fall last month according to the Labor Department, as plunging oil and weak overseas economies suppressed inflation.  Import prices declined -0.4%, less than expectations but still the fifth straight monthly decline.  Imported petroleum fell -2.5% versus the previous month and is down a huge -44.5% versus a year earlier.  Import prices excluding petroleum fell -3.4% versus a year ago, the biggest decline in six years.  The weak petroleum prices are attributed in large part to a perceived “war” that Saudi Arabia has launched on US oil and gas producers, seemingly determined to underprice them out of business.

The Association of American Railroads reported that US weekly rail traffic declined -6.6% last week from the year ago period.  Total carloads were down -12.9%, while containers and trailers were up +0.8%.  The rail traffic report has been called Warren Buffett’s “favorite economic indicator”.

Consumer spending remained flat as Gallup reported that the average self-reported daily US consumer spending was $92 in November, the same as October.  November spending was slightly below last year’s $95, but it remains among one of the highest readings since 2008. 

The Commerce Department reported that retail sales picked up in November, however, the small +0.2% gain missed expectations of a +0.3% rise.  Ex-autos, sales advanced +0.4%, beating forecasts.  Holiday shopping got off to a relatively healthy start as sales at electronics and appliance stores rose +0.6%.  Research firm Global Insight is projecting a +3.4% rise in holiday retail sales, a solid reading but behind last year’s +4.1% increase.

Inventories at US wholesale businesses fell -0.1% in October after a slight increase in September, according to the Commerce Department.  With sales remaining flat the inventory-to-sales ratio of 1.31 remains at a post-recession high for a third straight month.  The elevated level of inventories is one key reason that economists feel GDP growth will come in at a modest 2% or lower in the 4th quarter.

Credit card data for October slowed more than expected as Americans reined in credit card spending heading into the holiday shopping season.  The Federal Reserve reported that October consumer credit rose by +$16 billion, less than the +$20 billion analysts had expected.  Revolving credit, which is mostly credit card debt, increased +$179 million in October and was the weakest reading since February’s negative reading.  The reading suggests that consumers were frugal with their discretionary spending just before the holiday season.  Adding to this conclusion is the Commerce Department’s income and spending report, which showed that consumer spending rose only +0.1% in September and October.

In Canada, housing starts rose in November as the number of new homes under construction rose 211,916.  Consensus estimates were for 198,000 new units.  Strength was concentrated in condominium building in Ontario and regions of Alberta, Saskatchewan, and Manitoba.

In the United Kingdom, interest rates were left unchanged by the Bank of England as the bank’s Monetary Policy Committee voted 8-1 to keep rates at 0.5%.  The bank predicts that inflation will stay below 1% until the second half of next year.  Also in the United Kingdom, the trade deficit widened more than expected in October to $17.9 billion from $13.3 billion the previous month.  Imports rose 7% in the month powered by automobiles and other manufactured goods.  Excluding oil, it’s Britain’s biggest trade deficit since 1998.

In the Eurozone, 3rd quarter GDP growth was +0.3% over the previous quarter and up +1.6% year over year.  Private consumption grew +0.4% after a +0.3% increase in the 2nd quarter.  Inventories increased +0.2% and government consumption increased +0.6%.  Exports, however, suffered from a slowdown in global trade. 

In Germany, industrial production rose +0.2% in October, the first increase since mid-summer but well below expectations of +0.7%.  Annualized, growth was up +0.1%.  Weakness in energy output and consumer goods weighed against a good +2.7% gain in capital goods.

