FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 12/24/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.1, up from the prior week’s 25.5, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 57.70, up from the prior week’s 57.11, and continues in Cyclical Bull territory.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on Friday, December 11.  The indicator ended the week at 17, down a tick 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 negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3 above), the US is the only major market still firmly in Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Negative.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

In advance of the Christmas holiday, US stocks rallied in low-volume trading along with oil and other commodities.  The gains brought the large cap S&P 500 index back into positive territory for the year.  The Dow Jones Industrial Average gained 424 points to end the week at 17,552.  The LargeCap S&P 500 gained +2.76%, and is now up 1.5% year to date.  The MidCap S&P 400 and SmallCap Russell 2000 gained +2.97% and +3.01%, respectively.  The Nasdaq composite rose +2.55%, ending the week at 5,048. Canada’s Toronto Stock Exchange Index gained also, rising +2.3%.

Among European markets, the United Kingdom’s FTSE led the way up with a pop of +3.3%, Germany’s DAX gained +1.1% and France’s CAC 40 advanced a less-robust +0.8%.  In Asia, Australia’s ASX and Hong Kong both gained +2%, but the Japanese Nikkei slipped -1.1% – its fourth weekly loss.

In commodities, crude oil rocketed over +9%, ending the week at $38.12 per barrel of West Texas Intermediate crude oil.  Precious metals also participated in the rally as Gold gained +1%, rising $10.80 an ounce to $1075.80 and Silver tacked on 2% to $14.38 an ounce.

In US economic news, the Labor Department reported that initial jobless claims declined by 5,000 to 267,000.  The smoothed 4-week average rose slightly to 272,500, a 3-month high, but has held below 300,000 for most of 2015 after hitting a long-term low in July.

US average home prices have now officially surpassed their 2007 peak, according to Federal Home Financing Agency (FHFA) report.  Prices increased +0.5% on a seasonally-adjusted basis, according to the report, which matched the median estimate of the 16 economists polled by Bloomberg.  The FHFA’s monthly index is now +0.3% higher than the level reached in March 2007.  Nevada, Colorado, and Arizona had the biggest increases.

The National Association of Realtors reported that existing home sales declined -10.5% last month to an annual rate of 4.76 million units, the lowest annual rate in almost 2 years, which missed expectations by a wide margin.  Existing-home sales fell -3.8% versus a year earlier.  NAR blamed the weak housing numbers on a lack of supply.  In contrast to existing home sales, new housing starts jumped in November with single-family starts and permits hitting the highest levels in nearly 8 years.  The Commerce Department reported that new home sales rose +4.3% to a 490,000 annual rate.

The Commerce Department reported that US GDP rose at a 2% annual rate in the 3rd quarter.  The US is on pace for a 10th straight year of failing to achieve the desired 3% annual growth rate.  Exports were slightly weaker than previous estimates thanks to a stronger dollar, but business investment rose at a 9.9% rate – the best in a year.  Consumer spending rose at a solid 3% pace on a stronger job market and lower gas prices. 

The Chicago Federal Reserve’s National Activity index declined last month to -0.3; the index is now negative for the 4th straight month.  The 3-month smoothed moving average of the National Activity Index fell to -0.2, the lowest since the beginning of the year.  The National Activity Index is made up of indicators that attempt to show whether economic growth is above or below historical trends.  The production-related indicators fell further into negative territory.  The employment indicators were positive but declined.  Consumption and housing indicators remained negative but improved.

In the United Kingdom, retail sales grew weaker than expected coming in at 19 according to the business lobby group CBI.  Expectations had been for a reading of 21.  The British economy gained 0.4% over the previous quarter.  Year over year, GDP grew 2.1%. 

In the Eurozone, consumer confidence improved to -5.7 beating estimates of -5.9.  The index reached its highest level since the summer and the latest reading is well above its long-term average.  Producer prices in Germany, Europe’s largest economy, declined -0.2% last month.  Consumer goods declined -0.1% while energy fell -0.2%, and capital goods increased by +0.1%. 

Finally, it’s that time of the year again.  Each year, the best-and-brightest at every major Wall Street investment firm present their highly-educated and generously-compensated prognostications for the coming year.  There are 22 such luminaries bearing the title “Chief Market Strategist” at well-known firms like Goldman Sachs and Morgan Stanley.  Each year they are asked to forecast what the stock market will do over the next year.  They have access to the best information, Ivy League-educated economists, teams of analysts, and connected politicians.  We can’t expect their track records to be perfect, but surely these folks produce truly superior predictions…right? 

Morgan Housel, a columnist at investing site The Motley Fool (www.fool.com), dug deep into the numbers and what he found was disappointing, to say the least.  The average S&P 500 forecast of these experts was off by an average of 14.7% per year, a difference of more than 150% of the actual average return of the S&P 500. Note too in the chart below that as a group the experts did not predict even a single down year, instead choosing to always see a rising market.   A blindfolded monkey with darts would have been substantially superior to this august group – and would cost a lot less, too!

(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,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

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

The average ranking of Defensive SHUT sectors rose to 7.8 from the prior week’s 12.0, while the average ranking of Offensive DIME sectors fell to 17.5 from the prior week’s 12.0.  The Defensive SHUT sectors have expanded their lead over the Offensive DIME sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even through new highs were reached in the US earlier this year. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

FBIAS™ for the week ending 12/18/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.5, little changed from the prior week’s 25.4, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 57.11, down from the prior week’s 59.89, and continues in Cyclical Bull territory.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on Friday, December 11.  The indicator ended the week at 18, down sharply from the prior week’s 27.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3 above), the US is the only major market still firmly in Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Negative.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

As expected, the Federal Reserve raised interest rates on Wednesday, ending the nearly decade-long zero-rate policy.  Fed Chairwoman Janet Yellen stated that the conditions for a rate hike had been met, such as improving labor markets.  The Fed made it clear that it is in no hurry to raise rates again and that its favorite gauge of inflation still remains below its 2% target.  Stocks rose sharply in the days leading up the announcement, and on the day of the announcement rose another 1.5% as investors appeared to cheer the vote of confidence in the U.S. economy and the Fed’s dovish comments.  But the day after, reality set back in and the market gave back all those gains on Thursday and Friday.

For the week, the Dow Jones Industrial Average declined -136 points to end the week at 17,128.  Counterintuitively, the Dow Transports sold off even with the continued weakness in oil, down -2.13%.  Utilities rebounded +3% as investors rotated into defensive sectors.  The LargeCap S&P 500 declined a third of a percent but remained barely above 2000 at 2005.  MidCaps and SmallCaps declined -1% and -0.23%, respectively.  The Nasdaq was unable to defend the 5000-level, closing at 4923, down -0.21%.  Canada’s TSX recovered some lost ground from last week’s plunge, gaining +1.83% to close at 13,024.

In international markets, strength was found in European markets as Germany’s DAX gained +2.59%, France’s CAC40 rose +1.66%, and the United Kingdom’s FTSE increased 1.67%.  Major markets in Asia were mixed with China rallying +4.2%, but Japan’s Nikkei declining -1.27%.

In commodities, precious metals were mixed as Silver gained +1.37% to $14.08 an ounce, while Gold went down $8.10 to end at $1,065.60 an ounce.  A barrel of West Texas Intermediate crude oil reached a new 6-year low of $34.53 a barrel last week, but rebounded closing up +1.33% to $35.83.

