FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 5/27/2016

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 26.22, up from the prior week’s 25.64, 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 51.23, up from the prior week’s 47.86.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on May 12th.  The indicator ended the week at 28, up 3 from the prior week’s 25.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second 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 may have arrived.   The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is negative.  Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.

In the markets:

U.S. stocks rose for a second consecutive week and had their best week since March on the heels of better economic data and higher oil prices.  All major U.S. indexes were up, but SmallCaps and MidCaps outpaced their LargeCap counterparts.  For the week, the Dow Jones Industrial Average rose +372 points (+2.13%) to end the week at 17,873.  The S&P 500 LargeCap index gained +2.28%, the S&P 400 MidCap index added +2.89%, and the SmallCap Russell 2000 paced the pack with a strong +3.43% rise for the week.  The NASDAQ also had a strong week, up +3.44%, and at 4,933 is once again nearing the 5000 level.  Transports and Utilities were both bid higher, with the Dow Jones Transport Average rising +1.3% and the Dow Jones Utilities Average adding +0.95%. 

In international markets, Canada’s TSX rose for a 3rd straight week, adding +1.33%.  Likewise, all major European indexes showed decent gains.  The United Kingdom’s FTSE rose +1.86%.  On the mainland, France’s CAC 40 rallied +3.69%, Germany’s DAX gained +3.73%, and Italy’s Milan FTSE rose +2.1%.  Asian markets were mixed with Japan’s Nikkei up +0.59%, China’s Shanghai Stock Exchange down a slight -0.16%, and Hong Kong’s Hang Seng up over +3.6%. 

Commodities markets were mixed, with precious metals continuing to lose their luster.  Gold declined -$37.60 to $1215.30 an ounce, a loss of -3% and silver fell -1.8% to $16.25 an ounce.  However, the industrial metal copper rebounded from recent weakness up +2.65% and energy continued its rebound as a barrel of West Texas Intermediate crude oil closed at $49.56 up +2.23%.

In U.S. economic news, the number of Americans filing for first-time unemployment benefits fell more than expected last week as the labor market remains healthy and the economy appears to be regaining some momentum after a difficult first quarter.  The claims number declined -10,000 to a seasonally adjusted 268,000 last week, according to the Labor Department, below the expected 275,000.  Claims continue to remain below 300,000, a threshold traditionally associated with a strong labor market.  The 4-week average rose slightly to 278,500.

Perhaps the broadest and most reliable gauge of the state of the job market can be gleaned from taxes withheld from paychecks for federal income and employment taxes.  Analysis of daily Treasury statements funds by Investors Business Daily (IBD) revealed that the job market apparently grew +4.5% from a year ago.  It was the fastest pace in 6 months and supports the view that the economy is strengthening after 2 weak quarters.  The tax data, which doesn’t rely on statistical samples and seasonal adjustments, had previously been signaling weaker wage gains in contrast to the monthly employment reports which painted a rosier picture.  The improvement in tax-receipt growth since last month could indicate another strong employment report is coming and along with a further rise in wage growth may open the door to a June interest rate hike by the Fed.  On Monday, San Francisco Fed President John Williams stated that the U.S. is “basically at full employment or very near it.”

It was a very good week for U.S. Real Estate news.

Purchases of new homes in the U.S. surged last month to the highest level since the beginning of 2008.  Sales jumped +16.6% to an annualized pace of 619,000 and purchases for the first 3 months of the year were revised higher, according to the Commerce Department.  The sales rate exceeded even the most optimistic forecast in a Bloomberg survey.  In addition, the median sales price reached a new record of $321,100 up +9.7% from April 2015, reflecting a pickup in signed contacts on more expensive properties (although, oddly, sales of mega-mansions in the multi-million dollar category are reportedly stagnating).

The number of homes sold and not yet under construction also climbed to its highest level since May of 2007.  The gain in demand was led by the South where sales climbed +15.8% to a 352,000 annualized rate—the strongest in the South since December of 2007.  The supply of homes on the market fell to 4.7 months from 5.5 months in March. 

