FBIAS™ for the week ending 10/17/2014

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 10/17/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 24.7, down from the prior week’s 25.0, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 51.4, down from the prior week’s 55.1, and continues in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) ended the week at 3, down from the prior week’s 7, but up from the low of 2 – enough to switch the indicator back to Positive status.  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 October for the prospects for the fourth quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets returned to Positive status on October 17th.  The quarter-by-quarter indicator gave a positive signal for the 4th quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q4, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

A roller-coaster week was experienced in worldwide markets.  You know it is a wild one when investors breathe a sigh a relief that the Dow was only down -173 on Wednesday – since it had been down more than -450 earlier in the day!  Thanks to a strong positive showing on Friday, though, with markets around the globe rallying +1% to +3%, some indices actually finished higher on the week.  The week nonetheless saw many markets enter “correction” territory (a 10% decline from prior highs) and still others enter “bear” territory (a 20% decline from prior highs) before Friday’s bounce.  Among markets reaching “correction” territory are Canada, UK, Spain, S Korea, Australia, China, Japan, US SmallCap and US MidCap.  Among markets that hit “bear” territory are Germany, Italy and Brazil, as well as a number of sectors such as Homebuilders, Precious Metals Miners, and Semiconductors.

In the US, the indices that had been hardest-hit in recent weeks performed the best this week.  SmallCaps gained +2.8%, thereby avoiding what would have been a record 7th losing week in a row.  MidCaps also did well, rising +1.3%, but the rest of US indices lost ground, with the Dow and S&P 500 both retreating -1%.  Like the US SmallCaps, Canada’s TSX avoided a 7th consecutive losing week, but only barely, finishing essentially unchanged on the week.  Both Developed and Emerging International groups gained on the week, at +0.4% and +0.5% respectively, even though European stocks had declined eight consecutive days through Thursday – their longest losing streak since 2003.  China led the Emerging International group (+1.4%) while Germany paced the Developed International group (+1.7%).

Although earnings news dominated the headlines (with some notable “misses” – Google and Netflix among them – but also some big “hits” from industrial giants GE and Honeywell), US economic news was neutral to positive on balance.  Initial jobless claims came in at 264,000, the lowest number since 2000.  Gasoline prices have fallen significantly, and are the lowest in three years, effectively giving every driver a bonus.  The University of Michigan consumer confidence survey was reported at 86.4, the highest since before the “great recession”.   The Philadelphia Fed index of manufacturing activity was reported at 20.7, remaining in the good growth range.  Spurred by mortgage rates back to 4% and lower, refinance applications rose +10.6% week-over-week to the highest level in 4 months.  On the negative side, retail sales were down -0.3%, the National Association of Home Builder’s housing market index fell to 54, down from 59 last month and unchanged year-over-year, and the National Federation of Independent Business small business optimism index fell to a 3-month low.

Canada’s manufacturing output dropped for the first time this year, -3.3%, reversing July’s rise to record levels.  A Thomson-Reuters survey of economists had expected a much smaller drop of -1.6%.  Manufacturing output had been trending higher all year, but August’s sharp drop has essentially wiped out the gains of June and July.

Eurostats, the statistical arm of the European Union, released its inflation data for September and for the 18 Eurozone nations it was up just +0.3% on an annual basis.  By contrast, in September 2013 the inflation rate was +1.3%, a value the European Central Bank can only dream about today.  Prices are dangerously falling in some Eurozone countries.  Prices were down -1.1% in Greece, down -0.3% in Spain (after being down -0.5% in August and -0.4% in July), down -0.4% in Sweden and down -0.1% in Italy.  Deflation fears are well founded, it appears.  Eurozone industrial production was also released for August, down -1.8% over July and down -1.9% year-over-year.  The U.K. had some positive news, reporting an unemployment rate of just 6.0%, a six-year low, for the three months thru August.

In China, September exports were reported to have risen a better than expected +15.3%, with imports also exceeding expectations, up +7%, but the exports number was strong enough to arouse suspicions of fake invoices among some observers, despite the government’s assurances that such past chicanery is now under control.  Credit Suisse’s “Global Wealth Report 2014” places China as the fourth wealthiest region in the world and said that the country’s middle class, which has doubled since 2000, now makes up an amazing one third of the world’s total middle class population.

Economists and statisticians routinely deal with correlated data points.  A constant – and critically important – question to ask when pondering a correlation is “does this correlation arise from coincidence or causation?”  Here’s one that only the bravest would take on – two Emory University economists have discovered that there is a very high correlation between total wedding expenses and the subsequent likelihood of divorce.  Is it Coincidence or Causation?

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post)

The ranking relationship (shown in the graph below) 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 declined to 6.5 from the prior week’s 5.8, while the average ranking of Offensive DIME sectors fell sharply to 20.3 from the prior week’s 17.3.  Institutional investors remain cautious, and the Defensive SHUT group ranks higher than the Offensive DIME group ranking by the widest margin in more than a year.                                                                                                                                                                                                                            

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 10/3/2014

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 10/3/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 26.1, down from the prior week’s 26.3, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 58.8, down from the prior week’s 62.0, and continues in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) ended the week at 16, down 7 from the prior week’s 23, and in Negative status.  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 October for the prospects for the fourth quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets moved to Negative status on October 1st.  The quarter-by-quarter indicator gave a positive signal for the 4th quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q4, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter.