In US economic news, new unemployment claims declined 11,000 last week to 271,000 the smoothed 4-week average remained flat at 270,500 according to the Labor Department.  It was the 41st consecutive week of jobless claims below 300,000, the longest run since the early 1970’s.

The Commerce Department reported that builders of houses and apartments increased construction by +10.5% in November after the -12% plunge the previous month.  Single-family starts and building permits rose to their best levels since December of 2007.  Housing permits gained +11% to an annualized rate of 1.289 million, beating forecasts of 1.146 million.  Homes under construction rose +2.2% for the month, and is up +18.3% for the year.  The National Association of Home Builders Housing Market Index declined a point to 61 in December, still in expansion but at a slightly slower pace.  All 3 components of the index declined–six-month sales outlook, current conditions, and buyer traffic.

The Labor Department reported that core inflation rose at an annualized rate of 2% last month, reaching the Federal Reserve’s target, an important milestone that set the stage for Wednesday’s first interest rate increase in a decade.  However, the Consumer Price Index (CPI) was unchanged versus October as energy prices fell -1.3%. 

Several regional Fed surveys of the state of manufacturing in their respective areas were released this week.  The Philadelphia Fed’s manufacturing index came in worse than expected as weak global demand, a strong dollar, and falling commodities prices impacted U.S. manufacturers.  The index sank to -5.9, the 3rd negative reading in 4 months.  Analysts had expected a reading of 1.2.  New orders plunged to -9.5, the 3rd straight month in negative territory.  Shipments were up as manufacturers worked through their backlogs, but unfilled orders fell to -17.7, inputs declined to -9.8, and final goods came in at -8.7.   The New York Fed’s Empire State Manufacturing Survey was similarly negative, though less so than the prior report.  The Kansas City Fed’s manufacturing index plunged to 8, the eighth contraction in the last 9 months.   Confirming these regional surveys, the Fed reported that the US-wide Industrial sector was weak in November as output contracted -0.6%, worse than the -0.2% drop expected. 

Markit’s Purchasing Managers Index (PMI) for manufacturing 51.3 for December, the lowest reading in over 3 years and widely missing estimates of 52.8.  New orders showed the weakest rate of monthly expansion in 6 years.  Backlog orders were in contraction for the second consecutive month.  Markit’s flash PMI for services slowed to 53.7 from November’s 56.5, the lowest services reading in a year.  The weak overall reading reflects 5 months of contraction in backlog orders along with the slower growth in new orders. 

In Canada, the consumer price index declined -0.1% in November, but was up +1.4% compared to the same time last year.  The decrease was attributed to seasonal factors.

In the Eurozone, industrial production ex-construction rose +0.6% in October, beating expectations of a +0.2% gain, and was the first increase since July.  Year over year industrial production rose +1.9%.  Output increased +1.4% in capital goods and +1.8% in durable goods over September.  December’s flash PMI composite report slightly missed estimates, coming in at 54.  Manufacturing was at 53.1 and the services component was at 53.9, both in the “greater than 50” expansion area. 

Finally, “Bonds is Bonds” is the attitude many investors have when it comes to fixed income investments.  That attitude has been dangerous this year, as the bond market has bifurcated dramatically along “quality” lines. 

Higher quality bonds – Treasuries and high-grade Corporates – have maintained their values well during 2015, but the lower-quality end of the market, commonly called the “Junk Bond” market, has suffered badly.  One Junk Bond mutual fund, the Third Avenue Focused Credit Fund, even announced that it was halting redemptions and would proceed into liquidation – after dropping about 50% in value. 

Overall, the Junk Bond area has lost about -12% in the last 6 months, while high-grade bonds have maintained their value and the stock market has pulled back about -5% during the same period.   See the chart below for the comparison.

(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,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

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

The average ranking of Defensive SHUT sectors rose to 12.0 from the prior week’s 14.8, while the average ranking of Offensive DIME sectors fell to 15.0 from the prior week’s 13.5. The Defensive SHUT sectors have taken back the lead from the Offensive DIME sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even through new highs were reached in the US earlier this year. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

FBIAS™ for the week ending 12/11/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.4, down from the prior week’s 26.4, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 59.89, down from the prior week’s 62.71, and continues in Cyclical Bull territory.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned negative on Friday, December 11.  The indicator ended the week at 27, down sharply from the prior week’s 32.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3 above), the US is the only major market still firmly in Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Negative.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

Concerns over further declines in the price of oil and other commodities led to widespread weakness in the market, and every major US index finished down substantially for the week.  In the typical pattern as of late, the SmallCap and MidCap indexes took a heavier hit than their LargeCap counterparts.  For the week, the Dow Jones Industrial Average declined over 580 points, closing at 17265, a fall of -3.26%.  The Dow Transports plunged over 5.4%.  The tech-heavy Nasdaq Composite Index lost the psychologically-significant 5000-level, declining over -4% to 4933.  The LargeCap S&P 500 retreated -3.7%, the MidCap S&P 400 gave up -4.1% and the SmallCap Russell 2000 plunged over 5%.  Canada’s TSX pulled back more than -4.25%, as the heavy weighting of energy stocks took its toll.

Weakness hit European and Asian major markets as well.  The United Kingdom’s FTSE index declined over -4.5%.  Germany’s DAX ended down -3.8% and France’s CAC 40 lost -3.5%.  In Asia, Hong Kong’s Hang Seng declined -3.4% and China’s Shanghai Stock exchange declined -2.5% (and LargeCap Chinese stocks lost more than -7.5%).  Japan lost -1.4%.

In commodities, West Texas Intermediate crude oil cratered over -11.9% to $35.36 a barrel, a price not seen since 2009.  Precious metals were also weak as Silver lost -4.5% to $13.89 an ounce and gold declined $12.10 to $1073.70. 

In US economic news, initial unemployment claims hit a five month high, rising by 13,000 to 282,000.  It’s the highest reading since mid-summer and points to potential softness in the labor market if it continues.  Overall, jobless claims using the more-meaningful multi-week average remained below the 300,000 level, which has been associated with a healthy job market.

Job openings declined 2.7% to 5.4 million in October according to the Labor Department’s Job Openings and Labor Turnover Study (JOLTS) report.  The hiring rate held steady at 3.6%, and 5.1 million people were newly hired.  The rate of people quitting their jobs held near a historically low reading of just 1.9%.  Counterintuitively, higher rates of “quits” are a good thing, as it indicates that the quitters are confident of finding new employment promptly.

US import prices continued to fall last month according to the Labor Department, as plunging oil and weak overseas economies suppressed inflation.  Import prices declined -0.4%, less than expectations but still the fifth straight monthly decline.  Imported petroleum fell -2.5% versus the previous month and is down a huge -44.5% versus a year earlier.  Import prices excluding petroleum fell -3.4% versus a year ago, the biggest decline in six years.  The weak petroleum prices are attributed in large part to a perceived “war” that Saudi Arabia has launched on US oil and gas producers, seemingly determined to underprice them out of business.

The Association of American Railroads reported that US weekly rail traffic declined -6.6% last week from the year ago period.  Total carloads were down -12.9%, while containers and trailers were up +0.8%.  The rail traffic report has been called Warren Buffett’s “favorite economic indicator”.

Consumer spending remained flat as Gallup reported that the average self-reported daily US consumer spending was $92 in November, the same as October.  November spending was slightly below last year’s $95, but it remains among one of the highest readings since 2008. 

