Month: February 2016
FBIAS™ for the week ending 2/26/2016
FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 2/26/2016
The very big picture:
In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See graph below for the 100-year view of Secular Bulls and Bears.
Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 24.62, up from the prior week’s 24.24, after having earlier reached the level also reached at the pre-crash high in October, 2007. 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 U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 43.75 up from the prior week’s 40.78.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th. The indicator ended the week at 27, up sharply from the prior week’s 19. 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 January for the prospects for the first quarter of 2016.
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. The Bull-Bear Indicator (months to years) is negative (Fig. 3 above), indicating a new Cyclical Bear has arrived. The Quarterly Trend Indicator (months to quarters) is negative, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is positive. Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.
In the markets:
All major U.S. indices were green as the stock market was able to manage a second consecutive weekly advance. The LargeCap S&P 500 climbed +1.6%, extending its two-week rally to +4.5% and is now up +0.4% for the month. The Dow Jones Industrial Average gained 247 points to end the week at 16,639, up +1.5%. MidCaps and SmallCaps also fared well as the S&P 400 MidCap index rose +2.7% and the SmallCap Russell 2000 index also gained 2.7%. The defensive Dow Jones Utilities barely managed a positive close, up just +0.07%, while the Dow Jones Transports added +1.63%.
In international markets, Canada’s TSX was essentially flat, down just -0.12%. European markets were generally higher for the week in the +1.2 to +2.5% range, while major Asian markets were mixed, with the biggest loser being the China Shanghai Index, down -3.25%. Developed markets as a whole were flat for the week, and Emerging markets were down -0.6% on average for the week.
In commodities, crude oil surged more than +10%, up +$3.12 to $32.84 on news of supply disruptions in Iraq and Nigeria. Precious metals lost their upward momentum as Gold ended the week at $1222.80 an ounce, down 0.31%, and silver plunged more than -4.3% to $14.69 an ounce.
In U.S. economic news, GDP for the fourth quarter was revised upward to +1.0% growth by the Commerce Department, better than the +0.7% gain initially reported. For the year, the economy grew a very modest +2.4%, the same as in 2014. The report was a surprise to Wall Street, which had expected a downward revision. However on a not-so-positive note, the report reveals that the boost in growth resulted from a smaller decline in inventories and weaker imports.
New claims for jobless benefits rose 10,000 to 272,000 last week, according to the Labor Department. Continuing claims decreased 19,000 to 2.253 million. Despite the latest increase weekly initial claims remain in the lower half of the 250,000 to 300,000 range they have been in for 19 months.
The National Association of Realtors reported that existing home sales rose in January to an annualized 5.47 million rate, a six month high. Home sales were up +11% from a year ago, the biggest annual gain since July, 2013. Sales were up +0.4% from last month. Nationally, the median home price rose +8.2% from a year ago, the largest since last spring. The S&P/Case-Shiller index showed year-over-year price gains of +5.7% in December, in its 20-city index. But new-home sales fell in January to a seasonally adjusted rate of 494,000 housing units, according to the Commerce Department. This was a bigger decline than economists had expected. New home sales fell -5.2% compared with a year earlier and are down -9.2% from December’s rate. The median sales price for new homes was $278,800, while the average sales price was $365,700. The median price is down -4.5% versus a year earlier, the biggest year-over-year decline since January 2012. The seasonally adjusted inventory of new homes for sale was 238,000, representing a supply of almost 6 months at the current rate.
The Conference Board reported that consumer confidence fell -5.6 points to 92.2, missing forecasts by a wide margin. It was the lowest reading since last summer. Analysts suggest that recent market weakness and slowing job growth were behind the reading. In the report, the “present situation” sub-index declined -4.5 points to 112.1. Respondents who stated current business conditions were good decreased to 26%, while those describing current business conditions as bad rose to 19.8%. The 6.2% spread between the two was the smallest since last August. The expectations gauge sank -6.4 points to 78.9, a two year low. Only 12.2% of consumers expect more jobs in the future versus 17.2% who expect fewer jobs. Nonetheless, Lynn Franco, Director of Economic Indicators at The Conference Board, stated “continued turmoil in the financial markets may be rattling consumers, but their assessment of current conditions suggests the economy will continue to expand at a moderate pace in the near term.”
Consumer spending – the backbone of the U.S. economy – remains strong, rising +0.5% in January and beating analyst forecasts according to the Commerce Department. Personal income also beat projections rising +0.5%. The Federal Reserve’s favorite inflation gauge, the core personal consumption expenditures index, rose +0.3%, which was the biggest monthly gain in four years. The +1.7% annual gain for the personal consumption expenditures index was the most since July 2014, and nearing the Fed’s stated 2% target.
Good news for manufacturing has been rare in recent months. We got some this week, in the form of orders for durable goods, which jumped +4.9% last month – the most in ten months and handily beating forecasts. Economists had been expecting a +2% gain. Year-over-year, durable goods orders rose a less-robust +0.6%.
In international economic news, the Conference Board of Canada predicts little economic growth over the coming years for Canada. The report states that the global downturn in mineral prices has hit the Canadian economy particularly hard and it will be years before the territories regain their financial footing.
In the Eurozone, the president of Germany’s Bundesbank gave a positive outlook for the global economy on Wednesday, but stated that “central banks shouldn’t be overburdened with creating economic growth.” “The global recovery is on track,” he added. His cheerleading speech followed a report Tuesday that showed German exports dropped -0.6% in the fourth quarter for the first time since 2012. Business sentiment in Germany fell to the lowest level in more than a year.
In France, French Finance Minister Michel Sapin stated that the global economy faced a series of difficulties but described them as “surmountable”, and warned against investor overreaction – and against the UK exiting the European Union.
In Asia, a long-standing issue facing the world’s third-largest economy – Japan – has finally manifested itself in a visible way. The official population of Japan as of Oct. 1 is 127.1 million, which is down by 947,000 or -0.75% from the previous census in 2010; this is the first-ever decline since the census started in 1920. Even during World War II the population rose. A UN report last year projected that Japan’s population would fall to about 83 million by 2100. The average number of children a Japanese woman will bear in a lifetime – just 1.42 as of 2014 – is far below the replacement rate of 2.1. It doesn’t help that Japan keeps a tight lid on immigration, which business leaders are calling to be loosened, but Prime Minister Shinzo Abe is showing no signs of changing existing policy.
The Japanese census figures are likely to further Japan’s decades-long stagnation. From a government standpoint, further stimulus packages are likely. The declining Japanese population is particularly visible in many rural prefectures. While Tokyo’s population grew +2.7% from 2010 to 2015, the population in 39 of Japan’s 47 prefectures declined.