In the markets:

Markets worldwide were negative for the week, though well off the week’s lows thanks to the jobs-inspired rally on Friday.  LargeCap US indices continued to be relatively stronger, with the S&P 500 retreating a fairly modest      -0.8%.  US MidCaps and SmallCaps continued their underperformance, giving up -1.6% and -1.3% respectively (this was the 5th consecutive negative week for US SmallCaps).  Internationally, the biggest loser was Brazil, shedding    -6.7% ahead of Presidential elections and in reaction to negative Chinese consumption news (see below for more about the Brazil-China connection).  Emerging Markets gave up -2.7% on average, while Developed Markets lost    -3.2% on average.  Emerging Markets have now joined Developed Markets in the negative YTD column, and are now down -0.5% for the year to date, while Developed Markets are down -4.3% for the year to date.  Canada’s TSX pulled back -1.6%, and like US SmallCaps this was its 5th consecutive negative week.

For the month of September, the story was the same as above: everybody lost, but US LargeCaps did best and everything else not so much.   The Dow lost just -0.3%, the LargeCap Nasdaq-100 just -0.8% in September, but it was downhill from there.  US MidCaps gave up -4.7% and US SmallCaps shed -6.2%.  Canada and Developed International retreated -4% and -3.9%.  The biggest loser for the month was the previously high-flying Emerging Markets group, which was lost a huge -7.8%.  The 3rd Quarter as a whole was qualitatively similar: US LargeCaps were up, US MidCaps and SmallCaps were down substantially, and both Developed and Emerging International groups were also down for the quarter.  Canada’s TSX fared better than most non-US indices, losing -1.2% during Q3, but retains a lead over the US for the year to date.

The International Monetary Fund (“IMF”) recently described the US as “rare bright spot” in the global economy.  And the US lived up to that billing in this week’s economic news.  Friday brought a solid jobs report for September, with nonfarm payrolls growing 248,000 and the unemployment rate falling to 5.9%, the lowest since July 2008. The figures for the prior two months were also revised upwards; from 142,000 to 180,000 in August, and 212,000 to 243,000 for July.  Among the few negatives from the jobs report was that average hourly earnings were unchanged, and remain up just 2% from a year earlier, and the labor force participation rate fell to 62.7% from 62.8%, still a long way below pre-recession levels.  The Chicago Purchasing Managers Index (“PMI”) for manufacturing in September was a solid 60.5, while the Institute for Supply Management (“ISM”) data on national manufacturing was 56.6, down from the prior month’s 58.5 but still very good.  The ISM service sector reading came in at 58.6 for last month, also very good.

Canada got two unexpected surprises in economic data this week.  First, July saw no growth in GDP, following six consecutive monthly gains, according to Statistics Canada.  Then on Friday, Statistics Canada reported a surprise trade deficit for August as exports dropped and imports rose by the largest amount in almost two years, to a new all-time high.

Europe is described by the IMF as being stuck in a “new mediocre” condition with high debt, high unemployment and low growth.  The statistics arm of the EU, Eurostat, released its data on unemployment for the euro-18 and the rate remained stuck at 11.5% in August, only down slightly from the 12.0% reading of a year ago. Germany’s jobless rate is just 4.9%, but France is at 10.5%, Italy 12.3%, Spain 24.4% and Greece 27.0%.  The youth unemployment rate remains at shocking levels, especially in the southern tier: 53.7% in Spain, 57.5% in Greece, 44.2% in Italy and 35.6% in Portugal.  Deflation is still very much a danger, with Eurostat reporting just 0.3% annualized inflation, a five-year low.  The composite PMI for the Eurozone (combining manufacturing and services) was 52.0 in September, down from August’s 52.5.  France’s 48.4 was a 3-month low, and Italy’s 49.5 was a 10-month low (above 50 is expansion, below 50 is contraction).

It is noted above that Brazil’s market has taken a beating lately.  Some other Latin American markets have also suffered.  The troubles are in part due to political uncertainties, such as the Brazilian presidential race (the leading candidates are two Socialists each trying to out-promise one another with plans for taxes and anti-business regulations).  However, another little-appreciated cause for concern is that much of Latin America has become highly leveraged to China.  So much so that, to paraphrase an old saying, when China sneezes, Latin America catches a cold.  And it appears that the current slowdown in China may have given some Latin American economies a cold!  This chart, from Bloomberg, shows how much the total trade between major Latin American countries and China now exceeds the trade done with the US (note that both Chile and Brazil now do about double the amount of trade with China compared to their trade with the US).

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post)

The ranking relationship (graph below) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.