The Commerce Department reported that retail sales picked up in November, however, the small +0.2% gain missed expectations of a +0.3% rise.  Ex-autos, sales advanced +0.4%, beating forecasts.  Holiday shopping got off to a relatively healthy start as sales at electronics and appliance stores rose +0.6%.  Research firm Global Insight is projecting a +3.4% rise in holiday retail sales, a solid reading but behind last year’s +4.1% increase.

Inventories at US wholesale businesses fell -0.1% in October after a slight increase in September, according to the Commerce Department.  With sales remaining flat the inventory-to-sales ratio of 1.31 remains at a post-recession high for a third straight month.  The elevated level of inventories is one key reason that economists feel GDP growth will come in at a modest 2% or lower in the 4th quarter.

Credit card data for October slowed more than expected as Americans reined in credit card spending heading into the holiday shopping season.  The Federal Reserve reported that October consumer credit rose by +$16 billion, less than the +$20 billion analysts had expected.  Revolving credit, which is mostly credit card debt, increased +$179 million in October and was the weakest reading since February’s negative reading.  The reading suggests that consumers were frugal with their discretionary spending just before the holiday season.  Adding to this conclusion is the Commerce Department’s income and spending report, which showed that consumer spending rose only +0.1% in September and October.

In Canada, housing starts rose in November as the number of new homes under construction rose 211,916.  Consensus estimates were for 198,000 new units.  Strength was concentrated in condominium building in Ontario and regions of Alberta, Saskatchewan, and Manitoba.

In the United Kingdom, interest rates were left unchanged by the Bank of England as the bank’s Monetary Policy Committee voted 8-1 to keep rates at 0.5%.  The bank predicts that inflation will stay below 1% until the second half of next year.  Also in the United Kingdom, the trade deficit widened more than expected in October to $17.9 billion from $13.3 billion the previous month.  Imports rose 7% in the month powered by automobiles and other manufactured goods.  Excluding oil, it’s Britain’s biggest trade deficit since 1998.

In the Eurozone, 3rd quarter GDP growth was +0.3% over the previous quarter and up +1.6% year over year.  Private consumption grew +0.4% after a +0.3% increase in the 2nd quarter.  Inventories increased +0.2% and government consumption increased +0.6%.  Exports, however, suffered from a slowdown in global trade. 

In Germany, industrial production rose +0.2% in October, the first increase since mid-summer but well below expectations of +0.7%.  Annualized, growth was up +0.1%.  Weakness in energy output and consumer goods weighed against a good +2.7% gain in capital goods.

Finally, a continuous argument on Wall Street is whether the market’s current valuation is too high, too low, or just right.  Some analysts say that current Price/Earnings (PE) ratios are artificially high because of a handful of high-flyers with astronomical PEs (Amazon and Netflix, for example) – and therefore, the market is reasonably priced or better.  In order to remove the outsize effects of those highflyers, the respected research firm Ned Davis Research (NDR) published a study using the “Median” valuation instead of the usual “Average” valuation.  A median number, as you recall from your freshman statistics class, has an equal number of greater and lesser values on either side of it, and thus eliminates the outsize effects of those highflyers.  What NDR discovered was that, using median valuation measures based on trailing-12-month data, the current valuation of the market is higher than the 2 previous bull market peaks.  They noted that this is true on both a Price/Earnings basis and a Price/Sales basis.

Currently, on a median basis the NYSE has a P/E ratio of 25.6 based on trailing 12 month earnings.  At the bull market peak in October 2007 this same ratio was less than 20—and at the top of the internet bubble the ratio was even lower.  In fact, according to NDR’s report, the current median P/E ratio for the NYSE is the highest it’s been in a bull market environment since their data began in 1980.  NDR concluded with a nicely understated observation that this is “clearly a concern.”

(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,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

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

The average ranking of Defensive SHUT sectors rose to 14.8 from the prior week’s 17.8, while the average ranking of Offensive DIME sectors rose to 13.5 from the prior week’s 14.0.  The Offensive DIME sectors continue to lead the Defensive SHUT sectors, but not by much.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even through new highs were reached in the US earlier this year. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 12/04/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.4, unchanged from the prior week, and approximately at the level reached at the pre-crash high in October, 2007.  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 the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 62.71, up from the prior week’s 62.23, and continues in Cyclical Bull territory.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5.  The indicator ended the week at 32, up 1 from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3 above), the US is the only major market still firmly in Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

A strong rally on Friday moved the major indexes back into positive territory for the week as the closing weekly results hid the underlying intraweek volatility.  The Dow Jones Industrials rallied 369 points on Friday to end the week up +49 points (+0.28%) to 17,847.  The Nasdaq Composite +14.75 points (+0.29%) to close at 5,142.  The Large Cap S&P 500 index remained near flat adding a single point (+0.08%).  However, two indexes continue to lag the large caps–the Mid Cap S&P 400 declined -1.35% and the Small Cap Russell 2000 lost -1.58%.  Canada’s TSX lost a smidge at -0.07%.

International markets were mixed on the week, with Europe’s major markets jolted to the downside by an unexpectedly unambitious stimulus announcement by the European Central Bank’s Chairman Mario Draghi.  Market expectations had been for a much more aggressive stimulus announcement than Draghi delivered.  The German DAX led the major indexes to the downside losing over -4.8%.  France’s CAC 40 declined -4.37%.  The United Kingdom’s FTSE ended the week down -2.15%.  Asia and some emerging markets were better as China’s Shanghai Stock Exchange rose +2.58%, Hong Kong’s Hang Seng gained +0.76%, and Brazil moved up by +0.6%.

In commodities, precious metals had strong gains as Silver rose +3.38% to $14.54 an ounce and Gold added $29.70 (+2.8%) to end the week at $1,085.80 an ounce.  Oil, however, came under further pressure losing over 3.9% to finish at $40.14 for a barrel of West Texas Intermediate crude oil.

For the month of November, US equity markets were flat-to-up, but pretty much everywhere and everything else was down.  Hardest hit among global equity markets was Emerging International at -2.52%, and it is no coincidence that commodity markets were really dinged during November, hitting Emerging International equity markets the hardest.  Gold was down -6.75% for November, silver -9.19%, and oil -12.5%

In US economic news, the monthly Non-Farm Payrolls (NFP) report was stronger than expected as the US added 211,000 jobs in November, more than the 190,000 expected.  The unemployment rate remained at 5% as the labor force participation rate also moved higher.  Construction and retail sectors led the way with a second strong month of hiring.  However, manufacturing jobs fell by 1,000.  Average hourly earnings rose almost +0.2% last month.  The jobs report appears strong enough to give the Federal Reserve the green light to raise interest rates at its next meeting.

Weekly initial jobless claims rose by 9,000 last week to 269,000 according to the Labor Department.  Initial claims remain near a 4-decade low.  Continuing claims rose by 6000 to 2.16 million in the week ended November 21. 

ADP’s private-employer survey showed those employers added 217,300 jobs last month, more than expected.  The 204,000 jobs in the service industries accounted for almost all of the gain.  Manufacturing jobs showed a very small rise of 6,000, but overall remain down in 2015, which echoes the theme from the NFP of “strong services, weak manufacturing”.  Construction employment gains also slowed to 16,000, according to ADPP, roughly half the rate of the prior two months.

Employment firm Challenger, Gray & Christmas reported that employers announced plans to lay off 30,953 workers in November, the lowest since September of last year.  Announced plans fell 39% from October and were down 13% versus this time last year.  However, year-to-date layoffs of 574,888 make 2015 the worst year for layoffs since 2009.  Leading the way is Hewlett-Packard, which plans to cut 30,000 jobs.  Oil services firms Schlumberger, Halliburton, and Baker Hughes have all cut tens of thousands of jobs with Schlumberger recently stating that it plans to cut more.

