FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 3/24/2016

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 25.71, down slightly from the prior week’s 25.90, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return 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 49.03 down from the prior week’s 50.87.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 36 (the maximum value possible), unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of 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:

For the holiday-shortened week in the U.S., the Dow Jones Industrial Average declined -86 points ending the week at 17,515 (-0.5%).  The tech-heavy Nasdaq Composite lost -22 points closing at 4,773.50 (-0.5%), while the LargeCap S&P 500 index declined -13 points to close at 2,035.94 (-0.7%).  SmallCaps and MidCaps showed relative weakness compared to their larger brethren as the MidCap S&P 400 fell -1.1% and the small cap Russell 2000 ended down -2.0%.  Utilities managed a slight gain, up +0.25% while Transports declined over -1.8%.

In international markets, Canada’s TSX fell -1%.  In Europe, the United Kingdom’s FTSE gave up -1.34%, Germany’s DAX was down -1%, and France’s CAC 40 declined -2.98%.  In South America, Brazil’s BOVESPA ended down 2.28%.  In Asia, markets were mixed as Hong Kong’s Hang Seng index declined -1.5%, but both Japan’s Nikkei and China’s Shanghai Stock Exchange were up, closing +1% and +0.2% higher, respectively.

In commodities, there was weakness across the board as the precious metals, industrial metals, and energy groups were all in the red.  The recent rally in crude oil took a break after data released on Wednesday showed U.S. stockpiles of oil were again reaching record levels.  Also pressuring commodities was renewed strength in the U.S. dollar against most other currencies.  Gold gave up -$39.30 an ounce to end the week at $1,216.70, a loss of 3%.  Silver declined -3.95% to close at $15.20.  The industrial metal copper lost -2.1%.  Oil was unable to manage a 6th straight week of gains and ended the week down -3.74% to $39.59 a barrel.

In U.S. economic news, a broad and timely indicator of the health of the job market improved significantly this week.  At the beginning of the year, there was a serious slowdown in the annual growth rate of income and employment tax withholdings.  That suggested that the job market was on a much weaker footing than the headline numbers portrayed.  This past week withheld tax grew at a +3.4% gain over the past four weeks following a +2% rise the previous four.  Some analysts prefer the tax collections data because they aren’t seasonally adjusted or revised, even though economists focus much more on the monthly Non-Farm Payroll jobs report, which is prone to big subsequent revisions.

In housing, existing home sales slipped -7.1% in February to a seasonally-adjusted 5.08 million annual rate, according to the National Association of Realtors.  The level of sales, while up +2.2% from this time last year, was the second weakest in a year.  Sales fell in all four regions of the country.  The median existing home price was $210,800, up +4.4% from a year before.  First-time buyers fell to 30% from 32%, while investors purchased 18% of homes. 

New-home sales rose to an annual rate of 512,000 last month according to the Commerce Department, signaling a steady pace for housing activity and beating economists’ estimates by 2000.  The median sales price in February was $301,400 up 2.6% versus a year earlier.  The number of homes for sale was the highest since October 2009.

U.S. orders for durable goods fell -2.8% in February, matching expectations, but the details of the report showed underlying weakness.  Excluding transportation, orders fell -1%, which was worse than expected and the sharpest drop in a year.  Core capital goods orders (excluding defense and aircraft) fell -1.8%, taken as a bad sign for business investment in new plant capacity.

On Monday, both Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, and San Francisco Fed President John Williams asserted that the United States was experiencing growth and emerging signs of inflation – two stated prerequisites for more rate hikes – and therefore, they said, a rate hike is possible at either of the Fed’s next two policy meetings.

In international economic news, Toronto Dominion’s (TD) Economics’ Quarterly Economic Forecast for Canada stated that the Canadian economy has been through a bit of a rough ride over the past year, but 2016 will likely see the country return to growth.  Real GDP is forecast to grow +1.9% in 2016 and +2.0% in 2017.  This is the first time TD has increased its growth forecast in a year.

Germany’s economic advisors revised down their 2016 growth forecast, saying global economic uncertainties will weigh down trade.  The advisors said they expect Europe’s largest economy to grow by just +1.5% this year, down 0.1% from the previous forecast.