The average ranking of Defensive SHUT sectors rose to 8 from the prior week’s 9.5, while the average ranking of Offensive DIME sectors fell to 16.3 from the prior week’s 15.3.  Institutional investors remain cautious, and the Defensive SHUT group ranks higher than the Offensive DIME group ranking by the widest margin in more than a year.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 9/26/2014

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 9/26/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 26.3, barely changed from the prior week’s 26.4, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 62.0, down from the prior week’s 64.7, and continues in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) ended the week at 23, down 2 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 July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets returned to Positive status on August 25.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

The week ending September 26 was a losing week for almost all markets around the world.  All major US indices gave ground, with the Small Cap Russell 2000 leading the way down with a -2.4% loss (2/3 of all Russell 2000 stocks are now below their 200-day moving average, the most in that unhappy condition in more than four years).  The Dow Industrials lost -1% and the S&P 500 gave up -1.4%.  Canada’s TSX retreated -1.6%, the fourth losing week in a row.  Internationally, Japan bucked the trend with a +0.9% gain, but the rest of Developed International was not that lucky, averaging a -1.8% loss.  Germany led the losers with a loss of -3.6%.  Developed International is now in negative territory for the year to date.  Emerging International sank -2.4%, with Brazil among the worst at  -2.6%.  Many commodities continued to fall.  Iron ore hit a 5-year low during the week, and coking coal, also used in the steel-making process, sits at a 6-year low.

US economic news continued to be solid if unspectacular.  Housing numbers for August showed existing home sales at 5.1 million, down -1.8% from July, but July’s pace was a 10-month high.  New-home sales for August far exceeded expectations, at an annualized figure of 504,000, a 6-year high going back to May 2008.  August durable goods plunged -18.2%, but when aircraft sales are removed, durable goods actually rose +0.7% in August.  The final reading on second-quarter GDP was revised upward to +4.6%, the best performance since Q4 2011 – a nice rebound after the awful first quarter’s reading of -2.1%.  Business investment increased at a +9.7% annualized rate in Q2, with corporate spending on equipment revised upward to +11.2%.

Canadians are among the top 10 wealthiest citizens in the world, but household debt levels are a concern, says Allianz’s fifth annual Global Wealth Report.  The report ranks Canada in 8th place based on per-capita financial assets, up one spot from last year.  However, the level of household debt is a large and growing worry, the report noted.  Canadians’ household debt hit a near record between April and June of this year, according to Statistics Canada. Household debt to disposable income rose to 163.6% in the second quarter, which was slightly below the record 164.1% reached in the third quarter of 2013.

Europe’s economy continues to struggle to rise above the flatline.  Markit’s flash composite Purchasing Managers Index (“PMI”) reading for the 18-nation Eurozone ticked down in September to 52.3 vs. 52.5 in August. The manufacturing PMI was 50.5 vs. 50.7.  Germany’s September flash manufacturing component of PMI was 50.3 vs. 51.4 the prior month, barely in growth mode and the weakest since June 2013, though the service reading rose to 55.4 from 54.9.  France’s composite was 49.1 vs. 49.5, with manufacturing edging up to 47.9 from 45.8, though still very much in contraction territory (50 is the dividing line between growth and contraction).

China’s manufacturing PMI was reported by HSBC at 50.5 for September, slightly better than August’s 50.2, so global markets reacted positively to this.  However, Finance Minister Lou Jiwei said the economy is stable and he doesn’t see the need for any major new stimulus initiatives, a negative surprise to many observers.

The US football season is now in full swing, including Sunday and Monday night games, and this week also marked the debut of the new seasons for the highest-rated prime-time network TV shows.  However, the viewership of the Sunday/Monday night football games vs those top prime-time network shows are going in opposite directions, as this chart from theatlantic.com dramatically shows:

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, theatlantic.com)

The ranking relationship (see graph below) 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 9.5 from the prior week’s 10.8, while the average ranking of Offensive DIME sectors rose to 15.3 from the prior week’s 16.3.  Institutional investors remain cautious, and the Defensive SHUT group continues to rank higher than the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 9/19/2014

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 9/19/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 26.4, barely changed from the prior week’s 26.3, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 64.7, little changed from the prior week’s 64.6, and continues in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) ended the week at 25, unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets returned to Positive status on August 25.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

LargeCap US equities gained for the week, and pretty much everything else around the world dropped.  On the plus side, the S&P 500 gained +1.3%, and the Dow Industrials rose +1.7%.  But US MidCap and SmallCap indices lost -0.2% and -1.2% respectively for the week.  Likewise, Canada’s TSX gave up -1.7%, Developed International pulled back a slight -0.1%, and Emerging International lost -0.8%.  It is a saying among Wall Streeters that when the market is running out of steam, “large caps are the last to go.”  If the market is indeed running out of steam, the market is following this script.

In US economic news, initial jobless claims fell to 280,000, the lowest number in 7 years.  The National Association of Home Builders (“NAHB”) reported its housing market index rose to 59 from 55 a month ago, and matched its highest reading since 2005.  The Empire State Manufacturing index grew to 27.5 in September, the highest level since October, 2009.  Producer Price Index and Consumer Price Index figures stayed steady, benefiting from falling energy prices which have declined significantly over the last month.  On the negative side, housing starts were below expectation, as was industrial production which was dragged down by motor vehicle production that dropped -7.6% from the prior month.  And although it was widely anticipated that the magic phrase “considerable time” (describing how long accommodative policy would remain in place) would be removed from the Fed statement issued this week, it remained in place rendering the Fed announcement mostly a non-event.