The Chicago-area manufacturing Purchasing Managers Index (PMI) for November missed estimates and fell into contraction at 48.7 (readings below 50 are in contraction territory).  November’s reading was a sharp decline from October’s 56.2.  Estimates had been for a reading of 54.  New orders fell along with backlog orders that showed their 10th straight month of decline.  A competing measure, the Institute for Supply Management (ISM) survey, agreed with the PMI, reporting that US manufacturing activity fell into contraction to 48.6 last month, nearly 2 points below the consensus estimate and the lowest level since June 2009.  The ISM index had hovered around 50 since September as US manufacturers have been struggling with the impacts of a strong dollar, a slumping oil market, slowdowns in major international economies, and inventory overhang.

By contrast, ISM’s US service-sector index came in at 55.9, indicating that the U.S. service sector still remains in growth mode.  However, this is the lowest reading since May, and below expectations.

Federal Reserve Chairwoman Janet Yellen this week again signaled that a December rate hike is likely in testimony before lawmakers after the European Central Bank extended its asset buying program.  Yellen stated “U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market”, which supports her earlier comments that a rate hike is still likely at the December 15-16 meeting.  Yellen stressed, however, that rate hikes would be gradual. 

In the Eurozone, the European Central Bank opened its money tap only slightly on Thursday after previously indicating a substantial move would be required to force the economy out of its slump.  Instead of expanding its asset purchases beyond the roughly $66 billion per month, the ECB pushed back the purchase program’s earliest end date by 6 months.  It left its key lending rate unchanged but the interest paid on assets left overnight at the ECB dropped further into negative territory, from -0.2% to -0.3%.  European stocks instantly sold off 2-3% on the news.

October Eurozone consumer prices rose just +0.1% versus a year earlier, below expectations.  Core inflation, at 0.9%, also missed views.

In China, the official manufacturing index fell to a 3-year low in November, down -0.2 point to 49.6, according to the National Bureau of Statistics.  The reading was slightly below forecasts and pushed further into contraction territory.  However, the service sector index rose a half point to 53.6, further evidence that China is rapidly shifting from an export-focused industrial economy to one relying on services and domestic demand.  While industrial production and capital spending data have been weak, retail sales growth has remained robust.  Apple, Starbucks, and Nike have all shown strong sales growth in China.

Finally, as reported above key gauges of US manufacturing activity have slipped back into contraction territory.  Investors, however, still appear to be fixated on the ever rising major market indexes—the Dow Jones Industrials and the S&P 500.  Should investors be less blasé about this development?  Or can the manufacturing woes be safely ignored?  The following chart from economics reporting firm Factset shows that each of the last two big bear markets were preceded by a drop of the ISM manufacturing index into contraction territory, in August of 2000 and December of 2007.  Interestingly, each was also preceded by a brief dip into contraction a few months before.  The same pattern has now emerged, although the “brief dip” this time was more than a few months ago.  Given this history, perhaps investors would be wise to be less blasé.

(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,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

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

The average ranking of Defensive SHUT sectors slipped to 17.8 from the prior week’s 17.0, while the average ranking of Offensive DIME sectors fell to 14.0 from the prior week’s 11.3.  The Offensive DIME sectors continue to lead the Defensive SHUT sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even through new highs were reached in the US earlier this year. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

FBIAS™Fact-Based Investment Allocation Strategies for the week ending 11/27/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.4, unchanged from the prior week, and approximately at the level reached at the pre-crash high in October, 2007.  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 the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 62.23, up from the prior week’s 60.99, and continues in Cyclical Bull territory.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5.  The indicator ended the week at 31, unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3 above), the US is the only major market still firmly in Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

The major US equity market indexes were relatively flat for the holiday-shortened week.  The week included the release of some significant economic data, but the data was mixed and didn’t directionally influence the market.  The Dow Jones Industrial Average lost 25 points to end the week at 17,798 (-0.14%).  The LargeCap S&P 500 was relatively flat, up just +0.04%.  MidCaps and SmallCaps, which have lagged large caps in the recent rally, made up some of that lost ground as MidCaps gained +1.52% and SmallCaps added +2.32%.  Utilities were the weakest sector, down -1.41%.  Canada’s TSX pulled back by -0.49%.

In international markets, European markets fared well while most of the rest of the world fell back.  Italy’s FTSE and Germany’s DAX led the gainers, up +1.96% and +1.56%, respectively.  The United Kingdom’s FTSE gained +0.64% and France’s CAC40 added +0.39%.  There was widespread weakness elsewhere, though; Asia and Brazil led to the downside as China’s Shanghai Stock Exchange gave up -5.35% and Brazil dropped -8.52%.

In commodities, Gold declined for the 6th straight week down $20.60 to $1,056.10, and Silver declined -0.53% to $14.07 an ounce.  A barrel of West Texas Intermediate Crude oil rose +0.75% to $41.77/bbl, fighting to stay above the $40/bbl mark.

In U.S. economic news, the Commerce Department reported the domestic economy rose at a +2.1% annual rate in the 3rd quarter, up from an initial report of a +1.5% gain.  Year over Year GDP rose +2.2%, the weakest gain since the first quarter of 2014.  Nonetheless, the reading makes a December rate hike by the Federal Reserve more likely.  Consumer spending grew at a 3% annual rate after a 3.6% advance in the second quarter.

Initial jobless claims fell 12,000 to 260,000 last week according to the Labor Department.  The jobless rate remains near the lowest levels of the early 1970’s.  Economists say that such low claims numbers should accompany a boom in hiring, but gross hiring activity has remained modest.

New orders for big-ticket items rose +3% last month, helped by a large increase in aircraft orders for Boeing.  This was double the expectations and reversed most of the declines in August and September.  Durable goods orders climbed +0.5% excluding transportation items.  Core capital goods orders, which serve as a proxy for business spending plans, climbed +1.3% – up for the second straight month.

Consumer confidence had an unexpected decline in November to the lowest level in more than a year as Americans reported concerns about the labor market outlook.  The Conference Board’s index declined to 90.4, the lowest level since September 2014.  The share of Americans who see greater job availability in the next 6 months declined to the lowest level since late 2011, and an even greater proportion expect their incomes to actually decline.  The drop was broad-based, confidence declined in all age groups, but was particularly evident among those younger than 35.

Manufacturing slowed in November according to Markit’s flash November Purchasing Managers Index (PMI) manufacturing reading.  The reading declined -1.4 points to 52.6, missing estimates with its slowest growth rate in 2 years.  Growth in new orders was negatively impacted by the stronger dollar and weak global demand as exports also declined.  Markit’s PMI report diverged from the otherwise upbeat reports from the Philadelphia and Kansas City Fed and their indexes of regional factory activity, but was in line with downbeat reports from the Fed’s Atlanta and Richmond regions.

In the Eurozone, economic activity hit a 54-month high in November of 54.4 according to Markit’s flash PMI estimate.  Manufacturing and services had gains of 52.8 and 54.6, respectively.  Despite the good report, Eurozone companies continued reducing prices for goods and services as input costs remained flat.  Analysts are expecting the European Central Bank to unveil more monetary stimulus at its December 3rd meeting.