The National Association of Realtors reported that the Pending Home Sales Index surged +5.1% last month to the highest level since February 2006.  Economists had only expected a +0.8% rise.  The index suggests that actual existing-home sale closings should have strong readings in May and June as these pending contracts are finalized.

In U.S. manufacturing, durable goods orders spiked +3.4% last month, beating forecasts.  But non-defense capital goods orders excluding aircraft (a closely watched proxy for business investment plans) fell -0.8% following a 0.1% drop the previous month.  These “core capital goods orders” have now declined for 3 consecutive months.  Economists had forecasted orders rising +0.5% and core capital goods orders increasing +0.4%.  Manufacturing has continued to struggle with strength in the U.S. dollar and sluggish overseas demand.

The Commerce Department reported that the U.S. economy expanded at a slightly better pace in Q1 than originally reported.  GDP in the first quarter rose +0.8%, up from the +0.5% initially reported, but still missing the +0.9% expected.  Q1 consumer spending rose at a +1.9% pace, slightly missing expectations, while business investment fell sharply. 

On Friday, Federal Reserve Chair Janet Yellen said that ongoing improvement in the U.S. economy would warrant another rate increase “in the coming months,” stopping short of giving a definite timeline of when the central bank might act.  “It’s appropriate—and I’ve said this in the past—for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said during remarks at Harvard University.  “Probably in the coming months such a move would be appropriate.”  The next Federal Open Market Committee meeting will be held June 14-15, when the Fed will deliberate over a second interest-rate increase following 7 years of near-zero borrowing costs following the Great Recession.  Yellen’s comments follow speeches by several regional Fed Presidents given in recent weeks hinting at the likelihood of a rate hike sooner rather than later.

In Canada, the Bank of Canada said that wildfires will hurt the economy as it held its key interest rate at 0.5%.  Wildfires that razed parts of Fort McMurray and forced the shutdown of several oil sands operations will exact a toll on the economy, but asserted that it would be temporary.  The central bank said its preliminary assessment is that the fires will cut 1.25% points off real GDP growth in the 2nd quarter.

In the United Kingdom, with a month to go before Britain votes on leaving the European Union (yes, the infamous “Brexit”), the U.K. Treasury issued a report that warned that the British economy could dive into a year-long recession should Britain leave the E.U.  Analysts at the U.K. Treasury claim that the economy could slide more than -3.5% in the two years following a British exit from the E.U.

In the Eurozone, Markit released its flash estimates on manufacturing and services for May, showing manufacturing downticking -0.2 point to 51.5 from April (over 50 still signaling growth) and services reading 53.1.  Germany’s flash manufacturing reading was 52.4 and services was 55.2, both higher than April’s readings, while France’s readings were 51.8 for services and 48.3 for manufacturing, both also exceeding April’s results.

In France, tear gas filled the air in Paris as authorities struggled with nationwide strikes and a groundswell of public anger in response to a labor bill that gives employers more flexibility and weakens the power of unions.  The new labor law, tagged the “El Khomri Law” referring to French Labor Minister Myriam El Khomri, relaxes stifling labor rules regarding the 35-hour work week and lowers protections for workers from layoffs that employers maintain make them uncompetitive on the world market.

China’s central bank weakened its currency fixing to the lowest since March 2011 as the dollar strengthened.  The reference rate was lowered -0.3% to 6.5693 per dollar.  The dollar has been strengthening as traders place bets that interest rates in the U.S. will rise.  A resurgent dollar is interfering with the strategy that the People’s Bank of China has been pursuing over the last few months of maintaining a steady rate against the dollar along with depreciation against other major currencies. 

In Japan, leaders of seven leading industrialized countries, the so-called G-7, converged on Ise-Shima in Japan for a two-day summit (May 26th and 27th) to focus on the global economy and international security.  Other topics of discussion included terrorism, cybersecurity and maritime security, including issues with China’s assertiveness in the East and South China Seas where territorial disputes have arisen between China and Japan, Viet Nam and the Philippines, among others. 