Canada’s annual inflation rate was reported at 2.1%, the fourth month in a row that it was above the Bank of Canada’s 2.0% target.  The Bank of Canada is now in a quandary: it is on record as intending to maintain low interest rates to boost a soft economy, yet also on record as being more than willing to raise rates to keep a lid on inflation.  The central bank said earlier in September that higher inflation recently seen has been attributable to “temporary effects.”

The Organization for Economic Development (“OECD”) issued revised (and mostly lower) estimates of Eurozone GDP for 2014. The Eurozone as a whole estimate was revised down to +0.8%.  Some individual country examples are:  U.K. (+3.1%); Germany (+1.5%); France (+0.4%); Italy (-0.4%).

In China, factory output rose just +6.9% in August from a year earlier after a +9.0% rise in July, further confirmation of a slowdown.  Foreign direct investment in China, which is the lifeblood of the manufacturing sector, fell -14% last month to a four-year low, and followed a -17% decline in July.  Chinese new-home prices fell a fourth straight month in August.  Of 70 major Chinese cities surveyed, prices fell in 68 of them last month, following a decline in 64 of 70 in the previous month.

All year, globally-allocated investors have hoped that non-US assets would outperform US assets for the first time in four years.  Indeed, Emerging Markets have done better than the S&P 500 in 2014 until just a couple of weeks ago.  Since then, however, Emerging Markets have underperformed the S&P by a large -5% and in the process gave up their lead.  This chart shows the rather sudden reversal in fortunes:

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, scottgranis.blogspot.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 from the prior week’s 11.8, while the average ranking of Offensive DIME sectors rose to 16.3 from the prior week’s 18.3.  Institutional investors remain cautious, and the Defensive SHUT group continues to rank higher than the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

You can also open up an online account by clicking HERE at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 9/19/2014

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 9/19/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 26.4, barely changed from the prior week’s 26.3, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 64.7, little changed from the prior week’s 64.6, and continues in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) ended the week at 25, unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets returned to Positive status on August 25.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

LargeCap US equities gained for the week, and pretty much everything else around the world dropped.  On the plus side, the S&P 500 gained +1.3%, and the Dow Industrials rose +1.7%.  But US MidCap and SmallCap indices lost -0.2% and -1.2% respectively for the week.  Likewise, Canada’s TSX gave up -1.7%, Developed International pulled back a slight -0.1%, and Emerging International lost -0.8%.  It is a saying among Wall Streeters that when the market is running out of steam, “large caps are the last to go.”  If the market is indeed running out of steam, the market is following this script.

In US economic news, initial jobless claims fell to 280,000, the lowest number in 7 years.  The National Association of Home Builders (“NAHB”) reported its housing market index rose to 59 from 55 a month ago, and matched its highest reading since 2005.  The Empire State Manufacturing index grew to 27.5 in September, the highest level since October, 2009.  Producer Price Index and Consumer Price Index figures stayed steady, benefiting from falling energy prices which have declined significantly over the last month.  On the negative side, housing starts were below expectation, as was industrial production which was dragged down by motor vehicle production that dropped -7.6% from the prior month.  And although it was widely anticipated that the magic phrase “considerable time” (describing how long accommodative policy would remain in place) would be removed from the Fed statement issued this week, it remained in place rendering the Fed announcement mostly a non-event.

Canada’s annual inflation rate was reported at 2.1%, the fourth month in a row that it was above the Bank of Canada’s 2.0% target.  The Bank of Canada is now in a quandary: it is on record as intending to maintain low interest rates to boost a soft economy, yet also on record as being more than willing to raise rates to keep a lid on inflation.  The central bank said earlier in September that higher inflation recently seen has been attributable to “temporary effects.”

The Organization for Economic Development (“OECD”) issued revised (and mostly lower) estimates of Eurozone GDP for 2014. The Eurozone as a whole estimate was revised down to +0.8%.  Some individual country examples are:  U.K. (+3.1%); Germany (+1.5%); France (+0.4%); Italy (-0.4%).

In China, factory output rose just +6.9% in August from a year earlier after a +9.0% rise in July, further confirmation of a slowdown.  Foreign direct investment in China, which is the lifeblood of the manufacturing sector, fell -14% last month to a four-year low, and followed a -17% decline in July.  Chinese new-home prices fell a fourth straight month in August.  Of 70 major Chinese cities surveyed, prices fell in 68 of them last month, following a decline in 64 of 70 in the previous month.

All year, globally-allocated investors have hoped that non-US assets would outperform US assets for the first time in four years.  Indeed, Emerging Markets have done better than the S&P 500 in 2014 until just a couple of weeks ago.  Since then, however, Emerging Markets have underperformed the S&P by a large -5% and in the process gave up their lead.  This chart shows the rather sudden reversal in fortunes:

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, scottgranis.blogspot.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 from the prior week’s 11.8, while the average ranking of Offensive DIME sectors rose to 16.3 from the prior week’s 18.3.  Institutional investors remain cautious, and the Defensive SHUT group continues to rank higher than the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 9/12/2014

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 9/12/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 26.3, down from the prior week’s 26.6, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 64.6, down from the prior week’s 66.7, and continues in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) ended the week at 25, up one from the prior week’s 24.  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 July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets returned to Positive status on August 25.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

All major markets gave up ground last week.  Emerging markets reversed their prior week role as leader, and became the laggard, by quite a margin.  US and Canadian markets escaped the worst of it, only falling -0.3% and     -1.1%, respectively.  Developed International markets retreated -1.5%, but the worst results came from Emerging Markets with an average loss of -4.5%.  Brazil, recently red-hot, gave up a whopping -10.1% while China fell -3.7%.