Finally, Rob Arnott, the widely-followed financial guru and chairman of investing firm Research Affiliates, recently put out a rather striking research note exhorting investors to “dump quality stocks and buy value stocks”. He states that stocks that bear high-quality characteristics such as high profits, and strong balance sheets have now become too expensive in relation to the rest of the stock market. Meanwhile, value stocks, which traditionally mean boring companies with low future growth prospects but still cheap in relation to profits and dividends, are, according to Arnott, trading at a significant discount to historical norms. Arnott’s call is interesting given the fact that he is the best-known and one of the earliest proponents of “smart beta” investing, which targets known anomalies in market returns that favor low volatility, high quality, and higher momentum stocks, among other characteristics. So why did he put out the “sell quality” call? Perhaps because his proselytizing in favor of high quality has been too successful leading to too many buyers in this now-overcrowded space, and inviting a reversion to the mean.
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)
The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 8.0 from the prior week’s 8.8, while the average ranking of Offensive DIME sectors rose to 10.8 from the prior week’s 11.8. The Defensive SHUT sectors continued to lead 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, despite the superior US performance. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence. Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.
If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.
You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional.
Sincerely,
Dave Anthony, CFP®, RMA®
Understanding the changes to Social Security that occurred because of the Bi partisan Budget Act of 2015
On October 28, 2015, the House amended and passed the Senate amendment to H.R. 1314, the Bipartisan Budget Act of 2015, by a vote of 266-167. The Senate passed the measure on October 30, 2015 by a vote of 64-35, clearing the measure for the President. The President signed the bill into law on November 2, 2015. 266-167? Seriously? This thing wasn’t even close. Here’s some highlights of the key points:
Changes of the Bi-Partisan Budget Act of 2015
Change to Section 831(a)
· Extends Deeming rule to all ages for anyone born 1/2/1954 and later
o Prior to the act, when you reached full retirement age you could file for only a spousal benefit and allow your own benefit to accumulate Delayed Retirement Credits, and then switch later to your own larger delayed retirement benefit.
o Now, only people born 1/1/1954 or before can do this (must have turned 62 before 1/1/2016)
· Applies deeming for any age of eligibility, not just the month of initial entitlement
o Before, if you were not eligible for a spousal benefit because your spouse had not yet filed, you didn’t have to take it. You could later, have the choice of when you add the spousal benefit.
o Now, if you file for a retirement benefit, and later become eligible for a spousal benefit, the spousal benefit must immediately be paid upon your eligibility.
o There is no longer the month of entitlement rule that allows you to avoid eligibility and then later switch over.
· Impact
o Restricted application for only spousal benefit with ability to later switch to retirement benefits will no longer be available for people born on 1/2/54 or later, age 62.
Change to Section 831(b)—Voluntary suspension rules
· Modifies Voluntary Suspension to require suspension of all benefits payable under a wage earner’s record, not just the wage earner’s benefit
o The means that other people can’t claim benefits based on the wage earner’s work record
o If you have a spouse that is claiming off of you, and you suspend your benefit, via a voluntary suspension, in the past, only your benefit would stop and your spouse could continue to claim off of your earning record. Now if you suspend your benefits, your spouses’ benefit will stop as well.
· Eliminates ability to claim other benefits while the wage earner’s benefit is in suspense
o If you suspend your benefit, but could still claim some type of spousal benefit during the suspension, you wouldn’t be able to do that under the new rules.
· Eliminates ability to request retroactive benefits back to the beginning of suspension
o Under the old rules, you could file and suspend at FRA, wait till 70, and then request a check for all benefits, lump sum, going back to age 66.
· Applies to suspensions requested 180 days or more from the date of the enactment
o April 29, 2016 is the deadline
o If you request a voluntary suspension before the deadline, you’re grandfathered in.
· Impact
o Voluntary suspension will only be available to people who are 66 by 4/29/2016
o You can still use voluntary suspension if you claimed early, missed your one year window to withdraw the application. If you filed at 62 and receive the smaller benefit, you can still suspend your benefits at age 66, or whenever, and delay those benefits to a future date like age 70, and earn delayed retirement credits while your benefit is in suspense. No one else can claim on your record during the suspense.
Total impact on planning
· Timing options are still available
· All widow planning options are still available, as rule changes impact only spousal and retirement benefits
· No ability to request a retroactive lump sum, so the only reason to use a Voluntary Suspension is to fix a mistake
· Understanding which rule set applies to each member of a couple will be critical
o You can have two different rule sets applying to each spouse!
Key messages:
1. There are now three sets of rules
a. Until 4/29/2016
b. 4/29/2016 – 2020
For the people that are 62 today but will be 66 in 2020 and Full retirement age
c. 4 years and beyond
Those that turn 66 in 2020 and beyond
2. Age gaps for couples mean they could fall under different set of rules
3. Window of opportunity will close—they expire 4/29/2016
Learn what Social Security options you have available, and how Social Security can impact you! Find out all of your possible Social Security claiming strategy options!
Here’s the complete 2015 Bi-Partisan bill for your reading pleasure:
GENERAL.—Not later than September 30, 2017, 3 the Commissioner of Social Security shall establish and implement a system that—
(1) allows an individual entitled to a monthly insurance benefit based on disability under title II of
the Social Security Act (or a representative of the individual) to report to the Commissioner the individual’s earnings derived from services through electronic
10 means, including by telephone and Internet; and
11 (2) automatically issues a receipt to the indi12
vidual (or representative) after receiving each such re13
port.
14 (b) SUPPLEMENTAL SECURITY INCOME REPORTING
15 SYSTEM AS MODEL.—The Commissioner shall model the
16 system established under subsection (a) on the electronic
17 wage reporting systems for recipients of supplemental secu18
rity income under title XVI of such Act.
19 Subtitle C—Protecting Social
20 Security Benefits
21 SEC. 831. CLOSURE OF UNINTENDED LOOPHOLES.
22 (a) PRESUMED FILING OF APPLICATION BY INDIVID23
UALS ELIGIBLE FOR OLD-AGE INSURANCE BENEFITS AND
24 FOR WIFE’S OR HUSBAND’S INSURANCE BENEFITS.—
25 (1) IN GENERAL.—Section 202(r) of the Social
26 Security Act (42 U.S.C. 402(r)) is amended by strik71
•HR 1314 EAH
1 ing paragraphs (1) and (2) and inserting the fol2
lowing:
3 ‘‘(1) If an individual is eligible for a wife’s or
4 husband’s insurance benefit (except in the case of eli5
gibility pursuant to clause (ii) of subsection (b)(1)(B)
6 or subsection (c)(1)(B), as appropriate), in any
7 month for which the individual is entitled to an old8
age insurance benefit, such individual shall be deemed
9 to have filed an application for wife’s or husband’s
10 insurance benefits for such month.
11 ‘‘(2) If an individual is eligible (but for section
12 202(k)(4)) for an old-age insurance benefit in any
13 month for which the individual is entitled to a wife’s
14 or husband’s insurance benefit (except in the case of
15 entitlement pursuant to clause (ii) of subsection
16 (b)(1)(B) or subsection (c)(1)(B), as appropriate),
17 such individual shall be deemed to have filed an ap18
plication for old-age insurance benefits—
19 ‘‘(A) for such month, or
20 ‘‘(B) if such individual is also entitled to a
21 disability insurance benefit for such month, in
22 the first subsequent month for which such indi23
vidual is not entitled to a disability insurance
24 benefit.’’.