In France, the budget deficit narrowed last year, but unemployment hit a new record high, spotlighting the patchy recovery of the Eurozone’s second-largest economy.  French Finance Minister Michel Sapin said the deficit was 3.5% of gross domestic product in 2015, better than the 3.8% expected, and he expects growth to accelerate this year to +1.5% from +1.2% last year.  But the continuing problem with high unemployment weighs on the economy.  The number of French job seekers rose an additional +1% last month, keeping the stubbornly high unemployment rate at 10% or more of the workforce.

In China, Premier Li Keqiang said Beijing will reduce the tax burden on Chinese companies to spur dynamism and help the economy’s desired shift toward consumption and services and away from their over-dependence on manufacturing.  In a speech this past week, Mr. Li stated that the government will push ahead with tax cuts, particularly focusing on helping promising service industries, including those involved in research and development.  He said such tax cuts will amount to 500 billion yuan ($76.8 billion) this year.

Finally, frequent references are made in this weekly report to Markit’s Purchasing Managers Index (PMI) reports.  The reason is that the PMI reports are quite highly correlated to – and frequently lead – the changes in health of the economies being reported on.

Here is a chart showing the very high correlation between PMI levels and US Gross Domestic Product (GDP) quarter-over-quarter changes.  The upshot is that the PMI reports are very much worth the attention we pay them – and also that current PMI levels may portend worsening US GDP:

  Source: Markit

Chris Williamson, Chief Economist for Markit, writes that the U.S. economy is going through its worst growth spell for three and a half years.  Both the national manufacturing and services PMI indexes had fallen to the stagnation level of 50 in February and improved only slightly in March to 51.1, according to Markit’s early “flash” readings.  Williamson notes that the improved 51.1 reading was still “the third-lowest reading seen since the global financial crisis.”

(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 to 12.3 from the prior week’s 11, while the average ranking of Offensive DIME sectors fell to 9.8 from the prior week’s 9.3.  The Offensive DIME sectors are now ranked higher than and have taken the lead from the Defensive SHUT sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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 3/18/2016

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 25.90, up from the prior week’s 25.56, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return 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 50.87 up from the prior week’s 48.00.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 36 (the maximum value possible), unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of 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:

Large-caps moved back into positive territory for 2016 as stocks scored a fifth consecutive week of gains.  The major indexes all remain substantially below their record highs set last summer, but only the small-cap Russell 2000 index ended the week still in correction territory—commonly defined as a decline of -10% or more from a recent high.  For the week, the Dow Jones Industrial Average tacked on an additional +389 points to close at 17,602, up +2.26%.  The LargeCap S&P 500 gained +1.35%, the MidCap S&P 400 added +1.61%, and the SmallCap Russell 2000 rose +1.3%.  Both the Dow Transports and Utilities were positive for the week as well, up +4.97% and +1.76%, respectively.

In international markets, Canada’s TSX declined slightly down -0.18%.  In Asia, the big winner was China’s Shanghai Stock Exchange which rallied +5.15%.  Hong Kong’s Hang Seng was also a good gainer at +2.34%, but Japan’s Nikkei declined -1.26%.  Europe experienced a mixed week; the United Kingdom’s FTSE was up +0.81%, Germany’s DAX gained +1.22%, and the Netherlands Amsterdam Exchange rose +0.69%, but France’s CAC 40 declined -0.67% and Italy’s Milan FTSE was off -1.98%.

In commodities, the industrial metal copper continued its recent rebound, closing the week up +2.24%.  Precious metals were also positive as Gold added $4.90 (+0.39%) to close at $1,256 an ounce.  Silver, often the more volatile of the two, rose 2.03% to $15.82 an ounce.  Oil continued its impressive rally, adding an additional +$2.64 to close the week at $41.13 a barrel for West Texas Intermediate crude oil—a gain of +6.86%.

In U.S. economic news, initial claims for jobless benefits rose 7000 to 265,000 last week, a smaller than expected rise from the prior week’s five month low.  The smoothed four week average of claims rose 750 to 268,000 as claims remained below the 300,000 level for 54 weeks, the longest stretch since 1973.

It may be too early to call it a correlation quite yet, but among states where the minimum wage rose at least $.50 per hour, seven out of eight lost jobs in January according to the Labor Department.  Arkansas stood out in its region of the country by hiking its wage $.50 to $8.25 an hour.  It suffered the biggest job losses among those states imposing wage hikes– it reported a loss of 5,100 jobs, and the average workweek there declined to 33.7 hours, down -1.1 hours from a year earlier.