Emerging Markets had been outperforming the US in recent months, but gave up their year-to-date edge over the US and returned global ex-US investors to the all-too-familiar role of running behind the US, a role they have played for the last 4 years.

Two major fears gripped the markets.  The first fear, continued European stagnation at recessionary levels, received most of the coverage.  However, the major US story was largely absent from the headlines.  That story is the sudden, severe rise in US interest rates (more on that subject below).  Interest-rate sensitive sectors in the US took a pounding for the week: the Dow Jones US Real Estate index of REITS dropped by a huge -5.0%, and the Dow Jones Utilities Index fell -3.1%.

US economic news was generally positive.  Job openings were reported at the highest levels since 2001.  Retail sales gained +0.6% month-over-month, and July was revised upward to +0.3%. Consumer confidence rose to 84.6, up from 82.5 and above the 83.3 expected.  Consumer credit in July rose by the largest amount in 13 years, and the National Federation of Independent Business (“NFIB”) small business index rose to 96.1, half a point from the highest readings since 2007.  About the only sour note was that mortgage applications fell -2.6% from the prior week to the lowest level since February.

Despite some recent cooling, The Economist magazine just rated Canada’s housing market as among the most overvalued in the world and “bears an unhappy resemblance” to what the US housing picture looked like before the financial crisis.  When comparing the relationship between the costs of buying and renting, it cited Canada, Hong Kong and New Zealand as “the most glaring examples” of overheated markets.  The Economist magazine is not alone, as the Organization for Economic Cooperation and Development (“OECD”) has said Canada’s market is overvalued by as much as 30 per cent when measured by the price-to-income ratio and by 60 per cent based on the price-to-rent ratio.

In Europe, all eyes are on the Scottish vote on independence from Great Britain.  Several major financial institutions have stated their intention to move operations from Scotland should the vote be in favor of independence, including the Royal Bank of Scotland (would it then be the Royal Ex-Bank of Scotland?).  In France, which is firmly in recession and making little progress – or effort – to get out of it, President Francois Hollande suffers from an incredible approval rate of just 13%.  Even a quarter of his Socialist supporters, who swept him to power, want to see him resign, while 62% of the entire electorate likewise wants him to go.

More about US interest rates.  As shown on the chart below, rates have sharply risen on the widely-watched benchmark 10-year Treasury Note, moving up for 9 of the last 11 days.  The US dollar rose for the 9th consecutive week, its longest rally in 17 years, on continued weakness in the Euro and in recognition of the interest rate rise – and no doubt in anticipation of more to come.

It seems to have been concluded by many major investors that the US economy has finally reached the point of robustness that will force the Fed to commence their long-delayed but inevitable rate raising.  Many observers expect that the statement at the end of this coming week’s Fed meeting will strongly hint that the rate hikes will be sooner rather than later.

Two of the most important data points that the Fed is certain to consider are shown here – the Institute for Supply Management (“ISM”) separate readings for the Manufacturing and Services portions of the US economy.  Both have recently broken out to multi-year highs and are running on the “hot” side, leaving little room for the Fed to continue to use their frequently-employed word “slack” to describe the US economy.

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, scottgranis.blogspot.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 11.8 from the prior week’s 12, while the average ranking of Offensive DIME sectors declined to 18.3 from the prior week’s 16.8.  Institutional investors remain cautious, and the Defensive SHUT group again expanded its lead over the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

You can also open up an online account by clicking HERE at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 9/5/2014

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 9/5/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 26.6, up slightly from the prior week’s 26.5, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 66.7, up from the prior week’s 64.9, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) ended the week at 24, up one from the prior week’s 23.  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 July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets returned to Positive status on August 25.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Except for Emerging International indices, markets were little changed for the week.  Nonetheless, most US indices managed to post a 5th straight weekly gain.  Both the Dow and the S&P 500 gained a modest +0.2%, while the Nasdaq was flat and the Russell 2000 SmallCap index declined by -0.4%.  Canada’s TSX also declined by -0.4%, dragged down by declining commodities prices.  The best performers were found in the Emerging Markets category, led by China with a large +5.1% gain for the week.  Another strong winner in the Emerging category, India posted a +3% gain.  Several popular India ETFs (e.g., EPI, INDY, INDA, SMIN) are up 30% – 50% for the year to date.  Developed International indices were up +0.4% on average, with Europe leading the way in that category with a +1.8% gain.

In the US, the August nonfarm payroll report was the biggest economic headline of the week, but was disappointing with just 142,000 jobs created.  This was the first figure below 200,000 after six consecutive months above that level, and was also well below expectations of 220,000-230,000. The unemployment rate ticked down from 6.2% to 6.1%, while average hourly earnings rose just +0.2%.  July construction spending was up a strong +1.8%, July factory orders rose +10.5% (looks like a big number, but 11% was actually expected!).  The Institute for Supply Management (“ISM”) readings for August manufacturing came in at 59.0, and the services segment was reported at 59.7.  Both were very solid and the services segment reading was the best since August, 2005.  Janet Yellen’s speech at the recent Jackson Hole conclave was dissected syllable by syllable by economists and Fed-watchers; one of the peculiar findings was that her (or the Fed’s) new favorite word is “slack” – an intentionally ambiguous word with no associated metrics.  Her speech used the word an incredible 25 times.  No slacker, she!