72
•HR 1314 EAH
1 (2) CONFORMING AMENDMENT.—Section 202 of
2 the Social Security Act (42 U.S.C. 402) is amended—
3 (A) in subsection (b)(1), by striking sub4
paragraph (B) and inserting the following:
5 ‘‘(B)(i) has attained age 62, or
6 ‘‘(ii) in the case of a wife, has in her care (indi7
vidually or jointly with such individual) at the time
8 of filing such application a child entitled to a child’s
9 insurance benefit on the basis of the wages and self10
employment income of such individual,’’; and
11 (B) in subsection (c)(1), by striking sub12
paragraph (B) and inserting the following:
13 ‘‘(B)(i) has attained age 62, or
14 ‘‘(ii) in the case of a husband, has in his care
15 (individually or jointly with such individual) at the
16 time of filing such application a child entitled to a
17 child’s insurance benefit on the basis of the wages and
18 self-employment income of such individual,’’.
19 (3) EFFECTIVE DATE.—The amendments made
20 by this subsection shall apply with respect to individ21
uals who attain age 62 in any calendar year after
22 2015.
23 (b) VOLUNTARY SUSPENSION OF BENEFITS.—
73
•HR 1314 EAH
1 (1) IN GENERAL.—Section 202 of the Social Se2
curity Act (42 U.S.C. 402) is amended by adding at
3 the end the following:
4 ‘‘(z) VOLUNTARY SUSPENSION.—(1)(A) Except as oth5
erwise provided in this subsection, any individual who has
6 attained retirement age (as defined in section 216(l)) and
7 is entitled to old-age insurance benefits may request that
8 payment of such benefits be suspended—
9 ‘‘(i) beginning with the month following the
10 month in which such request is received by the
11 Commissioner, and
12 ‘‘(ii) ending with the earlier of the month
13 following the month in which a request by the
14 individual for a resumption of such benefits is so
15 received or the month following the month in
16 which the individual attains the age of 70.
17 ‘‘(2) An individual may not suspend such benefits
18 under this subsection, and any suspension of such benefits
19 under this subsection shall end, effective with respect to any
20 month in which the individual becomes subject to—
21 ‘‘(A) mandatory suspension of such benefits
22 under section 202(x);
23 ‘‘(B) termination of such benefits under section
24 202(n);
74
•HR 1314 EAH
1 ‘‘(C) a penalty under section 1129A imposing
2 nonpayment of such benefits; or
3 ‘‘(D) any other withholding, in whole or in part,
4 of such benefits under any other provision of law that
5 authorizes recovery of a debt by withholding such ben6
efits.
7 ‘‘(3) In the case of an individual who requests that
8 such benefits be suspended under this subsection, for any
9 month during the period in which the suspension is in ef10
fect—
11 ‘‘(A) no retroactive benefits (as defined in sub12
section (j)(4)(B)(iii)) shall be payable to such indi13
vidual;
14 ‘‘(B) no monthly benefit shall be payable to any
15 other individual on the basis of such individual’s
16 wages and self-employment income; and
17 ‘‘(C) no monthly benefit shall be payable to such
18 individual on the basis of another individual’s wages
19 and self-employment income.’’.
20 (2) CONFORMING AMENDMENT.—Section
21 202(w)(2)(B)(ii) of the Social Security Act (42
22 U.S.C. 402(w)(2)(B)(ii)) is amended by inserting
23 ‘‘under section 202(z)’’ after ‘‘request’’.
24 (3) EFFECTIVE DATE.—The amendments made
25 by this subsection shall apply with respect to requests
75
•HR 1314 EAH
1 for benefit suspension submitted beginning at least
2 180 days after the date of the enactment of this Act.
3 SEC. 832. REQUIREMENT FOR MEDICAL REVIEW.
4 (a) IN GENERAL.—Section 221(h) of the Social Secu5
rity Act (42 U.S.C. 421(h)) is amended to read as follows:
6 ‘‘(h) An initial determination under subsection (a),
7 (c), (g), or (i) shall not be made until the Commissioner
8 of Social Security has made every reasonable effort to en9
sure—
10 ‘‘(1) in any case where there is evidence which
11 indicates the existence of a mental impairment, that
12 a qualified psychiatrist or psychologist has completed
13 the medical portion of the case review and any appli14
cable residual functional capacity assessment; and
15 ‘‘(2) in any case where there is evidence which
16 indicates the existence of a physical impairment, that
17 a qualified physician has completed the medical por18
tion of the case review and any applicable residual
19 functional capacity assessment.’’.
20 (b) EFFECTIVE DATE.—The amendment made by sub21
section (a) shall apply with respect to determinations of dis22
ability made on or after the date that is 1 year after the
23 date of the enactment of this Act.
Social Security File and Suspend deadline is April 29, 2016
Social Security has issued the deadline for the file-and-suspend strategy, and it is April 29, 2016
If you are at least 66 years of age and submit a request to file and suspend before April 29, 2016, then you and your spouse will still be able to take advantage of this valuable benefit for married couples.
File and Suspend allows one individual to “file” and then “suspend” their Social Security benefits, which allows the spouse to file and receive spousal benefits.
This all comes about because of the Bipartisan Budget Act of 2015 that President Obama signed into law in November of last year.
Starting on 4/30/2016, one spouse will have to collect on his or her benefits in order for the other spouse to be able to collect a spousal benefit. Divorced spouses who were married at least 10 years can still collect on their ex-spouses record.
Moving forward, for someone who had collected reduced retirement benefits at 62 could suspend their benefits at 66 and then increase their monthly benefits until age 70.
If you are at least 66 by 4/29/2016, then find out what your claiming strategies are by clicking on the LINK below!
2/22/2016 Retirement Income Show with Dave Anthony
FBIAS™ for the week ending 2/19/2016
FBIAS™ Fact Based Investment Allocation Strategies for the week ending 2/19/2016
The very big picture:
In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See graph below for the 100-year view of Secular Bulls and Bears.
Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 24.24, up from the prior week’s 23.61, after having earlier reached the level also reached at the pre-crash high in October, 2007. 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 U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 40.78, up from the prior week’s 39.24.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th. The indicator ended the week at 19, up sharply from the prior week’s 8. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of January for the prospects for the first quarter of 2016.
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. The Bull-Bear Indicator (months to years) is negative (Fig. 3 above), indicating a new Cyclical Bear has arrived. The Quarterly Trend Indicator (months to quarters) is negative, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is positive. Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.
