FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 6/24/2016

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 25.35, down from the prior week’s 25.88, 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 50.56, down from the prior week’s 52.03.

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 from the prior week’s 29.  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:

The event that was never supposed to happen, happened.  In a surprise upset, the people of the United Kingdom voted in favor of leaving the European Union.  This triggered an avalanche of selling across global markets, all of which had rallied in anticipation of the “sure thing” win for the “Remain” side.  On Friday the Dow plunged -610 points, erasing substantial gains from earlier in the week and a lot more, closing at 17,400, down -1.55%.  The tech heavy NASDAQ composite fell -92 points, ending the week at 4,707, down -1.9%.  The LargeCap S&P 500 dropped 1.63%.  MidCaps and SmallCaps also lost ground, with the S&P 400 MidCap index giving up -1.5%, and the Russell 2000 small cap index also lost -1.5%.  In a flight to safety, the defensive Utilities sector managed to avoid much of the carnage, down only -0.13%.  The week’s declines brought the S&P 500, the Dow Jones Industrials, and the small cap Russell 2000 index all back into negative territory for the year to date (where the NASDAQ already was).

In international markets, Canada’s TSX fared relatively well with only a slight decline of -0.07%.  In Europe, somewhat surprisingly the United Kingdom’s FTSE actually ended up at +1.95% (helped considerably by the plunge in the British Pound).  However, on Europe’s mainland, Germany’s DAX ended down -0.77%, France’s CAC 40 gave up -2.08%, and Italy’s Milan FTSE plunged over -7%.  In Asia, markets were mixed with China’s Shanghai Stock Exchange losing -1.07% and Japan’s Nikkei plunging over -4.15%.  However, Hong Kong’s Hang Seng Index rose +0.44%.

In commodities, precious metals were strongly bid up in the wake of the Brexit vote, with Gold rising $17.50 to $1,319.10 an ounce, up +1.34% and silver rising $0.30 to $17.82 an ounce, up +1.71%.  The industrial metal copper saw its second week of buying, up +3.14%.  Crude oil continues to consolidate after its strong gains earlier in the year.  West Texas Intermediate crude oil fell -$1.29 to $47.57 a barrel, down -2.64%.

In U.S. economic news, the number of Americans filing for unemployment benefits fell to a near-43 year low as weekly jobless claims fell 18,000 to 259,000.  Economists polled by Reuters had forecast initial claims falling only to 270,000.  Claims have now been below 300,000, a commonly accepted threshold of a strong job market, for 68 straight weeks– the longest streak since 1973.  Continuing claims, a reading on the number of people receiving ongoing unemployment assistance, also fell by 20,000 to 2.14 million last week.

In housing, U.S. existing-home sales rose at the fastest pace since 2007.  The National Association of Realtors reported that sales were up +1.8% last month to a seasonally-adjusted annual rate of 5.53 million.  In addition, prices climbed to a new all-time high.  The national median sales price for a previously owned home rose +4.7% from a year earlier to $239,700.  Existing home sales make up roughly 90% of the housing market.  Gregory Daco, head of US macroeconomics at Oxford Economics, stated that “housing demand is likely to remain solid in the coming months, underpinned by gradually strengthening wage growth and low mortgage rates.”

In contrast to existing-home sales, however, new-home sales declined -6% to an annualized 551,000 in May, according to the Commerce Department.  The pullback wasn’t completely unexpected due to the outsized jump in new-home sales in April.  While new-home sales are volatile and subject to heavy revision analysts point out that the overall trend remains up.  The median price of a new home was $290,400, up 1% from a year ago.  Throughout this tepid economic recovery homebuilders have been reluctant to resume the blistering pace of home-building that occurred prior to the housing bust.   

In manufacturing, the Chicago Fed’s national economic index dropped sharply as factory output slowed.  The index fell to -0.51 last month from a positive 0.05 in April.  Most economists had expected an improved reading.  The Chicago Fed index is a weighted average of 85 different economic indicators.  All four broad categories of indicators decreased from April as weakness was broad-based.  The index’s three month moving average, used by analysts to offer a clearer picture of the trend in economic activity, fell to -0.36, the lowest since August 2012. 