Statistics Canada, the branch of Canadian government in charge of reporting employment numbers, caused more raised eyebrows when its August employment report showed heavy losses in private sector employment, but a nearly-equal gain in self-employment for a net job loss of 11,000.  This followed the July report which required a correction after a rather large number of workers (some 42,000) were later discovered to have been overlooked by Statistics Canada.  Scotiabank economists Derek Holt and Dov Zigler pointed out that never before in the 38-year history of the employment report had a decrease in private sector employment of this magnitude occurred    (-112,000) nor had the nearly-equal increase in self-employment ever occurred.  They called it “very fishy” and urged their clients to regard the report with some suspicion.

In Europe, Germany’s Angela Merkel and the International Monetary Fund (“IMF”) chief Christine Lagarde continued their long-running feud over stimulative government spending (Lagarde’s preferred strategy) vs austerity and reform (Merkel’s preference).  Merkel pointed out again this week that countries which chose austerity and reform seem to be recovering better than those who have done little but pay lip service to reforms or reduced expenditures.  Ireland, for example, imposed severe austerity measures three years ago, but now Ireland has the Europe’s leading composite Purchasing Manager’s Index (“PMI”) for August at 61.8, the best level since August 2000, the manufacturing PMI is 57.3, the best since 1999, and its GDP is likely to grow +3% this year.  Even Spain, previously a basket case, is beginning to benefit from its own limited brand of austerity measures, reporting a composite PMI of 56.9 for August, the best in 89 months.  But those countries that have only given lip service to reform – in particular France and Italy – continue to be stuck in flat or declining economies.

The extent and duration of the “declining” mentioned above can be readily seen in this chart.  Total Euro Area industrial production has been down from its August 2011 peak for 3 years, and is up less than a third of the gain in US industrial production over the period December 2009-July 2014.

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, Orcam Financial Group)

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 from the prior week’s 14, while the average ranking of Offensive DIME sectors declined to 16.8 from the prior week’s 14.3.  Institutional investors remain cautious, and the Defensive SHUT group expanded its lead over the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

You can also open up an online account by clicking HERE at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 8/29/2014

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 8/29/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 26.5, up slightly from the prior week’s 26.3, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 64.9, up from the prior week’s 63.1, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to Positive status during the week, and ended the week at 23, up two from the prior week’s 21.  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 July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets returned to Positive status on August 25.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Global markets gained during the final week of August.  US indices gained +0.8% on average, with SmallCaps leading at +1.2% and the Dow Industrials bringing up the rear at +0.6%.  Canada’s TSX gained +0.6%, Developed International averaged +0.4% and Emerging International averaged +0.7%.  The best significant market was Brazil at +6.5% and the worst China at -1.0%.

The month of August started out very poorly, with markets retreating rapidly from yearly highs set in late July.  But the decline halted abruptly on August 5, and an equally rapid rise took many markets back to recent highs by the end of the month.  In fact, the month was the strongest August in the US since 2000.  US indices gained from +3.2% to +4.9% for the month, and the Nasdaq Composite closed the month above 4500, a level last seen in March of 2000.  Emerging International markets also had a good August, gaining +2.8% on average, while Developed International averaged only a +0.2% gain.  Canada’s TSX gained +1.9% for the month.

US economic news featured a huge jump in durable goods for July – up a whopping  +22.6%!  But the report should have been named the “Boeing Goods Report”, since a closer examination revealed that the entire jump was due to aircraft orders (Boeing signed a record 324 contracts during the period).  When Boeing’s aircraft orders are removed, the durable goods figure actually declined by -0.8%.  The second revision of second-quarter US GDP edged up to +4.2%, vs expectations of a decline from +4.0% to +3.8%.  Consumer spending fell slightly,      -0.1%, vs a forecast of a slight gain.  This was the first decline in six months.  The Chicago Purchasing Managers’ Index survey (“PMI”) bounced back to a very healthy 64.3 from the prior month’s 56.0, and the Richmond Fed’s survey of regional manufacturing activity was reported at 12, the highest level in more than 3 years.

Statistics Canada released Q2 Canadian GDP, surprising to the upside at +3.1% and exceeding expectations.  This was the highest GDP reading in almost 3 years.  The segment of Canada’s economy showing the biggest burst of activity was exports, surging +17.8% via gains in the automotive, agricultural and forestry sectors.