In the markets:
Stocks bounced back from 2 weeks of losses with the S&P 500 managing strong gains the first 2 trading days of the holiday-shortened week. All major indexes were in the green with the Dow Jones Industrial Average rising 418 points to 16,391, up +2.6%. SmallCaps and MidCaps outperformed LargeCaps, as did technology. The LargeCap S&P 500 index rose +2.85%, the MidCap S&P 400 gained +3.47%, the SmallCap Russell 2000 surged +3.9%, and the tech-heavy Nasdaq 100 advanced +3.6%.
In international markets, Canada’s TSX rose +3.49% with the help of strong gains in the important energy sector. Major European and Asian markets were strong across the board, too, as the United Kingdom’s FTSE 100 surged +4.25%, Germany’s DAX jumped +4.69%, and France’s CAC 40 rallied +5.7%. In Asia, China’s Shanghai Stock Exchange rose +3.49%, Japan’s Nikkei surged +6.79%, and Hong Kong’s Hang Seng enjoyed a +5.7% gain.
In commodities, the industrial metal copper gained +2.29%, but precious metals declined slightly as Gold declined $11.90 an ounce to $1,226.60. Silver, the more volatile of the two, retreated 2.75% to $15.36 an ounce. Oil had a big week as rumors circulated that Saudi Arabia, Russia, and Venezuela had agreed to freeze oil output and that Iran is also considering joining the effort. Oil rallied over +10%, up $2.94 to $31.96 a barrel.
In U.S. economic news, initial claims for jobless benefits fell 7,000 to 262,000 last week, the lowest since November and a rate consistent with a healthy job market, according to the Labor Department. The smoothed four week average fell 8,000 to 273,250. However, analysts at TrimTabs Investment Research have dug deeper into a different metric, and what they have found is concerning. The growth of federal income and employment tax withholdings has been dropping at an alarming rate. For most of last year, tax withholdings had been rising at a rate of +5% versus the year ago period. Revenue inflows to the Treasury Department began to steadily decline through last fall, bringing the annual growth rate to just below +4% by the beginning of this year. From the beginning of this year, growth has been just +1.8%, far less than the +5% gains a year ago. “The slower pace of year over year gains in tax withholdings has pointed to a significantly slower pace of hiring since September,” says TrimTabs Investment Research, which estimates that 820,000 jobs were added from September to January. In contrast, the Labor Department estimates 1.137 million new jobs were added over that span, or almost 40% more.
The National Association of Home Builders reported single-family home construction starts fell -3.9% in January to an annualized 731,000. This is an increase of +3.5% versus a year ago. Multi-family starts were down -2.5% for the month and down -3.8% annualized. Homebuilder sentiment slipped to a nine month low. On a positive note, building permits were up +13.5% from year ago. Single-family permits were down -1.6% last month, but remain +9.6% above year ago levels.
Housing starts fell more than expected in January, declining -3.8% to an annualized 1.099 million, according to the Commerce Department. Housing permits, an indicator of future building activity, beat expectations by declining only -0.2% to 1.202 million.
The Mortgage Bankers Association reported that the 30 year fixed-rate mortgage stands at just 3.83%, the lowest since last April.
Core U.S. consumer prices, which exclude food and energy, rose +0.3% in January, up +2.2% from year ago. This is the fastest annual rise since June 2012, according to the Labor Department. Overall prices were unchanged for the month and up +1.4% from year ago. Core prices were driven by gains in the cost of medical care, health insurance and housing. Health insurance costs rose +1.1% for the month and are up +4.8% from year ago, the largest increase in nearly three years.
US-wide industrial production recovered much more strongly than expected in January, up +0.9%, according to the Federal Reserve. The gain was led by a +5.4% jump in utilities output. Factory activity returned to growth, up +0.5% after falling the two previous months. Mining output, which includes oil drilling, was flat last month, and down -9.8% versus a year earlier.
Many regional manufacturing reports continue to be poor, however. The New York Federal Reserve’s Empire state manufacturing index improved less than expected from January’s worst reading since the Great Recession. Overall business conditions improved to -16.6 from -19, however this is still the second worst reading since 2009. New orders and shipments remained firmly in negative territory, suggesting continued contraction.
Likewise, the Philadelphia Fed Manufacturing Index remains in contraction but improved to -2.8 from -3.5. Shipments increased, but new orders fell 4 points to -5.3. The employment index fell to -5 from -1.9, the lowest since May 2013. The inventory gauge fell further, suggesting that manufacturers continue to deplete stocks of goods. The business outlook index fell to its lowest level since November 2012.
In Canada, the Canadian dollar’s sharp drop over the past year is beginning to stoke inflation. The consumer price index rose +2% in January from the same time last year, according to Statistics Canada. It is now at its highest level since November of 2014 and approaching the central bank’s target, and puts the Canadian central bank in a difficult position as it has been attempting to prop up growth with low borrowing costs.
In the Eurozone, an interesting fact came to light last week: the United States became the top destination for German exports in 2015, the first time since 1961 that the U.S. has held that spot. Analysts believe that an upturn in the U.S. economy and a weaker euro led to the change. In France, Christine Lagarde who managed a tumultuous first term as Managing Director of the International Monetary Fund was officially named to a new term at the global emergency lender. Lagarde’s second five years is not anticipated to be any quieter than her first term.
Finally, much has been written in recent years along the lines of “if this is an expansion, why does it feel like we’re still in a recession?” Young people and low-wage workers in particular have felt this way. One answer is that the expansion in the years since the recent recession has been very weak, and nothing like the expansions that have followed many other recessions.
For example, President Ronald Reagan took office in 1981 in the midst of raging inflation and a deep recession. Similarly, President Barack Obama took office in 2009 in the midst of the recent global financial crisis. President Reagan’s first 7 years in office averaged +7.9% GDP growth, while President Obama’s first 7 years in office have averaged less than half as much, at +2.9%. The worst year of GDP growth in Pres. Reagan’s first 7 years, at +4.2%, was greater than the best year of growth under Pres. Obama’s first 7 years, which was +4.1%. The recovery during President Obama’s tenure has been so comparatively anemic that the “why does it feel like we’re still in a recession” question becomes much more understandable.
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)
The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell slightly to 8.8 from the prior week’s 8.5, while the average ranking of Offensive DIME sectors rose to 11.8 from the prior week’s 12.5. The Defensive SHUT sectors continued to lead the Offensive DIME sectors, but by a much-narrowed margin. 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, despite the superior US performance. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence. Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.
If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.
You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional.
Sincerely,
Dave Anthony, CFP®, RMA®
How does working after retirement affect Social Security?
What happens to my Social Security income if I continue working after retirement?
It depends on how old you are…..
- Working after retirement can impact your Social Security benefits, health insurance and taxes.
- You can contribute to a IRA or Roth IRA with you earned income
If you decide to go back to work after you have started Social Security benefits, this could impact the amount of Social Security that you will receive and your Medicare and tax payments.
Whether your Social Security income is reduced depends on your age. For benefit purposes, the Social Security Administration (SSA) defines the full retirement age as 66 for people born between 1/2/1943 and 1/1/1955. So let’s assume that you are under age 66 and you go back to work…
How much can you make in retirement and still get Social Security benefits if I am under 66?