Finally, it has historically been true that gold has benefited from a weak dollar.  Recently, the flip side of that coin has come into play: gold has been punished by a stronger dollar.  The inverse relationship has historically been less tight than now, leading some to fear that a continuation of the dollar’s rise (driven in large part by anticipation of Fed interest rate hikes) and a continuation of this strong inverse relationship would severely pummel gold prices.  This chart shows how tight the inverse correlation has been over the last 9 months.

(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 16.5, down from the prior week’s 12.8, while the average ranking of Offensive DIME sectors fell to 9.8 from the prior week’s 8.3.  The Offensive DIME sectors increased their lead over the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional.

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 5/20/2016

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 25.64, essentially unchanged from the prior week’s 25.69, 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 47.86, little changed from the prior week’s 47.39.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on May 12th.  The indicator ended the week at 25, down 3 from the prior week’s 28.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second 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 may have arrived.   The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is negative.  Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.

In the markets:

U.S. stocks were modestly higher for the week.  The tech-heavy NASDAQ composite index outperformed its peers for the second week, and the SmallCap and MidCap indices outperformed LargeCaps.  For the week, the Dow Jones Industrial Average fell 34 points to 17,500, but the NASDAQ rose 51 points to 4,769, up 1.1% to lead the gainers.  The LargeCap S&P 500 gained +0.28%, the S&P 400 MidCap index gained +0.66% and the SmallCap Russell 2000 added +0.89%.  The Dow Jones Transports gained +2.19%, while the Dow Jones Utilities index declined -2.29%.

In commodities, precious metals experienced a 3rd consecutive week of losses as Gold declined -$21.40 to $1,252.90 an ounce, down -1.68% and Silver fell -3.39% to $16.55 an ounce.  The industrial metal copper was also weak, down -1.03%.  Energy, though, continued to rally as a barrel of West Texas Intermediate crude oil added another +$1.45 to end the week at $48.48, up +3.08%.

In international markets, Canada’s TSX added +1.24% and the United Kingdom’s FTSE rose +0.29%.  Mainland Europe was mixed: Germany’s DAX fell -0.37%, but France’s CAC 40 gained +0.78% and Italy’s Milan FTSE rose +0.47%.  In Asia, China’s Shanghai Stock Exchange was essentially flat at -0.06%, but Japan’s Nikkei rallied +1.97%, and Hong Kong’s Hang Seng added +0.67%.  Emerging Markets as a group was down -0.2% (EEM), and Developed Markets as a group was up +0.60% (EFA).

In U.S. economic news, new filings for unemployment benefits fell by 16,000 last week to 278,000 exceeding expectations by 3,000.  Claims had hit a 1-year high the previous week after a surge in New York filings.  The 4 week average is up to 275,750 from 268,250.

The National Association of Home Builders’ Housing Market Index was unchanged last month at 58.  Economists had expected a 1 point rise.  Readings over 50 signal optimism among home builders.  The Commerce Department reported that housing starts rose +6.6% last month to 1.172 million units, but were down -1.7% versus a year earlier.  Economists had expected housing starts to rise 1.135 million units.  Building permits, used as gauge of future activity, rose +2.6% to 1.116 million but missed expectations for 1.130 million.  Sales of existing homes did better than permits and starts, rising last month +1.7% to a 5.45 million annualized pace according to the National Association of Realtors, beating forecasts for 5.4 million.  The median home price was $232,500, up +5% over last month and +6.3% vs. a year earlier.

The Labor Department reported that consumer prices rose +0.4% in April, the biggest gain in 3 years.  Gasoline costs spiked nearly 10% as energy costs continued to climb.  Core CPI (ex- food and energy) rose +0.2%, which was in line with expectations.  Year over year, CPI climbed +1.1%, while core CPI rose +2.1%.  The Federal Reserve has set its inflation target at +2%, but its preferred inflation gauge, the core PCE deflator, was up only +1.6% its latest reading.