U.S. housing starts rose +5.2% to an annual rate of 1.178 million units, according to the Commerce Department.  The gain was after two consecutive months of declines.  Single-family home starts jumped +7.2% to their best levels since before the recession.

Consumer prices fell in February, but underlying inflation trends remain intact, the Labor Department reported.  The consumer price index declined -0.2% in February as energy costs plunged the most in seven years.  But core prices, which exclude food and energy, rose +0.3% for a second straight month.  Year-over-year, core CPI climbed to 2.3%, the highest in nearly 4 years and slightly above the 2% Fed target inflation rate.  Service costs are behind the increase in inflation, with the services ex-energy inflation rate coming in at over 3% – the most in more than seven years.  Services prices, by their nature, are less exposed to commodities swings and international competition.

U.S. retail sales declined -0.1% in February, matching expectations, but concerns were raised by the January sales number which was revised sharply lower.  Instead of the +0.2% gain initially reported for January, the Commerce Department now states that sales sank -0.4%.  Two major sub readings also got sharp downward revisions for January.  Retail sales excluding autos were revised down by a half point to a -0.4% decline.  Sales ex-autos and gasoline were also revised down a half point to a -0.1% decline.  For February, retail sales ex-autos improved to a 0.1%.  After the release of the disappointing January numbers, economists at Barclays downgraded their outlook for US GDP in the first quarter to 1.9% growth from 2.4%.  On a more positive note, core retail sales (ex-autos, gas, food services, and building materials) grew +0.3% in February, the 3rd increase in 4 months and up 4.3% from a year earlier.

Despite the bad news in the retail sector, the manufacturing sector got good news from the New York Federal Reserve’s Empire State manufacturing index, which rose +17 points to 0.62 – the first positive reading since last July.  New orders and shipments both increased while employment held steady.  In Philadelphia, the Federal Reserve reported its index of mid-Atlantic manufacturing rose to 12.4 from -2.8 in February, the first positive reading in seven months.  In that report, the new orders index jumped 21 points to 15.7.  The employment gauge for the Mid-Atlantic area rose 4 points, but still remained negative at -1.1.

Consumer sentiment unexpectedly declined for a third straight month in March according to the latest University of Michigan consumer survey.  The index’s flash reading was 90, down -1.7 points from February’s final reading.  It’s the lowest reading since last October and analysts had expected a reading of 92.2.  The survey measures consumers’ attitudes toward current economic conditions and their future expectations. 

This past week, the Federal Reserve held its key interest rate steady and signaled that it’s willing to meet markets halfway.  Instead of the four rate hikes this year that Fed policymakers had signaled in December, they now see two quarter-point hikes.  Relief that the pause in rate hikes may extend for another six months helped boost major stock indexes.  In contrast, the January Fed meeting minutes released this week (now almost 2 months out of date), showed that one Fed member anticipated a single rate hike this year, nine predicted two hikes and seven predicted three or more hikes.

In Europe, Eurostats, the EU’s statistical arm reported industrial production in the Eurozone in January was up a solid +2.1% over December, the best reading in six years.  Construction spending rose +3.6%.  Inflation in the euro area came in at -0.2% annualized vs. a 0.3% rate in January as Germany, France, Italy, and Spain were all negative. 

In Asia, Chinese property prices in the top cities soared as much as +57% in the trailing year thru February, according to the National Bureau of Statistics.  Nationally, all prices rose at an average annual rate of +2.8%, the biggest one-month rise since June 2014 according to a review of government data by the Financial Times.  Separately, Central Bank governor Zhou Xiaochuan stated that China would not rely as heavily on exports for economic growth this year since their contribution to the economy has been dwindling. 

In Japan, the Bank of Japan left monetary policies unchanged after cutting interest rates into negative territory in January.  Japanese department store sales improved in February from year-ago levels.  Sales rose 0.2% year-over-year in February, up from -1.9% in January.