In contrast to the Chicago Fed’s national report, the Kansas City Fed’s Regional Manufacturing Index rose +7 points to a positive 2 for June– the first positive reading in 18 months and all components were at their strongest levels for 2016.  Specifically, the report noted a sharp improvement in the production index to 12 from -11 the previous month, with the components for shipments, new orders, and order backlogs all rising strongly. 

American businesses were pulling back from purchasing new equipment as new orders for durable goods—airplanes, industrial machinery, and other products that are designed to last at least 3 years – fell a seasonally-adjusted 2.2% last month, according to the Commerce Department.  That was a sharper decline than the 0.4% economists had forecast.  While the drop was led by a -34% plunge in military-aircraft orders, orders were down across the board.  Ex-transportation, orders fell -0.3%, and ex-defense spending, orders fell -0.9%.  Barclay’s economist Jesse Hurwitz wrote in a note to clients that the report showed “broad-based and persistent softness across the U.S. manufacturing sector.”  New orders for non-defense capital goods (a proxy for future business investment), also fell -0.7%.

In Europe, the Brexit vote dominated all market and economic news both before and (especially) after the vote became history.  All markets were higher for the week before the vote, and all (save for the UK) were lower for the week after the vote.

The huge drop in the value of the British Pound was the single biggest move, hitting the lowest level versus the U.S. dollar since 1985. 

The Eurozone manufacturing sector bounced in June.  Markit’s Flash Manufacturing Purchasing Managers Index (PMI) rose to 52.6 in June, up +1.1 points from May and well above the expectation of 51.3.  However, while manufacturing improved, the composite (manufacturing +services) PMI fell to a 17-month low of 52.8, down -0.3.

The German stock index, the DAX, fell -1000 points after the Brexit vote, the biggest drop since the financial crisis in 2008, and finished the day down -700.  Key business groups in Germany have said that the uncertainty will hit the German economy particularly hard.  The president of the Federation of German Wholesale, Foreign Trade and Services, Anton Barber said “Brexit has happened in a time of uncertainty.  That is poison for the economy.”  German industry is particularly concerned about any effects on trade with the UK, which is its third-biggest export market.

In Japan, representatives of the Japanese government and the Bank of Japan are set to hold meetings over the weekend to analyze the economic impact of Britain’s exit from the European Union.  The focus of the meeting will be its impact on the global economy, negative effects on the yen, and the interests of the many Japanese companies on British territory.  Japanese finance minister Taro Aso said his government will take “firm action on the yen, if needed”, however he stopped short of promising currency intervention or whether Japan had already intervened in the market.

In China, analysts are concerned that China may feel the effects of the “Brexit” vote particularly strongly.  Over the years, Britain has played a significant role in promoting Chinese relations with the European Union, which has become China’s largest trading partner.  Britain’s exit may lead to difficult trade and investment agreements between China and the bloc.  He Weiwen, co-director of the China-US-EU Study Centre under China’s Ministry of Commerce stated “The European Union [without the presence of Britain] is likely to adopt a more protectionist approach when dealing with China.  [The cooperation between China and the EU] may become more difficult.”

Finally, attempts at forecasting future market returns over coming 10-year periods have mostly focused on measurements of market valuation. The well-known Cyclically-Adjusted Price-to-Earnings ratio (CAPE) is a prominent example.  Another is Warren Buffett’s favorite: US stock market capitalization divided by US GDP.  Both have good records of predicting future returns when at high or low extremes – and both are predicting poor returns over the next 10 years.

But one with an even better statistical correlation to future returns (an “r-squared” of 0.91, for you geeks), does not use market valuation at all!  Rather, it is based on the percentage of all household financial assets that are invested in the stock market.  The higher the percentage, the lower future returns.  Currently, households are at the high end of the historical range, at 52% vs the long-term median of 44%.  This level portends future 10-year annualized returns of slightly less than 4%, joining the late 60’s, 2000 and 2007 as years with similar readings.