In U.S. manufacturing news, the New York Fed’s Empire State Manufacturing Index plunged -18 points to -9.02 in May from April’s 9.56, widely missing analyst expectations of 7.  New orders, shipments, and prices received all turned negative as well.  In the city of brotherly love, the Philadelphia Fed manufacturing index was -1.8 this month vs. -1.6 in April, missing expectations of a rise to 3.  The new orders gauge was -1.9 after a flat April. 

Industrial production jumped +0.7% last month, according to the Federal Reserve.  It was the best gain in more than a year and beating expectations of a +0.2% rise.  On a negative note, March’s decline was revised downward to a steeper loss of -0.9%.

The Conference Board’s Index of Leading Economic Indicators (LEI) rose +0.6% to 123.9 in April, beating estimates for a +0.5% gain.  It was the first rise since November.  Comprised of 10 components, including the S&P 500 price change, manufacturers’ new orders, and housing permits, the index is meant to signal swings in the business cycle and smooth out some of the volatility of individual components.  Ataman Ozyildirim, director of business cycles and growth research at The Conference Board stated, “The U.S. LEI picked up sharply in April, with all components except consumer expectations contributing to the rebound from an essentially flat first quarter.”

On Wednesday, the minutes from the Fed’s April policy committee meeting were released and they surprised many traders.  In March, Fed Chair Janet Yellen gave a speech in which she stated that “caution is especially warranted” when it comes to raising rates with global risks so high and policymakers so low on conventional ammunition to counteract a downturn.  But the minutes revealed a much more hawkish consensus within the Fed.  Most participants agreed that an interest-rate increase would be appropriate in June if the economy continued to improve.  From the minutes: “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the committee’s 2% objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June.”  On Thursday, New York Fed President William Dudley reinforced that notion, saying at a press briefing that “a tightening in the summer, the June, July timeframe is a reasonable expectation.”

In Canada, slowing car sales and inflation stuck below the central bank’s target points to gathering softness in Canada’s economy.  Retail sales fell -1% in March, worse than the +0.6% forecasted According to Statistics Canada.  Receipts at new car dealers fell -3%, as well as sales of furniture, building materials, and food and beverages.  Leslie Preston, an economist at Toronto Dominion Bank stated “the retail data just shows, there isn’t a lot of momentum in the Canadian economy as we headed into the second quarter, and we have the uncertainty of the shutdowns related to the Alberta wildfires.”  Canada’s dollar touched a 6-week low as Friday’s data contributed to the list of economic setbacks.

European equities rose as strength in commodities, bank, and energy stocks offset concerns about an earlier than expected US Federal Reserve interest-rate hike.  Preliminary estimates from the European Union’s statistics agency reported that consumer prices in April were down -0.2% from the same time last year.  April was the second month this year that the Eurozone was in deflation.

In the United Kingdom, a leading credit ratings agency warned that a British exit (“Brexit”) from the European Union could eventually lead it to downgrade the ratings of multiple EU countries as well as Britain.  In a report, Fitch Ratings said a vote in favor of a “Brexit” from the European Union would weigh on the economies of multiple EU countries and increase political risks in Europe.

The International Monetary Fund (IMF) is demanding that Europe release Greece from all payments on its bailout loans until 2040.  The new IMF proposal, shared late last week, goes far beyond what Greece’s Eurozone creditors, led by Germany, have said they are willing to do to help the country regain its financial health.  Germany is returning the pressure on the IMF to dilute its demands and rejoin the Greek bailout program as a lender instead of an opinionated spectator. 

In Japan, first quarter GDP rose +0.4% on a quarter-over-quarter basis and +1.7% year-over-year, both measures beating expectations.  The Japanese economy again avoided official recession as gains in government and consumer spending outweighed a decline in business investment.  But, according to a poll of 10 private organizations conducted by the Nikkei, economic growth is forecast to contract -0.4% in the April through June quarter.

A series of Chinese economic reports showed that the country’s economy slowed again after a temporary pickup in March.  Gauges of industrial production and retail sales as well as fixed asset investment all missed analyst expectations.  Some interpretations of the reports were positive, however, insisting that China’s growth is moderating as opposed to coming to a sudden halt and are less negative than the headlines would suggest.