Finally, analysts looking at the US stock market gyrations this year – a big downdraft followed by an offsetting rip higher – have begun to point to a factor that seems to neatly explain it all: the dollar.  Binky Chadha, Chief Global Strategist at Deutsche Bank, told marketwatch.com: “A lot of the market convulsions looked like they were coming from independent things.  But they all had a common denominator and that’s the dollar.”  Furthering this dollar-centric view, rumors are now circulating that finance ministers and central bankers at the late-February G-20 meeting in Shanghai settled on a so-called “Shanghai Accord” to weaken the dollar and thereby calm the financial markets.  Although there is nothing official to back up this suspicion, what is undisputed is that the dollar has declined more than -3% since the G-20 gathering and that has coincided with a near-vertical rally in stocks, emerging market assets, and commodities (including oil).  A weaker dollar has also been noted as a key reason in the 54% rally in U.S. crude and a 40% rally in Brent crude.  The chart below shows the drop in the Dollar Index from almost 100 to less than 95, which is also below the dollar’s important 200-day moving average, with the biggest part of that drop coming after the Shanghai G-20 meeting.

(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 to 11 from the prior week’s 9.8, while the average ranking of Offensive DIME sectors rose to 9.3 from the prior week’s 10.8.  The Offensive DIME sectors are now ranked higher than and have taken the lead from 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, 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,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 3/11/2016

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 25.56, up from the prior week’s 25.28, 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 48.00 up from the prior week’s 46.13.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 36 (the maximum value possible), up from the prior week’s 33.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of 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:

This past Wednesday, March 9th, was the 7th anniversary of the stock market low in the depths of the financial crisis.  The bull market of the last 7 years has been showing distinct signs of aging, but the rally of the last 4 weeks (which has been in lockstep with oil) has given hope to many that the old bull will live on.  In any event, it was a positive week for US indices.  The Dow Jones Industrial Average tacked on an additional 206 points, up +1.21%.  The large cap S&P 500 cleared the 2000-level and gained +1.11%.  MidCaps and SmallCaps also participated in the rally as the S&P 400 and Russell 2000 were up +0.57% and +0.52%, respectively.  Utilities, traditionally a “defensive” sector, nonetheless rallied +2.23% and Transports were up +0.54%.

In international markets, Canada’s TSX gained +2.34% on strength in the oil sector.  In Europe, after large see-saw reactions to ECB pronouncements on Thursday and Friday, France’s CAC 40 index rose +0.81%, Germany’s DAX ended the week near unchanged up +0.07%, and Italy’s Milan FTSE index rallied +3.88%.  Among the relatively few international losers, the United Kingdom’s FTSE ended down -0.96%, China’s Shanghai stock exchange declined 2.22% and Japan’s Nikkei lost 0.45%. 

In commodities, oil – bringing stocks along with it – managed to rally for a fourth straight week, up an additional +5.95% to $38.49 a barrel.  Precious metals retreated slightly, with Gold declining -$9 to $1251.10 an ounce and silver also closed down -0.23% at $15.51.

In U.S. economic news, jobless claims continued the optimistic tone from the previous week, falling by 18,000 to 259,000.  The smoothed 4-week average fell to 267,500 from 270,000.  Continuing claims were 2.225 million, a decrease of 32,000 from the prior week.  Weekly initial claims are at the lower end of the 250,000 to 300,000 range that has been in place since July of 2014.

In housing, mortgage applications showed a slight uptick in home buying demand as total mortgage applications rose +0.2%, according to the Mortgage Bankers Association.  The purchase index rose +4.2% for the week last week and was up a strong +30% compared to the year earlier.  Demand for refinancing declined 2.3% last week, but remained +13% higher than a year earlier.  The average interest rate for 30-year conforming loans climbed +6 basis points (100ths of a %) to 3.89%.

The closely-watched “rig count” continues to decline as oil drilling rigs in three of the nation’s most prominent shale formations continued to shut down in the wake of announcements from some of the major energy companies of plans to scale back operations.  The rig count in the Eagle Ford formation in South Texas fell by one to a total of 40 for the week ended March 4.  Permian Basin rigs, located in West Texas and southeastern New Mexico, declined by six to 156, while the Williston basin, located in eastern Montana, southern Canada and the Dakotas, saw rigs fall by three to 33.