The economic news with the most ominous portent came from the Eurozone, where the first estimate of August inflation was reported at just +0.3% year-over-year.  This number is perilously close to deflation, and nowhere near the approximately +2% target of the European Central Bank (“ECB”).  Several countries actually did report falling prices year-over-year, the biggest of which was Spain, reporting a -0.5% fall in prices from a year ago.  ECB chief Mario Draghi has repeatedly talked about further monetary stimulus to ward off deflation, but so far no actions have been taken.  Meetings of economic officials on September 4th will be watched closely for signs of action to accompany all the talk.  The Eurozone (ex-UK) unemployment rate remained unchanged at 11.5% in July vs. June, but down slightly from the year-ago mark of 11.9%.  The jobless rate was a low 4.9% in Germany (the German government calculates it at 6.7%), but more than twice that most everywhere else: 10.3% in France, 12.6% in Italy, 24.5% in Spain, and 27.2% in Greece.  Youth unemployment rates were 53.8% in Spain, 53.1% in Greece, 42.9% in Italy and 35.5% in Portugal. 

One little-reported measurement of US economic activity is called the “Architectural Billings Index”, which measures design-stage activity for US commercial developments of all sorts (retail, office and industrial).  It is generally regarded as a 1 to 3 year preview of future construction activity.  It was reported this week that the index has regained levels last seen in 2007 (see chart below), representing a completed round-trip recovery in pre-construction planning and design.

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, calculatedriskblog.com)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.

The average ranking of Defensive SHUT sectors slipped to 14 from the prior week’s 13, while the average ranking of Offensive DIME sectors declined to 14.3 from the prior week’s 13.5.  Institutional investors remain cautious, and the Defensive SHUT group retains a slight lead over the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

You can also open up an online account by clicking HERE at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 8/22/2014

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 8/22/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph belowfor the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 26.3, up from the prior week’s 25.9, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 63.1, up from the prior week’s 61.5, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is in Negative status, ending the week at 21, up 3 from the prior week’s 18.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets changed to negative status on August 5.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Despite world turmoil seemingly in every corner of the globe, markets forged higher this past week.  The US led the charge, with average gains of +1.8% among the major indices.  The Dow and MidCaps gained more than +2%, while the S&P 500, SmallCaps and the Nasdaq gained +1.7%.  The SmallCap Russell 2000 index remains slightly negative for the year-to-date, while the Nasdaq 100 is up a substantial +12.8%.  Canada’s TSX forged ahead by +1.5%, and now is +16% year-to-date.  Both Developed and Emerging International indices gained a less-robust +0.5% for the week, with Brazil leading at +2% and China lagging at -0.4%.

The economic world waited impatiently for Janet Yellen’s major speech at the annual Jackson Hole, WY, conclave hosted by the Kansas City Fed.  There was nothing new in the speech, in which she reiterated the consensus view of Fed governors that although the Fed could lift interest rates sooner than currently anticipated, there is no rush to do anything.  Among various Fed officials who spoke, a variety of views emerged about the current state of the US labor market which was taken to mean that more “wait and see” is in order.  In particular, there seems to be disagreement about what “full employment” means in this new era. 

Good news for US homebuilding came from several fronts.  July housing starts were up +15.7% to their best level in 8 months.  July existing home sales also came in better than expected at +2.4%, the biggest increase in almost a year. Housing permits for new multi-unit construction climbed +8.1%, while permits for single-family homes climbed +0.9%, the highest level since December.  However, mortgage applications fell -0.4% from the prior week to a new 6-month low, despite extremely low mortgage rates.

The July US consumer price index was tame, up just +0.1%, and up a similar amount ex-food and energy.  For the trailing 12 months, the CPI is up +2.0% (+1.9% ex-food and energy).  This tame inflation reading is no doubt another reason why the Fed continues to feel there is little pressure to raise the funds rate in the near future.

In Canada, consumers bolstered the economy in June with retail sales rising for the sixth straight month, by a stronger-than-expected +1.1%.  A new retail sales record was set, according to Statistics Canada.  The median forecast in a Reuters survey of analysts had been for only a +0.3% rise, so it was a welcome “beat”.

In the Eurozone, the early “flash” report on manufacturing and services for August was released.  The composite reading came in at 52.8 vs. 53.8 in July, but the manufacturing portion was just 50.8 – too near the dividing line between growth and contraction for comfort.  Germany’s flash composite was 56.4 vs. 56.7 in July, with manufacturing ticking down to 52.0, but France’s manufacturing number, just 45.4, was little improved over the prior month’s 45.2 and remains in contraction territory.

The Chinese real estate slowdown continues.  Home prices fell in 64 of 70 surveyed cities in July compared to June, according to the China National Bureau of Statistics.

A survey of individual investors conducted in June and July by the Gallup organization, in conjunction with Wells Fargo, revealed that only 7% of investors are aware that the US market gained roughly 30% in 2013.  Fully 57% believe that the market gained 10% or less in 2013, including 9% who think the market actually declined!  Astonishingly, 2/3 of the very same respondents rated themselves as “Somewhat” to “Highly” knowledgeable about investing and markets.  The survey participants were all investors with at least $10,000 invested in stocks, bonds, mutual funds, or in a self-directed IRA or 401(k).  The survey summary can be found at http://www.gallup.com/poll/174746/investors-seem-unaware-bull-market-strong-gains.aspx.

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, gallup.com)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.