(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 12,5, down from the prior week’s 10.8, while the average ranking of Offensive DIME sectors rose to 10.8 from the prior week’s 11.8.  The Offensive DIME sectors now lead the Defensive DIME sectors by a small 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 6/17/2016

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 25.88, little changed from the prior week’s 26.19, 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 52.03, down from the prior week’s 54.5.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on May 12th.  The indicator ended the week at 29, down from the prior week’s 31.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a 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:

The major U.S. benchmarks all recorded losses for the week, with the smaller cap indexes bearing the brunt of the selling.  The Dow Jones Industrial Average fell 190 points to close at 17,675, down -1.06%.  The tech heavy NASDAQ composite gave up 94 points to close at 4,800, down -1.92%.  The S&P 500 LargeCap index declined -1.19%, while the S&P 400 MidCap index and the Russell 2000 SmallCap index ended down -1.28% and -1.65%, respectively.  The defensive Dow Jones Utilities index gained +0.88%, and the Dow Jones Transports index fell -2.25%.

In international markets, Canada’s TSX ended down -0.97%.  The United Kingdom’s FTSE continued to see weakness, down -1.55%.  British voters are going to go to the polls next week to vote whether to stay in the European Union or leave – the so-called “Brexit” vote.  On Europe’s mainland, weakness was seen across the board with France’s CAC 40 down -2.62%, Germany’s DAX index down -2.07%, and Italy’s Milan FTSE down -1.15%.  In Asia, markets had a very difficult week where Japan’s Nikkei plunged over -6%, Hong Kong’s Hang Seng index fell over -4.15%, and China’s Shanghai index ended the week down -1.44%.

Precious metals enjoyed their third week of gains as gold climbed +$25.30 to close at $1,301.60 an ounce, up +1.98%.  Silver rose +$0.19, ending the week at $17.52 an ounce, up 1.10%.  The industrial metal copper regained some of last week’s plunge, rising +1.33%.  Crude oil was essentially flat, down only two cents, ending the week at $48.86 a barrel for West Texas Intermediate crude.

In U.S. economic news, Initial jobless claims rose more than expected, up +13,000 to 277,000 last week, according to the Labor Department.  However, analysts are quick to point out that the increase was primarily due to 19,470 claims in California that are “probably due in part to schools closing for summer recess,” a Labor Department spokesman said.  The median forecast of economists surveyed had expected 270,000.  Continuing claims increased by +45,000 to 2.16 million for the previous week.  These claims, reported with a one-week delay, reflect people who are already receiving unemployment checks.

In housing, the National Association of Home Builders (NAHB) sentiment gauge rose 2 points to 60, the highest since January.  Economists had expected a 1 point gain.  Readings over 50 indicate growth.  All the main sub-indexes rose, including confidence about future sales.  The NAHB noted “Builders in many markets across the nation are reporting higher traffic and more committed buyers at their job sites—but some headwinds remain, including a scarcity of available lots and labor.”

Actual housing starts fell -0.3% in May to an annualized rate of 1.164 million units, according to the Commerce Department.  That follows a +4.9% increase in April and is better than the 1.15 million expected by economists.  Building permits, a gauge of future construction activity, rose +0.7% to 1.138 million.  Monthly housing starts have hovered above 1 million for the past year, but remain below the 1.5 million that represents a very healthy housing market.  On a positive note, housing starts are up +10.2% so far this year. 

Small business optimism rose for a second straight month in May, according to the National Federation of Independent Business (NFIB).  The NFIB’s small business index rose to 93.8 last month, up +0.2 point from April, and 12% of companies plan to add staff, up one percentage point.  27% of companies reported that they had unfilled job openings.  But sales and earnings trends weakened, with fewer firms planning to step up spending, even though pessimism about the economy diminished.

Retail sales increased +0.5% last month, beating expectations as consumer spending remains strong, according to the Commerce Department.  Economists had expected retail sales to rise +0.3%.  Ex-autos, sales rose +0.4% and ex-autos and gas, sales were up +0.3%, both in line with expectations.  Auto sales gained +0.5% versus April as industrywide demand was slightly stronger than expected.  Nonstore sales, which represents e-commerce sales such as Amazon’s, continues to outpace overall retail sales– up +1.3% in April and a whopping +12.2% versus a year earlier.

Consumer prices rose +0.2% in May, missing forecasts by 0.1%, according to the Labor Department.  Core consumer prices, which exclude food and energy, also rose +0.2% matching expectations.  Energy prices gained +1.2% as gasoline prices increased.  Shelter costs rose +0.4%, the biggest monthly gain since 2007.  Year-over-year consumer prices are up +1%, but down slightly from April’s reading.  Core inflation was 2.2%, up +0.1% from April. 