Germany’s 3rd quarter growth was fairly flat as Europe’s largest economy was impacted by the slowdown in China and recessions in some emerging economies.  German GDP rose 0.3% from the 2nd quarter missing estimates of +0.4%.  Year over year, Germany’s economy grew at a modest +1.7%.   In Japan, Prime Minister Shinzo Abe is considering various additional measures to boost growth and inflation.  Multiple reports indicate that the Japanese economy fell into a recession in the spring and summer.  One draft referred to a minimum wage hike of 3% to try to boost consumer spending, according to the Nikkei newspaper.

Finally, many individual investors think that getting in on hot Initial Public Offerings (IPOs) is the way to stock market riches.  The news frequently covers the big “pop” in price that many IPOs experience on their first day, but rarely follow up with articles about how those hot IPOs fared over the following months.  This year, the majority those hot IPOs have cooled to icy cold, and their individual shareholders have been left holding the bag. 

GoPro, the maker of “action cameras” frequently mounted to helmets, cars, and even pets, has had a pretty rough 2015 even though a GoPro camera seems to be on every young person’s Christmas wish list.  Despite the product popularity, GoPro is down -70% since last December:

Etsy is a very popular e-commerce website that focuses on handmade or vintage items and supplies as well as unique factory-manufactured items.  It also had a strong IPO lift-off, and then a subsequent fade, falling by more than two thirds:

Others with similar-looking charts that started out as invincibly hot IPOs are Box, Castlight Health, Alibaba and Apigee.  To be fair, there are a few examples of IPOs that have held up this past year, like ZenDesk, Go Daddy and PayPal, but they are the exceptions and not the rule thus far in 2015.

(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,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

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

The average ranking of Defensive SHUT sectors slipped slightly to 17 from the prior week’s 16.8, while the average ranking of Offensive DIME sectors fell slightly to 11.3 from the prior week’s 11.0.  The Offensive DIME sectors continue to lead the Defensive SHUT sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even through new highs were reached in the US earlier this year. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 11/20/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.4, up from the prior week’s 25.6, and approximately at the level reached at the pre-crash high in October, 2007.  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 the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 60.99, up from the prior week’s 60.16, and continues in Cyclical Bull territory.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5.  The indicator ended the week at 31, down from the prior week’s 33.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3 above), the US is the only major market still firmly in Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

A week of strong gains nearly offset the previous week’s sharp losses and brought the LargeCap S&P 500 index back into positive territory for the year.  The Dow Jones Industrial Average gained 578 points to end the week at 17,823, a gain of +3.36%.  The tech-heavy Nasdaq blew through the 5000-level again, gaining 177 points and closing at 5,104, an improvement of +3.59%.  The LargeCap S&P 500 gained +3.27%, the MidCap S&P 400 was up +2.92%, and the SmallCap Russell 2000 was up +2.49%.  As has been the case for some time, the SmallCap and MidCap indexes have been unable to match the gains of their LargeCap brethren.  Canada’s TSX gained +2.74%, at the low end of US gains.

In Europe, Germany’s DAX Composite was up a strong +3.84%, and the United Kingdom’s FTSE gained +3.54%.  Doing less well, but still positive, were France’s CAC40 (+2.14%) and Italy’s Milan FTSE (+1.36%).  In Asia, major markets gained across the board with China’s Shanghai Stock Exchange up +1.39%, Hong Kong’s Hang Seng rising +1.6%, and Japan’s Nikkei climbing +1.44%.

In commodities, a barrel of West Texas Intermediate crude oil gained $0.73 to $41.46 a barrel.  Crude oil spent the week retesting support at the $40 a barrel level, last visited in late August.  Precious metals gave up ground as both Gold and Silver were down roughly -0.6% at $1076.70 and $14.14 an ounce, respectively.  Copper continued its plunge, down over -5.7% last week.  If copper is a harbinger of upcoming worldwide industrial health, as many maintain it is, then the future is not bright for that segment as copper hit a low this week not seen since the Great Recession of 2008-09.

In US economic news, initial claims for state unemployment benefits fell by -5,000 last week to 271,000, according to the labor department.  Initial claims have been holding near a 42-year low and have been below 300,000 for over half a year.  The number of people continuing to claim benefits rose by +2,000 to 2.18 million.

Housing starts fell -11% in October to an annual rate of 1.06 million units, with the decline led by a plunge in new apartment construction.  On the other hand, permits for single-family homes rose to the best level in almost 8 years.  Single-family home starts fell -2.4% to 722,000, the lowest since March.  The Mortgage Bankers Association reported that mortgage applications rose +6.2% last week; rising mortgage rates are encouraging buyers to act sooner rather than later.  Delinquency rates for mortgage loans fell in the third quarter to their lowest rate since 2007, and mortgage foreclosures fell to the lowest rate since 2005.

The October US Consumer Price Index rose +0.2% versus September.  Energy prices rose last month, but are still down -17.1% versus October of last year.  Core inflation, which excludes food and energy, remained at 1.9% and is holding just below the Federal Reserve’s oft-stated 2% target.

US manufacturing rebounded in October as manufacturing output rose +0.4% after two months of declines.  Motor vehicle production advanced +0.7% to a +10.9% annual gain as carmakers enjoy their strongest US sales in years.  However, overall industrial production declined -0.2% last month, reflecting weakness in the mining sector and utilities.

The New York Federal Reserve’s Empire State Manufacturing Index was still in contraction at -10.74 in November.  Economists had been expecting an improvement to -5.  New orders and shipments improved, but were still negative for the fourth straight month.  Unfilled orders, the workweek, and employment gauges were all the weakest in a year.  The Empire State index is the first of several factory activity gauges scheduled for release in November.

New York Fed President William Dudley said that he Federal Reserve rate hike should show confidence in the economy, though he admits he doesn’t know how markets would react to a rate lift off.  He also stated that winding down the global banking giants safely in a crisis would require more work–specifically making their legal structures “more rational and less complex.”

In their October meeting minutes, released on Wednesday of this week, Federal Reserve policymakers inserted language stating that “it may well become appropriate” to raise the benchmark lending rate in December, and largely agreed that the pace of increases would be gradual.  According to the minutes, “members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting.”  A majority of Fed officials have now signaled that they expect to raise interest rates this year for the first time since 2006. 

In Canada, September retail sales fell -0.5% after 4 months of gains, worse than expectations.  Excluding price changes, retail sales volume rose a bare +0.1%.  Canada’s October consumer price index rose +0.1% versus September, and sits at 1% versus a year earlier.  Core CPI was up +0.2% versus September and up 1.7% versus a year earlier.

In the Eurozone, European Central Bank (ECB) policymakers will “do what we must”, as expressed by ECB President Mario Draghi, giving an indication that the ECB will ease further at its December 3rd meeting.  The ECB President also stated that the bank is ready to act quickly to boost anemic inflation in the Eurozone—“If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible.”  They definitely have their work cut out for them: October consumer prices rose +0.1% versus September, while Core CPI grew +0.2%.  Core inflation was an annualized 1.1% for October versus September’s 1%.

Japan has fallen back into recession as the economy contracted at a -0.8% annual rate in the third-quarter, following a -0.7% decline in Q2.  Business spending fell at a -1.3% rate, worse than forecasts and the second straight decline.  The data will doubtless put even more pressure on the Bank of Japan to step up its monetary easing program.