- If you are under full retirement age for the entire year, Social Security is reduced $1 from your benefit payments for every $2 you earn above the annual limit. For 2016, that limit is $15,720.
Example #1:
You are under age 66 all year and you get $1,000/month from Social Security, and you make $25,720 at a part time job. This is $10,000 over the 2016 limit of $15,720.
Your Social Security benefits would now be REDUCED by $5,000, or $1 for every $2 you earned over the limit. Since you are $10,000 over this limit. Your total income is $5,000 SS + $25,770 part time job = $30,770. If you are single, your total taxable income will be, _________, and your total taxes would be __________
What happens when you reach the full retirement age of 66?
- In the year you reach full retirement age, Social Security is reduced $1 in benefits for every $3 you earn above $41,880. Social Security only counts the money that you earn before you turn 66, so if you have an early calendar year birthday in January or February then your benefits are only reduced in the months before you turn 66. In 2016, the limit on your earnings before you turn 66 is $41,880. Once you celebrate the big 66, you can make as much as you want without having a reduction of SS benefits! 85% of which could be included in your taxable income at a 46% rate (TAX TORPEDO), and your Medicare Part B and D premiums could quadruple, but that is for another post…..
Example #2:
Same as #1, but You turn 66 and reach full retirement age in August 2016. Your Social Security benefits should be $1,000/month or $12,000/year and you make $63,000 during the calendar year with $44,000 being paid out in the 1st 7 months of the year, January-July. You made $2,120 over the year you turn 66 limit of $41,880. Your Social Security benefits will be reduced from January to July by $706, $1 for every $3 that you made over the limit.
Limit: $41,880
You made: $44,000 before the month that you turned 66
Overage: $2,120
Reduction in SS benefits: $2,120 overage/ $3 Social Security reduction divisor = $706 total Social Security reduction
Instead of getting $12,000 of Social Security benefits for the year, you get $11,294. Your Social Security benefits are not reduced August-December. They will be taxed though….
What income counts toward my Social Security reduction of benefits if I work in retirement?
Social Security only counts the wages that you make from your job, or your net profit if you’re self-employed.
They include:
-
Bonuses
-
Commissions
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Vacation Pay
They don’t include:
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Pensions
-
annuities
-
investment income
-
interest
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VA or government benefits
As you continue working, your additional earnings will count towards your Social Security monthly benefit calculation, which means that your monthly Social Security payment could increase! If your benefit is wiped out before age 66 because you made a significant amount over the threshold, then Social Security will credit you for the months that you did not receive a benefit, and would increase your benefit amount.
Remember, by working in retirement, you could also could contribute to an regular IRA account, a Roth account, or even an Health Savings Account if you are not on Medicare. Sweet Deal!
What do I do now?
Social Security is one of the largest and most valuable assets that you will have in retirement, if you look at the present value of all of your future Social Security payments in retirement for the next 25-30 years, it could be worth $900k to over $2 million dollars depending if you are single or marred. ($2,500/month X 12 X 30 years for single person)
Tragically, the vast majority of Social Security recipients do not do any type of pro-active tax planning when it comes to the amount their Social Security benefits that are included in their taxable income, and they end up paying hundreds of thousands of dollars over their retirement life in additional income taxes because of it
TAX PLANNING EXAMPLE
Let’s look at a 66 yr old married couple who needs $100k gross income in retirement. They get $48,000 in combined Social Security income, and take $52,000 out of their IRA to equal $100,000. Their total tax payable would be $9,734. Without proper tax planning in retirement, 69% of their Social Security benefits, or $33,200 is included in their taxable income. Remember, this is the same Social Security that there were already taxed on for their entire working lives via payroll deductions, and now they’re being taxed again when they receive it?
2015 shows the couple doing no tax planning. Their ordinary and adjusted gross income is $85,200 after taxing the 31% of their Social Security benefits that isn’t counted toward income out of the equation. After their standard deductions and exemptions, their taxable income is $62,100 for a tax liability of $9,734.
2016 shows that same couple, with the same $100,000 of gross income, but with a little bit of pro-active tax planning. Here instead of taking $52,000 out of their 100% taxable IRA account, they only take $26,000 out, and pull another $26,000 from one of their FIVE COMPLETELY TAX FREE accounts that they had set up in advance with their Anthony Capital advisor. Income from these accounts don’t count towards Social Security taxes or Medicare Part B &D premium surcharges. They only pay $2,878 in taxes, saving them $6,856 a year.
Over a 30 year retirement life, saving $6,856/year in taxes with a little bit of planning grows to over $845,659 at 8%!!
You should get a 2nd Opinion review to make sure that you are claiming the correct amount of Social Security—the amount that will maximize your lifetime benefit. Also, you need to integrate your Social Security income with a comprehensive tax, investment, insurance, Medicare, Long Term Care, home equity, and legacy/estate plan. Request a 2nd opinion today, it could save you thousands!
Dave Anthony, CFP®,RMA®
In-Service Withdrawals from 401(k) Plans: The Law and the Plan Rules
What are in-service, non-hardship employee withdrawals?
Some companies allow active employees participating in a qualified employer retirement plan like a 401(k) to withdraw a portion of their plan’s account balance upon request, without demonstrating a specific financial need.
Let’s face it–some 401(k) plans are bad: the fees are high, the investment choices are slim, and your ability to customize your investment process within your company’s 401(k) structure is limited.
People naturally ask if there’s a way to take the money out of the plan and place it into their own account. We all know when you leave your job, you can. It’s called a 401(k) rollover. In most cases you should do a rollover as soon as you leave your employer. This gives you greater control over your fees, taxes, expenses, and the risk that you’re exposed to.
Can you take money out without leaving your job? Some plans do allow it. It’s called an “in-service withdrawal” or an “in-service distribution.” In service means you are still working for the employer sponsoring the plan. Because some plans allow it you should ask your plan administrator if it is an option.
When should you consider in-service, non-hardship employee withdrawals?
One reason you should consider them is that, by rolling over your employer-sponsored retirement plan assets to a rollover IRA, you may be able to significantly expand your investment choices if you have limited choices in your employer sponsored retirement plan.
A nontaxable rollover of your plan assets to an IRA would also provide you with greater freedom to work with your customized retirement income plan.
It’s important to understand that a normal withdrawal is typically treated as ordinary income and could trigger a tax liability. In addition, if you’re under age 59 1/2, you could be subject to a 10% early withdrawal penalty. However, by taking the “in-service, non-hardship employee withdrawal” and rolling it over into an IRA within 60 days, you will continue to benefit from tax-deferral status without an immediate tax liability or penalty.1
Who may be eligible?
If an employer-sponsored retirement plan permits in- service, non-hardship employee withdrawals, participants often must meet certain requirements. Plan guidelines may include a minimum age restriction (usually age 59 1/2), a length-of-service requirement (often two or five years) or both.