Producer prices rose for a second straight month as the cost of energy products and services increased, but a stronger dollar and lower energy prices is expected to keep inflation in check for a while.  The Labor Department said its producer price index for final demand increased +0.4% last month, following a +0.2% rise in April.  Year-over-year, producer prices are down -0.1%.  Economists had forecast the PPI to rise +0.3%.  Excluding food, energy and trade services, producer prices dipped 0.1% last month, following a 0.3% rise in April.

Industrial production fell -0.4% last month, missing analyst expectations of just a -0.1% drop, according to the Federal Reserve.  Manufacturing activity also fell _0.4%, also missing forecasts for a gain of +0.1%.  Production of autos and related parts plunged -4.2%, the sharpest drop since early 2014.  American producers are still battling the effects of weak energy prices, a stronger dollar, and stagnating global growth.  On a positive note, mining output (including oil drilling) rose +0.2% – its first increase since August.  However, drilling and servicing at wells dropped a further -7.9%.  Those numbers may stabilize as analysts point to Baker Hughes rig count data that show that oil rigs are beginning to come back online.  Capacity utilization, which measures the amount of plant capacity that is in use, fell to 74.9%, down -0.4%.

Manufacturing in the Empire state rebounded in June after a weak reading the prior month, according to the New York Fed.  The Empire state manufacturing index swung to positive territory coming in at 6.0, up +15 points from the deeply negative May reading.  A positive reading indicates improving conditions.  Economists had forecast -3.5.  Orders and shipments were also positive for June and the six month outlook also improved.   In Philadelphia, the Philly Fed index rose to 4.7 signaling growth following May’s reading of -1.8.  It was only the 2nd positive reading in the past 10 months; however, the details of the report were not optimistic.  The indicators for new orders, shipments, employment and work hours all remained negative.  The disparity is due to the fact that the headline value of the Philly Fed current conditions index is based on a single stand-alone question, unlike the Institute for Supply Management’s index which is based on a composite of components.

On Wednesday, the Federal Reserve voted to keep rates steady, which was widely expected.  However, the Fed signaled that markets might still be too complacent about the chances for rate hikes later in the year.  While economists don’t expect a hike at the next meeting in July, individual members’ projections for future policy still point to two hikes this year.  Six Fed officials now see just one hike this year, up from just one back in March.  Fed Chair Janet Yellen stated in a post-meeting press conference that the United Kingdom’s vote whether to leave the European Union later this month (“Brexit”), played a factor in the decision to leave rates unchanged.

In international economic news, the Conference Board of Canada stated that Canada’s economy is expected to grow by +1.5% this year, with British Columbia to lead the country in growth.  Four provinces will have a GDP growth rate of more than +2%: British Columbia, Ontario, Manitoba, and Prince Edward Island.  The Conference Board sees a “two-speed” Canadian economy, with resource dependent provinces in recession or growing slowly, and most of the rest of the country strengthening as manufacturing exports grow.

The Bank of England has issued a fresh warning that a vote to leave the EU in next week’s referendum risks impeding economic growth, forcing the pound lower, and sending shockwaves through the global economy.  The Bank of England’s Monetary Policy Committee voted unanimously to maintain its bank rate at just 0.5% and to keep the size of its asset purchase program at 375 billion pounds.

German Chancellor Angela Merkel said China’s push to produce higher quality exports is turning the country into a competitor in global markets and underscoring European concern about Chinese trade and investment.  Her three day trip to China included joint cabinet talks in Beijing and a chance to ensure that “diverging interests” between the two countries “aren’t swept under the carpet,” Merkel told reporters in Shenyang.  Merkel said she and Chinese leaders had very intensive talks regarding China’s bid for market-economy status, which would make EU penalties against Chinese exports more difficult.

In Japan, the yen surged to its strongest against the dollar since the fall of 2014 as the Bank of Japan abstained from adding any stimulus that could slow its advance.  Japan’s currency gained against all 31 of its major peers after Governor Kuroda and his board chose to continue to gauge the economic impact of their negative interest-rate policy.  The dollar extended its losses that have made it the worst-performing currency this year behind the pound after the Federal Reserve kept interest rates steady and suggested the pace of further action will be slower than previously indicated.