Finally, a recent paper by Rob Arnott of Research Affiliates puts the spotlight on the “hollowing out” of the U.S. middle class.  Entitled “Where’s the Beef?  Lies, Damned Lies, and Statistics”, the paper notes that American households, which have been “pinched’ by rising prices at a higher than headline inflation, have generally not benefited from the unrelenting stimulus of quantitative easing and zero interest rates and instead have experienced a decade of zero growth in income and spending power.  For example, the price of beef has soared over the past 5 years—up 80% cumulatively at the end of last year, but the official U.S. Consumer Price Index (CPI) is up only 7%, or 1.4% a year.  Despite what the official numbers may say, surveys suggest that the average American’s daily experience is one of going backward. 

For average Americans, the four biggest expenses are rent, food, energy, and medical care, in approximately that order.  These four expenses have been increasing at a faster rate than headline CPI, which simply ignores two of them and minimizes the others.  According to the BLS, these four components comprise about 60% of the “aggregate population’s consumption basket”, but for struggling Americans, it’s closer to 80%, and for the working poor can reach as much as 90% of total spending. 

The middle class is being squeezed by rising costs and almost no gains in real income—and consequently the middle class is disappearing.  As the following graph depicts, 53% of American considered themselves middle class in 2008.  But just six years later, that number had plummeted to 44%.  At this rate of decline there would be no middle class at all in 30 years!  The largest move was among those self-identifying as “Lower Class”, rising from 2008’s 25% to today’s 40%, a rise of an astounding 15 percentage points.  Even the self-identified “Upper Class” reported a drop, from 21% to 15% of the populace.

(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 12.8, down slightly from the prior week’s 12.5, while the average ranking of Offensive DIME sectors rose to 8.3 from the prior week’s 10.3.  The Offensive DIME sectors remain in the lead over the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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 5/13/2016

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 25.69, down slightly from the prior week’s 25.82, 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 47.39, down from the prior week’s 49.40.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on May 12th.  The indicator ended the week at 28, down 5 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 positive indication on the first day of April for the prospects for the second 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 may have arrived.   The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is negative.  Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.

In the markets:

Major U.S. benchmarks fell a third consecutive week.  The Dow Jones Industrial Average fell -205 points to close at 17,535, down -1.2%.  The NASDAQ declined -0.4% to 4,717, and the LargeCap S&P 500 fell -0.5%.  Smaller indexes were also weak: the MidCap S&P 400 fell -0.83% and the SmallCap Russell 2000 pulled back -1.1%.  The defensive Utilities sector fared the best, up +0.92%, while Transports fared the worst, down -2.99%.

In Europe, major markets all rose.  The United Kingdom’s FTSE was up +0.21%, Germany’s DAX added +0.84%, and France’s CAC 40 gained +0.44%.  However, Asian markets were mixed.  Japan’s Nikkei rose +1.9%, but China’s Shanghai Stock exchange fell -2.96% and Hong Kong’s Hang Seng index was off -1.94%.

In commodities, oil continued its strong rebound rising an additional +5.54% to $47.03 a barrel for West Texas Intermediate crude oil.  Precious metals lost their luster as both Gold and Silver lost ground.  Gold ended down $15.40 to $1,274.30 an ounce (-1.19%), and Silver gave up -2.14% to $17.13 an ounce.  The industrial metal copper also lost ground, down -3.44%.

In U.S. economic news, jobless claims unexpectedly jumped to a 1-year high as applications for unemployment benefits increased last week to the highest level since February 2015, a sign that progress in the job market is beginning to taper.  Initial jobless claims rose 20,000 to 294,000 last week, according to the Labor Department.  The median forecast called for a decline to 270,000.  The number suggests a more modest recovery lies ahead as companies reduce headcount after a first-quarter slowdown in demand.  However, Jacob Oubina, senior U.S. economist at RBC Capital Markets, noted that “New York accounted for most of the increase”, and was related to the Verizon strike concentrated in that state.  “It’s not a clean read.  The labor market is looking pretty healthy and that’s going to continue”, he asserted.  The number of people continuing to receive jobless benefits rose by 37,000 in the week ended April 30 to 2.16 million, the biggest increase since the end of November. 