Employer-sponsored retirement plans often limit these withdrawals to vested employer matching contributions, plus earnings, as well as rollovers and earnings from previous employer plans. Some plans allow employees age 59 1/2 and older to withdraw their entire balance without any further restrictions. Many plans require spousal consent for in-service withdrawals so you should check with your plan sponsor as your spouse may have to provide consent in writing.
Which plans permit in-service, non-hardship employee withdrawals?
Profit-sharing, 401(k), stock bonus and employee stock ownership plans usually allow in-service, non- hardship employee withdrawals. Cash balance, target benefit and money purchase plans may permit them for employees who have reached the plan’s normal retirement age. Defined benefit plans usually do not allow them.
Which plan assets are eligible for these withdrawals?
Because each employer-sponsored retirement plan is different, you should ask your employer which assets in your plan are eligible for in-service, non-hardship employee withdrawals. Some examples include:
• After-tax contributions, plus earnings
• Rollover amounts, plus earnings
• Company match contributions, plus earnings
• Before-tax contributions, plus earnings (if you are disabled or have reached age 59 1/2)
What investment options are available for the assets you withdraw?
If you make an in-service, non-hardship employee withdrawal and roll over the assets to an IRA at Anthony Capital, you will have access to a broad range of investment options, including stocks, bonds, exchange traded funds, and mutual funds. More importantly, your Anthony Capital advisor can provide you with a comprehensive asset allocation and asset investment management plan for your portfolio, incorporating the FBIAS: Fact- Based Investment Allocation Strategies to provide active risk management for your account. They’ll also take into consideration your goals, risk tolerance, as well as the tax laws governing dividends and capital gains.(2)
FBIAS portfolios aren’t limited by the silly trading restrictions that most 401(k) plans have, this means that you can reallocate your hard earned retirement monies into a risk-managed portfolio to put yourself in a potentially better situation to profit in bull markets and more importantly, protect profits in bear markets.
What rules and potential issues should you consider before you take an in-service, non-hardship withdrawal?
• Some investments can be rolled over in kind while others may not be eligible.
• Companies may impose penalties, including charges and suspension of plan contributions, on participants for making these withdrawals.
• Asset liquidation may result in penalties (e.g., early surrender of annuity contracts).
• By removing assets from your employer-sponsored plan, you may lose protection of those assets from creditors.
• While loans frequently are permitted in employer retirement plans, they are not allowed in IRAs.
• Determine if the assets from the in-service, non- hard- ship withdrawal are pre-tax contributions or earnings from the account. This can have major tax implications.
• You will not have the ability to use a Net Unrealized Appreciation (NUA) strategy if employer stock is rolled into an IRA.
If you want to make an in-service, non-hardship employee withdrawal, you should take the following steps:
• Contact the human resources department’s retirement plan administrator to determine whether your plan allows these withdrawals and whether you are eligible to take them. Ask, “Can I take an in-service withdrawal?”
• If the withdrawals are available and you are eligible to take them, then you should ask:
1. Which assets are eligible?
2. How much you can withdraw?
3. Does the plan imposes penalties, including suspensions or deferrals of company contributions, for these withdrawals?
4. What are the processing requirements and distribution timelines?
• Contact your tax advisor to discuss the potential tax implications of taking these withdrawals.
• Contact your Anthony Capital advisor to help you evaluate your options and to help you fill out the transfer forms to complete the rollover to an IRA.
How do in-service, non-hardship employee withdrawals fit in to your total financial picture?
In-service, non-hardship employee withdrawals, if permitted by your employer-sponsored retirement plan, allow you to make withdrawals upon request and roll over the assets to a rollover IRA, which usually offers more investment choices and improved beneficiary options compared with an employer plan. Your Anthony Capital advisor can help you integrate these withdrawals with your retirement, estate and investment strategies to help you meet your overall financial goals.
Is it worth the hassle? Why not just leave everything the way it is?
If you’re over age 59 1/2, and the in-service withdrawal option is available, your decision to take advantage of it and roll your monies over to an IRA in your name could be profound. Ask the pre-retirees who had monies in their 401(k) plans in 2008, when the market crashed and they lost 50%. FBIAS portfolios at Anthony Capital are actively managed, and the five Core Blend portfolios made anywhere from 12%-36% during 2008, plus they typically have 1/2 the fees and expenses of most 401(k) plans.
INVESTMENT HINT: Having a portfolio will less fees and expenses is good.
Take charge, take control, reduce risk, increase returns.
You can learn more about other Anthony Capital services at www.AnthonyCap.com.
Any information presented about tax considerations affecting your financial transactions or arrangements is not intended as tax advice and cannot be relied on to avoid any tax penalties. Neither Anthony Capital nor its Financial Advisors provide tax, accounting or legal advice. You should review any planned financial transactions with your accountant. 1 A direct rollover must be completed within 60 days after receiving the distribution. A distribution will be subject to 20% mandatory income tax withholding unless directly rolled over to an IRA 2 Asset allocation does not assure a profit or protect against a loss in declining markets.
FBIAS™ Market update 2/12/2016
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 Fig. 1 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 23.61, down from the prior week’s 23.80, after having earlier reached the level also reached at the pre-crash high in October, 2007. 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 Fig. 2).
![clip_image002[5]](https://anthonycapital.files.wordpress.com/2016/02/clip_image0025.png "clip_image002[5]")
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 U.S. Bull-Bear Indicator (see Fig. 3) turned negative on January 15th, and remains in Cyclical Bear territory at 39.24, down from the prior week’s 41.15.
![clip_image002[7]](https://anthonycapital.files.wordpress.com/2016/02/clip_image0027.png "clip_image002[7]")
In the intermediate picture:
The intermediate (weeks to months) indicator (see Fig. 4) turned positive on January 26th. The indicator ended the week at 8, down from the prior week’s 12. 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 January for the prospects for the first quarter of 2016.
![clip_image002[9]](https://anthonycapital.files.wordpress.com/2016/02/clip_image0029.png "clip_image002[9]")
Timeframe summary:
In the Secular (years to decades) timeframe (Figs. 1 & 2), 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. The Bull-Bear Indicator (months to years) is negative (Fig. 3), indicating a new Cyclical Bear has arrived. The Quarterly Trend Indicator (months to quarters) is negative, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.
In the markets:
A sharp late-week rally wasn’t enough to reverse U.S. market declines for the week as the Dow Jones Industrial Average ended the week down -1.43%, despite a 314 point rally on Friday. Similarly, the S&P 500 LargeCap index declined -0.81%, the S&P 400 MidCap gave up -1.36%, and the SmallCap Russell 2000 lost -1.38%. Dow Transports bucked the trend and gained +1.52% but Dow Utilities, the leading year-to-date sector, ended the week down ‑2.2%.