Finally, a continuous argument on Wall Street is whether the market’s current valuation is too high, too low, or just right.  Some analysts say that current Price/Earnings (PE) ratios are artificially high because of a handful of high-flyers with astronomical PEs (Amazon and Netflix, for example) – and therefore, the market is reasonably priced or better.  In order to remove the outsize effects of those highflyers, the respected research firm Ned Davis Research (NDR) published a study using the “Median” valuation instead of the usual “Average” valuation.  A median number, as you recall from your freshman statistics class, has an equal number of greater and lesser values on either side of it, and thus eliminates the outsize effects of those highflyers.  What NDR discovered was that, using median valuation measures based on trailing-12-month data, the current valuation of the market is higher than the 2 previous bull market peaks.  They noted that this is true on both a Price/Earnings basis and a Price/Sales basis.

Currently, on a median basis the NYSE has a P/E ratio of 25.6 based on trailing 12 month earnings.  At the bull market peak in October 2007 this same ratio was less than 20—and at the top of the internet bubble the ratio was even lower.  In fact, according to NDR’s report, the current median P/E ratio for the NYSE is the highest it’s been in a bull market environment since their data began in 1980.  NDR concluded with a nicely understated observation that this is “clearly a concern.”

(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 14.8 from the prior week’s 17.8, while the average ranking of Offensive DIME sectors rose to 13.5 from the prior week’s 14.0.  The Offensive DIME sectors continue to lead the Defensive SHUT sectors, but not by much.   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 12/04/2015

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 62.71, up from the prior week’s 62.23, 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 32, up 1 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:

A strong rally on Friday moved the major indexes back into positive territory for the week as the closing weekly results hid the underlying intraweek volatility.  The Dow Jones Industrials rallied 369 points on Friday to end the week up +49 points (+0.28%) to 17,847.  The Nasdaq Composite +14.75 points (+0.29%) to close at 5,142.  The Large Cap S&P 500 index remained near flat adding a single point (+0.08%).  However, two indexes continue to lag the large caps–the Mid Cap S&P 400 declined -1.35% and the Small Cap Russell 2000 lost -1.58%.  Canada’s TSX lost a smidge at -0.07%.

International markets were mixed on the week, with Europe’s major markets jolted to the downside by an unexpectedly unambitious stimulus announcement by the European Central Bank’s Chairman Mario Draghi.  Market expectations had been for a much more aggressive stimulus announcement than Draghi delivered.  The German DAX led the major indexes to the downside losing over -4.8%.  France’s CAC 40 declined -4.37%.  The United Kingdom’s FTSE ended the week down -2.15%.  Asia and some emerging markets were better as China’s Shanghai Stock Exchange rose +2.58%, Hong Kong’s Hang Seng gained +0.76%, and Brazil moved up by +0.6%.

In commodities, precious metals had strong gains as Silver rose +3.38% to $14.54 an ounce and Gold added $29.70 (+2.8%) to end the week at $1,085.80 an ounce.  Oil, however, came under further pressure losing over 3.9% to finish at $40.14 for a barrel of West Texas Intermediate crude oil.

For the month of November, US equity markets were flat-to-up, but pretty much everywhere and everything else was down.  Hardest hit among global equity markets was Emerging International at -2.52%, and it is no coincidence that commodity markets were really dinged during November, hitting Emerging International equity markets the hardest.  Gold was down -6.75% for November, silver -9.19%, and oil -12.5%

In US economic news, the monthly Non-Farm Payrolls (NFP) report was stronger than expected as the US added 211,000 jobs in November, more than the 190,000 expected.  The unemployment rate remained at 5% as the labor force participation rate also moved higher.  Construction and retail sectors led the way with a second strong month of hiring.  However, manufacturing jobs fell by 1,000.  Average hourly earnings rose almost +0.2% last month.  The jobs report appears strong enough to give the Federal Reserve the green light to raise interest rates at its next meeting.

Weekly initial jobless claims rose by 9,000 last week to 269,000 according to the Labor Department.  Initial claims remain near a 4-decade low.  Continuing claims rose by 6000 to 2.16 million in the week ended November 21. 