The average ranking of Defensive SHUT sectors slipped to 13 from the prior week’s 12.3, while the average ranking of Offensive DIME sectors rose slightly to 13.5 from the prior week’s 13.8.  Institutional investors remain cautious, and the Defensive SHUT group retains a slight lead over the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

You can also open up an online account by clicking HERE at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 8/15/2014

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 8/15/2014

The very big picture:

In the “decades” timeframe, we have been in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44.  The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge.  See graph below for the 100-year view of this repeating process.

If history is a guide, we may not yet be done with this Secular Bear Market.  The Shiller P/E is at 25.9, up from the prior week’s 25.5, and approximately at the level reached at the pre-crash high in October, 2007.  Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion.  This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that.  (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).

In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause P/E’s 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 typical of a Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 61.5, up from the prior week’s 61.2, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is in Negative status, ending the week at 18, down 5 from the prior week’s 23.  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 July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply too high to sustain a new rip-roaring Secular Bull.  In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets changed to negative status on August 5.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Markets continued recovering this week, picking up where they left off the previous Friday when they shook off a scare from the Ukraine.  All major markets were higher for the week, with Emerging International Markets leading the way with an average gain of +1.8% and Developed International Markets at the end of the line with a still-respectable +1.3% average gain.  Germany was once again the laggard among major developed-market indices, gaining +0.5%.  US indices gained +1.4% on average, led by the Nasdaq 100 at +2.6%, while the Dow gained the least at +0.7%.  The S&P 500, now less than 2% beneath its all-time closing high, gained +1.2%, and Canada’s TSX gained +0.7%.

In the US, July retail sales were disappointing, unchanged, and up just +3.7% the past 12 months.  Stagnant consumer incomes are begetting stagnant retail sales.  Wal-Mart matched the overall retail report with flat U.S. same-store sales for its recent quarter, and lowered forward guidance again.  July industrial production rose +0.4%, which although small was slightly better than expected.  Small businesses continue to express optimism, as reflected in the National Federation of Independent Businesses optimism index rose to 95.7, up from 95.  In the housing sector, the Mortgage Bankers Association reported a -3.7% fall in mortgage applications from the prior week, continuing a very soft trend.  Home sales plunged in Southern California in the month of July, down -12.4% from a year earlier, according to research firm CoreLogic DataQuick.  Sales in this critical six-county region have declined since October as would-be buyers are discouraged by sky-high prices, with three of the most-expensive five US metro areas contained in Southern California, as shown in this list of median home prices:

San Jose $899,500
San Francisco $769,600
Anaheim-Santa Ana $691,900
Honolulu $678,500
San Diego $504,200

In Canada, the government number-crunchers at the (previously) highly-respected Statistics Canada made an embarrassing admission:  they had lost track of a large chunk of workers, and didn’t include almost 42,000 newly-created jobs in their July report released a week ago.  The discovery of these lost jobs changed the tone of the July jobs report dramatically, to say the least.  Nonetheless, the corrected figures were still negative, showing there were 18,000 full-time jobs lost in July – though a far cry from the 60,000 losses reported originally.   The addition of these lost jobs turned the report from calamitous to merely poor – still bad, but a lot better than first thought!

There were further signs this week of major weakness in the Eurozone. The flash GDP for the euro-18 was flat vs. the first quarter, when it had risen just +0.2%.  Annualized, the rate of growth in the Eurozone is just +0.7%, down from the prior quarter’s paltry +0.9% pace. Germany saw growth decline -0.2% in Q2 over Q1, and is now up just +1.3% on an annualized basis, while an index of investor confidence hit a 2-year low.  Germany represents over one quarter of all output in the Eurozone.  France reported its second consecutive quarter of flat economic activity (up +0.1% annualized), and its full-year growth projection was lowered to +0.5%.  Despite assurances to the contrary given to the European Commission in 2011, France now says it will exceed its deficit target of 4% of GDP.   Spain reported solid growth of +0.6% in the quarter and is now running at +1.2% for the 12 months, but inflation fell -0.4% in July, raising the specter of disinflation again.  The same for Portugal, where consumer prices fell -0.7% in July, year over year.  Greece reported its 24th straight quarter of GDP contraction for Q2, although it was the smallest contraction since Q3 of 2008.  Greek retail sales were down -8.5% in June, and industrial production was down -6.7% in July, but tourists have returned as tourism was up +16.5% year over year.  The UK continues to purr, reporting that the unemployment rate for the three months to June fell to 6.4% (the lowest since 2008), though average wages were down -0.2% year over year.  European bond rates continued to fall to record low levels.  The German 10-year bund closed the week at an amazingly low 0.95%. France’s 10-year set a record at 1.34%. The Netherlands’ was at 1.13%, Spain a record low 2.39%, and Italy a record low 2.58%.

It has been a tough year for stock pickers, even the world’s best.  Here is a table from Bespoke Investment Group detailing the performance of the top 15 holdings of Warren Buffet’s Berkshire Hathaway.  For both the year-to-date (through August 4) and the trailing year, his top-15 holdings have substantially underperformed the S&P 500.

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, bespokeinvest.com, CoreLogic)

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 12.3 from the prior week’s 13.0, while the average ranking of Offensive DIME sectors declined to 13.8, down from the prior week’s 13.5.  Institutional investors remain cautious, and the Defensive SHUT group added to its lead over the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.

Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

You can also open up an online account by clicking HERE at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®, RMA®