In international markets, almost all major indices were negative with Japan the biggest loser, plunging -11.1%. In North America, Canada’s TSX declined -3%. European markets also had a difficult week as the Netherlands dropped -5.4%, France’s CAC 40 declined -4.89%, Germany’s DAX pulled back -3.43%, and the United Kingdom’s FTSE declined -2.4%.
In commodities, precious metals shone brightly as Gold gained +$64.40 an ounce to end the week at $1,238.50, up +5.49%. Silver added +$0.76 to $15.79, up 5.06%. Crude oil ended the week at $29.02, down -6.39%, despite a huge +10.7% rally on Friday.
In U.S. economic news, initial claims for jobless benefits fell 16,000 last week to 269,000, a bigger decline than expected and the lowest reading this year. Jobless claims have now remained below 300,000 for almost a year. Despite financial markets seemingly signaling trouble ahead for the U.S. economy, the labor market remains resilient. Continuing jobless claims remain near long-term lows of 2.239 million.
The Labor Department’s “Job Openings and Labor Turnover Survey” (JOLTS) report showed openings rose to 5.6 million in December, up 250,000 from November. Hires climbed to 5.36 million from November’s 5.26 million, the highest reading since the fall of 2004. The number of people quitting their jobs hit a 10-year high of 3.06 million, up 200,000 from the previous month, indicating a higher level of worker confidence in their ability to find better jobs.
U.S. retail sales rose a better-than-expected +0.2% in January, according to the Commerce Department. Core sales (ex-autos, restaurants, and building supplies) rose +0.6%. Non-store retailers such as Amazon outperformed all retail segments with a +1.6% gain, up +8.7% annually.
Import prices continue to fall, down -1.1% last month, matching the decline seen in December. Expectations had been for a greater drop. Year-over-year, import prices declined -6.2%. Export prices also fell, down -0.8% on the month and down -5.7% from a year ago.
Despite all predictions to the contrary, mortgage rates fell below 4% again and mortgage applications surged +9.3% last week. Purchase applications were little changed, but refinancing demand hit a one-year high, up +15.8%.
Small business sentiment fell to its lowest level in nearly 2 years, said the National Federation of Independent Business (NFIB). NFIB’s small business optimism index fell -1.3 points to 93.9, continuing a downtrend for over a year and the lowest since February of 2014. In the NFIB report, 21% of small business owners see economic conditions worsening—the lowest business conditions outlook since late 2013. Despite weaker readings in credit conditions, earnings trends, and sales a net 27% of companies raised compensation—the highest reading since 2007. A large part of the rise in compensation was due to the minimum wage hikes that took effect in 14 states on January 1st, pushing up labor costs. The broader labor issue remains that small businesses continue to have difficulty finding qualified candidates. A full 29% of businesses report having job openings and 45% reported few or no qualified candidates.
New York Federal Reserve President William Dudley said key sectors of the U.S. economy are in good shape and more resilient. He stated that the financial system is stronger with banks better capitalized and that household balance sheets are in much better shape. He reiterated Fed Chair Janet Yellen’s statement that economic expansions don’t die of “old age”.
In Canada, the Bank of Canada is selling off most of its remaining gold reserves, mainly by selling gold coins. The country held just US$19 million worth of gold as of last Monday. For most of last year, the country’s gold reserves stood at more than US$100 million.
In the Eurozone, the economy grew 0.3% in the 4th quarter—matching forecasters’ views. Among the larger countries, Spain gained +0.8%, its 2nd significant quarterly gain. Germany and France rose +0.3%, and Italy managed a +0.1% gain.
In Germany, industrial production declined, widely missing analyst expectations of a +0.5% gain. German production fell -2.3%, the worst since October 2012. Capital goods production declined -2.6%, consumer goods fell -1.4%, and energy-related production decreased by -3%.
Around the world, Central Banks have been using the tools at their disposal to spur economic growth in their respective zones. The Bank of Japan surprised markets two weeks ago by adopting a negative interest rate on bank funds deposited with the central bank—the idea being that it would get the banks to stop hoarding reserves and force them to put that money to work. Instead, banks appear to have used the money to purchase Japanese government bonds which remain in such high demand that the 10-year bond yield went negative for the first time this week. Since then, Japanese bank stocks have plunged -25%.
European Central Bank President Mario Draghi once more pledged to do “whatever it takes”, and further backed it up with a claim that there are “no limits” to how far the ECB will go to avoid a Eurozone breakup and to spur economic growth. Nonetheless, European bank stocks have plunged -60% over the past year.
By contrast, in the United States, the Federal Reserve took a different tack by hiking rates in December and anticipating more hikes in 2016. The intention was to put upward pressure on inflation and hence interest rates, but the opposite appears to have occurred. Investors rushed into Treasuries where the yield on the 10-year has plunged from 2.29% at the time of the hike to 1.73%. Steven Ricchiuto, chief economist at Mizuho Securities USA writes that, “The counterintuitive currency market behavior suggests markets are beginning to recognize that monetary policy can’t solve the deflation problem confronting the global economy.”
Finally, with oil selling at less than $30/barrel and the US’ major oil terminal at Cushing OK almost to full capacity, let’s revisit the “Peak Oil” scare of just a couple of decades ago. Peak oil is an event based on geologist M. King Hubbert’s theory that there is a point in time when the maximum rate of extraction of petroleum is reached, and after that point the rate of petroleum extraction begins a terminal decline, ending in the destruction of our oil-based economy. Indeed, petroleum production for the lower 48 states of the United States did reach a peak in early 1970 and then began a multi-decade decline. However, the dramatic increases in production since 2010 have reversed the decline, and pushed total production back to within spitting distance of that 1970 peak.
Hydraulic fracturing, the ability of refiners to process oil shale and oil sands, and new advanced drilling techniques that are able to breathe new life into old oil fields have all served to dramatically increase North American oil production and have essentially reversed the phenomenon of “Peak oil”.
To remind us of the “Peak Oil” hysteria of the last several decades, here is a collage of magazine and book covers that now can be relegated to the Library of Bad Predictions:
(sources: all index return data from Yahoo Finance; 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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)
The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 8.5 from the prior week’s 9.5, while the average ranking of Offensive DIME sectors rose to 12.5 from the prior week’s 14.3. The Defensive SHUT sectors continued to lead the Offensive DIME sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.
![clip_image002[11]](https://anthonycapital.files.wordpress.com/2016/02/clip_image00211.png "clip_image002[11]")
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, despite the superior US performance. 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.
FBIAS™ for the week ending 2/12/2016
FBIAS™ Fact Based Investment Allocation Strategies for the week ending 2/12/2016
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 23.61, down from the prior week’s 23.80, after having earlier reached the level also reached at the pre-crash high in October, 2007. 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 U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 39.24, down from the prior week’s 41.15.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th. The indicator ended the week at 8, down from the prior week’s 12. 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 January for the prospects for the first quarter of 2016.
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. The Bull-Bear Indicator (months to years) is negative (Fig. 3 above), indicating a new Cyclical Bear has arrived. The Quarterly Trend Indicator (months to quarters) is negative, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is positive. Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.