Chinese domestic banks are lending large amounts of cash to boost the near-term economic outlook, despite the nation’s swelling pile of debt.  New yuan loans rebounded to 985 billion yuan last month, surpassing all estimates, according to the People’s Bank of China.  The central bank is determined to keep credit flowing so that its economy continues to grow, but at the cost of rising debt risks.  China’s debt load is now 250% of its gross domestic product, according to Bloomberg Intelligence estimates.

Finally, are you favoring stocks right now because investment grade bonds are yielding a near 0% return?  If so, Mark Hulbert, in a research piece published at MarketWatch.com, says that is a terrible rationale.  To be fair, almost everyone seeks the return of stocks when bonds are yielding near zero.  But his research shows that bond valuations have almost nothing to do with how the stock market is likely to actually perform.  Over the past century, stocks have been just as likely to fall as rise when bonds have been less than an ideal alternative.  To demonstrate this, he calculated the stock market’s performance since 1871 for various states of stock earnings yield vs the yield on the 10 year treasury note.  What he found, as demonstrated by the chart below, is that there is no consistent relationship.  The implications for investing are that you should base investing decisions in the stock market based on the stock market’s own valuation criteria, not on whatever the bond market may be doing.

(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 10.8, up from the prior week’s 13.8, while the average ranking of Offensive DIME sectors rose slightly to 11.8 from the prior week’s 12.3.  The Defensive SHUT sectors now lead the Offensive DIME sectors by a small 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 6/10/2016

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 26.19, little changed from the prior week’s 26.22, 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 54.32, up from the prior week’s 53.59.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on May 12th.  The indicator ended the week at 31, up from the prior week’s 30.  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:

The major U.S. benchmarks ended mostly flat for the week as drops on Thursday and Friday erased the gains from earlier in the week.  The LargeCap S&P 500 index managed to reach its highest level since last summer before retreating later in the week.  The strong start to the week appeared to be due, at least in part, to reassuring comments from Federal Reserve Chair Janet Yellen on Monday that a rate hike was not imminent, but a poll from the United Kingdom favoring a “Brexit” triggered a global selloff at the end of the week.  The Dow Jones Industrial Average was the lone positive U.S. index for the week, up +0.33% to 17,865.  The broader LargeCap S&P 500 ended down 0.15%.  Smaller Indices fared were just slightly negative for the week: the S&P 400 MidCap index gave up -0.12% and the SmallCap Russell 2000 was down just -0.02%.  The tech-heavy NASDAQ Composite fared the worst among U.S. indices, ending the week down -0.97%.  Money flows headed for defensive destinations, with Bonds and the Utilities sector both up for the week.

In international markets, Canada’s TSX ended down -1.33%, its first down week in five.  Weakness was widespread in Europe as the United Kingdom’s FTSE was down -1.5%, Germany’s DAX index gave up -2.66%, and France’s CAC 40 ended down -2.6%.  In Asia, China’s Shanghai Stock Exchange declined -0.39%, Hong Kong’s Hang Seng index gained +0.46%, and Japan’s Nikkei ended down -0.25%.

In commodities, precious metals rallied strongly after being down 4 of the last 5 weeks.  Silver gained over +5.4% to $17.33 an ounce, and gold gained $29.80 to $1,276.30 an ounce, up +2.39%.  The industrial metal copper gave up the last 2 weeks of gains by losing over -4.4%.  Oil started the week strongly but reversed and ended slightly down to close at $48.88 a barrel for West Texas Intermediate, down -0.04%.

In U.S. economic news, the Labor Department’s “Job Openings and Labor Turnover Survey” (JOLTS) showed that job openings matched the record high set in April, but hiring activity sank to the lowest since August.  The number of job openings rose +118,000 to 5.788 million, exceeding analyst forecasts for 5.7 million openings.  Actual hires fell -198,000 to 5.092 million, while layoffs fell to their lowest level since September 2014.

The number of Americans filing for unemployment benefits fell unexpectedly last week, even in the face of a sharp slowdown in hiring last month.  Initial claims for state unemployment benefits declined 4000 to a seasonally adjusted 264,000 last week, according to the Labor Department.  Economists had forecast initial claims to rise to 270,000.  Claims have remained below 300,000 for 66 straight weeks, the longest since 1973.  The smoothed 4-week moving average of claims fell 7500 to 269,500.