Small businesses seem to have plenty of openings, but can’t fill them.  The National Federation of Independent Business reported that small-business owners were more upbeat last month, with job openings near a business cycle high, but finding qualified applicants continues to be a major problem.  NFIB’s Small Business Optimism Index rose 1 point last month to 93.6, ending a 3-month downtrend.  11% of firms plant to add staff, up +2% from March.  A net 29% of firms have job openings, but actual hiring has been weak.  A whopping 46% of small businesses said they had few or no qualified applications for open positions, and 12% reported that this shortage of qualified workers is their number one problem.

Retail sales posted their biggest gain in a year, up +1.3% last month according to the Commerce Department.  The report eased some fears about consumer spending following a string of weak earnings reports from Apple, Macy’s, Kohl’s, and Nordstrom.  Economists had expected a +0.9% gain after falling -0.3% in March.  Even more encouraging, retail sales (ex-autos and gas sale)s were up +0.6% and a solid +4.4% year over year.  The Atlanta Fed’s GDPNow indicator ticked up to a 2.8% annualized GDP reading after taking the latest retail sales numbers into account.  This year’s GDP is on track for another roughly 2% growth rate, anemic at best.

In Europe, Eurostat (the statistical arm of the European Union) reported a +0.5% increase in Eurozone GDP over last quarter and an annualized growth rate of 2.1%.  However, most economists believe that growth will be more realistically at the 1.5% level.

The Bank of England cut its growth outlook for the UK for 2016 through 2018 as it simultaneously announced no changes to its policies.  Members voted unanimously to keep the main rate at 0.5% and keep the bank’s stock of purchased assets at $543.4 billion. 

In Germany, the economic growth rate more than doubled in the first quarter of 2016, driven by a boost in domestic consumption.  On Friday, Germany’s Federal Statistical Office reported that the economy expanded by +0.7% in the first quarter, up from +0.3% the previous quarter. 

French first-quarter GDP rose +0.5% (+1.3% year over year).  Industrial production in March was down -0.8%.  Last week, the French government bypassed its own parliament and forced through a jobs bill designed to bring some flexibility to France’s notoriously inflexible labor market.  Lacking parliamentary backing to pass the legislation, Prime Minister Manuel Valls was authorized by President Francois Hollande to force through the reform without a vote. 

In Asia, China’s exports fell -1.8% last month after rising +11.5% in March.  Imports were down -10.9% following a 7.6% decline the prior month.  Even worse, China’s investment, factory output, and retail sales all grew less than expected in April and added doubt about whether the world’s second-largest economy is stabilizing.  Growth in factory output cooled to +6% in April according to China’s National Bureau of Statistics, missing analyst expectations of a +6.5% rise.  Zhou Hao, economist at Commerzbank in Singapore, remarked “It appears that all the engines suddenly lost momentum, and growth outlook has turned soft as well.”

In Japan, Bank of Japan Governor Haruhiko Kuroda said that the central bank will act “decisively” to achieve its 2 percent inflation target, stressing that is still has “ample” policy options available if it were to expand stimulus again.  Kuroda defended the BOJ’s decision last month to hold off on further easing, saying that more time was needed for the effects of previous easing measures to be detected in the economy. 

Finally, we take a look at the continuing devastation occurring in the energy industry following oil’s 13-year low earlier this year.  On Wednesday, Houston-based Linn Energy filed for bankruptcy, becoming the biggest U.S. casualty of the collapse in oil prices.  Linn sought to restructure debts of $9.2 billion to “provide a platform for future growth”, according to the CEO.  At last check, some 69 North American oil and gas producers have filed since the beginning of 2015 according to a recent report from law firm Haynes and Boone.  Last month was the worst so far, with 11 new Chapter 11 bankruptcy filings.  The website Visual Capitalist created the following “infographic” to demonstrate the worsening carnage in the oil sector – and how truly big players are now joining the crowd on the courthouse steps.