In the markets:
A sharp late-week rally wasn’t enough to reverse U.S. market declines for the week as the Dow Jones Industrial Average ended the week down -1.43%, despite a 314 point rally on Friday. Similarly, the S&P 500 LargeCap index declined -0.81%, the S&P 400 MidCap gave up -1.36%, and the SmallCap Russell 2000 lost -1.38%. Dow Transports bucked the trend and gained +1.52% but Dow Utilities, the leading year-to-date sector, ended the week down 2.2%.
In international markets, almost all major indices were negative with Japan the biggest loser, plunging -11.1%. In North America, Canada’s TSX declined -3%. European markets also had a difficult week as the Netherlands dropped -5.4%, France’s CAC 40 declined -4.89%, Germany’s DAX pulled back -3.43%, and the United Kingdom’s FTSE declined -2.4%.
In commodities, precious metals shone brightly as Gold gained +$64.40 an ounce to end the week at $1,238.50, up +5.49%. Silver added +$0.76 to $15.79, up 5.06%. Crude oil ended the week at $29.02, down -6.39%, despite a huge +10.7% rally on Friday.
In U.S. economic news, initial claims for jobless benefits fell 16,000 last week to 269,000, a bigger decline than expected and the lowest reading this year. Jobless claims have now remained below 300,000 for almost a year. Despite financial markets seemingly signaling trouble ahead for the U.S. economy, the labor market remains resilient. Continuing jobless claims remain near long-term lows of 2.239 million.
The Labor Department’s “Job Openings and Labor Turnover Survey” (JOLTS) report showed openings rose to 5.6 million in December, up 250,000 from November. Hires climbed to 5.36 million from November’s 5.26 million, the highest reading since the fall of 2004. The number of people quitting their jobs hit a 10-year high of 3.06 million, up 200,000 from the previous month, indicating a higher level of worker confidence in their ability to find better jobs.
U.S. retail sales rose a better-than-expected +0.2% in January, according to the Commerce Department. Core sales (ex-autos, restaurants, and building supplies) rose +0.6%. Non-store retailers such as Amazon outperformed all retail segments with a +1.6% gain, up +8.7% annually.
Import prices continue to fall, down -1.1% last month, matching the decline seen in December. Expectations had been for a greater drop. Year-over-year, import prices declined -6.2%. Export prices also fell, down -0.8% on the month and down -5.7% from a year ago.
Despite all predictions to the contrary, mortgage rates fell below 4% again and mortgage applications surged +9.3% last week. Purchase applications were little changed, but refinancing demand hit a one-year high, up +15.8%.
Small business sentiment fell to its lowest level in nearly 2 years, said the National Federation of Independent Business (NFIB). NFIB’s small business optimism index fell -1.3 points to 93.9, continuing a downtrend for over a year and the lowest since February of 2014. In the NFIB report, 21% of small business owners see economic conditions worsening—the lowest business conditions outlook since late 2013. Despite weaker readings in credit conditions, earnings trends, and sales a net 27% of companies raised compensation—the highest reading since 2007. A large part of the rise in compensation was due to the minimum wage hikes that took effect in 14 states on January 1st, pushing up labor costs. The broader labor issue remains that small businesses continue to have difficulty finding qualified candidates. A full 29% of businesses report having job openings and 45% reported few or no qualified candidates.
New York Federal Reserve President William Dudley said key sectors of the U.S. economy are in good shape and more resilient. He stated that the financial system is stronger with banks better capitalized and that household balance sheets are in much better shape. He reiterated Fed Chair Janet Yellen’s statement that economic expansions don’t die of “old age”.
In Canada, the Bank of Canada is selling off most of its remaining gold reserves, mainly by selling gold coins. The country held just US$19 million worth of gold as of last Monday. For most of last year, the country’s gold reserves stood at more than US$100 million.
In the Eurozone, the economy grew 0.3% in the 4th quarter—matching forecasters’ views. Among the larger countries, Spain gained +0.8%, its 2nd significant quarterly gain. Germany and France rose +0.3%, and Italy managed a +0.1% gain.
In Germany, industrial production declined, widely missing analyst expectations of a +0.5% gain. German production fell -2.3%, the worst since October 2012. Capital goods production declined -2.6%, consumer goods fell -1.4%, and energy-related production decreased by -3%.
Around the world, Central Banks have been using the tools at their disposal to spur economic growth in their respective zones. The Bank of Japan surprised markets two weeks ago by adopting a negative interest rate on bank funds deposited with the central bank—the idea being that it would get the banks to stop hoarding reserves and force them to put that money to work. Instead, banks appear to have used the money to purchase Japanese government bonds which remain in such high demand that the 10-year bond yield went negative for the first time this week. Since then, Japanese bank stocks have plunged -25%.
European Central Bank President Mario Draghi once more pledged to do “whatever it takes”, and further backed it up with a claim that there are “no limits” to how far the ECB will go to avoid a Eurozone breakup and to spur economic growth. Nonetheless, European bank stocks have plunged -60% over the past year.
By contrast, in the United States, the Federal Reserve took a different tack by hiking rates in December and anticipating more hikes in 2016. The intention was to put upward pressure on inflation and hence interest rates, but the opposite appears to have occurred. Investors rushed into Treasuries where the yield on the 10-year has plunged from 2.29% at the time of the hike to 1.73%. Steven Ricchiuto, chief economist at Mizuho Securities USA writes that, “The counterintuitive currency market behavior suggests markets are beginning to recognize that monetary policy can’t solve the deflation problem confronting the global economy.”
Finally, with oil selling at less than $30/barrel and the US’ major oil terminal at Cushing OK almost to full capacity, let’s revisit the “Peak Oil” scare of just a couple of decades ago. Peak oil is an event based on geologist M. King Hubbert’s theory that there is a point in time when the maximum rate of extraction of petroleum is reached, and after that point the rate of petroleum extraction begins a terminal decline, ending in the destruction of our oil-based economy. Indeed, petroleum production for the lower 48 states of the United States did reach a peak in early 1970 and then began a multi-decade decline. However, the dramatic increases in production since 2010 have reversed the decline, and pushed total production back to within spitting distance of that 1970 peak.
Hydraulic fracturing, the ability of refiners to process oil shale and oil sands, and new advanced drilling techniques that are able to breathe new life into old oil fields have all served to dramatically increase North American oil production and have essentially reversed the phenomenon of “Peak oil”.
To remind us of the “Peak Oil” hysteria of the last several decades, here is a collage of magazine and book covers that now can be relegated to the Library of Bad Predictions:
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)
The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 8.5 from the prior week’s 9.5, while the average ranking of Offensive DIME sectors rose to 12.5 from the prior week’s 14.3. The Defensive SHUT sectors continued to lead 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, despite the superior US performance. 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 schedule a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.
You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional.
Sincerely,
Dave Anthony, CFP®, RMA®
Dave Anthony, CFP® 