Consumer-credit continues to expand at a healthy pace but cooled slightly in April from the surge in March, according to the latest government figures.  Credit growth rose $13.4 billion in April, up a seasonally-adjusted rate of 4.5% according to the Federal Reserve.  Economists had expected a gain of $18 billion in April. 

Consumer sentiment, as measured by the University of Michigan’s Index of Consumer Sentiment, came in at 94.3, beating forecasts of 94.0.  The index is generated from a monthly survey of 500 consumers that measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates.  Richard Curtin, chief economist of the survey said “The strength in early June was in personal finances, and weaknesses were in expectations for continued growth in the national economy.”

Contrary to the shocking Non-Farms Payroll (NFP) report issued on June 3rd, showing a puny 38,000 job gain in May, a broader and (some say) more timely view of the state of the job market is not so gloomy.  Federal income and employment tax withholdings is telling a more upbeat story.  Investor’s Business Daily reports that the latest data from June 3rd shows that over the previous month withheld taxes rose +4.7% from a year earlier, which is the fastest growth rate in seven months.

On Monday, Federal Reserve Chairwoman Janet Yellen highlighted “disappointing” jobs data while subtly eliminating the timeline of anticipated rate hikes by removing the phrase “in the coming months” from her speech.  Stocks promptly rallied to a 7-month high following the comments.  Boston Fed President Eric Rosengren stated that the 4.7% jobless rate meets his definition of “full employment” and that he expects growth to remain sufficient to “justify a gradual removal” of monetary policy accommodation.  Atlanta Fed President Dennis Lockhart said that he is against a June rate hike, but he still sees the economy on a moderate growth path and thinks two rate hikes before year’s end would be appropriate.  The Chicago Mercantile Exchange’s “FedWatch” indicator is now seeing only a 4% chance of a June rate hike and just a 26% chance of a move in July.  Before last week’s job report, the odds were roughly 25-30% for June, and 60% by July.

Turning to international economies, the latest Canadian jobs report gives an early glimpse at the economic devastation caused by the wildfires in Alberta.  Statistics Canada reported that as a huge wildfire raged, job losses mounted, the unemployment rate surged, and total hours worked hit their lowest level in 30 years.  The wildfires forced the production shutdown of Alberta’s economically critical oilsands region and triggered the evacuation of Fort McMurray.  Unemployment soared in Alberta from 7.2% to 7.8% last month as a consequence of the loss of 24,100 jobs.

In the United Kingdom, George Osborne, Chancellor of the Exchequer stated that if Britain left the EU (the so-called “Brexit”), it would “lose control” of its economy.  The Chancellor stated voters should be “scared” of the consequences of a Brexit.  The Chancellor issued his warning on Wednesday, arguing that the economic turmoil predicted by economists was “not a price worth paying.”  Then on Friday, a poll was released showing a significant shift in voter sentiment, with 55% in favor of “Brexit”.

The German economic minister urged the G7 (Group of Seven leading industrial nations) to quickly allow Russia to rejoin the organization.  Minister Sigmar Gabriel stated “Russia is an important global player and not a regional power.”  Gabriel, who leads Germany’s Social Democrat Party, said Russia remained an important economic partner for Germany and German industry.

In China, the International Monetary Fund (IMF) says China’s growing corporate debt could become a systemic risk.  The level of debt is a major source of worry about the world’s second-largest economy.  David Lipton, first deputy managing director of the IMF warned that Chinese companies’ indebtedness is a “key fault line in the Chinese economy.”  “Corporate debt problems today can become systemic debt problems tomorrow,” Lipton said in a speech to economists in the southern Chinese city of Shenzhen.

The Japanese economy expanded at an annual rate of 1.9% in the first quarter, revised from a preliminary figure of 1.7%.  The economy was helped by a fractional revision in private consumption and business investment that dropped less than first thought.  The upward revision may be some relief to Prime Minister Shinzo Abe who is struggling to revive Japan’s economy and recently decided to postpone an increase in the sales tax.