As the infographic depicts, earlier bankruptcies were confined to the smaller players in the space with total debt load below $100 million.  However, last month the situation deteriorated to the point where 4 firms with greater than a billion dollars in debt sought bankruptcy protection.  And there are more to go, according to consulting and accounting firm Deloitte, which concluded that about 175 companies in total are at risk of insolvency.

(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 12.5, up from the prior week’s 13.5, while the average ranking of Offensive DIME sectors fell to 10.3 from the prior week’s 8.8.  The Offensive DIME sectors remain in the lead over the Defensive SHUT sectors, but by a much smaller margin.  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 5/6/2016

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 25.82, down slightly from the prior week’s 25.92, 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 49.40, down from the prior week’s 51.30.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 34, down 1 from the prior week’s 35.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second 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 may have arrived.   The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is positive.  Therefore, with two of the three indicators positive, the U.S. equity markets are rated as Mostly Positive.

In the markets:

Stocks recorded their 2nd week of losses, although a rally on Friday limited the declines.  The tech-heavy NASDAQ trailed the large-cap indexes and the small cap Russell 2000 was also relatively weak.  For the week, the Dow Jones Industrial Average gave up just 33 points (-0.19%), closing at 17740.  The NASDAQ Composite declined 0.82% to end the week at 4,736.  LargeCaps showed relative strength over their smaller brethren as the S&P 500 large cap index declined -0.4%, while the S&P 400 MidCap index fell -0.61%, and the SmallCap Russell 2000 tumbled 1.43%.  Utilities, traditionally a “defensive” sector, rose for the week as the Dow Jones Utilities Average gained +0.74%, and Transports fell -1.69% mirroring the weakness in the energy sector.

In international markets, Canada’s TSX fell -1.79% as a stronger Canadian dollar weighed on the market.  Markets were down across the board in Europe as the United Kingdom’s FTSE fell -1.86%, Germany’s DAX declined -1.68%, and France’s CAC 40 dropped -2.88%.  In Asia, China was the leader by limiting its fall to only -0.85% on the Shanghai Composite Index while Japan’s Nikkei fell -3.36% and Hong Kong’s Hang Seng plunged -4.54%.

In commodities, the industrial metal copper plunged -5.7%, reversing the gains of the last two weeks.  Precious metals took a break from their recent rallies as Gold fell -$5.20 to $1,289.70 an ounce and Silver fell -2.15% to $17.50 an ounce.  Oil also retreated -3.1% or -$1.43 to $44.56 for a barrel of West Texas Intermediate crude oil.

In U.S. economic news, the U.S. economy added a weaker-than-expected 160,000 jobs in April as the unemployment rate held steady at 5% according to the Labor Department.  It was the smallest gain since last September.  However, a positive detail in the report is that hiring in high-paying sector appears to have broadened out, helping to raise average hourly earnings by +0.3% on the month and +2.5% from a year earlier.  In a separate report from payroll processor ADP, private sector employers added 156,000 jobs last month, down from 200,000 in March – the smallest ADP gain in 2 years.  Both the Labor Department’s and ADP’s reports missed analyst expectations widely.

After the weakest stretch of economic growth in 3 years, an increase in income and employment tax receipts to the fastest rate in 6 months is a positive sign.  Over the past month, federal income and employment taxes withheld from paychecks rose +4.5% from a year ago, according to the Treasury Department.  This is the best year-over-year growth in tax receipts since early November, and more than double the rates from February and March.

In U.S. manufacturing, ISM’s manufacturing index declined a point to 50.8 last month, weakening but still in the expansion (>50) area.  Economists had predicted a lesser decline to 51.5 amid less-than-stellar reports on regional manufacturing activity last month.  The number largely reflected excess inventories which may weigh on future production.  On a positive note for manufacturing, the U.S. dollar has continued to lose ground versus other currencies.  That will make U.S. exports cheaper in foreign markets.  New orders remained the strongest point of the data at 55.8, a decline of 2.5 points from March.