ADP’s private-employer survey showed those employers added 217,300 jobs last month, more than expected.  The 204,000 jobs in the service industries accounted for almost all of the gain.  Manufacturing jobs showed a very small rise of 6,000, but overall remain down in 2015, which echoes the theme from the NFP of “strong services, weak manufacturing”.  Construction employment gains also slowed to 16,000, according to ADPP, roughly half the rate of the prior two months.

Employment firm Challenger, Gray & Christmas reported that employers announced plans to lay off 30,953 workers in November, the lowest since September of last year.  Announced plans fell 39% from October and were down 13% versus this time last year.  However, year-to-date layoffs of 574,888 make 2015 the worst year for layoffs since 2009.  Leading the way is Hewlett-Packard, which plans to cut 30,000 jobs.  Oil services firms Schlumberger, Halliburton, and Baker Hughes have all cut tens of thousands of jobs with Schlumberger recently stating that it plans to cut more.

The Chicago-area manufacturing Purchasing Managers Index (PMI) for November missed estimates and fell into contraction at 48.7 (readings below 50 are in contraction territory).  November’s reading was a sharp decline from October’s 56.2.  Estimates had been for a reading of 54.  New orders fell along with backlog orders that showed their 10th straight month of decline.  A competing measure, the Institute for Supply Management (ISM) survey, agreed with the PMI, reporting that US manufacturing activity fell into contraction to 48.6 last month, nearly 2 points below the consensus estimate and the lowest level since June 2009.  The ISM index had hovered around 50 since September as US manufacturers have been struggling with the impacts of a strong dollar, a slumping oil market, slowdowns in major international economies, and inventory overhang.

By contrast, ISM’s US service-sector index came in at 55.9, indicating that the U.S. service sector still remains in growth mode.  However, this is the lowest reading since May, and below expectations.

Federal Reserve Chairwoman Janet Yellen this week again signaled that a December rate hike is likely in testimony before lawmakers after the European Central Bank extended its asset buying program.  Yellen stated “U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market”, which supports her earlier comments that a rate hike is still likely at the December 15-16 meeting.  Yellen stressed, however, that rate hikes would be gradual. 

In the Eurozone, the European Central Bank opened its money tap only slightly on Thursday after previously indicating a substantial move would be required to force the economy out of its slump.  Instead of expanding its asset purchases beyond the roughly $66 billion per month, the ECB pushed back the purchase program’s earliest end date by 6 months.  It left its key lending rate unchanged but the interest paid on assets left overnight at the ECB dropped further into negative territory, from -0.2% to -0.3%.  European stocks instantly sold off 2-3% on the news.

October Eurozone consumer prices rose just +0.1% versus a year earlier, below expectations.  Core inflation, at 0.9%, also missed views.

In China, the official manufacturing index fell to a 3-year low in November, down -0.2 point to 49.6, according to the National Bureau of Statistics.  The reading was slightly below forecasts and pushed further into contraction territory.  However, the service sector index rose a half point to 53.6, further evidence that China is rapidly shifting from an export-focused industrial economy to one relying on services and domestic demand.  While industrial production and capital spending data have been weak, retail sales growth has remained robust.  Apple, Starbucks, and Nike have all shown strong sales growth in China.

Finally, as reported above key gauges of US manufacturing activity have slipped back into contraction territory.  Investors, however, still appear to be fixated on the ever rising major market indexes—the Dow Jones Industrials and the S&P 500.  Should investors be less blasé about this development?  Or can the manufacturing woes be safely ignored?  The following chart from economics reporting firm Factset shows that each of the last two big bear markets were preceded by a drop of the ISM manufacturing index into contraction territory, in August of 2000 and December of 2007.  Interestingly, each was also preceded by a brief dip into contraction a few months before.  The same pattern has now emerged, although the “brief dip” this time was more than a few months ago.  Given this history, perhaps investors would be wise to be less blasé.

(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 to 17.8 from the prior week’s 17.0, while the average ranking of Offensive DIME sectors fell to 14.0 from the prior week’s 11.3.  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,