Finally, here’s a look at in interesting new phenomenon in sports—more and more baseball fans are purchasing their tickets on game day rather than purchasing and planning their attendance well in advance.  So far this year, 20% of baseball fans purchased their tickets on game day, quadruple the number from 2012—and it’s growing fast.  As buying and selling of tickets on secondary markets becomes more convenient, ticket sales on game day have surged.  Baseball seems to be particularly well-suited for the practice due to the frequency of games and generally more hospitable weather.

(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 13.8, up from the prior week’s 16.8, while the average ranking of Offensive DIME sectors fell to 12.3 from the prior week’s 11.8.  The Offensive DIME sectors lead the Defensive SHUT sectors by a small 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 6/3/2016

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, little changed from the prior week’s 26.28, 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 53.59, up from the prior week’s 51.23.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on May 12th.  The indicator ended the week at 30, up 2 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:

The major U.S. benchmarks were mixed for the holiday-shortened week.  Repeating the pattern that dominated the entire month of May, the SmallCap and MidCap indexes and technology-heavy NASDAQ Composite outperformed the LargeCap S&P 500 Index, which ended basically unchanged for the week.  For the week, the Dow Jones Industrial Average fell -66 points to 17,807, down -0.37%.  The LargeCap S&P 500 finished just shy of 2100, essentially unchanged for the week.  The MidCap S&P 400 rose +0.59%, and the SmallCap Russell 2000 gained 1.19%. 

In international markets, Canada’s TSX rose for a fourth consecutive week, finishing higher +0.86%.  In Europe, markets were mostly negative.  The United Kingdom’s FTSE fell -0.98%, Germany’s DAX declined -1.78%, and France’s CAC 40 ended down over -2%.  Asian markets were mixed.  China’s Shanghai Stock Exchange rallied +4.17% and Hong Kong’s Hang Seng rose +1.8%, but Japan’s Nikkei gave up -1.14%.

In commodities, precious metals recovered after a multi-week sell-off.  Gold rallied $31.20 an ounce to close at $1,246.50 an ounce, up +2.57%.  Likewise, Silver rallied +1.17% to $16.44 an ounce.  The industrial metal copper was up a second week, rising +0.43%.  Crude oil had its first down week in four, giving up -1.33% to end the week at $48.90 for a barrel of West Texas Intermediate.

The month of May was positive for U.S. market indices, and not so much elsewhere.  In the U.S., the SmallCap and MidCap indices both gained more than +2% for May, while the S&P 500 rose +1.53%.  The big winner for May was the Nasdaq Composite, rising +3.62%.  International indices were less fortunate in May.  The Developed International markets lost a modest -0.09% (EFA), while the Emerging International markets lost a more significant 3.69% (EEM).  Gold and Oil went in opposite directions in May: gold lost -5.66% while oil gained +6.93%.

In U.S. economic news, analysts, investors and politicians alike were shocked Friday morning when the Labor Department’s official tally of job gains, the Non-Farm Payrolls report (NFP) showed the smallest increase in monthly payrolls since November of 2010, a gain of only +38,000.  The talking heads were (momentarily) speechless.  Forecasts had been for a reading of +162,000.  The report adds to evidence that job growth is slowing.  Shockingly to those who read the fine print (no one even commented on this, to our knowledge), the gains came entirely from part-time jobs – full-time jobs actually shrank in the month of May, for the second month in a row according to the “household survey” portion of the monthly NFP report.

A limited supply of homes on the market supported rising home prices, according to the latest S&P/Case-Shiller Index.  The 20-metropolitan area report showed a +5.4% increase in prices from a year ago.

The Institute for Supply Management (ISM) U.S. manufacturing index rose half a point last month to 51.3, the 3rd consecutive reading above 50, beating forecasts of a dip to 50.3.  In the report, however, the production and new orders gauges pointed to slightly weaker growth and the order backlog component turned negative.  However, the Chicago-specific manufacturing index fell 1.1 points to 49.3 in May, indicating that manufacturing activity in the Midwest is contracting. 

ISM’s services index fell to 52.9 in May, down from 55.7.  It was the lowest reading since February 2014, but remained in expansion territory (above 50).  Services reported slower growth in production and new orders.  Services account for more than 70% of U.S. jobs, and the weak reading added to the bad news from the weak May jobs report.