Finally, last week we noted the narrowing leadership in the LargeCap S&P 500.  The largest 90 of the S&P 500 are showing gains for the year, while the remaining 410 are, on average, down substantially.  The same situation – but even more narrow – exists in the Nasdaq 100, the home of the largest tech titans.  A new acronym has been born – “FANG”.   FANG stands for Facebook, Amazon, Netflix and Google.  One could say that “without FANG, the market’s not worth a dang!”  Consider this: with FANG, the Nasdaq 100 is +10% for the year; but without just these four FANG members (leaving 96 other Nasdaq 100 stocks), the Nasdaq 100 is -5% for the year.

(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,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

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

The average ranking of Defensive SHUT sectors rose to 16.8 from the prior week’s 18.0, while the average ranking of Offensive DIME sectors fell slightly to 11.0 from the prior week’s 10.8.  The Offensive DIME sectors continue to lead the Defensive SHUT sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even through new highs were reached in the US earlier this year. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 11/13/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.6, down from the prior week’s 26.5, and approximately at the level reached at the pre-crash high in October, 2007.  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 the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 60.16, down from the prior week’s 63.57, and continues in Cyclical Bull territory.  This week, International (ex-US) Equities’ and Canada’s Bull-Bear Indicators changed status to Bear, leaving the US as the only major Bull left standing.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5.  The indicator ended the week at 33, down from the prior week’s 35.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3 above), the US is the only major market still firmly in Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

All the major US indices closed in the red for the week, except for the defensive Utilities.  The Dow Jones Industrial Average lost 665 points (-3.7%) to end the week at 17,245.  The Nasdaq composite lost the 5000-level once again dropping over 219 points or -4.3%.  The LargeCap S&P 500 index, which had been showing greater strength than Mid- and SmallCaps, continued to do so by declining less, at -3.6%, than the MidCap S&P 400 (-3.9%) and the SmallCap Russell 2000 (-4.4%).   Canada’s TSX lost -3.5%, marginally better than the US indices.

Asia showed relative strength as Japan was up +1.7% and China was down only a quarter of a percent.  However, European bourses were hit as hard as the US, with the United Kingdom’s FTSE declining -3.7%, France’s CAC40 down 3.54%, Germany’s DAX backtracked -2.54%, and Italy’s Milan FTSE retreated -3.05%.

In commodities, Gold declined -$5.50 an ounce (-5.1%) to $1083, and silver declined -3.46% to $14.23 an ounce.  Energy continued to plunge as a barrel of West Texas Intermediate crude oil plummeted over -8.5% to $40.73 a barrel.

In US economic news, initial jobless claims remained close to a 42-year low, and were unchanged at 276,000 last week.  The number of people continuing to get state unemployment benefits climbed 5,000 to 2.17 million.

The retail sector had a difficult week as a few of the big name brick-and-mortar retailers were under pressure.  Nordstrom, Macy’s and Fossil were among the big names falling double-digits.  October retail sales rose less than +0.1%, missing forecasts.  Apparel chains, autos, electronics/appliance stores and gas stations all posted sales declines.  However, non-store sales (i.e., e-commerce) jumped +1.4% versus September and +7.1% versus a year earlier.  E-commerce accounted for more than a quarter of all the increase in retail sales even though it still only makes up barely 10% of the total.

Home buying sentiment dipped as the Fannie Mae Home Purchase Sentiment Index fell -0.6 point to 83.2 in September.  The net share of people who said it’s a good time to buy a home fell -2 percentage points to 34%, while 10% said it’s a good time to sell, down from 16%.  The Mortgage Bankers Association said mortgage applications declined -1.3% last week.  The average 30-year fixed-rate mortgage jumped +11 basis points to 4.12%, the highest in 3 months.

Non-mortgage consumer borrowing rose by $28.9 billion for the month, the biggest dollar gain since 1941.  Of that amount, $22.2 billion came in non-revolving debt – primarily auto and student loans.  Revolving debt, typically credit card debt, advanced $6.7 billion or an 8.7% annual rate. Year over year, revolving debt grew 4.7%, the highest since August 2008. 

The National Federation of Independent Business (NFIB) Small Business Optimism Index remained flat at 96.1 last month.  In the report, more small businesses are planning to boost pay now than at any time in the past 8 years.  A net 17% of small business owners plan to boost compensation, the highest since October 2007.  However, hiring activity actually slowed.  A net 8% said that actual sales fell, the worst data since early 2014.  The NFIB report indicates that the increase in compensation reflects a lack of qualified workers rather than strong demand.  Just 27% of firms have job openings, but 48% say that they find few or no qualified applicants for open positions.

San Francisco Fed President John Williams stated that the U.S. has reached full employment now that the jobless rate has reached 5%.  He now expects inflation to pick up, so the next step is to start raising rates.  “I do think it makes sense to gradually remove the policy of accommodation that helped get the economy to where we are,” he said.  Williams’ comments carry special significance because he was Fed Chair Janet Yellen’s chief researcher when she was head of the San Francisco Fed.

It hasn’t been tried in the US, but in Europe negative interest rates are a reality – and the European Central Bank (ECB) policymakers say deposit rates could be pushed much further into negative territory.  The ECB’s deposit rate has been at -0.2% since September of 2014.  Sweden and Denmark have their deposit rates at -0.75%.

In China, the world’s biggest trading nation reported that last month’s imports fell -18.8% versus last year to $130.8 billion.  It is the 12th consecutive drop and on the heels of September’s -20.5% plunge.  Exports were also down -6.9% to $192.4 billion, the fourth straight monthly decline.  However, China’s retail sales rose +11% in October versus a year earlier, which was the fastest pace since last December.  On a weaker note, industrial production rose 5.6% versus a year earlier, missing expectations and down from 5.7%.  Producer prices declined -5.9% from the prior year, the 44th straight month of declines.  Lending is also starting to slow as Chinese banks loaned 513.6 billion yuan in new loans, down from 1.05 trillion yuan in September.  Demand is slowing and the banks are reluctant to write potentially bad loans.

Finally, you may have heard the term “a narrowing of leadership” to describe  a condition in the stock market in which fewer and fewer leaders drag the market higher, while more and more stocks fall to the side or even decline while the “leaders” march ahead.  The market is currently exhibiting that condition – in spades.  Here is a table from CNBC showing how skewed the returns among the S&P500 members have been this year.  The gainers have been the so-called “mega-caps” – those huge companies at the top of the size heap, with capitalizations greater than $100 billion.  At the other end, companies in the smaller size group (< $10b capitalization) of the LargeCap S&P 500 universe are way down, off an average of -9.6%.

(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,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

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

The average ranking of Defensive SHUT sectors fell to 18.0 from the prior week’s 15.0, while the average ranking of Offensive DIME sectors fell slightly to 10.8 from the prior week’s 10.5.  Despite the market’s decline during the week, the Offensive DIME expanded their lead over the Defensive SHUT sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even through new highs were reached in the US earlier this year. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 11/6/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.5, up from the prior week’s 26.3, and approximately at the level reached at the pre-crash high in October, 2007.  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 the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 63.57, up from the prior week’s 60.57, and continues in Cyclical Bull territory.  Several of the world’s major markets have entered Bear territory, most notably Germany, China and Brazil, while many of the world’s other markets – including some US indexes – recently visited “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5.  The indicator ended the week at 35, up from the prior week’s 31.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3 above), a majority of major equity markets still remain in Cyclical Bull territory, although numerous others have moved to Bear status.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

Stock market gains were widespread for the first week of November.  The SmallCap Russell 2000, which had not been participating in the rally off October’s lows jumped +3.26% last week.  The Nasdaq composite added another +1.85% to end the week at 5,147.  The Dow Jones Industrial Average gained +246.79 to end the week at 17,910.  The S&P 400 MidCap index, which with SmallCaps had been relatively weak of late, added +1.28%, and the LargeCap S&P 500 added +0.95%.  The only major US index to the downside was the Dow Jones Utilities Index, which plunged 4.14%.  Canada’s TSX lagged the US indexes, gaining +0.18% for the week.