Consumer credit growth surprisingly slowed – and sharply – in January as consumers cut back on credit card use, according to the Federal Reserve.  Overall consumer credit increased just +3.6% in January, whereas December had seen a gain of +7.3%.  This is the weakest percentage increase since March of 2013.  Credit card borrowing declined -1.4% in January following average gains of +7.5% over the past 2 months, the first decline since early last year.  Economists often view credit card use as a proxy for consumer confidence.  Non-revolving consumer credit, which includes auto and student loans, grew a smallish +5.4% in January after a +7.4% gain in December.

The Commerce Department reported that wholesale inventories rose in January as sales fell, suggesting that efforts by businesses to reduce inventory overhang could last through the year.  Inventories rose +0.3% to a seasonally adjusted $584.2 billion.  The inventory-to-sales ratio rose 0.3% to 1.35:1 in January, the highest ratio since April 2009.  The time it takes to unwind wholesale inventories rose to the highest level since the recession.  A rising ratio can have positive or negative implications.  It could mean companies stocking up in advance of a pickup in sales growth — or it could mean an inability to sell goods.  The highest ratio is in machinery, where sales have dropped -1.4% over the trailing 12 months.

Small business optimism fell to a two-year low in February, according to the National Federation of Independent Business (NFIB).  Owners of small firms reported hiring and compensation plans weakening sharply since the end of last year—an indication that labor markets might not be as healthy as official government data indicates.  NFIB’s sentiment gauge fell one point to 92.9, the lowest since early 2014 and well below historical norms.  NFIB Chief Economist William Dunkelberg stated, “A ho-hum outcome this month confirms that the small business sector is not performing with any strength.”  A net 21% still see the economy weakening, the worst since late 2013.  Small firms have reported falling sales since June 2012.  A big shift so far this year in the NFIB survey is in labor outlook, with only 10% of small businesses planning to add staff, down from 11% in January and 15% in December.  This is the lowest labor outlook since last June.

In Canada, the dark clouds that hung over the Canadian economy are beginning to clear.  Exports are rebounding, fear of a global recession is abating, and the price of oil has rebounded strongly.  The federal government is also expected to inject a potent dose of fiscal stimulus in its March 22 budget to help the sluggish economy.  As a result, the central bank decided to keep its overnight interest rate unchanged at 0.5%.  “The global economy is progressing largely as the bank anticipated in its January Monetary Policy Report,” the bank said in a statement accompanying the rate announcement.

In Europe, the European Central Bank (ECB) was determined not to disappoint markets and announced a multi-faceted stimulus plan.  On Thursday, the ECB cut the overnight lending rate to zero from 0.5%, cut the interest rate on bank reserves stored at the central bank further into negative territory (from -0.3% to -0.4%), and increased by one third its monthly asset purchases (from $66 billion to $88 billion).  The ECB expanded its asset purchases to include investment-grade corporate bonds, as well as sovereign government debt.  Finally, the ECB announced it would originate long-term loans to European banks that will let them borrow for four years at rates between 0% and -0.4% (in effect paying banks to borrow as an incentive to increase lending).  At first, the positive stimulus effect seemed to be short-lived as the euro strengthened and stocks dove to the downside, but investors had reconsidered by Friday and drove European markets much higher on Friday.  Germany’s DAX, for example, was down -2.2% on Thursday, but up +3.5% on Friday.

In Germany, the German banking association (BdB) said that the German economy will likely grow at a slightly slower pace this year, citing a slowdown in China and other emerging markets.  The BdB said it expects Europe’s largest economy to grow by 1.6% this year, down 0.1% from last year.  BdB chief Michael Kemmer stated “Globally, we are witnessing an unusual bundle of risks.”

In the United Kingdom, the British Chamber of Commerce predicted a lower rate of domestic growth in 2016 and 2017, up +2.2% and +2.3%, respectively.  The revisions are down slightly from forecasts it had made in December.  Adam Marshall, acting Director-General said the U.K.’s economy is being hurt by weaker global growth.

In Asia, Japan’s fourth-quarter GDP growth was revised higher on Tuesday to a still-negative -1.1% from the 1.4% annualized pace reported last month.  Japan’s economy has contracted two of the past 3 quarters.  Consumer sentiment plunged as consumer confidence fell to 40.1 from 42.5, well below the 42.2 forecast.  This was the steepest decline in Japanese consumer sentiment since October 2013. 

In China, a worse-than-expected monthly trade report on Tuesday was the latest sign of China’s struggling growth.  February exports plunged nearly -25% from a year ago, the biggest monthly drop in more than 6 years.  China’s trade surplus narrowed sharply as imports also posted a double-digit drop.