Consumer spending rose last month to its highest level in almost 7 years, a hint that consumers may be back again after a very difficult first quarter.  The Commerce Department reported that consumer purchases rose +1% in April, beating forecasts by 0.3%.  The month-over-month increase was the largest since August of 2009.  Strong consumption also lifted inflation last month, the Personal Consumption Expenditures (PCE) core price index (which excludes food and energy) rose +0.2% following a +0.1% increase in March.  The year-over-year core PCE rate is at 1.6%, still substantially below the Federal Reserve’s 2% target.  However, on a negative note, the Conference Board’s consumer confidence index fell -2.1 points to 92.6, saying that households had a less favorable view of the labor market.  Economists had expected the index to rise to 96.  The share of respondents saying jobs were plentiful remained unchanged at 24.3, while those reporting that jobs were “hard to get” increased to 24.4% from 22.8% – which may help explain why more than 400,000 workers simply dropped out of the workforce in May. 

The Federal Reserve’s “Beige Book”, a compilation of anecdotal evidence from Federal Reserve Districts around the country, reports that the U.S. economy seems to be expanding at a modest pace across most of the country since mid-April.  The reported noted that “tight labor markets were widely noted in most districts.”  Employment and wage growth were described as modest, with pay raises “concentrated in areas of labor tightness.”  Energy sectors continued to report “soft labor markets” across the oil patch.  Generally, the Beige Book reported modest to moderate economic growth in the majority of its 12 districts stating that “several districts noted that contacts had generally optimistic outlooks, with firms expecting growth either to continue at its current pace or to increase.”

The Bank of Canada estimated that Alberta’s wildfires trimmed 1.25 percentage points from second-quarter GDP growth due to lost crude oil production.  Bank of Canada Governor Stephen Poloz said that once that production returns, Canada’s real GDP growth should rebound that much.  The Bank of Canada has held interest rates steady at 0.5% so far this year.

In the United Kingdom, the Organization for Economic Cooperation and Development (OECD) came out with an intentionally-alarming report that claimed a “Brexit” or British exit from the Eurozone would cost each worker in the UK $4,644.80 (US) by 2030 and send economic shockwaves around the world.  International institutions have been ramping up their warnings to British citizens who will vote June 23rd whether to stay in or leave the European Union.  The question is whether such warnings will be seen by the British electorate as outsider meddling, or as helpful input.

Eurozone Central Bank (ECB) President Mario Draghi released a forecast that showed inflation largely unchanged and called on governments to play a bigger role in spurring economic growth.  Its inflation forecasts include a +1.6% prediction for 2018—still shy of its price-stability goal of just under +2%.  He re-iterated that the ECB will continue to buy 80 billion euros ($90 billion) worth of assets each month under its QE program until at least March 2017.  Ultimately, he stated that the ECB will take whatever action is needed to revive the euro-area economy, “using all instruments available within our mandate.”

French economic growth accelerated faster than initially estimated in the first quarter.  Sharp rises in consumer spending and investment contributed to the gain.  The Eurozone’s second largest economy expanded +0.6% in the first quarter, up +0.1% from the initial estimate according to France’s national statistics agency Insee.  It marked the third straight quarter of growth in France, however puny, but further evidence that France’s economy is expanding modestly after years of being moribund.

In China, stocks surged as investors anticipated that the popular Morgan Stanley Capital International (MSCI) emerging-market index will soon include many stocks in the Shanghai Composite.  This inclusion would channel billions of passively managed dollars into the Chinese equity markets.  MSCI will announce its decision on June 14.

Finally, the Non-Farm Payrolls report issued on Friday contained a shocking headline, with just 38,000 jobs added, but also included an even bigger shocker (mostly ignored) in the “Household Survey” section: for the second consecutive month,  full-time jobs were actually lost, not gained – and that the reported jobs gains came from part-time jobs.  Any reasonable observer would agree that full-time jobs are the proper yardstick by which to measure jobs growth, so the shock in the market at the feeble supposed 38,000 jobs should have been even more severe had any attention been paid to the full-time vs part-time numbers.

(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 slightly to 16.5, up from the prior week’s 16.8, while the average ranking of Offensive DIME sectors fell to 11.8 from the prior week’s 9.8.  The Offensive DIME sectors continue to lead the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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,