Among international markets, the big winner was China which lead the way with a +6.1% surge in the Shanghai Stock Exchange.  Brazil also shook off recent weakness and gained +2.29%.  France and Germany gained +1.77% and +1.27%, respectively.  The United Kingdom was the only major European market in the red for the week, down, 0.11%.

In commodities, West Texas Intermediate crude oil was unable to build on last week’s strength and declined -4% to end the week at $44.52 a barrel.  Precious metals also got hit as an ounce of gold declined -$52.80 an ounce to $1,088.90 and silver dropped -5.12% to $14.74 an ounce.  The industrial metal copper also declined -3.15%.

In economic news, all eyes were on the Friday jobs report, taken as a harbinger of a possible December rate hike.  The U.S. Department of Labor reported that employers added 271,000 jobs in October, blowing away forecasts of 190,000 and sending the official jobless rate to a 7 year low of 5.0%.  Wage growth improved as well, with average hourly earnings rising +2.5% versus a year earlier.  Most industries saw job growth.  Chicago Fed President Charles Evans stated that the strong jobs report was “very good news” and that rising wages should help push up inflation.  The lack of inflation in the recovery has hindered the Fed’s ability to raise interest rates.  St. Louis Fed President James Bullard stated that the concerns that quelled a rate hike in October “have mostly passed”.  The jobs report coincided with congressional testimony by Fed Chair Janet Yellen who told the House Financial Services Committee that the prospect of a December rate hike was a “live possibility” if the economy continued to perform well.

Payment processor ADP reported that private employers added 182,000 jobs in October.  This was down slightly from the 190,000 added in September, but it met expectations.  Small businesses made up half of those gains, while construction added 35,000 jobs.  Manufacturing lost 2,000 jobs.  Job placement firm Challenger reported that announced layoffs fell 14% to 50,504 last month, down from an average of 68,000.  About a quarter of the cuts were related to the weakness in the oil market. 

Nonfarm productivity jumped to a +1.6% annual rise in the 3rd quarter, more than the 0.1% expected, and following a 3.5% gain last quarter.  Unit labor costs rose 1.4%, less than the 2.2% expected.  The self-employed reported a drop in hours worked for the first time since the recession ended.  Manufacturing reported productivity gains to the fastest rate since 2011. 

Real Estate research firm CoreLogic reported that home prices were up +6.4% nationally last month versus a year ago.  This is at the higher end of the annual increases that prices have averaged the past 15 months.  CoreLogic forecasts a +4.7% yearly rise from August 2015 to September 2016.  The Mortgage Bankers Association reported that home purchase applications fell -1% and refinancings fell -1% as well.  The composite index declined 0.8% last week.  The average 30 year fixed rate mortgage rose 3 bps to crack the 4% level, to 4.01%.

US Manufacturing barely held on to expansion as the Institute for Supply Management (ISM) factory gauge declined  -0.1 point to 50.1 last month—just slightly beating expectations for an even 50 reading.  New orders increased +2.8 points to 52.9, a good sign for future growth, but employment contracted to 47.6 (sub-50 is contraction territory).  This is only the second time that employment has fallen into contraction since May of 2013.  Exports improved a point to 47.5, but remained in contraction as well. 

The service sector continued showing strength as the Purchasing Managers’ Index (PMI) for nonmanufacturing jumped +2.2 points to 59.1 last month.  Production was up +2.8 points to 63 and new orders surged +5.3 points in a sign of strong activity in the future.

US factory orders were down -1% in September, the second-straight monthly decline, according to government figures.  Transportation orders were down -3.1%; orders excluding transportation fell -0.6%.  October marked the ninth straight month of year-over-year declines for core capital goods orders.  This category is often used as a proxy for business investment.  Those declines have accelerated from -1.2% in January to -7.5% in September. 

However, market research firm Markit’s survey disagreed, with its manufacturing PMI rising +1 to 54.1.  According to Markit, new orders rose the most since this spring.  Export orders increased, but at a slower pace due to the stronger dollar.  Employment and backlogs also both increased, said Markit.

In Canada, hiring jumped by +44,000 last month, blowing away expectations of a slight decline.  Participation rose to the strongest rate in over a year at 66%.  The jobless rate ticked down -0.1% to 7%.

In the Eurozone, Markit’s final manufacturing PMI for October was 52.3, a gain of +0.3 point.  Several countries saw multi-month highs.  New business and new export orders also improved, along with employment.  In the major Eurozone economies, German manufacturing decreased slightly to 52.1 from 52.3, French manufacturing was unchanged at 50.6, and manufacturing in the United Kingdom surged 4 points to 55.5.  Ireland, Spain and Germany had the strongest composite (services + manufacturing) readings.

In Asia, factories in China are still struggling as the official government PMI was unchanged at 49.8 in October, remaining slightly in the contraction range.  The Caixin-Markit manufacturing gauge for China’s private firms also remains in contraction for the eighth straight month, at 48.3. 

Finally, this week Bloomberg published a research note reporting that the U.S. earnings season is on track to be the worst since 2009.  So far roughly three-quarters of the S&P 500 have reported results, with aggregate profits down -3.1% on a share-weighted basis.  This marks the biggest quarterly drop in earnings since late 2009, and the second straight quarter of declines for this metric.

The one bright spot in the report is that damage seems to be heavily concentrated in the companies comprising the energy and commodity sectors.  The energy sector is showing a -54% drop in quarterly earnings so far this earnings season, and profits in the materials sector are down -15%.  On the flip side, the consumer discretionary and telecom sectors have been showing robust growth, with earnings per share growth up +19 percent and +23 percent respectively.

(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,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

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

The average ranking of Defensive SHUT sectors fell to 15 from the prior week’s 12.3, while the average ranking of Offensive DIME sectors rose to 10.5 from the prior week’s 13.3.  The Offensive DIME sectors took the lead over the Defensive SHUT sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even through new highs were reached in the US earlier this year. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 10/30/2015

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.3, little changed from the prior week’s 26.2, and approximately at the level reached at the pre-crash high in October, 2007.  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 the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see graph below) is at 60.57, up from the prior week’s 57.59, and continues in Cyclical Bull territory.  Several of the world’s major markets have entered Bear territory, most notably Germany, China and Brazil, while many of the world’s other markets – including some US indexes – recently visited “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5.  The indicator ended the week at 31, up from the prior week’s 27.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3 above), a majority of major equity markets still remain in Cyclical Bull territory, although numerous others have moved to Bear status.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a negative signal for the 4th quarter:  neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter. 

In the markets:

The LargeCap indexes registered modest gains for the week thanks to a strong rally Wednesday, which compensated for losses on each of the other days of the week.  Roughly one-third of the companies in the S&P 500 were scheduled to report third-quarter earnings during the week, and the mix of positive and negative surprises appeared to drive much of the market action.  For the week, the Dow Jones Industrial Average gained +16 points to close at 17663.  The Nasdaq composite held the 5000-level and gained +0.43% to end the week at 5053.  The LargeCap S&P 500 gained +0.2%.  The MidCap S&P 400 added +0.34% and the SmallCap Russell 2000 was the weakest US index, down -0.36%. 