Finally, as the bull market enters its 7th year, a troubling case of Déjà Vu has emerged in the tech sector, which is flashing a warning last seen during the “dot com” bubble era.  According to Credit Suisse’s Eugene Klerk, the share of IPOs in the U.S. that are losing money in their ongoing operations is now greater than 70% and almost back to the peak last seen during the “dot com” years.  Klerk writes, with considerable understatement, “All else being equal, these companies represent greater earnings and cash flow risk than seasoned, more established companies.”  To which one might reply, “Well, duh!”

(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 to 9.8 from the prior week’s 8.5, while the average ranking of Offensive DIME sectors rose slightly to 10.8 from the prior week’s 11.  The Defensive SHUT sectors continued to lead the Offensive DIME sectors, but by a very small 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,

FBAIS™ Fact-Based Investment Allocation Strategies for the week ending 3/4/2016

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 25.28, up from the prior week’s 24.62, 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 46.13 up from the prior week’s 43.75.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 33, up from the prior week’s 27.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of 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 recorded a third consecutive week of strong gains.  All major indexes were up more than +2% and the LargeCap index is close to erasing its losses for the year to date.  The Dow Jones Industrial Average rose +366 points to end the week at 17,006.  The LargeCap S&P 500 gained +2.67% and closed just shy of the 2,000 level.  MidCaps and SmallCaps rallied even more strongly, up +4.4% and +4.3% respectively, as investors appeared to focus on stocks that had suffered the steepest declines in recent months – and traders who were “short” those stocks scrambled frantically to cover their downside bets (this is called a “short squeeze”).  The rally was broad-based as Transports rallied +3.3% and even “defensive” Utilities were up +2.26%.  The NASDAQ 100 index rose +2.2% for the week, while the broader NASDAQ Composite gained +2.76% to close at 4,717.  Many U.S. market indexes are now down just a couple of percent for the year.  The Dow Jones Industrial Average is down -2.4%, the S&P 500 is down -2.15%, and the S&P 400 midcap index is down just -0.34%.  But Tech stocks and SmallCaps have had a more difficult time as the NASDAQ is still down -5.8%, and the SmallCap Russell 2000 is still down -5.04%. 

In international markets, Canada’s TSX joined the rally in oil and added +3.24%.  In South America, Brazil’s Bovespa stock index surged +18% after police detained former president Luiz Inacio Lula da Silva as part of a corruption investigation that could ultimately trigger great political change in the country, according to analysts.  In Europe, the United Kingdom’s FTSE was up +1.7%, Germany’s DAX gained +3.27%, and France’s CAC 40 added +3.29%.  In Asia, Singapore rallied over +7%, Japan’s Nikkei rose +5.1%, and China’s Shanghai index gained +3.86%.  Thanks largely to Brazil, the Emerging Markets index took the “index with the biggest gain” trophy for the week, at +9.2%.

In commodities, the big news was in oil as it tacked on another +10%, up $3.49 to $36.33 per barrel of West Texas Intermediate crude oil.  Industrial metal copper rallied +6.7%, as did precious metals.  An ounce of silver rose +5.9% to $15.55 an ounce, and gold gained over +$37, ending the week at $1,260 an ounce, an upmove of +3.05%. 

The month of February, if you were to look at just the monthly price change data, must have been very dull in most markets.  In truth, it was anything but, as February saw a deep dive in the first half, and a very strong rally in the second half.  The fact that most indexes closed the month with relatively little change masked very large intra-month moves.  The Dow Industrials finished with just a +0.30% change for February, and the S&P just moved 0.41%.  The best U.S. index for February was the MidCap 400 index, which rose +1.25%, and the worst was the NASDAQ Composite at -1.21%.  Developed International sank -3.33% for February, but Canada’s TSX rose +0.30%.

In U.S. economic news, the Labor Department reported the U.S. economy added +242,000 jobs last month solidly beating expectations of +190,000.  The unemployment rate remained at 4.9%.  The strong jobs number, along with an upward revision to January’s gain to 172,000 eased concerns of many that the financial market plunge in the beginning of the year might have had a serious effect on the overall economy.  The labor force participation rate rose +0.2 point to 62.9% continuing its lift-off from multi-decade lows but still far below pre-recession levels.  One of the flies in the jobs ointment, however, was the continuing stagnation in manufacturing employment, while services provided the bulk of employment gains.