Construction spending rose +0.3% in March according to the Commerce Department.  Private construction rose +1.1% from February and +8.5% from a year ago.  New single-family home construction came in flat, but multi-family construction jumped +5.6%, up over 34% from this time last year.

In Canada, the Canadian dollar’s relative strength over other developed nations’ currencies appears to have come to an end after the Loonie suffered its steepest 2-day slide in 15 months.  The country’s trade deficit widened to a record in March, sparking concern over the economy’s rebound.  Weakness in the early part of the week pared the currency’s gain to +7.6% this year, dropping it to the 3rd best performer among G10 countries after the Japanese yen and Norwegian krone.

The Eurozone’s April Purchasing Managers’ Index (PMI) reading on manufacturing came in at 51.7, up +0.1 point from March.  The services sector was unchanged at 53.1, according to Markit.  For the major economies, Germany was at 51.8 on manufacturing, but services slumped to an 11-month low of 53.6.  France was at a new 12-month low of 48, and at 50.2 in services.  Retail sales for March fell -0.5% over February, up +2.1% year-over-year. 

In the United Kingdom, there were fears of stalling economic growth as Britain’s vast services sector slowed down.  Analysts say the services sector was hit by the slump in global trade and the nervousness ahead of the June referendum on whether to stay in or leave the European Union.  A carefully watched survey of the UK’s largest sector businesses showed activity slumped in April to its slowest rate in over three years.

In Germany, President of the European Central Bank Mario Draghi fired back at German critics of the ECB’s easy-money policies.  ECB officials stated that Germany itself is partly to blame for the ultralow interest rates that are harming savers and pensioners.  In a speech last week Draghi stated that low interest rates were a symptom of an underlying economic problem—the compression of investment returns globally due to an excess of savings.  Mr. Draghi said, “Our largest economy, Germany, has had a surplus above 5% of GDP for almost a decade.”

In China, recent research suggests the economic future of China may not be as bright as hoped because of the nation’s aging population and its low fertility rates.  HSBC global economist James Pomeroy notes that China’s older citizens will stall economic growth and add strain to government spending. The country’s median age is projected to be over 40 in eight years and that it will be another 10+ years before China becomes a rich nation again, Pomeroy writes.

Japanese Prime Minister Shinzo Abe stated he was ready to respond to excessive currency moves if needed, adding that he may raise the issue of foreign exchange volatility at a meeting of G7 leaders in Japan later this month.  With the yen strengthening about 12% this year versus the dollar, Abe told reporters in London that “the exchange rate must be stabilized” and that Japan would “carefully watch these movements and as necessary we would need to respond.”  Japanese exporters suffer the most from a rising currency, a bad situation for an export-oriented society.

Finally, late 2011 was the dawn of the “Robo-Advisor” age.  Robo-Advisors were going to quickly take over from flesh-and-blood human advisors, especially for millennial clients who are supposedly more comfortable with a smartphone app than with a face-to-face advisor relationship.  Wealthfront and Betterment were the premier players, both heavily funded by venture-capital investments. 

But a funny thing happened on the way to that destination: the Robo-Advisors have begun to falter, fresh venture capital money has become scarce, and their growth rates have far undershot their grand plans.

New similar offerings from Schwab and Vanguard have put further pressures on the Robo-Advisors, to the point where the total lifetime revenue potential of new clients is less than the estimated cost of new-client acquisition – an obviously unsustainable situation.

Early on, the growth prospects looked good.  After about 2 years both Wealthfront and Betterment had over $500 million in assets under management and within 5 years of inception each had exceeded $2 billion.  But the latest data suggests that Robo-Advisor growth rates are falling rapidly, to just 1/3rd of their levels of only a year ago, as the chart below illustrates.  No doubt Robo-Advisors are here to stay, but their predicted quick dominance over human advisors seems to have been wishful thinking.

(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 13.5, up from the prior week’s 17.8, while the average ranking of Offensive DIME sectors rose slightly to 8.8 from the prior week’s 9.0.  The Offensive DIME sectors remain in the lead over the Defensive SHUT sectors, but by a smaller margin.  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,