Canada’s Toronto Stock Exchange Index declined -3.04% as the weakness in natural resources continues to impact Canada’s economy.  The United Kingdom’s FTSE declined -1.29%.  Germany’s DAX gained +0.52% and France’s CAC 40 declined -0.53%.  In the major Asian markets, Hong Kong’s Hang Seng declined -2.21%, China’s Shanghai Stock Exchange declined -0.88%, but Japan’s Nikkei bucked the trend by gaining +1.37%.

In commodities, precious metals sold off as Gold and Silver both lost ground down, with gold settling  down $22.30 to $1141.70 and silver settling down -$0.28 to $15.54 an ounce.  A barrel of West Texas Intermediate crude oil rebounded after 2 down weeks, closing up +3.71% to $46.39 a barrel.

October was the best month for LargeCap US indices in the last four years.  Outside of the LargeCap space, gains were unevenly spread.  The S&P 500 and Dow gained more than 8% for the month, but MidCap and SmallCap indices gains were less eye-popping, at 5%+.  Major International indices also gained strongly, in the 6%-7% range for the month, but the gains were not evenly spread and some, like Canada’s TSX, settled for a smaller +1.7% gain.

In US economic news, the economy slowed to a Gross Domestic Product (GDP) growth rate of just 1.5% in the 3rd quarter, down from a 3.9% pace in Q2.  This was a bit slower than the 1.7% growth rate analysts had forecast.  Consumer spending was up a strong +3.2% and housing investment was up +6.1%.  Auto sales have been extremely strong, pushing durable goods spending up +6.7%.  Export growth dipped to +1.9% from +5.1% in the second quarter—the strong dollar is weighing on exports. 

The Federal Reserve left interest rates unchanged Wednesday, which was widely expected, but hinted that a stabilization of market conditions could allow a rate increase at its next meeting in December.  In the release of their meeting notes, Fed policymakers noted a mixed view of economic conditions in their statement—household spending and business investment had increased at “solid rates”, and noted strength in the housing market, but the pace of job gains has slowed.  One statement that Fed watchers noted was missing in the latest notes release was their previous assertion that “recent global economic and financial developments” had stayed their hand.  The absence of the phrase could mean that policymakers are more comfortable with a rate liftoff in December and less concerned about global problems.

There were 260,000 initial claims for unemployment last week, up 1000 from the previous week.  Continuing claims were 2.144 million, down 27,000 from the week before—the lowest level since late 2000.

New-home sales were reported by the Commerce Department at a running at a rate of 468,000, missing forecasts of 549,000.  Supply rose to 5.8 months at the current rate, up from 4.9 in August.  The median sales price was $296,900—14% higher than this time last year.  Housing market research firm Black Knight reported that prices were up +5.5% versus a year ago in August and are now amazingly just 5.3% lower than their 2006 peak.  Its national index is 27% above its lows and 9 of its 40 metro areas notched new highs in August.  S&P/Case-Shiller’s index rose +0.1% in August, matching expectations.  The index is up +5.1% versus a year ago.  San Francisco and Denver remain two of the hottest markets with +10.7% yearly gains.  Case-Shiller’s index is 12% lower than its 2006 peak.

Pending home sales declined -2.3% in September according to the National Association of Realtors, whose analysts had estimated a gain of +1%.  It was the second straight monthly decline and took NAR’s index to the second lowest reading of the year.

The Conference Board’s consumer confidence reading declined -5 points to 97.6 in October, widely missing the 102.5 forecast.  The present situation index declined to 112.1 from 120.3.  The expectations gauge also declined to 88 from 90.8.  The University of Michigan’s consumer confidence reading rose less than expected in the final October reading.  Interestingly, the gain came mostly from lower-income households.  The current conditions gauge gained +1.1%, and the expectations component gained +5%.

The US service sector weakened more than expected, according to Markit’s October flash Purchasing Managers Index (PMI), which fell to 54.4 from 55.6.  October saw the weakest rise in service-sector employment since February.  The service sector had been a source of strength as manufacturing continues to struggle.

On the manufacturing side, US Durable goods orders declined -1.2% in September, worse than the -1% expected.  Excluding transportation, orders fell -0.4% whereas analysts had expected a decline of -0.1%.  Core capital goods, an indicator for business investment, declined -0.3% on top of a -1.6% decline in August.  However, there were two pockets of strength: motor vehicle orders gained +1.8%, and defense aircraft surged +25%. 

In Canada, railway car loadings fell -5% in August versus a year ago.  Freight origination also declined -4.9%.

In the United Kingdom, GDP grew +0.5% in the 3rd quarter, slightly lower than the +0.6% expected.  The yearly rate of expansion is now +2.3%, down from +2.4%.  Similar to the United States, the service sector is offsetting weakness in manufacturing and construction.  CBI’s October Industrial Trends Survey reported a decline in the rate of manufacturing growth to -18, worse than the -9 analysts were expecting.  Export orders fell to the lowest level since January 2013.  Retail activity in the U.K. sank in October to 19 from 49 according to CBI’s High Street survey—expectations were for a reading of 35.  This was the weakest retail reading since April.

In the Eurozone, German business confidence declined -0.3 point to 108.2 in the German Center for Economic Studies October survey.  However, that beat expectations of a reading of 107.9.  The current conditions gauge also declined, but the expectations component increased ½ point to 103.8—the highest since June 2014.  Consumer confidence in Germany continued to slide a 3rd straight month according to German consumer researcher GfK’s November survey, which fell to 9.4 while analysts had been expecting 9.6.  That’s the lowest reading since February.  A gauge of economic expectations fell for the fifth straight month, into contraction territory for the first time since May 2013.  The surge of refugees into the labor market was widely cited by respondents as a concern.

Finally, China this week officially ended its one-child per working-class couple policy, which had been in place since 1980.  Originally, the program was intended to curb China’s then-ballooning population.  However, China’s most recent population growth rate is closer to 0.5% rather than the 1.2% rate back when the policy was initiated, according to the World Bank.  That rate of population growth compares to a current rate of 0.7% for the United States and 1.2% for India.  Under China’s new policy, couples can now have two children, which had only been allowed in special circumstances previously.  An unintended consequence of the 1-child policy has been a gender-skewing among younger Chinese, with many more men than women (hundreds of millions of baby girls were aborted by parents more interested in having a boy as their only allotted child).  This will make it even more difficult to spur procreation, as there is a huge imbalance of genders preventing the formation of new households on a scale necessary to support the desired growth – or even stability – of the population.

China’s working-age population, defined as the ages between 15 and 64, is now peaking and is poised to fall just as its economy slows.  A shrinking working age population makes it harder to support a growing number of older citizens who will be retiring from the workforce.  China’s population pattern appears to be following Japan’s pattern from 20 years ago, as seen in the first chart below.  Unlike China and Japan, the US working-age population is forecast to continue rising slowly, as seen in the second chart, helped in part by continued high levels of immigration.

(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,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, Charles Schwab & Co)

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

The average ranking of Defensive SHUT sectors fell to 12.3 from the prior week’s 9.8, while the average ranking of Offensive DIME sectors rose slightly to 13.3 from the prior week’s 13.5.  The Defensive SHUT sectors retain a slight rankings lead overs the Offensive DIME sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even through new highs were reached in the US earlier this year. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

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

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

Sincerely,