The private-employer survey from payroll processing firm ADP reached similar conclusions about the private economy.  Private employers added 213,800 jobs in February, up from 193,400 in January, reported ADP.  The services sector accounted for virtually all of the gains; employment in manufacturing declined.  The services sector added 208,500 jobs up +20% from January’s downwardly revised 174,400.  But manufacturing lost 8,900 jobs, up just +0.1% from a year earlier—the smallest year-over-year gain in more than 5 years.

In housing, pending home sales unexpectedly dropped -2.5% in January, according to the National Association of Realtors (NAR).  Economists had expected a half percent gain last month.  Lawrence Yun, chief economist for NAR stated that inclement weather likely impacted Northeast sales, but accelerating home prices and limited inventory appeared to be the main impediments to would-be buyers.  Pending sales were up +1.4% compared with this time last year. 

Manufacturing remained in contraction according to the Institute of Supply Management (ISM) manufacturing index, which came in at 49.5 (below 50 is contraction).  However, this was an improvement over last month’s reading of 48.2 and beat expectations by +1.5 points.  U.S. manufacturers have been hurt by a strong U.S. dollar and weak global demand.  On a positive note, while the headline number is still below the neutral 50 level, new orders and production both expanded at the fastest pace in 6 months.  

ISM’s Non-Manufacturing Index fell for the fourth straight month to a two-year low last month, signaling slower growth and a small probable decline in jobs.  The services-sector gauge for February declined -0.1 point to 53.4, beating expectations by 0.3 points, but the lowest reading since February of 2014.

In Europe, the European Central Bank meets on Thursday, March 10, and is expected to cut the deposit rate even further into negative territory.  Analysts are concerned that financial markets may be expecting more aggressive stimulus such as quantitative easing and may be disappointed. 

The Eurozone PMI for manufacturing was 51.2, down from 52.3 last month but still in expansion territory.  The service reading was 53.3, down -0.3 from the prior month.  Eurostat’s flash reading on Eurozone inflation for February was -0.2% annualized, down from +0.3% and largely due to falling energy prices.  The volume of retail trade was up +0.4% in January.  Eurozone unemployment was at 10.3% in January, the lowest in over 4 years, but more than twice that of the US.  Individually, Germany’s was the lowest at 4.3%, France was at 10.2%, Italy at 10.5%, and Spain was at 20.5%.

In Asia, Moody’s Investors Services cut China’s government credit ratings to negative from stable, citing rising government debts, declining foreign reserves and doubts about authorities having the “capacity to implement reforms”.  Perversely, China’s Shanghai stock market index greeted the downgrade with a +4.3% rally on Wednesday.

China’s manufacturing PMI was just 49.0 last month, the worst since January of 2009.  Services declined -0.8 point to 52.7.  On Monday, the Chinese government reported that a total of 1.8 million workers in China’s coal and steel sectors are expected to lose their jobs as part of China’s efforts to reduce industrial overcapacity.

In Japan, the February PMI for manufacturing was 50.1 down 2.2 points.  The services reading was 51.2, down -1.2 points.  In a milestone event, the Japanese government sold 10-year bonds with a negative yield of -0.024% for the first time ever. 

Finally, to say 2016 has been an interesting year in the financial markets would be an understatement.  The year began with the most substantial market rout in years, raising serious concerns that another Bear market plunge perhaps as serious as the financial crisis of 2008 may be upon us.  However, the last 3 weeks has seen a significant rally that has brought most of the major indexes back to just modestly lower for the year.

So, is this would-be Bear Market already over? 

Oh, if only it were that easy!

Morgan Stanley’s Andrew Sheet points out that “Bear market corrections (i.e., rallies) have typically lasted about 35 days for the S&P 500, with the markets moving up an average 14% from local trough before the sell-off resumes.”

As of this writing, the S&P 500 has rallied 15 market days from its low on February 11.  Stay tuned.

(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 to 8.5 from the prior week’s 7.8, while the average ranking of Offensive DIME sectors fell to 11 from the prior week’s 10.8.  The Defensive SHUT sectors continued to lead the Offensive DIME sectors, but by a smaller 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,